HORIZONS

Bio-liquid gold:

How biofuel circularity could unlock the energy transition

August 2022

Alan Gelder, Vice President, Refining, Chemicals & Oil Markets Gerrit Venter, Director, Corporate Analysis, Head of Corporate Research Operations Gordon McManus, Research Director, EMEARC Oils & Refining Guy Bailey, Head of Intermediates & Applications

Biofuel: yesterday’s dream?

Global biofuel supply is currently just over 3 million b/d, meeting 3% of today’s 100 million b/d of liquid fuel demand. The industry began by processing corn/sugar cane and vegetable oils. Biofuel supply growth to date – a tenfold increase since the turn of the century – has been impressive, and much faster than total oil demand growth. However, the initial green shoots of hope that biofuels could transform global liquid supply have not flourished. The early years of strong growth in biofuel supply were driven by regulation – particularly in the US and Europe. Legislators used biofuel blending mandates to achieve multiple goals in one shot: air quality improvements, support for local agriculture and fewer imports of foreign crude oil. The combination of these drivers led to a demand trajectory that initially looked exponential, despite biofuels’ premium price.

Conclusion: It’s a win-win

For refiners, governments, and the public, creating biofuels from waste offers a viable pathway to a circular economy, with its many benefits, that is compatible with mitigating climate change. Refiners have proven their ability to safely manage complex chemical transformations in a low-margin environment. What is now needed is a shift to circular feedstocks in a commercial and financial framework that captures the broader benefits of doing so.

How biofuel circularity could unlock the energy transition

Time for waste-based biofuels to come of age?

Government policy continues to promote the use of liquid biofuels from non-food feedstocks. The Nordic countries, along with many others in Europe and the US, are looking to promote their growth by mandating minimum requirements, with sustainable aviation fuel a notable example. The EU, UK and California have identified certain agricultural residues and waste streams (such as used cooking oil, leaves, branches and cover crops) that are not in direct competition with food production as ‘advantaged’ biofuel feedstocks. Securing a steady supply of such easily processed feedstocks is proving a limiting factor, however. There are alternative feedstocks that have the potential to be game-changers and drive biofuel adoption as part of the transition to a circular economy. Municipal solid waste (defined as residential, commercial and institutional waste) will double by 2050 as global population grows, the economy expands and living standards rise, according to the World Bank. Managing this solid waste is critical for many reasons, but not least because it results in massive carbon emissions as it degrades. Virtually none of this material is used as feedstock today. Commercialising municipal solid waste, recycled waste plastic and ever more available agricultural and forestry residues could deliver an additional 20 million b/d of liquid biofuel supply by 2050. If achieved, liquid biofuels could account for a quarter of the 2050 global liquid demand foreseen in our Energy Transition outlook (ETO), primarily supplying diesel for heavy-duty commercial vehicles, sustainable aviation fuel and petrochemical feedstocks. High-income countries have the biggest untapped resource potential of municipal solid waste and recycled waste plastics, along with the infrastructure to collect it. The quantity and type of both agricultural and forestry waste is location specific. Municipal solid waste and recycled waste plastic are the only ubiquitous feedstocks.

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Gordon McManus

Research Director EMEARC Oils & Refining

Gordon is responsible for leading our global coverage of the long term oil products markets; co-ordinating and analysing regional supply and demand trends and the outlook for product cracks and refining margins. Gordon joined Wood Mackenzie in 2006, initially specialising in analysis of short and long-term demand trends within the global oil products market. He then transitioned into management of Wood Mackenzie’s Product Markets Service, before becoming Head of the EMEARC Oils Research team. Gordon has also undertaken extensive research into the impact of biofuels on the downstream oil sector. He led the analysis for two major multi-client studies of the global biofuels market and has presented at numerous international conferences on the subject.

There are alternative feedstocks that have the potential to be game-changers.

Fuel versus food Many, however, recognised that the role of food crops in biofuel supply would ultimately be limited. Concerns rose to a crescendo in a ‘food-versus-fuel’ debate just prior to the great financial crisis. Crude prices had risen to an all-time high, while corn, wheat and prices of other food items also rose sharply, sparking civil unrest in the developing world. Using food to make fuel has run its course. Governments were forced to change tack and focus on incentivising the use of non-food feedstocks - with mixed results. Governments incentivise biofuels produced from non-food feedstocks with additional credits, effectively valuing these biofuels at a premium to support their production. This has meant that biofuels remain expensive so, although supply has continued to grow, the pace of growth has slowed. Indeed, high expectations for biofuels from non-food feedstocks have not been achieved. New crops like jatropha, grown on marginal agricultural land, or the production of industrial volumes of algae for biofuel production have yet to be commercialised. Ambitious targets for cellulosic biofuels - made from leaves, stems and other fibrous plant parts - remain unfulfilled. Today, food-based biofuels are at their limits, despite only supplying 5% of total demand.

