Q+A: Why are foreign firms betting on Brazilian ethanol?

SAO PAULO (Reuters) - Royal Dutch Shell on Monday announced a joint venture with Brazilian sugar and biofuel giant Cosan, becoming the latest foreign company to invest in Brazil's fast-growing ethanol industry.

Here are some questions and answers about why foreign groups are betting on Brazilian ethanol:

WHY THE INTEREST?

Ethanol consumption has been rising around the globe and the fuel is a way for oil companies to diversify production.

Ethanol accounts for 7 percent of the total demand for gasoline globally, a percentage that is expected to increase in coming years as more countries adopt the fuel as a way to curb carbon emissions. Cane-based ethanol emits 90 percent less greenhouse gases than gasoline. In Brazil, ethanol accounts for more than half the fuel on the local gasoline market.

WHY BRAZIL COMPARED TO OTHER ETHANOL PRODUCERS?

Although Brazilian ethanol is one of the most competitive biofuels, analysts say there is room to reduce production costs, especially when new technologies allow producers to extract fuel from cane bagasse and other parts that are currently used to generate electric energy or are just burned.

Moreover, Brazil's domestic market for ethanol has been growing fast since automakers in 2003 launched flex-fuel vehicles, which can run on any mixture of gasoline and ethanol. These cars now account for about 90 percent of new vehicles in Brazil and demand for ethanol is growing at 15-20 percent a year.

Brazil also has vast areas of arable land that could easily and quickly be converted to cane production in the future.

WHAT'S DRIVING CONSOLIDATION?

The industry is still highly fragmented and the international credit crisis left several groups without access to financing in the middle of major investments to boost production capacity. Some mills are either forced to file for bankruptcy protection or find deep-pocketed investors to inject capital.

WHAT'S THE SHARE OF FOREIGNERS IN THE SECTOR?

Several deals in the last few months boosted the market share of foreign groups in the Brazilian ethanol sector. Considering Shell will have 50 percent in Cosan's mills, the share of foreigners in the sector is now 22.9 percent versus 12.4 percent a year ago, according to Datagro consultants.

WHO ARE THE TOP 5 PLAYERS?

(of the 570 million tonnes cane crushed in 2008/09)

Cosan - 52.6 million tonnes

LDC-SEV (Louis Dreyfus-Santelisa Vale) - 31.6 million tonnes

Usacucar - 16.1 million tonnes

Bunge - 14.1 million tonnes

Tereos - 13.8 million tonnes

HOW MUCH CANE GOES TO ETHANOL?

Mills in Brazil direct more than half of the country's cane crop to ethanol production, with the remainder going to sugar production. This mix can vary in a few percentage points based on prices during the season. In 2009/10, about 45 percent of the crop was diverted to sugar as sugar futures hit record highs as a result of a global deficit.

(Editing by Reese Ewing and Marguerita Choy)