EXPANDING THE ENERGY REALTIONSHIP WITH BRAZIL: KUPFER

UNCLAS SECTION 01 OF 06 BRASILIA 001122

SENSITIVE

SIPDIS

ENERGY DEPARTMENT FOR ANDY BECK, BEN GETTO AND GARY WARD
DEPT FOR MATT ROONEY, THOMAS HASTINGS, FAITH CORNEILLE, DEPT ALSO
FOR MATT MCMANUS, GREG MANUAL, DAVID SCHNEIR

E.O. 12958: N/A
TAGS: PREL ENRG EINV SENV KSCA BR IN
SUBJECT: EXPANDING THE ENERGY REALTIONSHIP WITH BRAZIL: KUPFER
VISIT

REF: A) Brasilia 910, B) Rio 138, C) Rio 135


1. (SBU) SUMMARY: Acting Deputy Secretary of Energy Jeffery Kupfer
and his delegation visited Brazil August 4 - 7. They met with a
wide variety of private sector and government officials to discuss a
broad range of energy issues. In Rio on August 4, Kupfer discussed
primarily oil issues, in Brasilia on August 5 - 6, he explored
options for bilateral cooperation and international issues, and on
August 6 in Sao Paulo he focused primarily on developments in the
biofuels sector. As a result of the trip, the bilateral energy
relationship is primed to expand beyond biofuels cooperation to a
broader, more developed relationship that will benefit both nations'
quests for energy security. END SUMMARY


2. (U) THE PROGRAM: A/DS Kupfer, along with Senior Advisor Ben
Getto, Director of Public Affairs Andy Beck, Acting DOE Assistant
Secretary for Fossil Energy Jim Slutz (through Brasilia),and DOE
international program staff, Carolyn Gay and Rhia Davis, visited
Brazil August 4 - 7 to meet with a variety of private sector and
government officials. In Rio, Kupfer visited the Petrobras research
center CENPES to focus on biofuels and emissions research. He later
met with Petrobras President Gabrielli, saw the head of the
petroleum regulatory agency (ANP) Haroldo Lima, and had a dinner
meeting with representatives of U.S. oil and gas industry. He also
heard a variety of perspectives on energy at a roundtable with
independent analysts, the head of long term planning for the
government, and other industry representatives. In Brasilia on
August 5, Kupfer had a luncheon meeting with a group of high level
government representatives with interests in energy affairs, hosted
by Minister of Mines and Energy (MME) Edison Lobao. This was
followed by a somewhat smaller meeting at MME and a one on one
meeting with the Minister. The next day he met with Ambassador
Evarton Vargas at the Ministry of External Relations (MRE) to
summarize his trip thus far and discuss bilateral cooperation and
international energy agendas. Kupfer then proceeded to Sao Paulo
where he held two roundtables on biofuels: one on trends in the
biofuels sector, the other on research and development
opportunities. Kupfer's visit received good press coverage; the
result of an exclusive interview with O Globo, a press conference
with Minister Lobao with a joint statement issued by Minister Lobao
and Acting Deputy Secretary Kupfer, and a roundtable with
international wire services.

TALKING OIL - PRE-SALT RESTRUCTURING AND OPPORTUNITIES
-------------- --------------


3. (SBU) Discussing oil writ large and the bilateral context, MRE's
Vargas urged the USG to look at the vast new off-shore oil
discoveries (Note: over the course of the past year, Brazil has
announced several discoveries of substantial reserves located in the
pre-salt layer in the Santos Basin) from a political view, not just
commercial. He underscored that Brazil had no intention of
"becoming a Venezuela, totally dependent on oil." Kupfer
acknowledged the GOB has to work through the issues associated with
the new discoveries, but encouraged that clarity be provided to the
global markets when practicable.


