Jun 28, 2007 | 19:30 GMT

13 mins read

Global Market Brief: Biofuels Pushing Energy Firms 'Beyond Petroleum'

The June 22 passage of significant biofuel mandates in a U.S. Senate energy package is one of many factors suggesting the oil industry will move closer to matching the rhetoric of certain oil companies' claims that they are not part of an "oil industry" but an "energy industry." Throughout the past decade, energy companies — most notably BP and Royal Dutch/Shell — have forayed into the alternative fuel/energy sector. However, they have remained oil companies first and foremost, no matter how "beyond petroleum" BP claims to be. Oil will still be the backbone of the energy industry's operations, but unless a major impediment to biofuel production develops, oil will no longer be the only significant component of vehicle fuel worldwide. Economic and regulatory circumstances could, for the first time, compel some oil supermajors to truly move beyond petroleum and into a more robust fuel mix. The Growth of Biofuels The U.S. Energy Policy Act of 2005 — which requires that renewable fuels make up 4 billion gallons of the nation's gasoline market starting in 2006 and 7.5 billion gallons by 2012 — spurred much of the current growth in biofuel research in the United States. The U.S. Senate Committee on Energy and Natural Resources said that, as of 2006, these renewable fuel requirements led to the construction of 34 new ethanol plants and the planned construction of an additional 150. In Europe, carbon regulations tied to energy security concerns and Kyoto Protocol commitments have propelled investments in biofuel research; earlier in 2007, the European Union mandated that biofuels make up at least 10 percent of European liquid fuel by 2020. To ensure that biofuel development continues, the U.S. Senate passed a comprehensive energy bill June 22 by a 65-27 vote, mandating at least 36 billion gallons a year of domestic ethanol production for vehicle fuels by 2022. The bill increases funding for bioenergy research by 50 percent for 2008 and 2009 and supports the development of biofuel infrastructure and transport. In July, the measure will go to the U.S. House of Representatives, where it will face few hurdles, given biofuel technology's political popularity among rural voters and the growing investment interest in renewable fuels. U.S. President George W. Bush's endorsement of cellulosic ethanol in his 2006 State of the Union address and his recent plan for reducing domestic gasoline consumption by 20 percent in 10 years have not only brought biofuels to the forefront of the national energy dialogue, but they have also led to direct federal support for biofuel research. In February, the U.S. Department of Energy (DOE) awarded $385 million for six separate industry biorefinery projects expected to produce at least 130 million gallons of cellulosic ethanol annually. On June 26, DOE pledged to invest $375 million in three bioenergy research centers, to be located in Wisconsin, California and Tennessee, in an effort to speed up cellulosic research. The auto industry has responded by committing to increase the production of flex-fuel vehicles. In 2006, the CEOs of Ford Motor Co., DaimlerChrysler and General Motors pledged to double the annual production of vehicles that can run on E85 — a gasoline blend containing 85 percent ethanol — or biodiesel to 2 million cars and trucks by 2010. With the likely emergence of a global post-Kyoto agreement on climate change (though likely not within the current Kyoto framework), and the likely passage of carbon reduction strategies in the U.S. Congress in several years, biofuels will grow more attractive a fuel source that produces fewer carbon emissions — particularly as the biofuel industry develops energy-efficiency advancements. Industry Response Government subsidies for biofuel production, likely to be hammered out in the 2008 Farm Bill, will make biofuels more competitive with oil; and, after years of fighting for permission to build new refineries rather than adding capacity at existing facilities, the oil industry is becoming uncertain about the future of the fuel mix and therefore about the future demand for refined oil products. This is not only leading many in the industry to give up on building new refineries, but it is also encouraging even the most reluctant within the industry to devise strategies to incorporate other forms of fuel into their portfolios. In other words, as the concept of supply and demand for transportation fuels radically changes, energy companies will change from primarily oil providers to transportation energy providers. To take the most recent example, BP, Associated British Foods (ABF) and DuPont announced June 26 a $400 million investment in the construction of a bioethanol plant and a biobutanol demonstration plant. The business coalition is marketing biobutanol, a biofuel more similar to unleaded gasoline and less corrosive to existing pipelines than traditional biofuels, as the "next generation" of biofuels due for introduction in the United Kingdom's transport mix this year. BP also launched the BP Energy Bioscience Institute in partnership with the University of California, Berkeley, and