FUEL ETHANOL PRODUCTION FROM BIOMASS

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					Project Idea Note (PIN)
TOWARD ENERGY (OIL) SELF-SUFFICIENCY FOR PANAMA

FUEL ETHANOL PRODUCTION FROM BIOMASS
BY PANAMA ACOS BIOMASS ETHANOL REFINERY S.A.

Dated: April 5, 2005

PROLOGUE Prosperity and indeed survival of more than 2/3 of the human beings living on earth are now inexorably linked to availability of energy. As oil and natural gas supplies diminish, enormous energy and economic challenges face the world and sustainable economic and social developments become questionable. Development and exploitation of renewable energy sources (solar -PV-, wind and particularly biomass), hold the potential for replacing fossil energy and provide a seamless shift to sustainable, long-term energy (transportation, heat and electricity) and organic chemical supplies without destroying the environment by global warming. The biomass energy option is particularly suited for sustainable social development (eradication of poverty) in developing countries having relatively modest per-capita energy needs and large biomass growing potential. Conversion of ethanol is a renewable energy technology whose time has come.

OBJECTIVE Panama has natural biomass reserves required for achieving total cut-back on gasoline imports within the next 10 years through converting the biomass to ethanol and high value co-products. When fully developed, the program will generate 1 375 full time factory employment positions and greater than 13 000 rural biomass procurement jobs along with 57 500 spin-off (service) jobs. Job creation is fundamental to sustained social and economic development.

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PROJECT DESCRIPTION The Project has three (3) components viz. first, conversion of existing timber reserves and sugarcane to ethanol and second, job creation and third, expansion (double) the timber reserves with new advanced and dedicated agro-forestry plantations. The ethanol production phase consists of conversion of existing biomass resources (pinewood, hardwoods, sugarcane bagasse and municipal solid waste, MSW, etc.) to fuel grade ethanol and value added co-products sold to the food, organic chemicals, pharmaceutical and cosmetic industries as a means for creating renewable energy and significant rural employment. Implementation of fast growing, high biomass-yielding tree species (pines and hardwoods) will assure total fuel energy self-sufficiency for Panama within 10 years. Up-grading Panama's forest reserves will reduce the country's CO2 (Greenhouse gas - GHG-) emissions and assure a sustained supply of reliable, clean, natural energy capital that will never run out.

THE TECHNOLOGY TO BE EMPLOYED Biomass conversion to fermentable sugars for ethanol production is to be carried out by a proprietary new hydrolysis process, known as the ACOS Biomass Ethanol Refining technology. The process is capable of total dissolution of biomass and separation of the components (sugars, lignin and extractives) for further refining to ethanol and co-products. The value added co-products share in the overall manufacturing costs and thus facilitate production of a competitively priced and affordable low cost ethanol at less than < $.076 /gal - < $0.20 /L or < Euro 0.56/gal** - < Euro 0.16/L**. PROJECT DEVELOPERS The Project Developers are PANAMA ACOS BIOMASS ETHANOL REFINERY S.A. in collaboration with PASZNER TECHNOLOGIES INC. (CANADA) the owner and licensor of the ACOS technology. The developer company is a private organization to be registered in Panama. PASZNER TECHNOLOGIES INC. will be responsible for the license, design and operation of the ACOS plant and marketing of the products. Dr. Laszlo Paszner, is Professor Emeritus of Wood and Pulping Chemistry and Forest Products of the University of British Columbia, Department of Wood Science in Vancouver, Canada with 40 years of teaching and research and development experience in chemical processing of wood. Paszner is owner of the ACOS Biomass Ethanol refining technology and other inventions. The Project developer also has extensive pulping industry experience through consulting for the industry. Dr. Paszner is a retired member of the

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Association of Professional Engineers of British Columbia (Canada). He can be contacted at: Dr. Laszlo Paszner PASZNER TECHNOLOGIES INC. 2683 Parkway Drive SURREY, B.C. CANADA, V4P 1C2 Tel.: +(1) 604 538 1349 Fax: +(1) 604 538 5108 e-Mail: lpaszner@shaw.ca paszner@interchange.ubc.ca Panama Project Representative: Mr. Hans Etienne Parisis, Financial Analyst P. O. Box 87-0959, Zone 7 PANAMA Republic of Panama Tel./ Fax: +(1) 507 263 6438 & +(1) 642 6144 e-Mail: hans@c-com.net.pa

Summary of Financials Ownership, development and marketing of the ACOS products are privately financed for the project in Panama.

