The Biojet fuel market : Strategic Management Consultation

José CastroJasmin SteinhardtMiguel MeloFilippo Pendin

2015Hottest year on record

2016To surpass 2015 by far

15New Record for hottest year in history recorded from 2000

GLOBAL CHALLENGE

GERMANYTopped its energy demand with renewables for the first time on May 15, 2016

Green Bonds Market in 2015

$100 billion

The UKHas set up the first greeninvestment bank in 2012

2nd Generation BIOfuelsAs most viable solution for airline industry

GLOBAL CHALLENGE

AGENDA

PROBLEM IDENTIFICAITON AND DISAGGREGATIONProduct descriptionDemandSupplyRegulatory EnviornmentPrice AnalysisStrategic AnalysisRECOMMENDATIONMarketing PlanCommercial Plan

DEMAND ANALYSIS

Globe

• 5,4 million barrels per day;

• Constant increase over the last decades, 3,3%;

• 2008 peak;

GEOGRAPHICAL ANALYSIS

GEOGRAPHICAL ANALYSIS

• 1,1 million barrels per day;

• similar growth to world, 2,7% in last 30 years;

• UK, Germany, France, Spain and Italy;

• 2008 peak;

European Market

• Similar pattern as Europe, however 5,2 % in the last 30 years;

• 24 thousand barrels per day;

• Peak in summer months;

GEOGRAPHICAL ANALYSISPortuguese market

• 115 thousand barrels per day;

• Railway Sines – Madrid;

GEOGRAPHICAL ANALYSISSpanish Market

GEOGRAPHICAL ANALYSIS

• 73 thousand barrels per day;

• Rotterdam port – biggest in Europe;

• Central European Pipeline System (CEPS);

Dutch Market

Expected increase in jetfuel consumption till 2040 – driven by globalization, low transportation costs

• Worlwide:1,7%• Europe: 1,2%• Portugal: 1,2%• Developing countries: 2,9%

Regarding now the Biojet fuel consumption from 2020 to 2050 – driven by European Union Policy• Europe: 13%• Portugal: 13

Demand growth and drivers

SUPPLY ANALYSIS

INTERNATIONAL COMPETITORS

• Green Subsidiary of Honeywell

• Bio fuel innovation leader• Produce and sells in the US• Had agreements with Repsol

in Spain

• Born as joint venture between airline industry stakeholder

• World leading supplier of Bio Jet

• RSB partnership• Bio Port worldwide

Country Production (MT)

Europe 27,80399874

Netherlands 5,06050016

Germany 3,748600005

United Kingdom 3,566500045

France 3,354500015

Turkey 2,82429992

Greece 1,74389992

Italy 1,59009987

Belgium 1,178699975

Portugal 0,83929998

JET FUEL PRODUCTION BEAKDOWN (Europe)

SCANDINAVIA

• Over 20 million liters produced

• AtJ (alcohol to Jet) process

• Very high costs• Major shareh. of

Povoo Bioport• Bio fuel world

leader

• Bio port in Karlstadt• Bio jet from cellulosic• Set up storing facilities in

Karlstadt airport

NORTH SOUTH CORRIDOR

• 800.000 tonne/year refinery (biofuel)

• Rotterdam Bio Port shareholder• HEFA process• Connections with Rotterdam and

Amsterdam – Schipol• Access to CEPS

CEPS advantages:

• Frankfurt direct connection• Zurich direct connection

• 400 million liter HVO plant started in 2014

• Production focused on road transport (Bio diesel)

• Possibility of Bio Jet production

FRANCE AND IBERIA

• 500.000 tons of biodiesel by 2017, sided by Bio Jet

• Aim to cover 30% of continental Europe bio fuel market

• Partnership with Thyssen for second plant

Joint Venture Total/Amyris

• Uses lignocellulosic to produce Bio Jet (FT process)

• Expected to be operative late this year

• 220.000 tons from 1MT of raw material

• 376 million liter of bio diesel in 2014

• No hints over bio jet production

• Refineries in Cartagena and Puertollano

PORTUGAL OVERLOOK

3.3 M liters per day

30%

70%

CLC

15% 15% 65%

• Owner of the 2 refineries

• Major supplier for Jet Fuel

• GOC (Grupo Operacional de Combustíveis) Reception à Storage à Distribution of the jet fuel

inside the Lisbon Airport

PORTUGAL OVERLOOK

Best Countries:

