bio-fuels: panacea to high oil prices or fool's gold?

Biodiesel

Sustainable Development

or

just another Farm Subsidy Program?

Presented by:

Bart Lucarelli, PhD

LP Power Consultants, Ltd.

at

DeWitt Asia Pacific Global Methanol & MTBE Conference

12-14 March 2007

Sukothai Hotel, Bangkok

TBLI Asia 2007 24-25 May, Bangkok

2

The Story-line

• Biodiesel programs in SE Asia are unlikely to lead to a big reduction in the region’s petrodiesel consumption due to the high cost of traditional feedstock oils (palm, coconut, soy and rapeseed oils) and limits to the amount of suitable land for expanded feedstock supply.

• Their high prices make the process of producing biodiesel uneconomic, even at today’s high oil prices, unless Governments’ offer very large subsidies.

• Moreover, as biodiesel programs increase in scale, serious social issues will emerge such as:

– social impacts caused by using edible vegetable oils to produce fuel instead of food– environmental impacts resulting from the conversion of virgin forests into palm oil plantations

reducing biodiversity and perhaps creating a net increase in greenhouse gas emissions

• But hope springs eternal!– Jatropha curcas, previously viewed as a non commercial weed, may allow the economic production

of feedstock oils on marginal lands and with minimum irrigation.– Before this can happen, the yield per hectare of jatropha oil must be increased substantially and

mechanizing the harvest of jatropha seed may be required. – In the longer term, reliance on more “exotic” feedstocks such as freshwater algae may bring down

cost of producing biodiesel even further.

• Without alternative low cost feedstocks, biodiesel programs worldwide will be prisoners to government subsidies, which may be discontinued at the whim of changing political direction.

• However, even if these two new feedstocks become economic alternatives to more traditional feedstocks, i.e., palm and coconut oil, biodiesel is unlikely to displace more than 15% of the region’s petrodiesel consumption.


3

Topics

• US & EU Biodiesel Programs

• Biodiesel’s transport fuel properties

• The biodiesel production process

• Feedstock considerations w/ a focus on Jatropha Curcas

• Economics of biodiesel production

• Summary


4

Worldwide biodiesel output is small but growing rapidly as a result of large government

subsidies in the EU and the US

• Europe– World leader in biodiesel– Germany is the EU’s largest producer followed by France and Italy– Main feedstock: rapeseed oil.– Rapid increases in production are the direct result of large tax incentives

(referred to as detaxation)– Maximum potential: around 10% of petrodiesel usage.

• US– Output and capacity have grown exponentially over the past two years– But 2005 biodiesel output in the US was still only 250,000 tonnes per annum

(tpa) vs. 200 million tpa of petrodiesel consumption– Biodiesel output likely to triple between 2006 and 2010 but when compared

against total petrodiesel consumption will still only be a drop in the bucket– Subsidies playing a big role in popularizing biodiesel; without them, the biodiesel

industry in the US would quickly disappear.– Example: In October 2006, biodiesel was being sold for $0.88/liter vs $0.48/liter

for petrodiesel before considering taxes and subsidies.


5


6

2

25

5

225

2015

75

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006

Million Gallons

US biodiesel production has tripled between 2004-05 and has either doubled or tripled between 2005-06

150

Source: National Biodiesel Board website


7

Biodiesel’s properties as a transport fuel

• Cetane index number for biodiesel is almost the same as for petrodiesel– The cetane index number measures the ability of a fuel to auto-ignite.– Fuels having a higher cetane number ignite more quickly than fuels with a lower cetane number. – The cetane for petrodiesel ranges from 40 -53; for biodiesel, it is 46-57.

• High lubricity– Fuel injectors and some types of fuel pumps need a certain level of lubricity in the fuel if they are to operate

safely and efficiently. – Biodiesel has a much higher lubricity than current low-sulphur, petroleum distillate. – In the US and Europe, sulphur levels in distillate have either already been lowered to 50 ppm or will shortly

be lowered to this level. – In these countries, biodiesel as a blending agent is seen as a solution.

• Solvent property– Biodiesel has a strong solvent property that, over time, should result in a cleaner burning engine. – Initial use of either pure biodiesel or biodiesel blends can cause fuel-system blockages.

• Lower emissions– Biodiesel contains 11% oxygen by weight, which improves combustion efficiency and reduces emissions of

unburned hydrocarbons, carbon monoxide, and particulates. – But oxygenated fuels also tend to increase nitrogen oxide emissions. – Engine tests have confirmed the expected increase in NOx emissions as well as the decreases in CO,

particulates and unburned hydrocarbons from engines without emissions controls.– NREL in US estimates substituting biodiesel for petrodiesel can lead to a 78% reduction in CO2 emissions.