4. (SBU) Haroldo Lima, Director-General of the National Petroleum
Agency (ANP),assured A/DS Kupfer that Brazil would continue to have
an efficient and transparent process for industry to seek new
exploration and production opportunities. While the national debate
continues on how to regulate the pre-salt area (REFTELS),ANP is
committed to ensuring a transparent process with clear rules that
are uniformly applied, said Lima. He described with pride Brazil's
previous nine bid lease auctions and explained that ANP is preparing
for the tenth bid round sometime in 2009. The tenth round will not
have pre-salt blocks for bid, but will have many other potentially
lucrative off-shore and on-shore blocks. In particular, ANP wants
to encourage the involvement of small and medium size companies and
hopes to raise the profile of opportunities in Brazil's marginal and
on-shore reserves. DOE Acting Assistant Secretary for Fossil Energy
Jim Slutz agreed to follow-up with ANP on how to better promote
opportunities for small and medium sized U.S. companies in Brazil.


5. (SBU) MME Minister Lobao told Kupfer that auctions for all
pre-salt reserves had been suspended for the near term, because "we
don't know what we're looking at in pre-salt yet." Lobao went on to
confirm Lima's earlier comments about the upcoming tenth round and
expressed a similar interest in attracting small and medium sized

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companies. He also unequivocally stated that no pre-existing, fully
executed contract will be affected by the restructuring plans,
although noted some potential for changes to contracts from the last
bid round that are not yet fully executed. Later in a private
meeting with Kupfer, Lobao shared his plans to recommend the
formation of a national company to hold the rights of the pre-salt
reserves under a production sharing agreement structure.


6. (SBU) Representatives of the U.S. oil and gas industry also
suggested to Kupfer that they would benefit from a larger time
window between the release of information from ANP and the deadline
for submitting bids for bid rounds. Lobao responded to Kupfer's
question on this topic the next day by saying that he would be
willing to talk to ANP's Haroldo Lima to see if it was possible to
grant broader time intervals, noting that the more bidders these
auctions are able to attract, the better.


7. (SBU) U.S. industry also mentioned delays in environmental
licensing due to environmental regulator IBAMA's policy constraints;
however, they expressed cautious optimism at the stated plans of
newly appointed Minister of Environment, Carlos Minc, to increase
IBAMA's efficiency and cut licensing time in half. (Note: despite
what some see as intractable systemic issues such as the fact that
employees can be held criminally liable for problems associated with
projects for which they grant licenses, IBAMA has quickly issued
licenses for other major energy projects, such as the Rio Madeira
hydro electric projects, since Minc's arrival in May.)

WHAT'S NEXT FOR PETROBRAS AND INDUSTRY?
--------------

8. (SBU) When asked to forecast supply over the next twenty years,
Petrobras' Gabrielli responded that he didn't see any big changes in
the near term. He noted transportation limitations in Russia,
geological constraints for growth in the Middle East, time
requirements to ramp-up offshore and oil sands production in Brazil
and Canada, a general decline in Mexico, Venezuela, Norway and
Nigeria, and tight refining capacity globally. Despite enhanced
recovery techniques, Gabrielli does not foresee any significant
impact on production and supply. He also does not foresee any big
change on the demand side. He forecasts a generally tight market,
with supply and demand each growing at 1.8 to two percent over the
next five years. Beyond 2012, he predicts that Russia will build the
necessary infrastructure and Canada and Brazil will increase
production as new projects come online. He also noted that the use
of renewables and flex-fuel technology will need to increase.


9. (SBU) Petrobras President Gabrielli noted the global exploration
bottleneck for equipment, but said that Petrobras is well positioned
due to its aggressive equipment procurement strategy. It has 27 new
rigs under contract for delivery over the next five years. Another
28 new rigs will be built in Brazil from 2013-17. This supply is
enough to cover current operation plus potential new discoveries in
the Santos Basin, Gabrielli said, and the size of the orders is
comparable to expenditures under the U.S. Marshall Plan. U.S. and
other international oil companies will be stretched thin in Brazil,
but U.S. service providers are well positioned, he added.
Specifically, he mentioned opportunities for U.S. firms for shipyard
services, flexible rise plants, compressors, and the development of
detail engineering offices.