TYPE OF THE PROJECT Greenhouse gas (GHG) emission reduction, as target, is achieved through replacement of fossil fuels (gasoline and diesel) with biomass (cellulose) based ethanol. Each ACOS refinery of 350 T/day dry feedstock capacity will produce 45 500 000 L/yr (12 021 000 gal/yr) ethanol from 119 000 T/yr dry pine biomass. Carbon content (by direct conversion) of the ethanol produced is 19 386 T C/yr or 71 088 T CO2e/yr. On total implementation of the ACOS biomass ethanol project in Panama in 10 years by constructing 12 ACOS plants, 232 632 T C/yr or 853 062 T CO2e/yr will be abated by displacing 546 000 000 L/yr - 144 253 633 gal/yr gasoline. At 11 832 g CO2 emission/gal gasoline, 1 706 809 T CO2e emissions are eliminated (Note: renewable fuels do not emit GHG emissions). The amount of biomass (119 000 T/yr) per 350 T/day feedstock capacity ACOS plant is grown in 15 year rotations in pine plantations, 3-6 year rotations for hardwoods or by annually harvesting 585 718 T/yr green sugarcane. The CO2 sequestered thereby, is 218 186 T CO2e/yr per ACOS refinery for softwood (pine) plantations to reach 2 618 238 T CO2e by 2010

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when all 12 ACOS refineries could become fully operational. This biomass production program will be maintained on a renewable basis in the future. The ACOS ethanol refinery program in Panama will require doubling of the current forestry and agro-forestry plantation reserves to 20 000 ha in aggregate. The new plantation forestry program will create 1 500 man-years of new permanent employment in rural settings. The new forest plantations will be financed from earnings of the ACOS refinery.

Project Energy Supply The ACOS biomass ethanol refinery will be designed with an option for energy self-sufficiency (to be decided by the site-specific engineering feasibility study) through co-generation of steam and electricity (CHP) using low quality biomass (e.g., branch and stump wood). The surplus electricity will be made available to local communities in the vicinity of the ACOS refinery.

Transport Transportation energy requirements for the project are to be reduced by short distance (< 25 km) transportation of raw materials to the relatively small scale (< 500 T/day) ACOS refineries. The dehydrated (anhydrous) ethanol will be blended with local gasoline to reduce the transportation distance to the consumers. Only surplus ethanol will be sold to international markets. E85 fuel blends will be used in all raw material delivery trucks and fuel distribution vehicles within Panama.

Waste Management ACOS refineries do not generate any waste. In turn, in locations where ACOS refineries will operate, they will accept sorted municipal solid waste (MSW) containing paper, wood and other renewable products (garden waste) for processing to ethanol.

Land Use Change and Forestry ACOS refineries will encourage agro-forestry activities throughout the country. The revenue from sale of pine wood is expected to be between ---$ 5 625/ha and up to $ 10 125/ha depending on the variety of species and age of the trees at harvest. The return on hardwood plantations can be as high as $ 4 050/ha at harvest (3-7 years). The return from sugarcane growing would be between $ 1 200/ha to $ 2 700/ha depending on the cane biomass yield. The new market for biomass will encourage better land

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utilization by small farmers and land owners. Therefore, no major change in land use is envisaged as result of renewable ethanol production by the ACOS Biomass Ethanol Refining process in Panama.

Location of the Project Location of the first ACOS biomass ethanol refinery is proposed in the vicinity of the city of Santiago in the province of Veraguas, Panama. Other subsequent ACOS refineries will be evenly distributed across the Panama country side close to identifiable feedstock supplies.

BioRefinería

ACOS

A short distance from the city of Santiago in Veraguas at the site called “La Yeguada” located: Latitude (DMS): 8° 22' 0N and Longitude (DMS): 80° 42' 0W, some 4 000 ha of government owned 30+ year old pine plantation of suitable quality exists. The plantation has lost its growing vigor and is in the declining growth stage. The timber is of variable and inferior, knotty quality and escaped to attract buyers in the past. It is estimated that the current timber volume is around 450 m3/ha (202 T/ha) and about 590 ha/yr would need to be harvested annually to supply a 350 T/day feedstock capacity ACOS refinery. The existing resource would be sufficient for 9.3 years, not counting the additional growth on the standing timber for the 10 years (750 000 T). Additional biomass could be secured from the city of Santiago (MSW: 53 600 T/yr) and biomass originating from nearby farming communities. The harvested areas will be replanted within 2 years with improved tree varieties, including Caribbean pine and other species creating a mixed forest of improved stand structure, ecology and growing vigor.

