Organization of the Petroleum Exporting Countries 1

The Rise of Biofuels: Sustainability Concerns and Impacts on the Oil Industry

Fuad M. F. SialaSenior Alternative Sources of Energy

AdvisorOPEC Secretariat

9th Arab Energy Conference

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Outline

● Definition and types of biofuels

● World developments in biofuels production

● Environmental credentials of biofuels

● Food vs. fuels & Other sustainability issues

● Biofuels projections

● Impacts on the oil industry

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Definition and types of biofuels

● Processed biomass● The output could be gaseous, liquid or solid fuel● Focus is on liquid biofuels in transportation sector● Ethanol and biodiesel account for almost all consumption

in transportation

ROW, 2%

China, 1%

Brazil, 10%

US, 17%

EU, 70%

US, 51%

Brazil, 41%

ROW, 1%China, 3%

EU, 4%

Bioethanol production in 2008 (1.12 mb/d) Biodiesel production in 2008 (0.22 mb/d)

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First generation biofuels

● The feedstock is biomass: biodegradable waste and residues from agriculture, forestry, industry, municipal waste; but also agricultural products

● Biodiesel produced from oilseed crops

● Ethanol produced from high-sugar-content plants, and plants yielding starch and starch-like material

● Most of the world’s ethanol is produced from sugar cane in Brazil and from corn in the United States

● Thus consequences on food security

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Advanced-technology biofuels

● Second-generation biofuels– Follow one of two main pathways:

• gasification using catalysts based on the existing Fischer-Tropsch process, producing diesel-like products

• biochemical reactions using enzymes to produce ethanol

– Use cellulosic biomass instead of agricultural crops

• can substantially expand the supply of biomass available for biofuels

• potential in minimizing issues in first generation biofuels

– R&D and demonstration stage• not commercially available until the latter

part of the current decade

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Advanced-technology biofuels (cont.)

● Algae-based biofuels– Actively pursued as a feedstock for biofuels

– Algae do not require fresh water or arable land for cultivation

– Algae feed on CO2

• biofuels production and CO2 capture

– R&D stages• commercial-scale production is still several

years away

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World developments in biofuels production

● Economic growth cycle from 2001–2008 led to a significant expansion in global demand for petroleum products

● Until mid-2008 the oil price was also on an upward trend

● Some investors began looking at petroleum substitutes

● Biofuels were seen as having greatest potential to substitute oil in transportation

● Biofuels initially viewed as key option to reduce greenhouse gas emissions

● In some countries, biofuels thought of as a means to reduce oil imports

● Thus, both energy and climate policies extended to biofuels

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Rationale for biofuels

● First generation biofuels based on domestic feedstock can only marginally enhance energy security

● In many countries, biofuels industry runs the risk of marginalizing the rural poor and creating higher unemployment – small-scale biodiesel production could

benefit small-scale farmers and help meet local energy demand

– export markets require stricter quality standards

– increasing need for big business

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Environmental credentials of biofuels

● Environmental benefits depend on location, technology and feedstock – Ethanol production in Brazil reduces

greenhouse gas emissions by 80–90 per cent, compared to gasoline

– US corn ethanol production is 10–30 per cent – Ethanol from wheat in Europe could either

increase emissions by 25 per cent, or decrease them by 65 per cent

• depending on whether lignite or wheat straw is used as a heat source in production

– Second generation biofuels typically provide 80–90 per cent greenhouse gas emissions savings

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Other sustainability issues

● Biofuels could lead to competition for water resources, in terms of both physical availability and access to water – projections for 2050 suggest that irrigation

withdrawals may have to increase another 20 per cent to meet future global food demand

– water resource impacts could be large for a number of countries

– unlikely to meet future food, feed and biofuel demand without aggravating water scarcity problems

● Large-scale mono-cropping could have severe negative impacts on biodiversity

● Biotechnology (GM) offers improving crop yields– safety in the food chain remains paramount

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Food vs. fuels

50

100

150

200

250

300

Jan-

80

Jan-

82

Jan-

84

Jan-

86

Jan-

88

Jan-

90

Jan-

92

Jan-

94

Jan-

96

Jan-

98

Jan-

00

Jan-

02

Jan-

04

Jan-

06

Jan-

08

Maize, U.S. No.2 Yellow, FOB Gulf of Mexico

Wheat, No.1 Hard Red Winter, ordinary protein, FOB Gulf ofMexico

Corn and wheat price index, 1980-2008 (January 1980 = 100)

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Policy measures – financial incentives

● A wide range of policies: local, regional, and national – exemptions/reductions in fuel-excise taxes– tax credits to producers/blenders– grants/soft loans for infrastructure– payments to feedstock (crops) growers– import tariffs

• Largest subsidies in the US and the EU– 2008 estimates: ~ $13 billion and $7.5 billion,

respectively– on average: ~0.45 $/lit.

