World Market for Biofuels An acceptable and positive impact

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1 World Market for Biofuels An acceptable and positive impact BP Biofuels a growing alternative Presentation title second line if required Philip New President, BP Biofuels 27 th March 2007

2 Introduction Introduction The The long-term long-term energy 1 1 mix energy will change mix will Regulatory change Drivers Drivers Energy security Climate change Energy Rural development security Climate change with with biofuels biofuels being a material being component a material Up component to 2 2 Up to 30% 30% penetration penetration by 2030 by Today s Today s biofuels biofuels face four face main four challenges... main challenges... Cost Cost Availability Quality Quality Sustainability Sustainability meaning industry growth industry is reliant growth on: is reliant Technology on: 4 4 meaning Regulatory Regulatory Support Technology Solutions Rural development Shaper of an emerging industry Shaper of an emerging industry Leadership position in the industry Leadership position in the industry 2

3 The long term energy mix will change Enduring nature of regulatory drivers Greenhouse gas reduction Regulatory targets Energy security Rural development Global in nature 3

4 with with biofuels biofuels being a material being component a material Up component to 2 Up to 30% penetration by 2030 by 2030 Transport s Transport s Contribution Contribution to Total CO 2 to Total CO 2 30% 25% 20% 15% 10% 5% 0% 21% 22% Given an increasing global energy demand, biofuels are the best supply side option for ground transportation Source: IEA World Energy Outlook, 2004 Source: IEA World Energy Outlook, 2004 Biofuels Biofuels represent represent ~40% of ~40% the predicted of the global predicted growth in global transport growth fuels in Transport Transport fuels transport fuels Biofuels Billion fuels gallons Biofuels CAGR 15-20%* CAGR 15- Biofuels Billion Biofu as gallons 20%* % of total els as transport % of total 3% 6.5% 8.5% fuel market % 5 5 Biofuels trans Biofuels % % port Gas/diesel fuel Gas/diesel mark et * Biofuels * Biofuels could reach could 30% reach of the 30% fuel of pool the by fuel 2030pool by 2030 Source: Tecknon 2006, Team analysis Source: Tecknon 2006, Team analysis Energy dependency and and climate climate change change will remain will remain primary primary motivators motivators for for pursuing alternative and and renew renewable transport transport fuels fuels For ground transportation, biofuels are the best supply side option to meet both challenges For ground in transportation, a material w ay by biofuels They are the also best support supply rural side development. option to meet both challenges in a material way by They also support rural 4 4

5 Availability: biofuels currently represent 2-3% of the transport fuel pool. Today, feedstocks limit penetration to around 5-7% 2006 current demand and production 2011 predicted demand and maximum capacity (bn galls) conventional feedstock supply (bn galls) EU ethanol EU biodiesel U.S. ethanol Brazil ethanol Demand Supply Conventional feedstock) Demand Announced Capacity Feedstock Limit 2006 to Europe constraints Distribution need ethanol infrastructure for distribution, blending 3.2 and retail Ethanol max feedstock limit 2.4 reached with 5.75% target. 1.7 Bio-diesel max limit from rapeseed 3.8 will be 1.1ban galls short of target; B5 1.1 will limit further penetration 4.5 US constraints 2.9 Distribution - rail car production 5.3 capacity backlog of ~3 years Growth limited by construction Economics Increasing corn price will erode margin and limit growth to RFS and mandate volumes 15 Brazil constraints 3.8 Distribution - Trucking is primary method, despite long distances and limited capacity resulting in high costs; 7.3 limited port facilities Risk management lack of paper market for hedging will limit exports 2011 forward Europe constraints Feedstock Limits include use of 50%set aside land and crop optimisation; Potential for 1.2 bn gall ethanol if cereal exports used; then LC required; increasing imports of veg oils for biodiesel Capacity insufficient indigenous feedstock for announced capacity Ethanol demand beyond 10% - will require FFVs and E85 distribution US constraints Corn supply max gallons then LC technology needed 30 Distribution river barge limited reach, ageing infrastructure E85/FFVs to exceed 15 bn galls (10% vol) will require E85 distribution priced at energy parity and FFVs Brazil constraints Trade Policy Tariffs in demand markets will limit investment in exports?? Domestic markets rapid growth in FFV s limit export volumes 5

6 Implications of market growth to 155bn litres by 2015 What does such growth mean in practice? An incremental 10 billion litres every year sq km every year (based on sugar cane ethanol) Potential land use changes Photo from Prof Donatoo Aranda, Feb