- Portugal- Spain- Italy

Worst Countries:

- Scandinavia- Holland & Germany- The UK

EUROPEAN EXPANSION FEASIBILITY MAP

REGULATORY ENVIRONMENT

ENVIRONMENTAL COMPLIANCE

The Production process- HVO

ENVIRONMENTAL COMPLIANCE

• Maintenance of aviation components

Component Status biojet fuel maintenance

Fuel tank Inspecion of tank of seal property damage andcorrosion leading to leak, cracking or pump blockage needed

Fuel filter Normal sediment possibility coming from the tank or the biomass residue

Engine fuel pump/electric booster pump

Fuel flow needs to be tested for minimum flowrate (low for bio jet fuel)

Fuel nozzles decreasing fuel flow rate led to decrease in fuel nozzle supply enhancing disturbance on complete combustion

TECHNICAL COMPLIANCE

EUROPEAN UNION OVERLOOK

2010 to 2050 Worldwide Aviation ↑ 5% per year

Operational efficiency ↓CO2 emissions = 2% per year

350%growth CO2 emissions (2050)

EUROPEAN UNION GOAL

“In 2050 technologies and procedures available allow a 75% reduction in CO2 emissions per passenger kilometre” Flightpath 2050 Europe’s Vision for Aviation

EMISSIONS TRADING SYSTEM (ETS)11 000 power stations and industrial plants in 31 countries, as well as airlines (2012)

+ 10 CO2 tonnes + 10 CO2 tonnes

- 20 CO2 tonnes

SELL

ETS – AIRLINES (2012)

World Carbon Market DatabaseAviation ETS Database

CARBON MARKET

AVAILABILITY PRICE

Thomson Reteurs - 2030 EU carbon price forecast: What`s next for the EU ETS

EUROPEAN ADVANCED BIOFUEL PATH

2016Goal: 300 000 tonnes of biofuel producedInvestment: 1.3B €

2018Goal: 800 000 tonnes of biofuel producedInvestment: 1.7B €

2020Goal: 2 000 000 tonnes of biofuel produced

THE TREND

No specific law will be imposed to airlines to further use biofuel in the future

EU`s “Flightpath 2050 Europe’s Vision for Aviation” 2050, technologies and procedures available will allow a 75% reduction in CO2 emissions per passenger kilometre

Short-term successPrice + Performance + Origin

PRICE ANALYSIS

PRICE ANALYSIS

Feedstock Selection

Correlation factors

• With Oil• With US $

UCO Application

Carbon Credit Application

RECOMMENDED FEEDSTOCKSUsed Cooking Oil Jatropha Camelina

Advantages

- Highest CO2 reduction- No land use- Do not compete with food- Relatively cheap

Disadvantages

- Fragmented nature- Limited up-scaling potential- Short-term solution, but not

competitive in the long run

Advantages

- Grow in poor soil- Low water necessary- High yields- Up-scaling potential- Low prices

Disadvantages

- Need rich soil and lots of water to produce high yields

- Scale economies will interfere with food crops

- Price increase if RSB is granted- Low prices probably fake

Advantages

- Grow in poor lands- Do not require much water- Up-scaling potential

Disadvantages

- Grow in developed countries- High prices- Not very high carbon

reduction compared to UCO

Best Price: €270/ton

Best Price: €200/ton

Best Price €950/ton

367%Biofuel Production Increase from 2000 to 2010

• Increased correlation from 2000 onwards

• High volatility with recessions

• Oil and Jet-A1prices totally bounded

FOOD , OIL , and USD CORRELATIONS

• Strong negative correlation between Oil and US Dollar

Estimated exchange rate EUR/USD as of 2020

0,97

FOOD , OIL , and USD CORRELATIONS

UCO Application

• Best scenario with High Oil prices

20% Incidence of “fixed costs” for the low case scenario

Feasibility TestJet-A1

CARBON CREDITS APPLICATION

• Emission savings to play a major role

• Impact ranging from 3,7% to 9,5%

STRATEGIC ANALYSIS

STRATEGIC ANALYSIS

Future Strategic Issues

StrategicIssues

Competition

Substitution

SustainabilityImplementation

Profitability

Strategy formulation

Enter market andsecure positoin

Expand over borders

Exit strategy - selling

Address strategic issues

Leverage key successfactors

Exploit firstmoveradvantage

Costefficiency

differentiation

StrategicIssues

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STRATEGIC ANALYSIS

MARKETING PLAN

4P’s OVERVIEW

• Fairs and conferences• International trad fair for

aviation industry• European Business aviationconvention & exhibition• Sustainbaility summit• Advanced bioeconomy