Using food to make fuel has run its course.

Source: Wood Mackenzie

Alan Gelder

Vice President Refining, Chemicals & Oil Markets

Alan is VP Refining, Chemicals and Oil Markets, responsible for formulating our research outlook and integrated cross-sector perspectives on the global downstream sector. Alan joined the business as part of our Downstream Consulting Team in 2005 and later went on to lead the division. He has managed consulting assignments all over the world, focusing on major transactions (projects and M&A) and their alignment with key success factors for industry players and third parties. He then transitioned into research upon his return to London from Houston in 2011. Prior to joining Wood Mackenzie, Alan spent 10 years as an industry consultant after working for ExxonMobil in a variety of project planning and technical process design roles.

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Global liquid biofuel supply (million b/d)

Follow the petrochemical lead

The petrochemical industry is leading the way by demonstrating the art of the possible, both in technology deployment and the circular economy. There have been significant investments announced in the last two years, underpinned by initiatives such as the current Plastic Pollution Treaty being negotiated under the auspices of the United Nations Environment Programme. That event put the spotlight on plastic waste in the environment, aiming to deliver a step change in the proportion of waste plastic to be chemically recycled.

Chemical waste plastic recycling projects under development (million tonnes/year, cumulative)

Source: Wood Mackenzie

Incentives and collaboration are key

Policy support will be essential to making this happen. For governments, waste to biofuels can be central to achieving net zero aspirations, alongside hydrogen and other transition technologies. The politics are compelling – encouraging sustainable investment in an industry that strengthens energy security and supports both local employment and a circular economy. Waste-to-biofuel provides an opportunity for refiners to retain their core competencies in the chemical transformation of feedstock and their role as key energy providers. They need to learn to become more adaptive and experiment with various approaches as the technology is under development. Could this be the best way for refiners to invest the record profits they are currently banking?

Could this be the best way for refiners to invest the record profits they are currently banking?

Higher biofuel production could mean profound structural changes for the refining and petrochemical industries.

There’s little doubt that liquid biofuels should play a crucial role in the energy transition. Bio-based diesel and aviation fuels from plant-based feedstock could emit 80% less carbon than the crude oil-based products that dominate today’s global market. The question is how to make it happen. The rapid growth of these fuels hit a major stumbling block earlier this century when, to avert the risk of food shortages, governments capped the amount of food-based feedstock available for biofuel. Alternative non-food feedstocks and technologies now promise a new dawn. Municipal waste, agricultural residue and recycling waste plastics could be game-changers and drive biofuel adoption as part of the transition to a genuinely circular economy. Virtually none of this material is used as feedstock today, but if technology delivers, it could supply an additional 20 million barrels per day (b/d) of liquid biofuel by 2050. According to Wood Mackenzie’s Energy Transition Outlook, this would satisfy a quarter of all liquid fuel demand. Should biofuels achieve the scale envisaged, there will be big implications for oil producers, adding to the threat posed to supply by the growth of electric vehicle sales. If global biofuel production gets to 20 million b/d by 2050, under our AET-1.5 scenario, which foresees global warming being kept to less than 1.5 °C by 2050, there will be little room for higher carbon-intensive crude oil. The refining sector will have to adapt to unlock this potential. Here, it can learn much from the petrochemical industry, which has been busy adopting and adapting technologies to use non-fossil fuel feedstocks and establish a circular economy. Refining could follow a similar path to supply biofuels from waste. There’s an opportunity to reinvigorate smaller refineries close to urban areas that are the source of much of the waste feedstock. The economics, though, are challenging, so policy support will be needed to make this happen. This would be in national governments’ interest: biofuels – often blended with traditional fuels – can help achieve net-zero targets and boost energy security. Meanwhile, local governments could convert fossil-fuel-based refineries with limited lifespans into sustainable businesses that underpin local employment, deliver circularity and boost security of supply.

Some believed that this rapid rate of growth was sustainable, and if land, feedstock and technology issues could be resolved that biofuels had the potential to satisfy 30% of transportation demand by 2030, equivalent to 20 million b/d.