8

Table 1 EN 14214 Standard for Biodiesel produced from rapeseed oil

Property Units lower limit

upper limit

Test-Method

Ester content % (m/m) 96,5 - pr EN 14103d

Density at 15°C kg/m³ 860 900 EN ISO 3675 / EN ISO 12185.

Viscosity at 40°C mm²/s 3,5 5,0 EN ISO 3104

Flash point °C > 101 - ISO CD 3679e

Sulfur content mg/kg - 10 -

Tar remnant (at 10% distillation remnant)

% (m/m) - 0,3 EN ISO 10370

Cetane number - 51,0 - EN ISO 5165

Sulfated ash content % (m/m) - 0,02 ISO 3987

Water content mg/kg - 500 EN ISO 12937

Total contamination mg/kg - 24 EN 12662

Copper band corrosion (3 hours at 50 °C)

rating Class 1 Class 1 EN ISO 2160

Thermal Stability - - - -

Oxidation stability, 110°C hours 6 - pr EN 14112k

Acid value mg

KOH/g - 0,5 pr EN 14104

Iodine value - - 120 pr EN 14111

Linolic Acid Methylester % (m/m) - 12 pr EN 14103d

Polyunsaturated (>= 4 Double bonds) Methylester

% (m/m) - 1 -

Methanol content % (m/m) - 0,2 pr EN 14110l

Monoglyceride content % (m/m) - 0,8 pr EN 14105m

Diglyceride content % (m/m) - 0,2 pr EN 14105m

Triglyceride content % (m/m) - 0,2 pr EN 14105m

Free Glycerine % (m/m) - 0,02 pr EN 14105m / pr EN 14106

Total Glycerine % (m/m) - 0,25 pr EN 14105m

Alkali Metals (Na+K) mg/kg - 5 pr EN 14108 / pr EN 14109

Phosphorus content mg/kg - 10 pr EN14107p


9

Biodiesel is an attractive renewable option when compared to ethanol produced from corn

Biodiesel

Energy Efficiency

• Energy conserving with an FF EER of 3.25

• Diesel engines are 35%-40% more efficient than ICEs

Fuel Properties

• Energy density = 90% of petrodiesel (117 kbtu/gal vs. 131 kbtu/gal for petrodiesel)

• Can either be blended with or used as 100% petrodiesel replacement

Process Technology & Feedstocks

• Low tech process lends itself to community-scale plants

• Can be produced from used cooking oils and non-edible oil seed feedstocks such as jatropha

Ethanol

Energy Efficiency• Energy intensive with an FF EER of 1.34

Fuel Properties• Energy density 30% lower than petrol ( 84

kbtu/gal- ethanol vs 125 kbtu per gal - petrol) and 35% lower than diesel

• Has affinity for water, which requires special transport and blending arrangements to avoid petrol-EtOH/H2O separation

• Main selling point: replacement for MTBE, benzene and other carcinogenic octane enhancers.

Process Technology & Feedstocks• Large scale plants needed to achieve

economies of scale• Until enzymatic hydrolysis process becomes

cost-effective, ethanol plants will remain dependent on food crops (grains and sugar)


10

The Biodiesel Production Process

• Biodiesel can be produced from most vegetable and animal fats through a process known as transesterification.

• The usual transesterification method involves reacting a straight vegetable oil with methanol in the presence of sodium methoxide, also known as sodium methylate.

• This reaction is a base-catalyzed transesterification process that produces fatty acid methyl esters (FAME) or biodiesel, with glycerine as a by-product.

• If ethanol is substituted for methanol, ethyl esters and glycerine are produced but methanol is preferred, because it is less expensive than ethanol and the process is more predictable.

• Acid catalysts, such as sulphuric acid, can also be used in place of a base catalyst but base catalysts are preferred because they:

– achieve a quick reaction that is almost 100% efficient– drive reactions at lower temperatures and pressures than the acid catalyzation process,

resulting in lower capital and operating costs for the biodiesel plant.

• With regard to base catalysts, the preferred catalyst is sodium methoxide, which:– is more efficient than sodium hydroxide at converting fatty acids to fatty acid methyl ester

(FAME). – eliminates the step of having to mix sodium hydroxide with methanol.