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Expected Project Schedule

ACOS BioRefinery starting date: Financial commitments: Legal Arrangements: Negotiations: Plant Construction:

September, 2007 90 days (August 2005) 4 months (September, 2005) 6 months (October, 2005) 18-20 months: January 2006 - September 2007 2008 20 years Planning and Capital Fund Raising Full verbal Presidential and Administrative Endorsement pledged Signatory to the Kyoto Protocol

Expected first year of verified emission reduction: Project life: Current Project Status: Current Status of Host Country Acceptance:

Host Country Kyoto Protocol Position:

TIME LINE - ACOS BioRefinery Project in Panama
Expected Project Schedule
Financial Commitments: 90 days (August 2005) Legal Arrangements: 4 months (September, 2005) Negotiations: 6 months (Oktober, 2005) Plant Construction: 18-20 months (January 2006 - September 2007) Expected First year of verification emmision reductions: 2008 Project Life: 20 years 2005 Q1 Q2 Q3 Q4 Q1 Q2 2006 Q3 Q4 Q1 0 2007 Q2 Q3 Q4

2008

Q3-2007 2027 KEY
Milestone marker start Milestone marker - end

Gantt bar

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ENVIRONMENTAL AND SOCIAL BENEFITS: The environmental benefits accrue from GHG emission reductions through replacement/substitution of fossil transportation fuels with ethanol and substantial carbon sequestration through enhanced plantation agro-forestry activities. For the first ACOS refinery the annual CO2 abatement by gasoline substitution with ethanol as of 2008-2012 is: 355 442 T CO2e CO2 sequestration from replanting of harvested areas between 2008-2012 will be 590 ha/yr: 243 375 T CO2e CO2 sequestration by new pine plantation: 885 ha/yr for 10 years: 365 062 T CO2e TOTAL GHG Reduction: 963 879 T CO2e

On contemplating construction of 5 ACOS refineries by 2012 the total abated and sequestered CO2 will be: 1 288 379 T CO2e The 10-year abated CO2 amount by 2018 will be: The 10-year sequestered CO2 amount will be: Total 10-year CO2 emission reduction:

3 065 592 T CO2e

1 825 125 T CO2e 6 179 096 T CO2e

Baseline Alternate Scenarios The ethanol substitution for the gasoline blending program will initially and primarily address GHG emissions form the automotive sector by replacing up to 85 % of the current gasoline imports (546 000 000 L/yr - 144 253 633 gal/yr) to Panama. The ACOS ethanol and associated agro-forestry activities are expected to generate 14 375 full time rural employment and up to 57 500 spin-off (service) jobs in 10 years, thereby substantially reducing unemployment in rural Panama. The investment to be attracted for the project is $ 182 250 000 US per ACOS refinery. The whole project will require in excess of $ 2 billion when fully deployed. Each ACOS refinery will return up to $ 30 000 000/yr to Panama's economy in form of payments for the raw material, chemicals, wages, and plant maintenance contracts. Assuming that by 2012 five ACOS refineries

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will be operational, the investment required will rise to $ 911 250 000 (largely generated by reinvestment of profits from existing ACOS refineries) and the annual disbursements will run in excess of $ 150 000 000/yr. The government shows now a firm commitment to widen the Panama Canal within the next 7 years. The cost of the project is expected at $ 10 billion. While this project promises short term employment in construction of the widened canal, but little additional job opportunities will be added to those already in existence at the present time. The project will add substantially to the national debt with only limited additional possibility for long-term employment, no extension to renewable fuels for greenhouse gas reduction but severe constraints on future government spending for probably the next 20 years. The canal widening project will not solve the impending energy shortage and gasoline import problem and as result will make Panama vulnerable as to its energy future. Neither will the canal widening project generate GHG emission reduction credits. Only by a long stretch of imagination could the environmental benefits of the canal widening project be accepted. A massive improvement in employment required for social growth and provision of more energy is not expected to result from the canal widening project. On the other hand, the ACOS Biomass Ethanol Refining project will prevent a massive energy shock to develop (see "Enormous Energy Challenges Face the World" [Energy Future Coalition at http://www.energyfuturecoalition.org/ , Washington, D.C., USA, 2005] in the future and creates substantial rural employment through substantial less investment and commitment than required for the canal widening project. The ethanol project will both abate GHG emissions from burning gasoline and provide on-going carbon credits (income) through sequestration of atmospheric CO2 in the new forests. The total GHG reduction potential of the ethanol project is in the range of 6 000 000 T CO2e within 10 years when the ACOS Biomass Ethanol project is fully implemented. The current forest cover in Panama (Data reference year 2000) is 33 645,91 Km² or 3 364 591 ha that represents 45% of the total land area indicating that a major portion of the land area is dedicated to forestry and agroforestry.