Vegetable oil use versus jet and road diesel (million tonnes per year)

Source: Wood Mackenzie

Higher biofuel production could mean profound structural changes for the refining and petrochemical industries. In our Energy Transition outlook, the refining and petrochemical industries become increasingly concentrated around fewer giant integrated sites that trade globally, squeezing out smaller, higher-cost local sites. In turning waste into biofuels, being local is an advantage. The biofuels ecosystem would revolve around a hub-and-spoke distribution model, where the initial conversion of waste to biofuels was local, with the liquids produced then aggregated for processing in an existing refining facility. Larger, integrated refinery/petrochemical facilities become a hub, with feedstock supplied by an array of local facilities. It’s a similar model to what’s emerged in steel, with electric arc furnaces using scrap in many locations, and fewer traditional and large-scale blast furnaces in operation in many Western nations. As the energy transition takes hold, refiners will convert smaller, low-margin facilities into bio-sites that convert waste to biofuels, following the path blazed by Eni at its Porto Maghera and Gela sites in Italy and TotalEnergies at Grandpuits in France.

Gerrit Venter

Director, Corporate Analysis, Head of Corporate Research Operations

Gerrit leads our corporate downstream research, covering the refining, chemical and marketing portfolios of the integrated Majors, NOCs and Independents. He is based in London and brings over 10 years’ experience in downstream energy research, consulting and pricing analysis. Gerrit also leads the wider Corporate team’s strategic operations function. Gerrit joined Wood Mackenzie in 2012 as an analyst in the oils and refining research team. He has since progressed to Director level through various content and team leadership positions across our downstream and corporate research units. As a downstream SME, Gerrit has contributed to various consulting projects in the EMEA region. Before joining Wood Mackenzie, Gerrit was a price risk analyst at World Fuel Services. Prior to this, he worked on African infrastructure projects as a transport economist in Cape Town, South Africa.

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Guy Bailey

Head of Intermediates & Applications

Guy brings over 15 years of experience in regulation and sustainability. As Head of Intermediates and Applications research, he leads our teams looking at plastics, fibres and sustainability in the chemicals chain. He is particularly interested in the challenge of how the chemical industry addresses net zero goals. Prior to Wood Mackenzie, Guy spent five years at our sister company Verisk Maplecroft, where he led the Analytics team. He created quantitative models to asses firms exposure to political, economic, environmental and social risks.

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They are much more expensive than the jet and road diesel they are blended into – a ‘green premium’. Biofuels risk being seen as yesterday’s dream.

Global liquid biofuel 2050 supply potential (by feedstock, million b/d)

Source: Wood Mackenzie

So how would the circular economy work? Biofuel circular economies would essentially be local, located where residue or waste streams are available in high volumes. Moving solid waste over distance is expensive. Supply chains would be local, with feedstocks from agriculture, industry and waste management collected and processed at small-scale facilities to minimise costs. The optimal locations will be near towns and cities, where waste streams are available in high volumes, or in major agricultural or forestry areas. Various technologies are being developed to convert these solid wastes into liquids. These involve pre-treatment to ‘wash’ the materials followed by thermal cracking (pyrolysis or gasification) to convert the waste into hydrocarbons. The last stage, in a conventional refinery, is processing, to create biofuel versions of the crude oil-based products we use today. As well as liquid yields in the range of 50–70%, circularity brings additional efficiencies. These include savings on landfill or incineration costs and the related emissions; residual hydrocarbons not converted into usable liquids can be used to generate power and fed into the grid. Several oil Majors and refiners are collaborating with technology licensors to develop pilot projects. Technically, these circular projects are feasible, but the absence of policy incentives means that the economics are challenging.

the absence of policy incentives means that the economics are challenging.

Game-changing potential Currently, there’s little direct economic support beyond blending mandates and the ‘green premium’ to reflect the higher costs of producing biofuels. Incentives are needed and one option would be a carbon tax credit. Fossil fuel-based products will be subject to a carbon tax of up to US$100/t on Scope3 emissions. Biofuels also emit CO2 on combustion, but their net lifecycle emissions are far lower, as carbon is removed when the vegetable feedstock is grown. A ‘carbon tax credit’ at the refinery gate would create a level playing field and significantly improve the competitiveness of biofuel. These circular waste technologies can be made ‘carbon negative’. Carbon capture and sequestration of the emissions from the facilities that process agricultural residues could play such a role, as it would eliminate most carbon emissions during the manufacturing process and any associated power generation. Many of the attributes required for the successful growth of the circular economy – technological development, deployment, policy support and high carbon prices – are consistent with an accelerated energy transition. In our AET-1.5 scenario, the global demand for liquids falls to just 35 million b/d by 2050, 60% lower than our base case. Biofuels could meet two-thirds of liquids demand in hard-to-decarbonise transportation sectors, as well as provide circular feedstocks for petrochemicals.

The remaining fossil requirement (around 10 million b/d) could be met by the natural gas liquids supplied from natural gas production – a fossil fuel that is more resilient in our AET-1.5 scenario, virtually eliminating the need for upstream oil production. This could be a hugely disruptive shock to oil producers.

