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The traditional refinery and biofuels sectors are at a point of
convergence - one caused by falling demand for petroleum fuels,
driven by decarbonization, and aided by food demand slowing to a
rate below agriculture productivity growth. Traditionally
competitive in the fuels sector, oil and agriculture are now
confronted with shared short-term and strategic issues that, if
acted on, will materially change the direction of each industry.
However, a clear, stable policy and regulatory framework is needed
to realize the full potential of oil/agdecarbonization options.
Policy evolution of biofuels: How did we get
here?
Policy support has been necessary for the development of biofuels.
The relative importance of supporting or enabling policies varies
by country and over time but generally biofuels are driven by three
major policy areas: agricultural support, energy security, and
environmental policies related to urban air quality and
decarbonization.
The table shows the current ranking of the three major biofuels
policy drivers by country. Today, decarbonization is the major
policy force in the Organization for Economic Cooperation and
Development (OECD) countries. For the rest of the world (except
China), agriculture and the local economy are the most important
factors.
The US shows how the supporting policy for biofuels has changed
over time. Figure 1 shows the US biofuels policy progression, from
early emphasis on agricultural support to energy security to
decarbonization. It also notes EU policy highlights.
The combined impacts of these policies, and many others -
including vehicle effeciency standards and maturing demographics -
are causing oil demand to fall in most developed countries. This
pattern will continue in most countries over the next several
years. Going forward, the growth of electric vehicles could
accelerate the decline in oil demand.
Refinery and biofuel synergies: Can the two industries
come together at scale?
For the first 25 years of the biofuels industry, the refining and
marketing industries had almost no involvement in terms of
ownership of production. For the most part, these industries were
competitors - only coming together at the distribution terminal or
fuel outlet, when biofuels were blended with gasoline and diesel
fuel.Three key policy events changed the relationship between the
biofuels refining and marketing businesses:
The 2005 US methyl tert-butyl ether (MTBE) ban as part of the
Energy Policy Act resulted in ethanol being used as the oxygenate
to meet the Clean Air Act Amendments (CAAA) requirements for
reformulated gasoline. A few US refiners bought ethanol plants to
ensure supply.
The EU passage of the Renewable Energy Directive (RED) and the
Fuel Quality Directive (FQD) in 2008 and 2009 supported the first
renewable diesel plants built in EU countries and Singapore in 2010
and 2011.
California's passage of the Low Carbon Fuels Standard (LCFS) in
2011 supported the start of the US renewable diesel industry with
the first plant on stream in 2013.
The adoption of renewable diesel and jet fuel as a bio-product
from conventional oil refineries could be considered the vanguard
of continued convergence between the petroleum and bio-based
transport fuels supply chain. To date, renewable diesel is the most
compatible biofuel with existing refi nery processing. However, as
decarbonization policies deepen and spread to other jurisdictions,
processing expertise and technologies from the hydrocarbon
processing industry could be critical factors for expanding
biofuels production from biomass feedstocks.
The energy density of bio-oils allowed refineries to directly
enter the biofuels production business at scale. The next step in
direct refinery production of biofuels will likely be different
than renewable diesel and jet fuel. It also will be costlier, due
to the low-energy density of other widely available and studied
feedstocks. Future integration with the refining and marketing
supply chain, particularly with existing refinery operations, will
likely require some form of biomass densification. They may also
require the use of refinery-based processing technologies and
practices (which are much closer to the biomass supply) in existing
refineries and biofuels plants (see Figure 2).
Agriculture: Is it a sustainable
solution?
Since the food chain can be a significant CO2 emitter, agriculture
is seen as part of the climate change problem. However, it also can
be part of the solution. Agriculture has the potential to adopt new
technologies, alter farming practices, and increase production
output in a more sustainable way. Linkages into the energy sector
through renewable and biofuels represent a large opportunity to
contribute to decarbonization.
To create carbon reduction pathways between agriculture and
energy (and other sectors of the economy), clear policy and
regulatory frameworks are needed to fully capitalize on
agriculture's greenhouse gas (GHG) emission reduction potential.
With these systems in place, farmers will be able to, in effect,
"farm for carbon," which will facilitate decarbonization. These
activities will initially focus on farming practices - such as more
sustainable planting, crop protection, and harvesting techniques.
But they could also include carbon sequestration in the soil, seed
and crop selection and technology that rewards farmers for carbon
reduction.
Based on current consumption trends, there is enough land in
production to meet demand, since yield and productivity increases
will be sufficient to match quantities needed. However, these
projections do not include an increase in biofuels above what
current policy mandates require. New policy initiatives would be
additive. They also do not include transformative technologies that
could increase productivity above baseline projections. These will
be areas to monitor in the future.
Where do we go from here?
The separation between the refinery sector and traditional biofuels
is ending, and a new industry structure emerges. How far this goes
may depend on the policy and regulatory framework keeping pace with
technology and markets. The refining sector brings a "refinery
approach" to biofuels production that is underdeveloped. The
traditional agriculture-oriented biofuels industry will benefit
from R&D, technology, and marketing networks. The connection
between the traditional refinery sector and biofuels must be
supported by decarbonization actions, both in the public and
private sectors. Fears of a repeat "food-versus-fuel" debate are
tempered by an adequate productive base in agriculture - one that
can support a feedstock base for the future growth of biofuels
through increased productivity, potential new technologies, and
shifts in consumptive patterns. With these drivers in place, the
stage is set for an expansion in biofuels production, this time in
tandem with - and via active involvement from - the refinery
sector.
Biofuels Value Chain Service - Fundamentalsbased service
delivers medium to long-term coverage of the supply chain, from
feedstocks to refined products, and to supporting credit/ticket
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Find out more:
ihsmarkit.com/biofuels-valuechain-service
Posted 16 December 2020 by Juan Sacoto, Executive Director, Agribusiness Consulting, IHS Markit and
Kevin Lindemer, Executive Director, Downstream Oil and Biofuels, IHS Markit and
Tom Scott, Global Director, Agribusiness Consulting, IHS Markit