Global and Environmental Benefits The world as a whole has been procrastinating on financing development of potential cellulose to ethanol (read biomass ethanol) conversion technologies for the past 30 years. Though the environmental benefits of full life cycle GHG emissions on burning cellulose ethanol blended fuels has been known for at least 10 years (Margaret Singh. 1997. Carbon factors for transportation fuels. Argonne National Laboratories; Riley and Tyson 1993. 10th International Symposium on Alcohol Fuels, National Renewable Energy

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Laboratory, Bolder, Co). Accordingly, on a life cycle analysis basis, light vehicles using reformulated gasoline with MTBE as oxygenate and octane booster emit 308 g CO2e for every mile driven, whereas E95 cellulose ethanol fuelled vehicles (Flexible Fuel Vehicles) emit only 28 g per vehicle mile, less than one-tenth of that emitted by the cleanest burning reformulated gasoline. Further, E95 blends achieve a 70 % reduction in SO2 emission reduction on a per mile basis and show 5.8 times the fossil energy efficiency of gasoline on a carbon fuel cycle basis. Plantation cellulose ethanol generates negligible amounts of GHG emissions in comparison to grain (and even sugarcane) ethanol. However, whether ethanol is derived from grain or cellulose biomass is of no major consequence since the carbon dioxide released on burning ethanol is re-captured by photosynthesis from the atmosphere by the new biomass crop growth and no GHG accumulation occurs. The advantage of biomass ethanol lies in the different requirements for intensive feedstock cultivation and lack of fertilizer use for biomass production. Fertilizer and weed killer productions generate significant GHG emissions. Thus low GHG emissions generated on burning biomass ethanol (15.32 g CO2e/L - 58 g CO2e/gal) compares to 11 832 g CO2e/gal - 3 007.13 g CO2e/L by burning gasoline. Thus the environmental benefits of using biomass cellulose for substituting gasoline is unmistakable. The Stockholm Institute-Boston Center estimates 3.1 kg CO2 emission per kg of oil. (SEEN Global Database: http://www.nepo.go.th/ref/UNIT-oil.html).

GHG Sequestration Accredited GHG sequestration occurs when existing forests are harvested and replanted with new forest crop. For tropical pine trees the average annual growth is calculated as 15 T/ha/yr which at 50 % carbon content for the biomass converts to 27.5 T CO2e/ha/yr as sequestered carbon. In a 15 year rotation, pine forests will sequester 412 T CO2e/ha as the sequestered CO2 accumulates automatically at the rate of 27.5 T CO2e/ha/yr for the rotation length. For example, the existing 5 000 ha pine forest is expected to sequester 137 500 T CO2e/yr.

Kyoto Carbon Credits Each 350 T/day feedstock capacity ACOS refinery will produce 45 500 000 L/yr (12 021 000 gal/yr) ethanol equivalent to 19 386 T C/yr or 71 089 T CO2e/yr. The associated timber (119 000 T/yr) when replanted on 590 ha/yr will sequester 59 500 T C/yr or 218 186.5 T CO2e/yr for a total of 289 275 T CO2e/yr carbon credit to the refinery. For a starter, the value of the Kyoto Carbon Credit today, at the current price of $ 20.27/T CO2e (Euro 15.40 / T CO2e) as European Union Allowance (1 EUA = 1 T CO2) is $ 5 863 614 (Euro 4 545 000**)/yr. Of course, it should be pointed out that with the addition

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of further ACOS refineries, the carbon credits earned multiply according to the number of refineries in operation. The carbon credits to be earned by 10 000 ha of pine plantation at the biomass yield of 150 000 T/yr is 275 025 T CO2e/yr and potentially valued at $ 5 574 800 (Euro 4 325 000**)/yr. With a 15 year contract (the rotation age), the sequestration credits would amount to: $ 83 621 400 (Euro 64 845 000**).

