Biodiesel: Boom or bust

05 February 2007 00:00  [Source: ICB Americas]

The US, Europe and Asia rush to boost biodiesel production. Will new developments in green technology lead to success?

GROWTH FOR biodiesel has been unprecedented over the past five years, boosted by several legislative actions in energy security and environmental concerns. However, considerable uncertainty surrounds costs, feedstock supply, consumer acceptance and technological barriers (see the Big Biofuels Blog).

Global capacity, production and consumption grew an average 32% per year during 2000-2005, according to SRI Consulting (SRIC). The ramp-up in capacity over the next five years, however, will exceed expected demand in many regions.

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"With capacity growing at 115% per year, the world is expected to run into an overcapacity situation during 2007, even though growth in biodiesel consumption is expected to reach its peak during 2006-2007," says SRIC vice president Ralf Gubler. "This will result in intensified competition, lower capacity utilization rates, squeezed profit margins, a war for raw materials and, probably, the closure of small-scale producers and those in less strategically important regions."

The buildup in capacity is expected to be particularly strong in North America and Asia. Biodiesel production in Western Europe, which accounted for more than 75% of global production in 2005, is expected to slide to below 40% through 2010.

US growth gone wild

In the US, the National Biodiesel Board (NBB) projects 2007 capacity will reach nearly 2bn gallons/year versus the current estimated capacity of about 580m gallons.

"Our goal is for biodiesel to make up 5% of the US on-road diesel fuel market by 2015," says NBB CEO Joe Jobe. "That may not sound like a lot, but if we could do that, it would be the diesel fuel equivalent of the amount of oil we import from Iraq each year. It is a very relevant number," he adds.

Domestic biodiesel production was estimated at 200m-250m gallons in 2006, triple that of 75m gallons in 2005. There were 88 US biodiesel plants in total at the end of 2006. "It is more difficult to estimate 2007 and beyond, but we expect it to keep growing," notes Jobe.

The challenge, says NBB, is to keep a favorable regulatory climate for biodiesel. Creating a high level of consumer confidence in biodiesel is also a top priority.

"The industry has taken an aggressive approach to quality, asking government agencies to adopt fuel quality standards for biodiesel and enforce them," says Jobe. "NBB has developed the Fuel Quality Enforcement Guide, which provides guidance on actions for anyone who has concerns that a company might not be producing spec fuel."

Technology development continues to be a key element for growth in addition to consumer acceptance, says Bill Downey, head of Kline & Company's petroleum and energy consulting practice.

"Making biodiesel efficient and effective for the fuel business is actively being developed," he says. "Changes in technology to make biodiesel cost-effective, and changes on the regulatory front will shape up the industry's future."

Europe burning out?

European biodiesel capacity in 2006 is estimated at more than 6m tonnes and is projected to increase to around 10m tonnes this year, according to the US Department of Agriculture (USDA). Biodiesel production in the EU-25 last year is estimated at 4.4m tonnes and is projected to rise to 6.1m.

Technical barriers, changing public policies and availability of land for nonfood applications, however, are challenging growth, says Ian Butcher, managing director for Kline Europe.

"There are still a lot of technical issues that need to be tackled and oil companies haven't really stepped up to the plate in terms of research and development," Butcher notes. "Meanwhile in Germany, tax exemption for biodiesel has recently been lifted, making the fuel currently a tad more expensive at the pump."

The German tax rate on blended biodiesel is expected to rise annually by 6 euro cents/liter between 2008 and 2011, and reaching 45 cents/liter by 2012, according to a report by Citigroup Research. "This is slightly below the current tax rate for diesel at 47 cents/liter. At the same time, the compensation for pure biodiesel will gradually decrease from the current 38 cents/liter to 2 cents/liter in 2012."

Because of the tax benefit reduction, German biodiesel growth is expected to slow. The country produced 1.7m tonnes of biodiesel in 2005 and is estimated to produce 3m tonnes this year, the USDA notes.

In France, tax cuts for biodiesel were reduced last year to 25 cents/liter from 33 cents in 2005. "Tax cuts for biofuels in France were reduced as the cost of supporting biofuel production results in lower tax gains for the government budget," the USDA says. "If raw materials necessary to produce biodiesel are imported from outside of the EU, the preferential tax system benefiting biofuels may also be revised."

French biodiesel production this year is estimated to increase to 800,000 tonnes from last year's 550,000 tonnes.