10. (SBU) Petrobras is in the process of revising its international
strategy to focus on domestic opportunities in the wake of the
Santos Basin pre-salt discoveries, Gabrielli explained to A/DS
Kupfer. However, the United States will remain an important part of
the company's operations as USD 4 billion, or one-third of the
company's planned investments abroad, will be invested over the next
five years into the 300-plus blocks that Petrobas has in the Gulf of
Mexico. Worldwide, Petrobras sees employee expertise and talent as
a limitation on how extended it can be internationally.


11. (SBU) Tangential to oil developments, Gabrielli said there were
logistical constraints in piping the associated natural gas to be
produced from the new pre-salt discoveries from 300 kilometers (km)
offshore (existing pipeline infrastructure only reaches 150 km
offshore where production currently takes place). Petrobras is
considering floating liquefied natural gas (LNG) technology to be
able to transport the gas inland or to export it. LNG is
advantageous since Petrobras doesn't need long-term contracts for
LNG supply and can rely on purchasing spot cargos, as Brazil's peak

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season for LNG use is opposite that of North America and is only
dispatched when dry conditions affect the supply of hydropower to
Brazil.


12. (SBU) Downstream, Petrobras plans to add four new greenfield
refineries to 2016, increasing refining capacity by 1.3 million
barrels per day, build two large ethanol pipelines to move interior
ethanol production to the ports of Sao Sebastiao and Paranagua for
export, and build 72 tankers, all made in Brazil.


13. (SBU) Finally, Gabrielli highlighted the importance of the
Carbon Sequestration Leadership Forum and of the development of
sequestration technology. He mentioned the possibility of developing
new technology for the Tupi field to inject CO2 to increase
production.

COOPERATION OPPORTUNITIES
--------------


14. (SBU) During a luncheon meeting with Minister Lobao, his Deputy
and all of his undersecretaries, as well as representatives from the
Ministry of External Relations (MRE) and Ministry of the
Environment, each of the attendees took a turn offering his opinion
as to what might make fruitful areas for bilateral cooperation. In
general, the Deputy Secretary responded that these were all issues
the USG spends a great deal of time thinking about as well and there
might well be some natural areas of cooperation.


15. (SBU) Marcio Zimmermann, MME's Deputy Secretary equivalent,
emphasized several areas of interest that were later echoed by
others. He said that cellulosic ethanol is a good area for
collaboration, as are the alternative technologies of solar, wind,
and thermal, since these are areas where the U.S. is fairly
developed and Brazil is just revisiting, including by rejoining the
IAEA group on alternative technologies since Minister Lobao took
office. Highlighting Brazil's intention to build 4 - 6 new nuclear
reactors by 2030, Zimmermann suggested that civil nuclear programs
might be another possibility for cooperation. He also offered that
large-scale transmission was an area in which Brazil might have some
expertise to share. The president of Electrobras, Jose Antonio
Muniz Lopes, echoed the importance of many of these items and added
energy conservation to the list. The MME Undersecretary for
Strategic Planning, Altino Ventura Filho, also cited carbon capture
and gasification of coal as ripe for cooperation.


