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1 Biofuels : Policy Options AGRI OUTLOOK 2006 26 & 27 OCTOBER 2006, CSIR CONFERENCE CENTRE, PRETORIA, GAUTENG Raoul Goosen Sustainable Progressive Solutions.

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Presentation on theme: "1 Biofuels : Policy Options AGRI OUTLOOK 2006 26 & 27 OCTOBER 2006, CSIR CONFERENCE CENTRE, PRETORIA, GAUTENG Raoul Goosen Sustainable Progressive Solutions."— Presentation transcript:

1 1 Biofuels : Policy Options AGRI OUTLOOK 2006 26 & 27 OCTOBER 2006, CSIR CONFERENCE CENTRE, PRETORIA, GAUTENG Raoul Goosen Sustainable Progressive Solutions

2 2 Biofuels Agricultural crops converted to petrol or diesel substitutes Ethanol –same as regular alcohol –made by fermentation of sugar & starch crops –used as petrol blend (10% called E10, max limit accepted by Vehicle Manufacturers) Bio-diesel –modified cooking/vegetable oils –made by extracting oil from seeds (typically 25 %) –mainly sunflower, Soya beans, olive, palm & canola/rape –used as diesel blend (5% called B5, max limit accepted by vehicle manufacturers) Future technologies (2 nd Generation) based on grasses, trees (wood), waste, etc. –but >5 years away

3 3 Why the interest? Peak Oil Oil Prices Global warming Emissions

4 4 Shell expects that globally, over the next 20 years, bio-fuels will grow to >7% of Shell’s road-transport fuel volume Bio-Gasoline 4% Bio-Diesel 3% XTL Diesel 4% 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 20052010201520202025 KBPD Shell Global Road Transport Fuel Volume Base Case Diesel 45% Gasoline 44% Conventional gasoline and diesel = 89% Bio-fuels: ~ 7 % CO 2 reduction from bio- fuel: ~ 3 MT 2005 ~ 17 MT 2025 Source: IEA, PX, DXF

5 5 The 5 ways to reduce Oil usage : Greenhouse gas & Cost 1. Switch to less greenhouse gas-intensive transportation modes 2. Switch to less greenhouse gas-intensive fuels – eg.Biofuels 3. Increase vehicle efficiency 4. Decrease travel distance 5. Increase occupancy of vehicles

6 6 Drivers of Alternate Energy worldwide : environmental benefits renewable source of energy job creation energy security utilisation of agricultural surpluses and biomass resources state invention through tax incentives and regulatory measures

7 7 AgricultureProcess PlantsFuel BlendingFuel Market Role Provides feedstock, & gets co-products (animal feed) Converts feedstock to quality bio-fuel Blends bio-fuel with mineral fuel Consumes petrol or diesel Share of value $ 40/bbl to pay to grow crops (65 % of value & more of incentives here) $ 10/bbl for capital $ 15/bbl for operating costs (35 % of value) Blending - cover costs Pay BFP (import parity price) Pays same price as for mineral equivalent Drivers If price too low stop growing, or grow something else Must pay farmers going market price for maize, Soya etc Mandatory blending? (Infant Industry) Oil price fixes & fluctuates. Massive demand Not regulated Regulation needed? Regulated Bio-fuels industry value chain summary

8 8 R bil pachange % pa Imported % Employees thousand SA GDP,2005 1500 (20 % to households) + 4.528 But balanced 12,000 Large Scale Agriculture 52 (21 % is field crops) -108 (exports) 614 (95 % primary education) Petrol & Diesel, ex refinery 75+3.5 + oil price > 903 Auto industry manufacturing 30+ 10 50 Job intensity (Jobs per Rand) for Agriculture is >100x Oil Refining Forex effect of “growing own fuel” : 85 c better for R1 expense Bio-fuels industry sectors

9 9 Bio-fuels as substitutes SA petrol usage SA diesel usage

10 10 Global biodiesel trend

11 11 Global ethanol fuel usage trend


13 13 SA Crop Yield Data - absolute maximums Land Mil ha Yield mil tpa Oil production Mil l pa % of SA Diesel (B) or Petrol (E) Soya 3.04.1820B11 Sunflower8.112.93500B50 Maize 4.722.55800E35 Grain Sorghum 9.8647.418000E100 Sugar beet 0.835.52300E14 Sugar cane 1.548.13000E18

14 14 What will make bio-fuels in SA work? Feedstock for plants sufficient critical mass input price versus oil price Mills & fermentation plant - investment needed –existing converted (debt for equity) – few jobs –New – more job creation Government support/framework for a bio-fuels market - it has forex & job benefits better than alternatives Technology Funding – if viable, will be available; longer term Fit with existing sectors Maize, Sugar, Oil

