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Wednesday, July 11, 2007

Biofuels Pushing Energy Firms 'Beyond Petroleum'

The June 22 passage of significant biofuel mandates in a U.S. Senate energy package is one of many factors suggesting the oil industry will move closer to matching the rhetoric of certain oil companies' claims that they are not part of an "oil industry" but an "energy industry." Throughout the past decade, energy companies -- most notably BP and Royal Dutch/Shell -- have forayed into the alternative fuel/energy sector. However, they have remained oil companies first and foremost, no matter how "beyond petroleum" BP claims to be. Oil will still be the backbone of the energy industry's operations, but unless a major impediment to biofuel production develops, oil will no longer be the only significant component of vehicle fuel worldwide. Economic and regulatory circumstances could, for the first time, compel some oil supermajors to truly move beyond petroleum and into a more robust fuel mix.
The Growth of Biofuels
The U.S. Energy Policy Act of 2005 -- which requires that renewable fuels make up 4 billion gallons of the nation's gasoline market starting in 2006 and 7.5 billion gallons by 2012 -- spurred much of the current growth in biofuel research in the United States. The U.S. Senate Committee on Energy and Natural Resources said that, as of 2006, these renewable fuel requirements led to the construction of 34 new ethanol plants and the planned construction of an additional 150. In Europe, carbon regulations tied to energy security concerns and Kyoto Protocol commitments have propelled investments in biofuel research; earlier in 2007, the European Union mandated that biofuels make up at least 10 percent of European liquid fuel by 2020.
To ensure that biofuel development continues, the U.S. Senate passed a comprehensive energy bill June 22 by a 65-27 vote, mandating at least 36 billion gallons a year of domestic ethanol production for vehicle fuels by 2022. The bill increases funding for bioenergy research by 50 percent for 2008 and 2009 and supports the development of biofuel infrastructure and transport. In July, the measure will go to the U.S. House of Representatives, where it will face few hurdles, given biofuel technology's political popularity among rural voters and the growing investment interest in renewable fuels.
U.S. President George W. Bush's endorsement of cellulosic ethanol in his 2006 State of the Union address and his recent plan for reducing domestic gasoline consumption by 20 percent in 10 years have not only brought biofuels to the forefront of the national energy dialogue, but they have also led to direct federal support for biofuel research. In February, the U.S. Department of Energy (DOE) awarded $385 million for six separate industry biorefinery projects expected to produce at least 130 million gallons of cellulosic ethanol annually. On June 26, DOE pledged to invest $375 million in three bioenergy research centers, to be located in Wisconsin, California and Tennessee, in an effort to speed up cellulosic research.
The auto industry has responded by committing to increase the production of flex-fuel vehicles. In 2006, the CEOs of Ford Motor Co., DaimlerChrysler and General Motors pledged to double the annual production of vehicles that can run on E85 -- a gasoline blend containing 85 percent ethanol -- or biodiesel to 2 million cars and trucks by 2010.
With the likely emergence of a global post-Kyoto agreement on climate change (though likely not within the current Kyoto framework), and the likely passage of carbon reduction strategies in the U.S. Congress in several years, biofuels will grow more attractive a fuel source that produces fewer carbon emissions -- particularly as the biofuel industry develops energy-efficiency advancements.
Industry Response
Government subsidies for biofuel production, likely to be hammered out in the 2008 Farm Bill, will make biofuels more competitive with oil; and, after years of fighting for permission to build new refineries rather than adding capacity at existing facilities, the oil industry is becoming uncertain about the future of the fuel mix and therefore about the future demand for refined oil products. This is not only leading many in the industry to give up on building new refineries, but it is also encouraging even the most reluctant \nwithin the industry to devise strategies to incorporate other forms of fuel into their portfolios. In other words, as the concept of supply and demand for transportation fuels radically changes, energy companies will change from primarily oil providers to transportation energy providers.
To take the most recent example, BP, Associated British Foods (ABF) and DuPont announced June 26 a $400 billion investment in the construction of a bioethanol plant and a biobutanol demonstration plant. The business coalition is marketing biobutanol, a biofuel more similar to unleaded gasoline and less corrosive to existing pipelines than traditional biofuels, as the "next generation" of biofuels due for introduction in the United Kingdom's transport mix this year. BP also launched the BP Energy Bioscience Institute in partnership with the University of California, Berkeley, and the University of Illinois, Urbana-Champaign, on Feb. 1; BP will provide $500 million over the next 10 years to increase current biofuels' efficiency and develop biofuels from plant matter that does not compete with food crops.
Shell claims to be the largest global distributor of transport biofuels, selling slightly more than 900 million gallons in 2006. Shell has invested significantly in cellulosic ethanol and, in 2006, the company launched a study with Volkswagen and Canadian biotech company Iogen Corp. that claimed this fuel both produces fewer carbon dioxide (CO2) emissions than traditional ethanol and can be cost-competitive with gasoline. Later this year, Shell intends to demonstrate the first biomass-to-liquids plant that converts wood chips, through gasification, into a synthetic fuel that can be combined with diesel for use in diesel engines. Shell claims this technology could reduce CO2 emissions by 90 percent relative to conventional diesel.
While European-based majors have taken the lead in biofuel research and development, U.S. companies are increasing their involvement in the industry. In April, Tyson Foods Inc. and ConocoPhillips announced a partnership to turn animal fat into diesel fuel. The companies call the fuel "renewable diesel." In 2006, Chevron Corp. invested with Galveston Bay Biodiesel to construct a biodiesel production and distribution center and entered into a $400 million partnership with the Georgia Institute of Technology to develop cellulosic biofuels.

Coming Biofuels Challenges

While oil companies are increasingly retooling their portfolios to include biofuels, the move is not without its challenges. As momentum builds for biofuels, the debate will focus on what types of biofuels should be promoted and what type of constraints, if any, should be placed on biofuel production methods. Certain interest groups and legislators are concerned about the unintended consequences of increased industrial agriculture methods to produce biofuels and the moral dilemma of whether to use would-be food crops to power vehicles or to feed the world's hungry. Notably, the new Senate measure on biofuels requires that advanced biofuels not derived from cornstarch (the primary source used in current U.S. ethanol production) make up increasing volumes of the annual 36 billion gallons of biofuels required by 2022 -- from 3 billion gallons in 2016 to 21 billion gallons in 2022. These advanced biofuels include ethanol derived from cellulose and waste material (including vegetative and animal materials), biobutanol and biodiesel.
This provision is designed to spur research into less land-intensive and more energy-efficient biofuels to reduce the unavoidable increase in tension over rising food prices attributable to the increasing diversion of basic crops and cropland to fuel production.
A significant breakthrough in cellulosic ethanol might develop rapidly, or it could be 10 years away. Regardless, before cellulosic ethanol can be widely produced and used, technological advances will have to reduce production costs enough to overcome the likely enormous expenses of transporting cellulosic ethanol. In the meantime, supporters of traditional ethanol will have to temper anger over rising food prices and the negative environmental effects (such as habitat destruction and fertilizer runoff) of increased fuel crop cultivation using conventional biofuel crops in order to establish the biofuel infrastructure necessary to facilitate profitable growth in the biofuel industry and a true transformation of energy companies.

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