11

Schematic Diagram of Biodiesel Refinery

Source: Lurgi AG website


12

Palm oil, coconut and jatropha curcas give the greatest yield per hectare of straight vegetable oil

5.36

2.42

1.07

1.71 1.64

0.70 0.63 0.40

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Palm Oil Coconut JatrophaCurcas

Jojoba Rapeseed Safflower Sesame Soybean

To

nn

es/h

ecta

re-y

r

Source: journeytoforever.org


13

Land requirement for 100,000 tonne Bio-diesel plant

19

4159 61

93

143

250

160

0

50

100

150

200

250

300

Palm Oil Coconut JatrophaCurcas

Jojoba Rapeseed Safflower Sesame Soybean

(in '

000

hect

ares

)


14

Jatropha reportedly offers many benefits as a feedstock for biodiesel production, but….

many questions about its economic viability remain

Benefits

• Positive Employment Impacts – Employment: 1 job for each 4 hectares

• Does Not Use Arable Lands – drought-resistant – tolerates very dry to moist tropical, subtropical

and rain forest climates– can be raised almost anywhere in the tropics-

even on gravely, sandy and saline soils

• Simple Cultivation Methods – can be directly propagated from either cuttings

or seeds or– seedlings can be raised in poly bags and then

transplanted in the main field

• Resistance to Insects and Plant Diseases– reportedly resistant to most insects and plant

diseases – can be intercropped with many other plants,

which will help minimize monoculture risks

Questions

– Increased labor costs may destroy economic feasibility of biodiesel refinery

– Seed and oil yields per hectare drop significantly w/o irrigation and fertilizer

– Fruit bunches ripen at different times; makes it difficult to harvest mechanically

– Low yields per hectare make collection and transport costs very high

– Little is known about jatropha’s level of resistance to insects and disease

– Susceptible to mosaic virus, bacteria root rot, and various insects


15

Jatropha reportedly offers many benefits (cont.)

Benefits• Early Yields of Oil and Long Plant Life

– Jatropha starts yielding seeds from which oil can be extracted after the first year of growth.

– It produces substantial amounts of oil by the 3rd year

– Peak production achieved in the 5th year– Jatropha bushes are expected to have a 25-

30 year economic life but can live for 50 years

• High Oxygen Content Reduces Emissions – Pure biodiesel contains by weight about 11

percent oxygen. – The presence of oxygen in biodiesel improves

combustion, reducing hydrocarbon, carbon monoxide, and particulate emissions.

– The US National Renewable Research Lab (NREL) estimates that biodiesel produced from soy beans reduces CO2 emissions by 78% relative to petrodiesel.

Questions

– Plant has not been raised long enough under plantation conditions to verify yields over time.

– Oxygenated fuels also tend to increase emissions of NOx, which is a greenhouse gas with 310 times the global warming potential as CO2

– Estimate of CO2 emission reduction based on single NREL study, which assumes no expansion in land used to raise soy beans.


16

Unpruned Jatropha Bushes planted for vegetative cover


17

35 Hectare Jatropha Research Nursery located about 2 1/2 hours west of Rangoon


18

Varieties under cultivation at research nursery come from Burma, Thailand, South Africa and Latin America


19

Jatropha plants are being propagated at nursery from seeds and cuttings.Recurrent selection over 4-5 year period will identify specific plants for

establishing large scale plantations


20

Both male and female flowers are contained on each flower bunch.Mature fruits or seed pods occur within 3 months of first flowering.


21

- Jatropha Curcas flowers at least 2 times per year, more often with if temperature is sufficiently warm and soil moisture is adequate.- Seed pod bunches are produced at the end of each branch with each bunch consisting of 10 to 12 seed pods, 3-4 seeds per pod.

Source: D1 Oils Website


22

Seeds from the nursery after harvesting are being processed at an agricultural research institute in Rangoon, using a simple screw-type

expeller.


23

This simple screw-type expeller requires 1.2 kWh to process 40 kgs of seed


24

The seed cake that remains after the oil is “expelled” is very rich in NPK an is as good as chicken manure. However, the simple expeller leaves around 25% of the oil still in the cake.


25

After oil has been expelled, it is passed through a primitive oil press to remove solids. Below are pictures of unfiltered oil (left) and the sludge

that remains (right) after the jatropha oil passes through the filter

Economics of Biodiesel Production

Bottom-line

Biodiesel price, feedstock cost and glycerine prices determine economic viability


27

Financial feasibility analysis was conducted using a standard DCF financial model

• The user first enters into the model technical, price and financial inputs for the biodiesel facility.

• Based on these inputs, the model is then used to calculate a build-up of project costs over the project life-cycle.

• The cost analysis is completed separately for the construction period and operating period, which are handled as separate calculation modules in the model.

• Once costs are estimated, the model calculates the annual net cash flows required to generate the desired return on equity for the project. Two target IRRs – 15% and 18%- have been considered for the analysis presented in the next few slides.

• We used the equity IRR as our main criterion of financial viability.

• However, the model was also used to estimate:– the maximum feedstock price that will generate a target equity IRR– the impact of CDM certified carbon credits on maximum feedstock cost.