the University of Illinois, Urbana-Champaign, on Feb. 1; BP will provide $500 million over the next 10 years to increase current biofuels' efficiency and develop biofuels from plant matter that does not compete with food crops. Shell claims to be the largest global distributor of transport biofuels, selling slightly more than 900 million gallons in 2006. Shell has invested significantly in cellulosic ethanol and, in 2006, the company launched a study with Volkswagen and Canadian biotech company Iogen Corp. that claimed this fuel both produces fewer carbon dioxide (CO2) emissions than traditional ethanol and can be cost-competitive with gasoline. Later this year, Shell intends to demonstrate the first biomass-to-liquids plant that converts wood chips, through gasification, into a synthetic fuel that can be combined with diesel for use in diesel engines. Shell claims this technology could reduce CO2 emissions by 90 percent relative to conventional diesel. While European-based majors have taken the lead in biofuel research and development, U.S. companies are increasing their involvement in the industry. In April, Tyson Foods Inc. and ConocoPhillips announced a partnership to turn animal fat into diesel fuel. The companies call the fuel "renewable diesel." In 2006, Chevron Corp. invested with Galveston Bay Biodiesel to construct a biodiesel production and distribution center and entered into a $400 million partnership with the Georgia Institute of Technology to develop cellulosic biofuels. Coming Biofuels Challenges While oil companies are increasingly retooling their portfolios to include biofuels, the move is not without its challenges. As momentum builds for biofuels, the debate will focus on what types of biofuels should be promoted and what type of constraints, if any, should be placed on biofuel production methods. Certain interest groups and legislators are concerned about the unintended consequences of increased industrial agriculture methods to produce biofuels and the moral dilemma of whether to use would-be food crops to power vehicles or to feed the world's hungry. Notably, the new Senate measure on biofuels requires that advanced biofuels not derived from cornstarch (the primary source used in current U.S. ethanol production) make up increasing volumes of the annual 36 billion gallons of biofuels required by 2022 — from 3 billion gallons in 2016 to 21 billion gallons in 2022. These advanced biofuels include ethanol derived from cellulose and waste material (including vegetative and animal materials), biobutanol and biodiesel. This provision is designed to spur research into less land-intensive and more energy-efficient biofuels to reduce the unavoidable increase in tension over rising food prices attributable to the increasing diversion of basic crops and cropland to fuel production. A significant breakthrough in cellulosic ethanol might develop rapidly, or it could be 10 years away. Regardless, before cellulosic ethanol can be widely produced and used, technological advances will have to reduce production costs enough to overcome the likely enormous expenses of transporting cellulosic ethanol. In the meantime, supporters of traditional ethanol will have to temper anger over rising food prices and the negative environmental effects (such as habitat destruction and fertilizer runoff) of increased fuel crop cultivation using conventional biofuel crops in order to establish the biofuel infrastructure necessary to facilitate profitable growth in the biofuel industry and a true transformation of energy companies. UAE: Approximately 50 percent of UAE natural gas meant for increasing oil field output will be diverted for use in power plants to help fulfill increased summer energy demand, UAE Oil Minister Mohammed al-Hamli, president of the Organization of the Petroleum Exporting Countries, said June 26. Natural gas is typically reinjected into oil reservoirs in order to maintain pressure and maximize crude output; UAE oil fields produce between 2.58 million and 2.6 million barrels per day. Although al-Hamli did not indicate the volume of natural gas being diverted, industry sources say UAE fields require approximately 1.2 billion cubic feet per day (cfd), which means approximately 600 million cfd will go toward electricity production. The massive development in the United Arab Emirates has led to an increase in electricity demand, especially during hot summer months. It is unlikely this will lead to any significant decline in oil production, given that it is a short-term move, but ultimately the UAE will have to enhance its electricity production capabilities to meet demand while continuing its planned oil production. RUSSIA/UKRAINE: Ukrainian-Russian natural gas company RosUkrEnergo and Gazprom Export, the exporting arm of Russian natural gas monopoly Gazprom, are in the process of drafting a contract that will facilitate Gazprom's intended sale of an additional 4 billion cubic meters of natural gas in spot contracts to Europe via Ukraine. The deal — announced June 26 by a Gazprom official — will allow Gazprom to buy natural gas from Ukrainian storage facilities at near-market prices and resell it in spot contracts, which are both profitable