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Organization of the Petroleum Exporting Countries 1 The Rise of Biofuels: Sustainability Concerns and Impacts on the Oil Industry Fuad M. F. Siala Senior.

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Presentation on theme: "Organization of the Petroleum Exporting Countries 1 The Rise of Biofuels: Sustainability Concerns and Impacts on the Oil Industry Fuad M. F. Siala Senior."— Presentation transcript:

1 Organization of the Petroleum Exporting Countries 1 The Rise of Biofuels: Sustainability Concerns and Impacts on the Oil Industry Fuad M. F. Siala Senior Alternative Sources of Energy Advisor OPEC Secretariat 9 th Arab Energy Conference

2 Organization of the Petroleum Exporting Countries 2 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

3 Organization of the Petroleum Exporting Countries 3 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 Bioethanol production in 2008 (1.12 mb/d)Biodiesel production in 2008 (0.22 mb/d)

4 Organization of the Petroleum Exporting Countries 4 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

5 Organization of the Petroleum Exporting Countries 5 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

6 Organization of the Petroleum Exporting Countries 6 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 CO 2 biofuels production and CO 2 capture – R&D stages commercial-scale production is still several years away

7 Organization of the Petroleum Exporting Countries 7 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

8 Organization of the Petroleum Exporting Countries 8 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

9 Organization of the Petroleum Exporting Countries 9 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

10 Organization of the Petroleum Exporting Countries 10 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

11 Organization of the Petroleum Exporting Countries 11 Food vs. fuels Corn and wheat price index, 1980-2008 (January 1980 = 100)

12 Organization of the Petroleum Exporting Countries 12 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

13 Organization of the Petroleum Exporting Countries 13 Policy measures - mandates CountryMandateTime frame ArgentinaE5 and B5by 2010 BoliviaB2.5by 2007 B20by 2015 BrazilE22 to E25on going B3by 2008 B5by 2013 CanadaE5by 2010 B2by 2012 ChinaE10on going ColombiaE10 and B10on going GermanyE5.25 and B5.25in 2009 E6.25 and B6.262010 through 2014 IndiaE5by 2008 E20by 2018 US36 b gallonsby 2022

14 Organization of the Petroleum Exporting Countries 14 Extraordinary expansion Global biofuels production, 2000-2008

15 Organization of the Petroleum Exporting Countries 15 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

16 Organization of the Petroleum Exporting Countries 16 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

17 Organization of the Petroleum Exporting Countries 17 OPEC reference case projections medium term long term

18 Organization of the Petroleum Exporting Countries 18 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

19 Organization of the Petroleum Exporting Countries 19 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

20 Organization of the Petroleum Exporting Countries 20 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

21 Organization of the Petroleum Exporting Countries 21 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

22 Organization of the Petroleum Exporting Countries 22 Thank you


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