16. (SBU) Rolando Schluck, MME Undersecretary for Electrification,
suggested that the MOU of 2003 needs to be reactivated to
incorporate these possibilities for cooperation. He added to the
list the monitoring of the safety of the energy supply as well as
technologies of decentralized generation due to the challenge of the
many far flung secluded regions in Brazil. Paulo Roberto Costa,
Director of Supply at Petrobras, discussed the ongoing cooperation
with Japanese investor Mitsui and a Utah company in oil from shale
as well as the need for U.S. commercial involvement in the
development of oil infrastructure such as refineries. Claudio
Scliar, MME Undersecretary of Mines and Geology, pointed out that
there has been ongoing cooperation in the coal area and that the
1997 Implementing Agreement for Cooperation on Energy Technology was
important to renew. He also stressed the importance of identifying
some concrete items for collaboration and setting up corresponding
working groups. During a meeting the next day, MRE's Vargas
proposed that the 1997 Implementing Agreement be renewed. Kupfer
said that the USG did not need the Implementing Agreement to
cooperate with Brazil. However, if the GOB needed the renewal then
"we could go forward on it."


17. (SBU) Minister Lobao summarized that there are many
opportunities for us to pursue jointly and stressed that after
Brazil's past experience with energy rationing, energy security is
very important to the Brazilians. A/DS Kupfer agreed, saying we
have the same concerns and deepening the relationship makes sense.
He suggested that concrete deliverables be identified and suggested
that we develop a mechanism to follow up. In the private meeting
that followed, Kupfer invited Lobao to Washington and Lobao
responded eagerly, ready to schedule a date, to which Kupfer replied
that he would get back to him with specific timing after the visit.
(Note: the Ambassador also passed a similar invitation from Commerce
Secretary Gutierrez for a possible September visit.)


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18. (SBU) The suggestions offered during the luncheon and the
follow up meeting comport with the Rio's energy experts' roundtable
during which participants identified solar and wind technology and
energy efficiency technology as good opportunities for U.S.
companies in Brazil. They also highlighted the need to develop
value-added industries, such as petrochemicals, around Brazil's
existing energy-sector operations.

INTERNATIONAL INTERESTS
--------------


19. (SBU) GNEP - During the meeting with Lobao, Kupfer also pressed
for Brazil to become a full member of the Global Nuclear Energy
Partnership (GNEP),(Note: Brazil is currently an observer). Lobao
responded that he would consult with MRE and send a response via the
Embassy. Privately, Kupfer told Lobao that GNEP membership would
not require giving up any sovereign rights, to which Lobao replied
that the GOB does not plan to have nuclear weapons ever - now or in
the future. In a later conversation with MRE U/S Everton Vargas,
MRE's Chief of the Department of International Organizations Carlos
Duarte said the GOB has two major concerns: (1) possibly curtailing
the right to enrichment; and (2) possibly interfering with the
international nuclear fuel market, but noted GOB agencies are
meeting to consider GNEP membership. Kupfer pointed out that other
uranium exporters with similar concerns had joined GNEP, including
Canada. Duarte indicated a willingness to consider Amb. Sobel's
suggestion that DOE send an expert to Brazil to meet with the
appropriate officials to explain better how GNEP operates.

20. (SBU) Kupfer thanked Vargas for Brazil's supportive stance on
India and nuclear energy. Vargas requested that the USG provide his
staff, as soon as possible, a draft of the proposal on India to the
Nuclear Suppliers Group. He added that he recently met with senior
Indian officials and told them that Brazil wanted to help them on
this issue.


21. (SBU) Kupfer also raised the G-8 International Partnership on
Energy Efficiency Cooperation with Lobao and later with Vargas.
Lobao was noncommittal. Vargas explained that Brazil was
interested, but miffed at not being invited to its launching in
Japan in July. Until it received a formal invitation to join from
the G-8 Presidency, Brazil remains "agnostic." Kupfer stressed that
this initiative is just getting started and we would welcome
Brazil's involvement on the ground floor. Kupfer noted Brazil's
expertise in the efficiency arena and explained that Brazil could
help "put meat on the bones" of this important international
initiative.