• Some countries started to shift away from exemptions to mandates

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Policy measures - mandates

Country Mandate Time frame

Argentina E5 and B5 by 2010Bolivia B2.5 by 2007 B20 by 2015Brazil E22 to E25 on going

B3 by 2008

B5 by 2013

Canada E5 by 2010

B2 by 2012

China E10 on going

Colombia E10 and B10 on going

Germany E5.25 and B5.25 in 2009

E6.25 and B6.26 2010 through 2014

India E5 by 2008

E20 by 2018

US 36 b gallons by 2022

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Extraordinary expansion

0

200

400

600

800

1,000

1,200

2000 2001 2002 2003 2004 2005 2006 2007 2008

Glo

bal b

iofu

els pr

oduc

tion,

tb/d Ethanol Biodiesel

Global biofuels production, 2000-2008

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Impact of the global financial crisis

● Since the fourth quarter of 2008 biofuel expansion slowed down – tight credit– lower profitability – less demand for energy

● Most large producing countries affected

● Projects delayed or cancelled

● Idle capacity

● Companies went bankrupt

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Biofuels projections

●World Oil Outlook

●Reference case assumptions:– global supply growth will slow in the

medium term:• concerns about sustainability• impact on food prices• impact of GFC

– policy targets are not fully met:• 66% in the EU by 2020• 52% in the US by 2022• second generation biofuels contribute

modestly after 2015

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OPEC reference case projections

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2008 2009 2010 2011 2012 2013 2015 2020 2025 2030

mb/ d

MiddleEast &AfricaAsia

China

WesternEurope

LatinAmerica

US &Canada

medium term long term

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Impacts on the oil industry

● In the upstream sector:

● A higher biofuels supply scenario would assume full implementation of announced energy policies

● The ambitious announced targets are based on very large volumes from advanced biofuels

● Biofuels legislation in the EU and the US contain escape clauses

● Uncertainty over biofuels supply translates into large uncertainties over the amount of oil that OPEC Member Countries need to supply

● This signifies a heavy burden of risk:– investment requirements are very large– subject to considerably long lead-times and

pay-back periods

● Security of demand is a major concern for producers

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• In the downstream sector:

• Further increase in biofuels production would eat into refinery throughputs and margins – policy initiatives may discourage investing in

needed capacity expansion

• If biofuels fail to meet the stated targets, the result could be downstream tightness– significant impact on prices, margins and volatility

• How is the complex downstream sector to be structured to withstand major disruptions– chances of losing capacity for longer periods and

over a larger area– should refiners hold sufficient spare capacity to

cover potential losses?

Impacts on the oil industry

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Concluding remarks

● The economic viability of biofuels is subject to uncertainties stemming from possible changes in government policy and energy prices– Expansion over the past few years sustained by

public sector support – The economics of the biofuels industry are highly

dependent upon crude oil prices

● Changes in agricultural practices and land-use patterns are crucial to realizing large biofuels potentials – Insights into regional and local conditions and

impacts of large-scale production and use are lacking

● The biggest concern is the diversion of food crops to manufacturing fuels

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Concluding remarks (cont.)

● A positive contribution from biofuels to reducing greenhouse gas emissions questioned

● Long-term biofuels targets assume very large volumes of advanced biofuels– Considerable research effort, but questions remain

whether these can be achieved technically or commercially

● This uncertainty over future biofuels supply is transmitted directly to the oil industry – Producers, in particular OPEC Member Countries,

face large uncertainties over the amount of oil that they need to supply

– Failure of biofuels to meet the announced targets could lead to tightness if refiners are discouraged from investing in the needed capacity expansion

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Thank you