Biofuels in the Energy Matrix: Opportunities and Challenges

1. Biofuels in the Energy Matrix: Opportunities and Challenges Ethanol Projects: Development and Implementation Presented by Marcello Hallake and Alexandre Chequer

2. Summary • What is Ethanol? • Particularities of Ethanol • How to Develop Ethanol Projects • Construction of Ethanol Plants • Implementation of Ethanol Projects • Legal Issues • Ethanol Projects • Consumption of Ethanol • Ethanol Plants • Conclusions

3. What is Ethanol? • Ethanol (also known as ethyl alcohol or grain alcohol) is a clear, colorless liquid made by fermenting and distilling material, usually sugary substances. • In Brazil, Ethanol is made by fermenting and distilling the sugar cane.   • In the Unites States, it is made by fermenting and distilling most commonly corn. One bushel of corn produces between two and three gallons of ethanol.  • Ethanol is used as a fuel in some vehicles that have been classified as flexible fuel vehicles (can use gasoline or ethanol to power the vehicle).

4. Particluarities of Ethanol • Particularities of Ethanol • In France, ethanol is produced from grapes that are of insufficient quality for wine production. • In Brazil, ethanol is made mainly from sugar cane. This country is a model of Ethanol development. In 1975, after the first global energy crisis, Brazil introduced a program (Proálcool) to produce ethanol for use in automobilies in order to reduce oil imports. • By the mid-1980’s more than 75% of the cars made in Brazil could run on cane-based ethanol. When sugar prices rose sharply in 1989, ethanol fell in discredit for economic reason. In 2003, automakers introduced the “Flex Fuel” motors in Brazil, giving consumers the autonomy to buy the cheapest Fuel. Today, more that 70% of cars sold in Brazil have Flex Fuel. • Brazil’s abundance of land, sunshine and rain make it ideal for sugar cane production.

5. Particularities of Ethanol

6. How to Develop Ethanol Projects • The first step prior to the implementation of an Ethanol Project is a project feasibility study, including the following issues: • site selection; • the weather conditions of the territory; • the conditions of the land; • the raw material to be used in the production of ethanol; • the construction of an ethanol plant next to the plantation;

7. How to Develop Ethanol Projects (Cont.) • market analysis; • infrastructure options; • water requirements; • transportation options; • labor availability; • environmental conditions.

8. Construction of Ethanol Plants • Step by step: • The first step is to analyse the Business Incentives and the market possibilities, which includes: - the incentives related to the use of ethanol, and - the incentives related to the production of ethanol. • Then, it is necessary to analyse and obtain: - Regulatory Permits - Construction Permits - Operating Permits

9. Implementation of Ethanol Projects • An ethanol market assessment helps identify markets and relative value of current and potential markets based on a variety of factors: • Regulatory, legislative or legal factors that impact target markets • An assessment of demand for specific gasoline components • Transportation costs and options, including a rail service evaluation, a determination of commercial trucking service and other applicable models including large capability and potential pipeline shipment in the region • Infrastructure review, including the proximity of pipeline terminals • Current ethanol utilization in target markets and an assessment of existing competition • Ethanol price and volume utilization history in target markets

10. Implementation of Ethanol Projects • The market assessment generally provides: • a regional overview; • a national overview of ethanol and gasoline markets; • a discussion of ethanol demands factors, and • a description of potential target markets.

11. Implementation of Ethanol Projects • Ethanol Implementation Challenges: • Development of the agriculture sector, including small producers • Construction of ethanol plants • Environmental issues • Funding for new technologies • Competition with oil fuels • Increase of exportation

12. Legal Issues • Due Diligence Review • Real Estate • Environmental • Tax • Employment • Contracts • Tax Structuring • Tax Incentives • Selection of Legal Entity

13. Legal Issues (Cont.) • Confidentiality Agreement • Engagement Letter-Investment Bankers, Lawyers, Consultants • Letter of Intent - Pros and Cons • Consortium/Shareholders/Operating Agreements • Governance • Minority Rights • Dispute Resolution • Governing Law • Exit Mechanism (puts, calls, tag alongs, drag alongs, right of first refusals) • Capital Markets, IPOs, Novo Mercado

14. Legal Issues (Cont.) • Financing Options • Business Plan • Eligibility for Public Finance Programs • Kyoto Protocol Carbon Credit Mechanisms • Export Markets • US Import Restrictions: duty of 54 cents per gallon • Caribbean imports and CAFTA: Can a Brazilian Company Acquire a Central American Company and Benefit?

15. Ethanol Projects • In Brazil, the business plan of Petrobras for the period between 2007-2011 aims to increase ethanol participation in the national market. • A partnership between Petrobras Internacional (Braspetro) and Nipon Alcohol Haibai K.K. incorporated the Brazil – Japan Ethanol Co. Ltd., which is headquartered in Japan and will import and distribute Brazilian ethanol to be used as a fuel in Japan.

16. Ethanol Projects

17. Consumption of Ethanol Consumption of Ethanol in the World Source: BEN, 2005

18. Ethanol Plants Source: Abengoa Bioenergy

19. Ethanol Plants • Modern ethanol plants have been designed to incorporate a variety of emission control equipment to make the plants safe, efficient and to control potential pollutants.

20. Conclusions • Ethanol is a growing market in many parts of the world. • Its development is related to the price of oil but also to the concern with the environment. • Structuring of a new project involves assessing business opportunities, logistics and regulatory issues. • Experience in structuring prior projects in Brazil and abroad certainly helps in the development of new projects.

21. Thank you for your attention. Contact: Marcello Hallake New York Office: 212 751 3070 Marcello.Hallake@tklaw.com and Alexandre Chequer Houston Office: 1-713-653-8617 Alexandre.Chequer@tklaw.com