BIOFUELS - COMMODITY AND FUTURES MARKETS NEEDED
-------------- --


22. (SBU) MRE's Vargas said Brazil is interested in research on
second generation biofuels, but the costs are still too high with
little additional benefits to sugar cane. Thus, he urged the USG to
work on making ethanol an international commodity: a product traded
on the Chicago and other commodity markets. At the energy experts
roundtable in Rio, Adilson de Oliveira (Institute of Economics) and
Alvaro Teixeira (Brazilian Institute on Petroleum, Gas and
Biofuels-IBP) concurred that ethanol should be an international
commodity and that the U.S. and Brazil should work together towards
that goal. In particular, they mentioned the need for increased
market access both in the context of Doha negotiations and U.S.
tariff and non-tariff barriers. More importantly, global production
capacity needs to be increased, said Teixeira. He explained that
Brazil wants to help developing countries in Africa, Central America
and Asia to become ethanol producers. Increased U.S.-Brazil
cooperation at the technical level will be necessary to achieve the
necessary scientific breakthrough on second generation ethanol.


23. (SBU) In a roundtable discussion at the Sao Paulo American
Chamber of Commerce (AmCham),participants were largely pessimistic
about the short-term prospects for the commoditization of ethanol
although recent shipments by the Brazilian company COSAN, one of the
world's leading ethanol producers, of ethanol are already happening
for manufacture of E-10 in Saudi Arabia. They criticized the U.S.
tariff on foreign ethanol as did UNICA's (Brazilian Sugarcane
Industry Association) President Marcos Jank at a small reception at
the Consul General's residence when he expressed his conviction that
the Brazilian government will proceed with a WTO case against the
U.S. ethanol program, and noted that UNICA would be supportive of

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the GOB case. The Sao Paulo Amcham business leaders noted however
that a major impediment was also the US corn ethanol industry not
being a more active/supportive international player to increase use
of ethanol worldwide. Joel Velasco of UNICA noted that the
prospects for developing ethanol industries in Central America and
the Caribbean is complicated by domestic subsidies and international
tariffs that make it more profitable to export sugar.


24. (SBU) COSAN representatives noted that ethanol is still a
"political" commodity, making it difficult to predict the market.
Participants generally agreed that the existence of a more
predictable and robust market would allow producers to plan ahead
for capital-intensive projects. It was suggested that an effort be
made to bring venture capitalists to the table in discussing the
future of the ethanol industry and that stakeholders work to create
a fund to provide for public education on the benefits of ethanol
production and use.


25. (SBU) Sao Paulo's AmCham industry leaders also emphasized the
need to create a viable futures market and to expedite the
standardization of contracts and specifications. The inability of
investors to hedge themselves has reduced the availability of market
liquidity, according to Joseph Tutundjian (Chairman of AmCham's
Biofuels Task Force and head of the Brazilian firm Winner Comercio
International). This, combined with a lack of global ethanol
standards and specifications, has limited the growth of the
international ethanol market. Tutundjian emphasized the need to
negotiate a new standard contract for ethanol trading. The
participants generally agreed that Brazil's futures and commodities
market (BM&F) did not have a sufficiently robust or useful market
for trading ethanol and that on-going negotiations between the
Chicago Mercantile Exchange and BM&F to agree to a standard contract
were advancing slower than anticipated.

BIOFUELS - R&D
--------------


26. (SBU) Vargas urged the development of one or two concrete
projects to show that the MOU produced action. He noted that the
Brazilian private sector was very interested in seeing results from
this cooperation. Highlighting one area of ongoing cooperation Dr.
Carlos Tadeu Fraga of Petrobras discussed cooperation with DOE's
National Renewable Energy Lab (NREL),working to commercialize the
process by which residual sugarcane biomass is processed for second
generation ethanol. Dr. Fraga explained that part of the bilateral
cooperation between CENPES and NREL involves comparing research,
harmonizing results, and eventually will include sharing test
samples.


