“Bio of a fuel”, by Irina Slav
On March 1, Chevron shut down two biofuel plants in Iowa and Wisconsin, blaming the EPA for its disappointing revision of biofuel mandates, which, the company said, “caused an imbalance in supply and
“Bio of a fuel”
AUG 19, 2024
∙ PAID
On March 1, Chevron shut down two biofuel plants in Iowa and Wisconsin, blaming the EPA for its disappointing revision of biofuel mandates, which, the company said, “caused an imbalance in supply and demand.”
On June 21, Bloomberg reported that BP was changing its plans for two biofuel facilities — in the U.S. and Germany — eyeing a mixed processing of both biofuels and petroleum instead of pure biofuel processing.
On July 2, Shell said in a news release it was pausing the construction of a biofuels plant in Rotterdam “to address project delivery and ensure future competitiveness given current market conditions.”
On July 8, Bloomberg again reported that biofuel makers in the U.S. were turning to so-called sustainable aviation fuels because of “Slumping returns from renewable diesel production.”
On August 1, Shell reported an impairment of $800 million related to the Rotterdam biofuels plant without further explanation. It also reported a $187-million loss from its “Renewables & Energy Solutions Business” but that was probably just a coincidence.
Biofuels are one of the pillars of the transition. Along with the Cartier of fuels — “sustainable aviation fuels” — bioethanol and biodiesel were supposed to be the fuel of tomorrow. Instead, they are crashing and they are crashing hard. Because someone once again forgot how demand and supply work, even with subsidies. It’s solar all over again, but more expensive.
Governments in Europe and the U.S. love biofuels. They love them as tools to reduce emissions from transport, by blending those biofuels with petroleum fuels — up to a point, however. That point was supposed to constantly increase every year but it turned out this was easier said than done.
Refiners, however, jumped the gun and expanded their biofuel production facilities in anticipation of massive demand that was never going to materialise. First, because you can’t just turn car fuel into half-and-half and second, because the more biofuels you produce, the lower the price would be. And the lower the price, the lower the profit. Ask any Chinese refiner of regular petroleum.
In addition to refiners, a whole cohort of “clean fuel startups” popped up looking for a piece of the new fuel pie — only to see their dreams crushed under the heel of reality, per this new WSJ report.
“Rising costs have pushed out project timelines and made it more difficult for companies to raise money. The government’s delays in completing tax credits are adding to the challenges,” the report said, citing executives from some of those unfortunate companies that bet their whole existence on government support demonstrating there are different kinds of complacency and complacency with government support for certain chosen industries is of the more dangerous variety.
“It’s really challenging to get new technology to do what the fossil-fuel industry has been doing for 80-plus years,” one such executive of a sustainable aviation fuel maker told the Wall Street Journal. Speaking of sustainable aviation fuels, or SAFs for short, they are a bit of a different story. Because they are extremely expensive to make — so they can only be made in small amounts that make zero sense for airlines.
Not that this has stopped airlines from investing in startups such as LanzaJet, whose executive the WSJ quoted in its story. LanzaJet boasts Shell, Microsoft, and Southwest Airlines among its financial backers — and its SAF costs twice as much to produce from ethanol as jet fuel costs to produce from crude oil. But there are SAF mandates on the table so the factory that the company just built in Georgia and that ended up costing more than LanzaJet expected should totally make sense, right?
Well, not if Air New Zealand is any indication and it might be. The airline became the first to drop its net-zero plans citing lack of new, more fuel-efficient planes and “the affordability and availability of alternative jet fuels”.
“The price of [SAF] is more expensive than traditional fuels, and there is not enough capacity to produce that at scale,” one aviation analyst told the BBC in case the message from Air New Zealand wasn’t clear enough.
That may well be about to change, with the U.S. EPA forecasting that SAF production capacity could rise from a puny 2,000 bpd to almost 30,000 bpd this year — if all planned facilities get built, that is. And if they are economical to operate. And here’s the kicker: Shell’s biofuels plant in Rotterdam was supposed to make SAFs along with biofuels for cars.
“The delays further highlight that the advanced biofuels market is not an easy one. The oil majors have dipped their toes and found it challenging,” one UBS analyst told Reuters when Shell announced the “pause”, noting the supermajors’ pullback on transition projects in general as they focused on the outrageous idea of returns over expensive virtue-signalling.
Yet elsewhere refiners are turning to SAFs from biodiesel because of the oversupply in the latter and shortage in the former. Per Bloomberg, “Slumping returns from renewable diesel production is pushing US refiners such as Valero Energy, Phillips 66, and Calumet Specialty Products to overhaul facilities to produce sustainable aviation fuel (SAF) — jet fuel derived from things like cooking grease. Although SAF production is costly, government incentives aimed at decarbonizing the aviation industry are expected to help improve its economics.”
So, these refiners got burned on biodiesel because they bet on government incentives that failed to spur sufficient demand for their supply and now they are betting on government incentives again to spur sufficient demand for their coming SAF supply. I guess the thinking goes “It will work this time.”
Even though there is not enough feedstock to produce SAFs in the world. Even though U.S. legislators are seeking a crackdown on Chinese imports of supposedly used cooking oil used as a feedstock for SAFs on suspicions it may contain virgin palm oil and we all know how bad palm oil is for the environment and the climate.
Vitol, meanwhile, is also investing in a SAF and biodiesel facility, also in Rotterdam. The commodity giant made record profits these past two years from oil and gas, and is looking for investment opportunities — betting, like those U.S. refiners, on government incentives, “despite lower than expected growth in demand for the product,” per the FT.
Government incentives appear to be a siren song for investors with extra money, and even those without extra money. The temptation is irresistible and companies are not resisting it, although “At United Airlines, one of the biggest backers of biofuel and hydrogen startups, the pace of investments has slowed this year,” per the WSJ.
What we have, then, is, on the one hand, overcapacity in biofuels and undercapacity in SAFs. The former is a result of those irresistible government incentives, and the latter is a result of high production costs. The incentives are driving growth in SAF capacity but there’s no mention of costs falling, which is going to be a problem in the future — because forcing airlines to buy more SAFs is possible but forcing people to pay exorbitant prices for a plane ticket is not.
We’ll probably end up with surplus SAF capacity before it gets scaled to the desired levels to reduce air travel emissions. And before SAFs start making any money for their producers, which, regrettably, remains a characteristic feature of a business, even with government incentives. Some biofuel refiners are about to realise it any time now.