28

Inputs to Biodiesel Model for Conducting Financial Analysis

Units RBD Palm Oil

Crude Palm Oil

Further Glycerine

Processing

Main Inputs

Palm Oil Feedstock Kg 1,000 1,005 -

Major Chemicals

Methanol Kg 102.3 102 -

Sodium methylate solution (catalyst)

Kg 16.7 18.3 -

Final Product

Biodiesel Kg 1,000 1,000 -

Crude glycerine Kg 120 120 -

Refined glycerine Kg - - 97


29

Other Inputs:EPC PriceUnit prices for biodiesel and glycerine

feedstock, methanol and sodium methylate

Units RBD Palm Oil Crude Palm Oil

Refined Glycerine

Processing

EPC Price (100,000 t) US$ $20.7 million $23 million $3.45 million

Final Product

Biodiesel US$/tonne 500 500 -

Crude glycerine US$/tonne 200 200 -

Refined glycerine US$/tonne - - 580

Feedstock US$/tonne 450 432 -

Chemicals

Methanol US$/tonne 490 490 -

Sodium methylate solution (catalyst)

US$/tonne 924 924 -


30

Other Inputs to the Financial Model

Units RBD Palm Oil

Crude Palm Oil

Plant Capacity

Tonnes per year

(of biodiesel)

100,000 100,000

Maintenance outage period Days per year 35 35

EAF %(Available

days/365 days)

90% 90%

Plant Operating factor % of EAF 100% 100%

Construction period Months 15 15

Operating period Years 25 25

Debt-to-equity ratio Ratio 60:40 60:40

Income tax rate % 30% 30%


31

Base case Equity IRR and Key Base Case Assumptions

ParameterRBD Palm Oilw/crude glyc.

Crude Palm Oilw/crude glyc.

RBD Palm Oil

w/Refined

Glycerine

Crude Palm Oil w/Refined

Glycerine

Biodiesel price $ 500 /t $ 500 /t $ 500 /t $ 500 /t

Feedstock Price $ 450 /t $ 432 /t $ 450 /t $ 432 /t

Crude glycerine price $ 200 /t $ 200 /t n/a n/a

Refined glycerine price n/a n/a $ 580 /t $ 580 /t

IRR 0 0 0 0

Plant Type


32

New Base Case ScenarioEquity IRR 18% achieved if feedstock ranges from $ 364/t to $ 381/t

ParameterCrude Glycerine Unit Refined Glycerine Unit

Biodiesel price $ 500 /t $ 500 /t

Feedstock Price $ 364 /t $ 381 /t

Crude glycerine price $ 200 /t n/a

Refined glycerine price n/a $ 580 /t

IRR 18% 18%

Plant Type


33

• Decreases in glycerine prices are expected to drive biodiesel plant returns below investment grade levels• Only solution: find a way to acquire lower priced feedstock oil.

ParameterChange

Crude Glycerine Unit Refined Glycerine Unit

Feedstock cost required to earn 18% IRR (USD/t)

Equity IRR at biodiesel price of ($500/t) and Feedstock Price of $364/t

Feedstock cost required to

earn 18% IRR (USD/t)

Equity IRR for biodiesel at $500/t and feedstock

price at $381/t

1. Crude glycerine price reduced to zero

341 8% na na

2. Refined glycerine price reduced to $350/t

na na 359 10%


34

Even with carbon credits, feedstock prices must be reduced to around $310 /tonne to achieve a 15% equity IRR in the case where the price of biodiesel declines by 10% and the price of refined glycerine declines by 40%.

393408

312326

0

50

100

150

200

250

300

350

400

450

500

US

$/to

nn

e

Base Case Ltd, CCs Base Case Max, CCs ? B/G Price, Ltd. CCs ? B/G Price, Max. CCs


35

Summary

Biodiesel Pluses

• High FF EER and very high conversion rate for crude vegetable oil.

• Diesel engines are 35%-40% more efficient than ICE and about to get even more efficient.

• Versatile fuel, can be blended or used as 100% diesel replacement

• Attractive attributes as petrodiesel substitute– High lubricity– No sulfur & other impurities– Solvent property means cleaner burn– High oxygen level - lead to cleaner fuel

combustion.

• Simple production technology, which lends itself to community scale plants.

• Most captive fleets are diesel powered.

• Perfect choice for Asia: palm oil is widely grown and climatic conditions are conducive for raising jatropha.

Biodiesel Negatives

• High palm oil prices with further price increases for all vegetable oils as biodiesel programs increase in scale.

• Biodiesel production increases will cause oversupply of glycerine, driving crude glycerine prices as low as zero and refined glycerine prices from $580/t to $350/t.

• Large-scale, mono-culture plantations on virgin forestlands and marginal brush lands may cause significant reductions in biodiversity.

• Only large scale plants (100 KT+) are being offered by Lurgi and Desmet Ballestra.

• Lack of experience in raising jatropha as a commercial crop makes reliance on this crop as the future biodiesel feedstock a very risky proposition.

• Biodiesel programs worldwide are being sustained by means of large and unsustainable government subsidies.

bio-fuels: panacea to high oil prices or fool's gold?

Economy & Finance