15 15 Conclusions for biofuels in SA Economics require oil price of US$ 50 per barrel plus – with current 40 % fuel tax exemption Volatility of oil & feedstock prices make investment risky Price trends (if continues to decrease for food; increase for oil) makes it sustainable in future Fuel market is huge and can use excess growing capacity for feedstocks – opportunity for Southern African region Socio-eco-enviro benefits warrant Govt support Level of Government support? acknowledgement : Dr Brian Purchase, Presentation to Fossil Fuel Foundation 14 June 2005

16 16 Brazil - 40 % of local petrol (1.5x SA’s) & growing 1970’s driven by mandate for Forex & Independence reasons now viable & macro-economic benefits (at high oil prices) Similar to Sasol Secunda - had floor & ceiling tariff protection USA - 3 % of petrol (1.5x SA’s) & growing driven by oxygenate mandate for air pollution farm subsidies – political/votes supply & demand subsidies on top 100 SA cpl federal & 100 SA cpl import duty EU - 1 % biofuels driven by GHG, voluntary targets and massive tax incentives - fuel levy exemption (450 SA cpl) – Germany at 2 % (mainly biodiesel – 1.5 bil l pa) now reducing incentives as too costly (R 10 bil lost to fiscus, & by 2010 : R100 bil) – Consider move from massive incentives to mandate – Feedstock - cannot compete with Developing (South America, Africa) – No common trade position – eg. import from Brazil etc, then duties of ca. 50 SA cpl International Experience

17 17 Australia - high GHG emitter (like SA) - stop-start programme due to perceptions (Oil coy negativity) India - droughts hampered, but high oil price : E5 by Oct 2006 China - E10 in 20 % of petrol – regional Indonesia - 2 % by 2010 & 5 % by 2025 Thailand - E10 available widely South Korea - B5 programme started Malaysia, New Zealand - early stages Most have 100 % fuel levy reductions (initially) Most have 100 % fuel levy reductions (initially) Mainly “leap before look” (or superficial examination and/or lobbyist lead) Mainly “leap before look” (or superficial examination and/or lobbyist lead) More detailed studies by Japan (5 year study – but land issue, so uncertainty), Jamaica, Costa Rica More detailed studies by Japan (5 year study – but land issue, so uncertainty), Jamaica, Costa Rica Quality and perception issues arise and risk Quality and perception issues arise and risk Boom with recent high oil prices Boom with recent high oil prices International Experience cont…

18 18


20 20 Consider the evidence or facts … Analysis of impacts for SA - Environment - Social - Economics

21 21 Environment GHG reduction contributes to national renewable target : = E-12 or B-15 Improved local air quality by reduced CO, HC and hence less smog –particularly for non catcon vehicles (majority in SA) Biodegradable, hence low risk for water and aquifer Positive!

22 22 CO 2 Emission reductions compared to crude oil products

23 23 Social – Job provider  100 times more jobs than for oil refining (per liter)  1 % biofuel in SA petrol and diesel (ca. 200 mil liters pa) results in ca. 6000 jobs – mainly (90 %) for growing feedstock  Compares very favourably to:  ca. 3000 jobs in SA’s 4 crude oil refineries & 2 syncrude refineries* at Secunda and Mosselbay that produce 100 % of SA petrol plus diesel, Jet Fuel/IP, LPG etc  Fuel levy cost of job of R 12 000 pa is 10 times lower than average SA job  Cappex R 100k per job is 2.5 times lower than IDC target  Jobs can facilitate land reform, transformation & rural upliftment (eg. Co-op type approach) * Excludes production of syncrude, ie. coal mining, off-shore gas, methane reforming and/or gasification and FT process

24 24 Economic Scenarios & Sensitivities Oil price (1) Maize or Sugar Price (less co-product credits) I Good for EtOH, Wise investment II neutral II’ neutral III Bad for EtOH, Needs support for growers or for plant to sustain L,L ($30/bbbl; R700/ton) H ($75/bbl) H (R 1200/ton) Line of constant NPV/IRR for ethanol Bio Subsidies move line up (fixed eg. fuel levy reducion) Scenario A Support for III (Scenario B) is insurance for I (Scenario A). An excellent hedge Country can afford to protect here! Scenario B (1)$ 5/bbl increase Raises inflation by 0.5 %; GDP by –0.3 % (same as Aids pandemic); BOP by –1.5 % Range and trend upwards, so some cover for scenario A is prudent Spin-off of “getting wet”