Socioeconomic Benefits Each ACOS refinery of 350 T/day pine feedstock capacity will eliminate the purchase of 45 500 000 L/yr (12 021 000 gal/yr) gasoline. This will represent an annual foreign exchange saving of $ 25 845 442 (Euro 20 000 000**)/yr for fuel import (at $ 2.15/gal) on implementation of the ACOS ethanol refinery. The $ 182 250 000 US investment in the ACOS plant will generate: $ 3 000 000/yr in stumpage payments, $ 4 000 000/yr in workers' wages, $ 7 250 000 in maintenance contracts and $ 15 million in other operating payments for a total of $ 29 250 000/yr flowing into the local rural economy. The ACOS ethanol refinery will require 125 full time workers of which 15 are administrative, 50 professional, 30 skilled and 30 semiskilled full time laborers. On the other hand, plantation forestry will require 150 full time workers for nursery, planting, harvesting, transportation and forest management in supplying a single ACOS refinery with raw material. More than double of these jobs will be created during the first 10 years, while doubling the size of the pine plantation as scheduled. It is estimated, that for each 350 T/day feedstock capacity ACOS ethanol refinery a total of 275 full time positions will be created (400 during the first 10 years). Such new industrial activity will require extensive initial training and education in engineering and biotechnology and forest sciences. Also further research and development in biomass chemistry, tree improvement and product marketing will be encouraged at university level. On successful operation of the ACOS plant in Santiago, up to 12 additional biomass refineries will be added (5 additions by 2012). In the absence of the ACOS project, it is unlikely that such a strong growth stimulating sustainable industrial development would occur in Panama. The most direct method of stimulating sustainable development is by social mobilization and empowerment of the rural poor. The ACOS biomass ethanol project is consistent with CDM (Clean Development Mechanism) objectives and guidelines for self-initiated sustainable social, economic and environmental development in Panama.

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FINANCIAL SUMMARY OF THE PROJECT Technology development costs (R&D, engineering feasibility study, patenting and legal costs etc) to date exceed $ 15 000 000. The installed capital cost of a 350 T/day feedstock capacity ACOS refinery is estimated at $ 182 250 000 US. The site-specific engineering and economic feasibility study to follow will add $ 1 500 000 to the plant construction costs and will allow close estimation of the capital costs of the entire refinery, including the co-product processing facilities. Long-term debt (15 years), from as yet unidentified source(s), will have to cover $ 183 750 000 US.

Sources of Financing Long-term debt (15 years) from as yet unidentified sources for $ 183 750 000 US will be partially offset from carbon credit pre-financing at the rate of $ 11 438 414/yr or $ 171 576 210 over the 15 year initial operating term of the project. Advance carbon credit payments will be arranged for both the fossil fuel GHG abatement from gasoline ($ 5 863 614/yr) and long term (15 year) CO2 sequestration by plantation forests ($ 5 574 800 /yr). The likely source of such carbon credit financing is Canada, the USA, Japan, Europe and China, among others, specifically undetermined at the present time. In the carbon credit calculation the currently published (March 22, 2005) European Union Allowance cost of $ 20.27 US/T CO2e (Euro 15.40/T CO2e) is used. Emission Reduction Sales Potential At $ 11 438 414 /yr the carbon credit sales between 2008 to 2012 will amount to $ 57 192 070 (Euro 43 350 000**). For a 10 year period (2008 to 2017), the revenue from carbon credit sales is expected to be $ 114 384 140 (Euro 88 700 000**) and $ 80 068 898 US (Euro 62 000 000**) for a period of 7 years (2008-2014). The 14 year aggregate carbon credit revenue is expected to be at least-$ 160 137 796 US (Euro 124 000 000**) and can be guaranteed by a rotation age for pine trees of not less than 15 years. None of these carbon credit revenues are used in the profitability calculation for the ACOS biomass refinery.

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POJECT PROFITABILITY

Capital Cost: Total Project Revenue per year: Less: Production Cost: Sub-Total: Depreciation (15 Less: yrs) Sub-Total: Less: Interest (8.5%) NET EARNINGS:

$ 182 250 000 $ 372 674 764 ($ 34 736 250) $ 337 938 514

($ 12 150 000) $ 325 788 514 ($ 15 491 250) $ 310 297 264*

R. O. I.: 170 % Pay-Back Period: 0.59 year
* Tax-free status (Panamanian Law #54 of July 22nd, 1998) in Panama. The actual profitability may slightly vary depending on the conditions of loan arrangements and advance debt service required during the construction and start-up phases of ACOS refineries. ** Exchange rate USD/EUR on April 4, 2005.

The volatility and expected doubling of the oil prices within the next few years (Goldman & Sachs) suggests that it is time to "run for cover". Governments are powerless in this one-sided struggle and it is wise to recognize ethanol for its crucial role as our next generation distributed energy future.

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