7 Sustainable growth requirements Technology development & regulatory support Technology development Relative Energy Content 100% 80% 60% 40% 20% 0% 67% 86% 100% Ethanol Butanol Gasoline Advanced molecules improving efficiency of product Energy crops low water usage, crops on low-grade soils Lignocellulosic - economic conversion processes Public Goodwill Regulatory support Regulatory Support Biofuels Regulatory Withdrawal Industry + Sustainable Unsustainable Growth Growth - Positive Benefits Negative Consequences Market based balancing environmental, energy security and development goals Encouraging innovation and applying equally to all so stimulating solutions Geared to emissions reductions - stimulating quantity of fossil fuel energy replaced, not specific volumes Supporting guidelines regulating sustainable and responsible production Societal Concern 7

8 BP s approach: Build business across the value chain Understand, communicate, regulate impacts The road to renewal.learning by doing BP s own volumes of ethanol blended into gasoline have increased 25% from 2005 to 2006 Specific initiatives 8000 ha Jatropha project Biobutanol EBI: Foundations for lignocellulosic business First oil industry member of RSPO Sourcing guidelines 8

9 Second step: Develop BP s magnetic north Guidance for operations across the value chain What we seek to do: Understand likely environmental and social impact Adopt best industry practices in cultivation and process design Look for synergies between biofuels and food production, water management and power generation Transparent reporting, verification & continuous improvement What we seek to avoid: Negative life-cycle GHG balances, whether through fuel processing or land change Feedstocks from high conservation value areas Unsustainable stress on soil or water Sourcing from plantations that displace staple foods Engage our customers! Improper labour practices or BP Biofuels a growing alternative community relations 9

10 Conclusion 1 The long-term energy mix will change 2 with biofuels being a material component 3 Today s biofuels face four main challenges... 4 meaning industry grow th is reliant on: Regulatory Drivers Energy security Climate change Rural development Up to 30% penetration by 2030 Cost Quality Availability Sustainability Regulatory Support Technology Solutions Shaper of an emerging industry Leadership position in the industry 2 10

11 Thank you BP Biofuels a growing alternative 11

12 First step: sourcing guidelines Fundamental to an enduring industry is the avoidance of harmful environmental & social impacts Issues include: stress on the world s limited water resources biodiversity deforestation the destruction of High Conservation Value Forest (HCVF)* child and forced labour and other employment abuses planting on peat soils community conflict issues land rights, including economic and physical displacement effects of monoculture on local food production and local economies pollution and environmental damage (water / soil / air), including related socio-economic impacts net greenhouse gas balances resulting from land use change * HCVF is technically defined according to principles defined by the WWF 12

13 Principles need to be converted into workable tools Here are some thoughts, neither definitive nor final With regard to its investments, BP proposes, for example, to: make use of environmental and biodiversity assessments to ensure the effects of the establishment of BP dedicated biofuel feedstock crops on biodiversity are understood and managed appropriately BP will expect best practice in crop rotation, pesticide and herbicide application so as to foster biodiversity in food short regions, BP will neither grow nor displace the local recognized staple food for fuel use in addition to supporting the UN sponsored voluntary initiative on human rights, BP will actively aim to build sustainable advantage through the implementation of inclusive business models that enable local communities to benefit ALL THE ABOVE OPEN TO DISCUSSION 13

14 What we believe the industry needs Dialogue about choices, Robust operational tools Watching and waiting is not an option: What are the trade-offs? Who is in the debate? What are the unintended consequences What should be in? What should be out? BP Biofuels a growing alternative 14

15 Energy is at the heart of the world economy. World population growth continues rapidly. Energy Use Per Capita Temperature Changes Source: UN IPCC Climate Change 2001; Synthesis Report. Summary for Policymakers 15

16 Advanced conversion: developing better quality molecules Next generation biofuels offer advantages over conventional biofuels (e.g. ethanol) Benefits: Not corrosive can use in higher concentrations Relative Energy Content 100% 80% 60% 40% 20% 0% 67% Ethanol 86% Butanol 100% Gasoline Low water affinity no risk of phase separation; can pipeline Easier to blend no RVP issues Higher energy content better for the environment; better for the consumer (fewer fills) Conventional Engines Max Blend % 25% 20% 15% 10% 5% 0% 10% Ethanol 17% Butanol 16

17 Bioscience: improving economics and addressing sustainability Current generation technology can be input intensive e.g. Water usage for plant growth Acid usage in first generation lignocellulosic conversion Opportunities: Genetically modified plants which are less thirsty Plant decomposition triggered by UV-light 17