Asia driving supply

Asian palm oil players announced several biodiesel investments last year in Indonesia, Malaysia, Singapore and China. Some were driven by government initiatives to reduce diesel imports, while others are mostly for planned exports.

"Asia is expected to become the second-largest biodiesel producing region by 2010 right behind Western Europe," says SRIC's Gubler. "New and large single consuming markets for biodiesel are expected to emerge in China and India."

In China, biodiesel is currently listed as a government R&D priority. China's Renewable Energy Development Center of the National Development and Reform Commission (NDRC) set a target that 10% of energy demand be met from renewable resources by 2020.

"The biofuels boom in China is mostly from bioethanol as opposed to biodiesel, at least initially," says Li Wang, director of Kline Asia. "In the biodiesel sector, the goal by 2010 is to reach 11m tonnes, about 10% of diesel consumption. This might be very ambitious."

Raw material availability, high manufacturing costs, and lack of quality standards must be addressed, notes Wang, before China's biodiesel sector can take off.

China has about 30 small-scale biodiesel plants in operation, which mostly use waste cooking oil as feedstock. Biodiesel production in China this year is expected to reach between 100,000 and 200,000 tonnes, according to the USDA.

In Malaysia, more than 500,000 tonnes of biodiesel capacity are set to be operational this year. Investors include Golden Hope, Carotino, IOI Corp., Kumpulan Fima, Kulim Berhad and IJM Plantations.

Agribusiness group Wilmar is constructing three biodiesel plants with a total of 1.05m tonnes/year capacity in Indonesia.

Brazil's biodiesel industry is hampered by higher production costs and similar taxation compared to petroleum diesel.

The industry's development is mainly driven by the government's legislation where 2% biodiesel blend becomes mandatory for diesel distributors in 2008, rising to 5% blend by 2013.

This program is expected to drive biodiesel consumption of over 1bn liters/year by 2008 and over 2.4bn liters/year by 2013, says Sergio Rebelo, managing director of Factor de Solucao, Kline's affiliate in Latin America. Rebelo estimates Brazilian diesel fuel consumption to reach 50bn liters in 2008.


"To support the program, state-owned Petrobras is made responsible for buying all the biodiesel products in the market through auctions, which they then resell it to fuel distributors," says Rebelo. "However, once the current price of biodiesel is higher than the diesel price, over 75% of the biodiesel bought by Petrobras is sold through their subsidiary BR Distribuidora."

Petrobras itself is investing 227m Brazilian reals ($106m) to build three biodiesel plants, each with a capacity of 57m liters. Kline estimates current Brazilian biodiesel production at 150m-180m liters/year. More than 550m liters/year capacity are idle at present.


Chemical industry jumps in to biodiesel

The global biodiesel industry is said to be among the fastest-growing markets the chemical industry has ever seen, and major chemical and oil players are looking at opportunities to cash in on its growth.

Honeywell's UOP is anticipating the first US commercial sale of its Green Diesel in the first quarter. Compared to biodiesel, which uses methanol, UOP's biofuel - made from vegetable oils and greases - is produced using hydrogen, and has properties said to be identical to petroleum diesel.

"Biodiesel, which is also known as fatty acid methyl ester, is an additive to diesel and has very different properties," says UOP's director of renewable energy and chemicals unit, Jennifer Holmgren. "Green Diesel is used as real diesel and its cost-economics are much better than those for the production of biodiesel. It also does not require changes in the engine or fuel delivery infrastructure. This technology will represent an important step in the acceptance of biofuels by refiners and auto manufacturers."

ConocoPhillips says its renewable diesel fuel made from vegetable oils also uses a different processing method compared to conventional biodiesel. The company recently started its 150,000 liter/day renewable diesel fuel refinery in Cork, Ireland.

Petrobras's H-BIO, a semirenewable fuel produced through the hydrogenation of vegetable oils and diesel blend, is expected to be commercialized by 2008 in Brazil. The company will produce the biofuel in five refineries, which will produce a volume equivalent to 25% of Brazil's diesel imports.

Technologies to improve the properties and cost economics of conventional biodiesel are also being investigated. Diversa says its soon-to-be launched Purifine enzyme will increase the efficiency of oilseed processing for biodiesel.

Eastman Chemical is launching its new biodiesel additive, BioExtend 30, a combination of antioxidant MTBHQ (2-tert-butylhydroquinone) and the chelating agent citric acid. The additive minimizes biodiesel's tendency to oxidize, allowing the fuel to be stable for extended periods of time.

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