Sustained growth in biofuels rests on government policy support

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24 November 2010, Oil

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The biofuels industry has faced a tough period during the last two years due to the global financial crisis, declining crude oil prices, and the surging price of feedstock (especially of corn in the US). Many biofuels projects were reportedly shelved during the last two years after crude oil prices declined to less than $40 per barrel. A slowdown in biofuels research initiatives during this period further added to the woes of the industry.

However, with the world energy market witnessing a recovery in 2010, the biofuels market has also experienced improved business prospects. The US and Brazil - the two largest producers of ethanol - are preparing themselves to take advantage of the demand opportunities expected to be created in 2011. The domestic demand for ethanol in the US will, to a large extent, depend on the government's decision to allow use of E15 instead of E10. The industry stakeholders who were expecting a decision on blending by end of this year will now have to wait until early next year as the Environmental Protection Agency has decided to delay this decision. Overseas demand is expected to come largely from the EU region, following the EU's acceptance of the Renewable Energy Directive, which requires EU member states to increase their use of renewable fuel for transport purposes to 10% by 2020, a significant increase from the current contribution of about 3.4%.

US ethanol exports have more than doubled in the first nine months of this year compared to the same period of 2009. However, it remains to be seen whether the government will extend the tax credit incentive given to domestic producers, which is due to expire later this year. Meanwhile Brazil, led by national oil company Petrobras, is pursuing an aggressive export strategy, with the UK as its focus market. In October this year, the company procured 2.2 billion gallons of ethanol from Brazilian producer Guarani to sell in the UK market, in a deal worth $1.22bn. The company has also formed an ethanol distribution partnership with five other companies, at an initial capital investment cost of about $58m.

The signs of revival in the biofuels market have also been sufficiently encouraging to attract the likes of energy giants Shell and BP. While Shell decided to enter into a $12bn joint venture with Brazil's Cosan, BP has decided to increase its investment in the Brazilian ethanol industry from $5bn to $6bn during the next decade. The strategic nature of these investments reiterates the long-term development plans of these companies with respect to biofuels.

However, before forging ahead with their biofuels plans, energy companies will be monitoring closely the stance of the various governments involved, particularly those of the US and the EU, with respect to the environmental concerns related to the use of biofuels. Hence, any new R&D works, such as those in the area of third- and fourth- generation biofuels, may take longer to be set in motion.

While biofuels demand is likely to strengthen in the short term, the industry can only expect to see sustained growth if the governments involved actively set up clear regulations related to biofuels production, tax credits, emissions, and food security. Without clear directives on these issues, biofuels have recently faced a backlash from various environmental groups, which have cited issues such the higher emissions involved in the production of biofuels and what they claim is the unjustified use of arable land. The year ahead thus promises to be an interesting one for the biofuels industry, not only in terms of demand growth, but also in the area of regulatory policy making.

Source: Datamonitor

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