LONDON (ICIS)--As governments continue to count the cost of the pandemic, both in terms of the price of keeping economies afloat and the wreck lockdowns and have made of certain industries, many lawmakers have settled on sustainability as the key to the reconstruction.
With the decarbonisation of energy-intensive sectors such as transport and manufacturing, and growing interest among governments and the public about driving the circularity of manufacturing, stimulus packages such as the EU Green Deal have also singled out biofuels as another facet of a sustainable recovery.
The sector has had a slow start, characterised by sporadic growth and limited take-up, exacerbated by concerns over the palm oil sector and of the impact growth of the sector could have on land use for crops.
As a goal directed by the Paris agreement and the goal for some countries of achieving net zero emissions by 2050, support for bio-refining has become increasingly substantive due to the need to slash emissions from tough to decarbonise sectors such as air travel.
The approaching tipping point for the biofuels sector comes at the intersection of regulatory trends and the hunt for profitability.
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Oil and gas majors have taken stronger looks at the sector by necessity due to fuel blending rules like the EU’s renewable energy directive II (RED II), which stipulates that 14% of road and rail transportation fuel should be from renewable sources by 2030.
The need to source and utilise sustainable fuels helped to push sector players to develop competencies in the space, but public interest in sustainability comes at a point when incumbents are looking beyond their comfort zones of exploration and production.
The push by oil majors to diversify beyond crude has taken several key routes – petrochemicals, electric vehicles, renewable energy and biofuels- with different firms weighting priorities differently.
Some, such as Saudi Aramco, have signalled a multi-billion dollar push into petrochemicals, while others such as BP have sold off most of its assets in the sector.
The regulatory pressure to develop sustainable fuels production capacity and supply chains means that nearly all producers have a focus, with Shell placing biofuels at the heart of its strategy to bring about a “managed decline” of its conventional oil and exposure, according to CEO Ben van Beurden.
The groundswell of support for some form of net zero emissions commitment in governments from all regions means that staking a strong position in biofuels and other emissions abatement spaces could result in significant future demand.
“If we can be successful in pioneering countries, work out how regulations need to change, I think you will find that other countries are going to copy it,” van Beurden added.
Growing consumer interest and increasingly stringent regulatory targets for biofuels usage have come at a point where coronavirus and the chilling effect the pandemic has had on global travel, have led to a substantial drop in demand for conventional refined products.
The drop in demand has driven European producers to mothball refineries across the continent in a bid to balance the market in light of the likely protracted nature of the downturn.
Some have gone even further. Like producers for aerospace components, refiners have started to shut down facilities on expectations that demand may never bounce back to pre-pandemic levels, with significant question marks still remaining over what the new normal will be for commuter and business travel.
Several players including Gunvor and Neste are shutting facilities outright, but others, including Total and INA are looking towards bio-refining as a solution, with the France-based firm looking to shift the slate of its Grandpuits refinery 100% to bioplastics and renewable diesel targeted at the aviation sector.
The growing viability of sustainable aviation fuel (SAF) highlights the growing sophistication of the biofuels sector and the gathering political will behind it, with the Netherlands setting out a target for 14% of air fuels from sustainable sources by 2030.
By 2050, the Dutch and French aviation sectors are expected to be powered completely from sustainable sources.
There is also significant potential for the bio-naphtha sector, both as a drop-in feedstock for petrochemicals production and as a blending stock for bio-gasoline.
Players in policy-driven growth sectors face the dangers of over-exposure to the pace and coherence of regulations, and biofuels has proven no exception.
As supply ramps up, the source and scalability of biofuel raw materials has received greater focus, and land use concerns for crops and palm oil led to a lengthy period of deliberation in the European Commission. The EU has issued clearer guidance capping usage levels
The Commission has given clearer guidance capping levels for crop-based biofuels, but was slow to act, meaning a long stretch of uncertainty that had a cooling effect on investment.
US regulation has also placed for a long-standing cap on sector growth but is starting to shift. Referred to as the 'blend wall', the country has historically had a limit of 10% of biofuels – largely first-generation corn ethanol – in road fuels, but this has been revised to 15% for newer model cars.
In every biofuels sector, regulation is fast-moving and varies hugely by country, meaning that firms need to stay agile and respond quickly to new developments. But the sheer scale of the targets and how that stands to drive the scale of the sector in the next decade means the opportunity is likely to be substantial.
The impact of the restrictions and company spending cuts during the pandemic year have inarguably slowed biofuels sector growth, along with the protracted regulatory limbo caused by EU indecision on how to regulate the space.
Despite teose hurdles, the strong growth potential and overall policy push comes at a time when, for some sectors, the pre-pandemic era may never return.
The International Energy Agency projects that, despite strong petrochemicals demand growth, the shift towards electric vehicles and other more sustainable forms of fuel, the traditional refining sector will never fully recover from the hit it took during the pandemic.
The decline of the traditional refining sector makes even more of a case for the growth potential in biofuels, and government targets are only likely to increase in ambition as the 2050 net zero emissions deadline draws closer.
Insight by Tom Brown.