27. (SBU) In a roundtable discussion moderated by the Sao Paulo
State Research Foundation (FAPESP),Brazilian scientists discussed
the future of Brazilian biofuels from the scientific perspective.
FAPESP's Glaucia de Souza discussed the Biomass Division program
aiming to achieve transgenic advances in sugarcane in Brazil,
described as analogous to corn in the U.S. 100 years ago. Current
FAPESP-sponsored research is focused on creating insect resistant
sugarcane and sequencing the entire sugarcane genome and the genetic
structure of the cell wall, possibly leading to the discovery of an
enzyme that can easily break down the wall, or improve on existing
acid hydrolysis procedures to the same effect. FAPESP's BIOEN
program is interested in collaborating with additional US
researchers in the bilateral efforts.


28. (SBU) Souza emphasized that sugarcane uniquely offers both a
high amount of sucrose for first generation ethanol production as
well as an abundance of biomass for second generation use. FAPESP's
Marcos Buckeridge argued that unlocking the additional energy stored
in the biomass could triple the amount of energy available from the
same amount of sugarcane. Jose Luiz Oliverio, Vice-President of
capital-goods giant Dedini, expects to have the first commercially
available products to process bagasse into second generation fuels
by 2010. Given the high capital cost involved in second generation
production, William Burnquist (Center for Sugarcane Technology, CTC)
suggested that the U.S. and Brazil jointly invest in a binational
second generation ethanol mill. (Note: Despite this research into
second generation biofuels, over 80 percent of Brazilian R&D monies
are spent on first generation technologies. End Note)


29. (SBU) While Souza praised the growing collaboration of

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Brazilian and U.S. universities, biofuels consultant Plinio Nastari
offered two practical suggestions for furthering bilateral
cooperation on the R&D front. Noting that U.S. grant funding laws
prohibit grantees from conducting research outside of the United
States, Nastari suggested that regulations be revised to allow for
U.S. companies to conduct their research in Brazil where access to
sugarcane feedstock is abundant. He also suggested that the U.S.
and Brazil jointly fund a small travel program to facilitate the
travel of cash-strapped biofuel consultants with a view to
accelerate biofuels R&D.


30. (SBU) Moderator Carlos Henrique de Brito Cruz mentioned that
the U.S. participation in the InterAcademy Panel on International
Issues (IAP) is inactive at a time when ethanol has come under
strong attack from other countries. He asked for U.S.
representation from the National Academy of Sciences at the IAP's
next meeting. A/DS Kupfer called on the scientific community to
weigh in on the food v. fuel debate and noted that the voice of the
scientific community adds significant credibility to a debate that
has been made largely inter-governmental.

FOLLOW-UP
--------------

31. (SBU) Post identifies the following areas for follow-up action:
designating central points of contact, establishing working groups,
arranging a Washington visit by MME Minister Lobao, helping to
identify small and medium-sized U.S. firms with interest in on-shore
and shallow water exploration, renewing 1997 Implementing Agreement
for Cooperation on Energy Technology, pursuing nuclear cooperation,
exploring the possibility of providing expert consultation on GNEP,
and considering the possibility of U.S. participation at the
Inter-academy panel on international issues.



32. (SBU) COMMENT: The visit by A/DS Kupfer is the first of a
series of 3 strategic high profile visits to Brazil focused on the
energy sector. State Department Undersecretary for Economic Affairs
Reuben Jeffery is planning a visit in the coming months with a
specific focus on the biofuels MOU, as well as the wider array of
energy issues between our two countries. In October, Commerce
Secretary Gutierrez will visit for the CEO forum and will bring
attention to opportunities for U.S. companies in Brazil's energy
sector. Kupfer's visit successfully started the process by
highlighting U.S. interest in the sector and helping to identify
opportunities for collaboration. We have an opportunity to
institutionalize these relationship-building and energy
security-enhancing collaborations. Designating central points of
contact for each side and establishing working groups will be the
first steps in ensuring that the results of this visit reach their
full potential.



33. This message was produced jointly by Embassy Brasilia, Congen
Rio and Congen Sao Paulo, and cleared with DOE.

SOBEL