25 25 ScaleSignificanceComment Jobs (Social) 55 0001.3 % reduced unemployment 90 % of jobs in rural areas Renewable Energy (Environment) 75 % of Target for RE by 2013 Major (for a small target) Sustainable, basis for future expansion Supply Security & Diversity 4.5 % of Liquid Fuels use Minor, as market growth is 3-5 % pa Little impact on oil supply Economic ImpactR2 bil pa added to GDP 6% of AsgiSA target of 2 % additional economic growth 60% into Agriculture, 3-7 % sector growth supported Macroeconomic impacts summary for 4.5 % biofuels

26 26 Macro-economic impacts for 4.5 % Biofuels Based on a Realistic scenario without excessive support or harming food security Achievement of 75 % of total Renewable Target 2013 –8% bio-ethanol blend (50% maize, 50% sugar cane) –2% biodiesel blend (mainly Soya) Supply security of liquid fuels increased by 4.5 % –Currently 35% (Sasol, PetroSA, own crude) Emission & GHG benefits (R100 mil @ $10/ton CO2) Balance of Payments improved by R 3.7 billion pa Investment requirement is R6 billion, i.r.o 12 large biofuels plant, to achieve the 4.5% penetration

27 27 Eviro positive Socio (jobs) positive Economics varied….. (depends on Oil price mainly) Conclusions – answer Sustainability analysis

28 28 Price of crude oil and alternative feedstocks for transport fuels Where to?

29 29 Stakeholders and their impacts Balance stakeholder (public/motorists, growers, plant/investors) interests in fair way Policies important to balance energy, trade, agriculture –Imported biofuels, eg. ethanol ex Brazil should have some tarriff protects local jobs (farming /ethanol protected by producer countries) SA currently has agricultural duties and controls on ethanol –No reason why biofuel imports should be controlled any greater than conventional fuel imports – in fact should be favoured, as greener & better for developing (agricultural) economies via price support? National or Motorist Biofuels plant and Growers Govt. or Regulation Increasing fuel levy exemption moves Govt to right, ie. favours biofuels plant investors & agriculture.

30 30 Government Support 3 generic mechanisms to apply 1.Direct mandates through regulation, eg. land use (push), blends (pull) 2.Market-based policy instruments eg. tax reductions (40 % of fuel levy for biodiesel), subsidies 3.Direct investment eg. in plants via Govt (parastatals), or capex tax incentives (has 50:30:20 accelerated depreciation)

31 31 Cost Benefit Analysis –Compare to conventional and trade alternatives –Macro-economic benefit calculations eg. Forex, GDP –Social benefit estimate eg. Jobs, Rural upliftment, BEE –Environmental benefits Regulatory Policy –Goal/target for biofuels –Incentive level/schedule – once-off capital subsidies via tax, Fuel Levy 40% reduction –Environmental “best practices” w/enforcement – EIA’s required Industry Partnership –stakeholder management needed International representation & collaboration (IEA membership; bi-laterals, eg. Brazil; IBSA) International Energy Agency Recommendation Developing a National Strategy ex Government Policy & Action towards Biofuels by DR R Crompton at Fossil Fuel Foundation 14 June 2005

32 32 Biofuels Policy Considerations ex Shell  Financial instruments used to offset the additional cost of bio-fuel production and distribution.  Policy should clearly link the proven performance of individual bio-fuels to the delivery of well-to-wheel carbon dioxide emission reduction. A certification system for bio-fuel carbon dioxide production is required.  Targets should allow compliance to be achieved through the use of market mechanisms, applied across the aggregate fuels market and not specific fuel types.  Targets should be phased  Open and fair competition in the type of bio-fuel brought to market  Minimum standards for fuel specifications  Not create a distortion in markets by cross-subsidising one sector with another  Aim to achieve a market-based mechanism, free of intervention and subsidy in the medium to long term  Public policy should support the development of the technology and not simply subsidise the cost of the bio-fuel

33 33 Summary Bio-fuels will play a growing role, but not major, in the road transport sector Bio-fuels become part of existing fuel industry and be distributed within the existing fuel infrastructure Oil Coys will purchase and distribute 1 st Generation bio-fuels to meet legislative needs & capture commercial opportunities –No Oil Coy investment in agriculture or in production assets likely –But purchase of biofuels that are economically competitive, sustainably produced and meet stringent quality standards The development of bio-fuels will be within the framework of Sustainable Development initiative Form of mandated offtake is necessary Incentives needed based on oil price expectations Incentives justified by environmental, social and macro- economic benefits compared to imported crude oil products

34 34 THANK YOU Questions

35 35 First generation bio-fuels use food crops as feedstock; second generation bio-fuels will use residues…. Bio-fuel briefing ex Shell Biomass to Liquids Biomass to Liquids Current Bio-fuels Advance d Bio- fuels Current Bio-fuels Advance d Bio- fuels Cellulose-Ethanol Biomass Residues

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