feedstock conference• Magazines (Lufthansa, E&T) • Sales force

Product

Price

Place

Promotion

CLIENTS SHORTLIST

1st phase: Promotional / Sales channel setup (2018 – 2021)

2nd phase: Sales consolidation (2021 – 2024)

National International

between others

Advantages Disadvantages

ü Easier to enter into the

market

ü Easier to establish a long-

term purchase agreement

û High risk exposure and

dependency

û Margins could be squeezed (lower bargaining power from Infraventus)

Sales channel setup and consolidation (2020 – 2024)Establish a 1st mover advantage

One Costumer

Advantages Disadvantages

ü Split the risk exposure

ü Higher possibility of selling

the full production capacity

ü Better margins (higher bargaining power)

û Difficult to convince; no 1st-

mover advantage

û Difficult to fulfil all the three

companies if demand ↑

Spit Sales

Diversification and increase Sales

International Sales

Advantages Disadvantages

ü Portfolio diversification: risk

reduction

ü Additional increase in sales

û International competition

û Additional costs: tariff

barriers + transportation

BIOFUEL PLATFORM

Sales channel setup and consolidation (2020 – 2024)

MARKETING OVERLOOK

Establish a 1st mover advantage Diversification and increase Sales2018-2020 2020-2024

(-) Risk exposure based on customers` dependence

(+) Profit margins

(+) Long-term contract stability

(+) Probability of selling the full installed capacity

1. Galp enters organically into the market

2. Galp tries to acquire Infraventus

Promotion activities

COMMERCIAL PLAN

Market analysis

European comission targets Biojet fuel consumption: - 2 MT in 2020;- 156 MT in 2050;

According to this, we get an annual increase of 13% on the consumption of Biojet fuel.Adding to that, we know that the Portuguese market represents roughly 2% of the european consumption of jetfuel;

COMMERCIAL PLAN

Summary:• Investment – 50m €;• Total Variable Costs – 367€ /ton;• Total fixed costs – 2723800€ +

%maintenance;• Depreciation – 2000000€ per

year;

It is important to notice that the ratio between fixed costs and variable is really high, which shows us the relatively low importance of it;

COST BREAKDOWN

Breakeven analysis, yearly, for given prices

• Low capacity of production in order to breakeven;• Low operational efficiency;

Breakeven analysis with respect to Infraventus targetsInfraventus desired targets:

• Production capacity of:• 1st year : 35%• 2nd year: 50%• 3rd year: 65%• 4th year: 80%• After the 4th: 85%

• 10% compounded ROI;

• Payback of investment made after 7,2 years of the beginning of the project;

COMMODITY TARGET PRICE

Now, controling for the ROI, prices given, and the quantity produced in 7,2 years, we can obtain the maximum price that Infraventus can buy the commodity for each scenario:

Further, we can even analyze the percentage of the cost of commodity on the price and thus analyze the advantages and disadvantages of each scenario:

Net Income with 10% compound ROI – high Scenario

Concluding, using the commidity cost found, we see that Infraventus can payback fully it’s invesment in 7,2 years, and obtain a compounded ROI of 10% during this period;

High scenario: • High financial exposure;• Bigger capacity to “play” with margins;

Low scenario:• Low financial exposure;• Lower capacity to vary the margins;

COMPARISON BETWEEN THE SCENARIOS

Timeline

2016 2018 202420222020

PLANT BUILT

PROMOTION SALES

2027 2045

Invest. Payback END OF THE PROJECT

ETS 4th phase

ICAO & EU agreement

RecommendationProduct

-100% bio jet to

energy companies

Price-increase

stock during low oil prices

Place-Galp

national-Sky NRG

international

Promotion-fairs and

conferences-magazines-salesforce

THANK YOU COMPANY NAME FOR YOUR TIME !