The Republic of Biofuels and the Age of Plenty

What is the role and scope of biofuels in a world potentially awash in newfound oil & gas?

Since its inception, the bio-based economy — a multifaceted effort aimed at supplanting fossil fuels with biomass resources as the engine of the global economy — has been squarely focused on the issue of Peak Oil. Bio-based advocates have seized upon shortages of easy crude, associated high energy prices, and concerns around energy security as rhetorical sound bites to accelerate the production of biofuels and other bio-based products.

The significant economic potential of the bio-based economy also fuels scale-up aspirations. In its Future of Industrial Biorefineries report published in 2010, the World Economic Forum estimated that the biorefining sector can inject more than $230 billion into the global economy by 2020.

But the notion of “homegrown energy” — a direct response to Peak Oil and the primary driver for Brazil’s long-standing ProAlcool policy as well as the U.S. biofuels boom over the last decade — has always been at the heart of bio-based ambitions. With oil prices registering $70 swings and above-ground geopolitical conflicts trimming supplies to key markets like Europe, the last several years have largely justified such efforts.

The New Age of Plenty

Seemingly overnight, according to a number of analysts, the forces that ushered in today’s biofuels production may have shifted with uncertain implications for future biofuels expansion. Daniel Yergin is among a growing group of Peak Optimists that see a future awash in new oil production. His firm, CERA, predicts a 20% increase in total global liquids production by 2030. Backing up these forecasts, a much talked about policy brief published last month by the Harvard Kennedy School’s Belfer Center and authored by former Eni executive Leonardo Maugeri suggests that oil production will surge, especially in countries like the United States and Brazil over the coming decade. The study is based on a field-by-field analysis of the world’s major oil formations and exploration projects.

Assuming that the Peak Optimist’s “Age of Plenty” forecast is accurate, a surge in global oil production raises two key questions:

• Can future biofuels production capacity keep pace with past growth in the absence of an immediate Peak Oil threat?
• More importantly, what role will the U.S. and Brazil play in expanding global biofuels production over the next decade, especially if both countries find themselves awash in new oil (and natural gas)?

The answer to the first question is it’s too early to tell, but the road ahead will certainly be bumpy. To date, efforts to scale-up homegrown (biofuel) energy have largely proven successful. While current estimates suggest that biofuels production accounts for 3-4% of global liquid fuel consumption, this relatively small market share fails to tell the whole story.

Looking at data compiled for Pike Research’s Biofuels Markets and Technologies report published in 4Q 2011, if global biofuels production by volume were aggregated among producing countries and treated as a single nation (a.k.a. the Republic of Biofuels), it would rank 18th among oil-producing nations in 2011. That places the Republic of Biofuels one notch ahead of Libya, which given the impact reduced oil exports due to civil war had on global crude prices, suggests that global biofuels production occupies an important place in the international energy landscape.

If we compare Maugeri’s estimates with Republic of Biofuels’ predicted future production in 2020 based on business-as-usual growth, we can see that the Republic of Biofuels surges to the 7th spot among oil-producing nations. The Republic of Biofuel’s rise to major producer status is based on a near doubling of production capacity.

Top 20 Oil Producing Countries, World Markets: 2009-2020

Source: Pike Research

*Biofuels data from Pike Research’s Biofuels Markets and Technologies report
**2011 production estimate assuming oil production within Libya was not curtailed by civil war

Retreat of the Majors

We are still very much at the beginning stages of the next era of biofuels expansion, with hundreds of advanced and integrated biorefinery projects under construction throughout the world. Still, many of these projects are at pilot scale, suggesting that it is likely to be several years or more before a density of projects even have the capacity to deliver the gallons called for by national blending mandates. These projects are inherently more complex and expensive than existing refinery infrastructure, and one can assume that a portion of them will fail, as can be expected for new business models and technology applications.

Furthermore, bio-based chemicals and other products are likely to soak up a portion of future production, potentially siphoning investment and renewable oil away from pure biofuels production. Ultimately, the growth of the biofuels industry will depend on the durability of blending mandates like the RFS2 in the United States, which is facing increasing scrutiny.

This brings us to the second question, which has perhaps the most direct impact on the fate of the Republic of Biofuels. Currently accounting for 72% of global biofuels production (including both ethanol and biodiesel), the United States and Brazil are the reasons the Republic of Biofuels is even discussed in the context of the future energy landscape. While both countries have faced significant energy security threats in the past, under Maugeri’s analysis, the United States would climb to No. 2 among oil producing nations and Brazil No. 5, a geopolitical reality far different than the one today’s 650+ Brazilian and United States ethanol refineries were born into.

While biofuels production is beginning to take off in many countries worldwide, the loss of significant expansion in the United States and Brazil would surely frustrate scale-up efforts over the next decade. Nevertheless, it’s likely to be several years or more before new oil production in the United States and Brazil comes online, and whether new production lives up to the potential counted on by Peak Optimists remains to be seen.

One immediate conclusion that can be drawn from the new Age of Plenty is that oil majors are likely to retract at least some of their already tepid support for biofuels as they direct assets to capitalize on emerging oil and gas opportunities. For its part, the Republic of Biofuels will need a series of breakthroughs on the commercialization of advanced conversion platforms to counter the potential surge in fossil fuel production, or risk being shelved until the next oil crisis.

Mackinnon Lawrence is a Senior Research Analyst at Pike Research — A Part of Navigant. He contributes to the firm’s Smart Energy practice, with a focus on advanced biofuels and bioenergy.