and risky for Gazprom. RosUkrEnergo bought the natural gas at very low prices initially and is expected to make at least $500.5 million but lose its ability to engage Europe in spot contracts, since this agreement will eliminate competition between RosUkrEnergo and Gazprom in making these deals with Europe. RosUkrEnergo is registered in Switzerland but Gazprom owns 50 percent of the company. Ukrainian natural gas tycoon Dmitry Firtash owns 45 percent of RosUkrEnergo and has his eye on purchasing Hungary's Fogaz, in which Gazprom is also interested. FRANCE: The French Senate released a report June 27 that indicates management errors and an internal power struggle within the European Aeronautic Defense and Space Co. (EADS) are partly to blame for the current troubles faced by Airbus. The report says a personal conflict between French EADS executives Noel Forgeard and Philippe Camus created a lasting disturbance in the company that, along with an excessively strong euro and an overly complex management structure, led to Airbus' consistent underperformance, among a host of other problems. The complex management structure the Senate pointed out is a product of a rigid agreement among shareholders that has resulted in a doubling of management at nearly every level. The French Senate probe into Airbus began in fall 2006, and its findings will serve as nonbinding advice to EADS, the French and the Germans. The announcement adds fuel to the fire started by French President Nicolas Sarkozy, who is intent on changing France's relationship with the aerospace company and has even threatened to abandon the company altogether. ZIMBABWE: Zimbabwean President Robert Mugabe threatened in a June 27 speech to seize foreign-owned companies, including banks and mining firms, which he accuses of economic "dirty tricks," claiming they are attempting to force regime change by artificially raising prices and cutting output in several key sectors. Additionally, a proposed black empowerment bill is currently before Parliament; its passage would lead to further nationalization of foreign-owned companies and mining installations. This move is seen as an effort to increase Mugabe's standing among members of the ruling Zimbabwe African National Union-Patriotic Front party ahead of the 2008 general elections. JAPAN/ZAMBIA: Japanese Ambassador to Zambia Masaaki Miyashita on June 25 announced Japan's commitment of $42.6 million to development projects in Zambia. Two days earlier, Japanese Prime Minister Shinzo Abe's Liberal Democratic Party said a proposal is being prepared to triple Japan's Africa budget over five years. Japan is looking to increase its presence in Africa to counterbalance China's growing economic and political influence on the continent. To date, China has extended its influence in Africa via loan/aid packages free of human rights/democratization conditions, but Beijing is facing growing international criticism over issues such as Darfur and African allegations of Chinese imperialism. In Zambia, Japan has stepped up to offer an alternative. By offering aid that will provide higher local pay, better safety standards and more efficient production methods, Tokyo is beginning to whittle away at Chinese influence in Africa. IRAN: Riots broke out in Tehran on June 27 after the Iranian government announced it had imposed a fuel rationing plan. Differing media accounts reported that between 20 and 50 gasoline stations were attacked and three people were killed. Many rioters condemned Iranian President Mahmoud Ahmadinejad, whose low-income support base will be hardest hit by this rationing plan. Due to Iran's severe lack of refining capability, Tehran is attempting to dial back the public's gasoline consumption, but such a policy poses a serious threat to Iran's political and social stability, particularly as negotiations between the United States and Iran over Iraq are in full swing. VENEZUELA: Venezuela's deadline for negotiating with foreign oil majors involved in Orinoco oil projects passed June 26, and two U.S. firms failed to sign an accord with the country. ExxonMobil Corp. and ConocoPhillips refused to sign a deal surrendering majority stake. Other foreign firms involved in Orinoco, including the United States' Chevron, the United Kingdom's BP, France's Total and Norway's Statoil, made agreements with Venezuela to reduce their majority holdings. Because ExxonMobil and ConocoPhillips did not surrender majority holdings, Venezuelan Energy Minister Rafael Ramirez said June 27 that the two majors can no longer produce oil in Venezuela. Ramirez said the firms' refusal to negotiate "automatically grants" Venezuela control of their operations. Ramirez added that negotiations will continue between the government and the two firms. While Ramirez indicated that the negotiations would establish the firms' settlements for surrendering operations, it is highly possible that some type of deal could salvage the relationship between Venezuela and these companies. At a minimum, ConocoPhillips will maintain offshore natural gas exploration operations in Venezuela, while ExxonMobil will no longer have any Venezuelan operations.

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