INSIGHT: Are biofuels out of control?

20 December 2006 17:31 [Source: ICIS news]

By Simon Robinson

LONDON (ICIS news)--The market for investing in biofuels is pretty hot, fast moving and quite unstructured.

Speaking at the 2006 European Biofuels Forum in Warsaw in November, Michael Liebreich, chief executive officer of New Energy Finance put this whirling market into perspective: Total investment into biofuels was $20bn from the final quarter of 2005 and the third quarter 2006.

He quantified total global investment in energy in 2005 at $500bn. So, the current biofuels investment level corresponds to about one dollar in every eleven invested in energy.

By 2010, Liebreich estimates that the world will be investing around $100bn in energy projects and about one dollar in six will be going into clean fuels.

“Is this the bubble? There will be people who will lose their shirts but we will find a transformed sector in the future,” he said.

But the fastest growing area for biofuels is not in projects or technology, it is in deals. There were 254 deals in 2005 which saw $7.2bn invested, in 2006; he estimates there will be 289 deals with around $8.8bn invested.

And the number of IPOs and secondary offerings of biofuel-based firms leaped this year. Around $1.5bn was raised in the second quarter of 2006, compared with $75m in the last three quarters of 2005.

“There is a gold-rush mentality at the moment, investors are confused between technology and project finance, but the amount available is essentially unlimited at the moment,” he said in late November.

“How much do investors understand the market?” he asked, adding “will venture capitalists, [who are investing increasingly now] be the long term owners? Or will it return to oil and agribusiness?”

Those are probably unanswerable questions, but the biggest investors by a long way, into biofuels are agricultural companies. This sector invested $8.9bn between 1 January 2001 and 31 August 2006, said Liebreich.

This compares with $1.4bn from financial investors and $1.3bn by independent developers over the same time frame.

ADM tops the list with $1.5bn, followed by Abengoa with around $700m in the same period and Tereos with around $280m in the period.

Liebreich defines biofuels as “a policy driven market”. He adds that investors hate policy risk because they cannot control it. So, the smart ones diversify in to different geographical regions.

Other, relatively savvy financial investors are looking at joint ventures with the existing agricultural players. But while smaller biofuel players are glad of the investment income, the larger ones are happy for financial investors to bear the risk.

Perhaps they are wise to, because not only are the markets driven by national or regional policy, which can change at short notice there is no clear winning technology, with at least four alternative technologies available for substituting petrol and a larger number for diesel.

Additionally, there seems not to be a clear winning strategy based around integration with the oil firms and their logistics or the large agricultural suppliers.

Should you invest in a plant or technology with a single feedstock, or will your technology base allow for a range of feeds and fuels?

There is also little integration along the potential chains from seed to fuel tank, leaving many investors to try and catch the value in their segment of the chain.

One thing is certain: that there will be a shake out, especially if raw materials prices continue to rise.

Simon Robinson blogs about biofuels for ICIS in the Big Biofuels Blog.

By: Simon Robinson
+44 20 8652 3214

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