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Biofuels : Policy Options

AGRI OUTLOOK 2006

26 & 27 OCTOBER 2006, CSIR CONFERENCE CENTRE, PRETORIA,

GAUTENG

Raoul GoosenSustainable Progressive Solutions

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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 (2nd Generation) based on grasses, trees (wood), waste, etc.– but >5 years away

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Why the interest?

• Peak Oil

• Oil Prices

• Global warming

• Emissions

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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

2005 2010 2015 2020 2025

KBPDShell Global Road Transport Fuel

Volume Base Case

Diesel 45%

Gasoline 44% Conventional gasoline and diesel = 89%

Bio-fuels: ~ 7 %

CO2 reduction from bio-fuel:

~ 3 MT 2005~ 17 MT 2025

Source: IEA, PX, DXF

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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 efficiency4. Decrease travel distance5. Increase occupancy of vehicles

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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

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Agriculture Process Plants Fuel Blending Fuel 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

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R bil pa change % pa

Imported

%

Employees

thousand

SA GDP,2005

1500(20 % to

households)

+ 4.5 28But balanced

12,000

Large Scale Agriculture

52(21 % is

field crops)

-10 8 (exports) 614(95 % primary education)

Petrol & Diesel, ex refinery

75 +3.5+ oil price

> 90 3

Auto industrymanufacturing

30 + 10 50 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

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Bio-fuels as substitutes

SA petrol usage

SA diesel usage

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Global biodiesel trend

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Global ethanol fuel usage trend

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ETHANOL OPPORTUNITY

SA petrol

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SA Crop Yield Data - absolute maximumsSA Crop Yield Data - absolute maximums

Land

Mil ha

Yield mil tpa Oil production

Mil l pa% of SA Diesel (B) or Petrol (E)

Soya 3.0 4.1 820 B11

Sunflower 8.1 12.9 3500 B50

Maize 4.7 22.5 5800 E35

Grain Sorghum 9.86 47.4 18000 E100

Sugar beet 0.8 35.5 2300 E14

Sugar cane 1.5 48.1 3000 E18

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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

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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 :acknowledgement : Dr Brian Purchase, Presentation to Fossil Fuel Foundation 14 June 2005 Dr Brian Purchase, Presentation to Fossil Fuel Foundation 14 June 2005

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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

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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 2006China - E10 in 20 % of petrol – regionalIndonesia - 2 % by 2010 & 5 % by 2025Thailand - 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 Mainly “leap before look” (or superficial examination and/or lobbyist lead)lobbyist lead)

More detailed studies by Japan (5 year study – but land issue, so More detailed studies by Japan (5 year study – but land issue, so uncertainty), Jamaica, Costa Ricauncertainty), Jamaica, Costa Rica

Quality and perception issues arise and riskQuality and perception issues arise and risk Boom with recent high oil pricesBoom with recent high oil prices

International Experience cont…

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INTERNATIONAL LESSONS - Comments

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Consider the evidence or facts

… Analysis of impacts for SA

- EnvironmentEnvironment

- SocialSocial

- Economics- Economics

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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!

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CO2 Emission reductions compared to crude oil products

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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

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Scale Significance CommentJobs

(Social)

55 000 1.3 % 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 Impact R2 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

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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

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Eviro positiveSocio (jobs) positive

Economics varied….. (depends on Oil price mainly)

Conclusions Conclusions – – answer Sustainability analysis answer Sustainability analysis

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Price of crude oil and alternative feedstocks for transport fuels

Prices: Maize, Sugar cane and Crude oil

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

1990 1992 1994 1996 1998 2000 2002 2004 2006

Pric

e, $

/ton

Crude oil, $/bbl Crude oil Maize Sugar Where to?

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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 orMotorist

Biofuels plant andGrowers

Govt. orRegulation

Increasing fuel levy exemption moves Govt to right, ie. favours biofuels plant investors & agriculture.

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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)

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• 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

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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

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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 1st 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

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THANK YOU

Questions

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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

Advanced Bio-fuels

Current Bio-fuels

Advanced Bio-fuels

Cel

lulo

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ol

Biomass Residues