Biofuels as seen by OPEC: The Digest’s 2016 8-Slide Guide to biofuels in the World Oil Outlook

In this year’s World Oil Outlook, OPEC writes:

The prospects for first generation biofuels are constrained by factors such as land use changes, excessive water usage, and the impact on food production and prices from cultivating crops. The costs of production are high and mostly determined by feedstock availability and conversion processes. In the medium-term, the outlook for biofuels this year is similar to that in the WOO 2014.

Supply is composed predominantly of ethanol in the US and Brazil, and biodiesel in Europe. Agricultural interests still represent the major supporting factor for expansion until 2020. Given that biofuels are primarily mandate-driven, the impact of low oil prices on supply is likely to be relatively small. Total biofuels supply rises from 2.1 mb/d in 2014 to 2.4 mb/d in 2020. By then, the three largest producing regions are responsible for 88% of supply: OECD America produces 1.1 mb/d, Latin America 0.7 mb/d, and OECD Europe 0.3 mb/d. In some producing areas, forest degradation and resulting greenhouse gas levels pose major obstacles. The large quantities of freshwater needed to irrigate crops is an additional challenge, especially in seasons of drought.

In the US, technical and market constraints to the EPA’s regulatory requirement of a 15% ethanol blend (E15) with gasoline continue to limit the biofuels outlook. The majority of road vehicles are not suited to handle an E15 blend, while the ethanol ‘blend wall’ remains a challenge. Other challenges surrounding the achievement of the Renewable Fuels Standard (RFS) have led US authorities to propose reductions to the mandates of the RFS in terms of the amount of ethanol that refiners must blend with gasoline. In May 2015, the EPA proposed lower requirements for ethanol use, which are to be finalized in November. Despite the lower oil price environment, the rise in the supply of tight crude and unconventional NGLs has weakened arguments promoting biofuels development as a means to enhance domestic energy security.

In Brazil, an ethanol blend mandate of 25% has been in place since 2013. The National Agency of Petroleum, Natural Gas and Biofuels regulates the production of ethanol, while the Brazilian Government determines the blend ratio. The ratio has fluctuated in past years according to sugar cane harvest yields and market factors such as sugar prices. The use of fiscal incentives and public financing for ethanol remains strong. For instance, the government employs large tax cuts and enhanced credit to assist the ethanol industry compete with gasoline. Furthermore, a tax on fossil fuels (last used in 2012) was reinstated in early 2015, thus enhancing the competitiveness of ethanol versus gasoline in flex-fuel cars that can handle either fuel.

In Europe, the former target of ensuring that 10% of road transportation fuels come from crop-based biofuels (which was to be achieved by 2020) was reduced on grounds of it being unsustainable. Doubts were largely centred around the effects of crop planting on emissions levels and food production. As a result, in April 2015 the European Parliament gave final approval to a new proposal that states that crop-based biofuels should not exceed 7% of fuels used in the transport sector by 2020. A target of 0.5% for advanced biofuels, coming from non-food sources, was also established.

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