In my recent peek at innovation in the biofuels space, I noted pipeline limitations as one problem faced by the present ethanol crop. Today, I'd like to flesh out that issue a bit, examining some recent developments both here and abroad.

Ethanol's not easy to expedite
Two properties of ethanol create potential headaches for pipeline operators. One is that the fuel tends to pick up leftover water and other impurities as it moves through a pipeline. This makes it difficult to introduce ethanol into a multi-product pipeline, even though Kinder Morgan Energy (NYSE: KMP) is attempting to do just that down in Florida. The company is getting its existing 104-mile pipeline as clean as possible, and even then, it will still have to run "cleaning batches" of ethanol through the system before running test quantities of deliverable product later this year.

The contamination problem makes a pretty strong case for dedicated ethanol pipelines, but that's where corrosion concerns come in. The fuel's corrosivity raises pipeline integrity issues, making it difficult for pure or 95%-pure (E95) blends to run through today's pipes without cost-prohibitive modifications. The Association of Oil Pipe Lines, which is studying both the product quality and corrosion issues, is only just getting comfortable with running 10% ethanol/90% gasoline blends (E10) through existing pipelines.

There's been plenty of chatter regarding dedicated ethanol pipelines this year, but little action so far. Profit machine Kinder Morgan has hinted at overhauling an existing product pipeline system to handle ethanol exclusively, while Magellan Midstream Partners (NYSE: MMP) and Buckeye Partners (NYSE: BPL) are assessing the feasibility of building a multibillion-dollar intrastate system from scratch. This is all very preliminary, and dedicated pipelines would require a tremendous volume increase from producers like Archer Daniels Midland (NYSE: ADM) and Verasun Energy (NYSE: VSE). For the real action today, you have to look to Latin America -- specifically, Brazil.

Pour a little sugar on it, honey!
It all goes back to the oil shocks of the early 1970s. Unlike our nation, which dallied in various alternative energy pursuits only to abandon them when oil got cheap again in the '80s, Brazil chose a renewable energy path and stuck to it. Fast-forward to the present, and nearly nine out of every ten new vehicles sold in Brazil can run on ethanol. These so-called "flex fuel" vehicles are expected to comprise a majority of the country's fleet within five years, and recent reports indicate that the nation's cheap, sugarcane-derived ethanol is already outselling gasoline.

With increasing biofuels mandates around the world, Brazil finds itself in a prime position to begin seriously ratcheting up its ethanol export capacity. Even the current U.S. tariff on Brazilian imports doesn't look to be a significant barrier to this export initiative -- which brings us back to the matter of pipelines.

Brazil has been piping ethanol around for decades. Even there, the fuel's movement has generally been limited to multi-product pipelines, and the country has no magic fix for the quality issues we talked about earlier. Ethanol and gasoline get mixed together, but that's tolerated locally because all gasoline in the country is blended with ethanol. Quality control becomes more significant when international standards come into play.

In order to economically ship massive of quantities of ethanol out of the country, Brazil needs dedicated ethanol pipelines. The first of these systems, which is to run from inland sugarcane-producing regions to the country's coastal offloading terminals for shipment overseas, was initiated last year by Petrobras (NYSE: PBR). The energy giant, which has quite a petroleum puddle on its hands, is also becoming a biofuels baron; it recently formed a joint venture in order to set off on a second such pipeline system.

More narrowly focused sugarcane ethanol player Cosan (NYSE: CZZ), which I haven't really discussed since its sugar-free debut on a U.S. stock exchange, has been vocal in its criticism of Petrobras' plans. Not wanting to get manhandled by monopolistic transport fees, the company and a group of partners have recently responded with their own export pipeline initiative.

What's coming down the pipe
While U.S. ethanol pipelines may look like little more than pipe dreams today, our government's Renewable Fuels Standard guarantees that ethanol production will keep cranking higher. Whenever dedicated pipelines become more practical, first-movers like Kinder Morgan ought to be well-prepared to carve out strong market positions. Others will find our neighbors to the south happy to guide them through the construction process -- for a price.

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Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.