Biofuels contribution to 2050 liquids demand scenarios

Note: Size of pies reflect liquids demand under the two scenarios. Source: Wood Mackenzie

These projects involve the conversion of a variety of waste plastics into a ‘pyrolysis oil’ that can be re-used as a feedstock, soaking up about 5% of landfilled plastic waste by 2027. Petrochemical players are partnering with brand owners and collection companies to secure reliable volumes of feedstock for environmental, social and governance purposes. The refining sector could follow suit and supply biofuels from waste if the policies and incentives were right.

There are three waste-to-biofuel conversion technologies, all at different stages of development:

Gasification-based conversion is mature, but capital-intensive. Pyrolysis routes come at a lower capital cost, but are not yet commercialised. Cellulosic biofuel technology (enzymatic hydrolysis) is the lowest-cost option, but there are few examples of operational facilities.

• • •

As well as the technical challenges of increasing scale, the key barriers to be overcome are the:

net-carbon footprints of these potential pathways to validate their environmental credentials. yields and operating costs for the locally available feedstocks to establish the policy framework and drive further deployment.

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Game-changing potential Currently, there’s little direct economic support beyond blending mandates and the ‘green premium’ to reflect the higher costs of producing biofuels. Incentives are needed and one option would be a carbon tax credit. Fossil fuel-based products will be subject to a carbon tax of up to the US$100/t on Scope3 emissions. Biofuels also emit CO2 on combustion, but their net lifecycle emissions are far lower, as carbon is removed when the vegetable feedstock is grown. A ‘carbon tax credit’ at the refinery gate would create a level playing field and significantly improve the competitiveness of biofuel. These circular waste technologies can be made ‘carbon negative’ . Carbon capture and sequestration of the emissions from the facilities that process agricultural residues could play such a role, as it would eliminate most carbon emissions during the manufacturing process and any associated power generation. Many of the attributes required for the successful growth of the circular economy – technological development, deployment, policy support and high carbon prices – are consistent with an accelerated energy transition. In our AET-1.5 scenario, the global demand for liquids falls to just 35 million b/d by 2050, 60% lower than our base case. Biofuels could meet two-thirds of liquids demand in hard-to-decarbonise transportation sectors, as well as provide circular feedstocks for petrochemicals.

The biofuel aspirations of the oil Majors

Note: Conversions to volumes for some companies uses a conversion of 7.6 bbls of biofuel per tonne. Source: Wood Mackenzie

The oil Majors are on board Oil Majors are certainly on board. All have forecast strong growth in biofuel supply this decade. Despite this growth, liquid biofuels will still only account for a small fraction of their processing capacity. The following figure excludes the implications of portfolio rationalisation and high grading that are an inevitable part of adapting to the energy transition, but broad levels of ambition are similar across European and US companies. The success of waste-to-biofuels could enable the re-purposing of their competitively weak fuel refineries. Critical to that success is investment in research and development to innovate and deploy best-in-class waste-to-biofuel facilities. This will need to be done in collaboration with various stakeholders – traditional technology licensors to leverage their development capabilities and local governments and their waste collectors to secure a reliable supply of waste for conversion to biofuel. Waste-to-biofuel is an exciting opportunity for the significant amounts of capital looking for a low-carbon home. Refining is typically a low-margin business and will need third-party capital to capture the high-growth opportunity as both the technology and commercial framework develop. The providers of this capital do, however, need to accept technology risk and so become partners in waste-to-biofuel technology development and deployment.

circular waste technologies can be made ‘carbon negative’.

Waste-to-biofuel is an exciting opportunity for the significant amounts of capital looking for a low-carbon home.

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Source: Wood Mackenzie

Game-changing potential Currently, there’s little direct economic support beyond blending mandates and the ‘green premium’ to reflect the higher costs of producing biofuels. Incentives are needed and one option would be a carbon tax credit. Fossil fuel-based products will be subject to a carbon tax of up to the US$100/t on Scope3 emissions. Biofuels also emit CO2 on combustion, but their net lifecycle emissions are far lower, as carbon is removed when the vegetable feedstock is grown. A ‘carbon tax credit’ at the refinery gate would create a level playing field and significantly improve the competitiveness of biofuel. These circular waste technologies can be made ‘carbon negative’ . Carbon capture and sequestration of the emissions from the facilities that process agricultural residues could play such a role, as it would eliminate most carbon emissions during the manufacturing process and any associated power generation. Many of the attributes required for the successful growth of the circular economy – technological development, deployment, policy support and high carbon prices – are consistent with an accelerated energy transition. In our AET-1.5 scenario, the global demand for liquids falls to just 35 million b/d by 2050, 60% lower than our base case. Biofuels could meet two-thirds of liquids demand in hard-to-decarbonise transportation sectors, as well as provide circular feedstocks for petrochemicals.

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