The Role of Woody Biomass in Bioenergy Business in Russia and the World

The Role of Woody Biomass in Bioenergy Business in Russia and the World Spring Biofuel Congress, St. Petersburg, Russia Mr. Jarno Seppälä, Head of Forest Industry and Bio Solutions Consulting March 22, 2016

Agenda Indufor Local and Global Wood based Fuels Conclusions

Indufor Quick Facts Independent international consulting company based in Finland, New Zealand, Australia and the US with over 35 years of experience in the field of forestry, forest industry and bioenergy Provide world class advisory services to a wide range of private and public sector clients More than 300 clients in over 800 projects in 5 continents

Indufor Forest Industry & Bio Solutions Biomass sourcing and wood supply plans Site suitability for forest plantation and biomass species and varieties Potential and realistic supply availability in biomass supply baskets Developing supply models and assessing associated cost structures Business strategies Pre-feasibility/feasibility studies Business plans Market supply, demand and trade assessments market entry solutions End use segment and client identification studies Due Diligence and M&A Purchaser and vendor due diligence Valuations Mergers and acquisitions Process Improvements Technology assessments Operational improvement analysis Industry benchmarking Industry segment productivity assessments Single plant benchmarking studies

Indufor Russia In Russia since late 1980s Both strategic and operational projects. Services cover all strategically important issues for the industry: Forest management Forest inventories Wood supply and procurement Investment advice and manufacturing processes Sales and marketing Logistics.

Local and Global Wood based Fuels

Local and Global Wood Based Fuels The consumption of different wood based fuels is connected with their transportability and the spread of the geographical market area. Changes in the demand for global market products, mainly industrial pellets, may have far-reaching consequences for regions producing biomass. Local products Global products Wood based fuels with low value adding: Harvesting residues (forest chips) Processing residues (chips and sawdust) Firewood Wood based fuels with high(er) value adding: Wood pellets Torrefied/black pellets Liquid biofuels All above products have strong dependence on the wood supply streams of local forest industry operations Low energy content per volume Short economical transportation distance Production and use are less dependant on the forest industry Better energy value per unit of volume Long transportation distances and better stocking capabilities

Local

Local Production Available Harvesting Residue Volumes Biological potential is the maximum theoretical volume of harvesting residues available. This volume differs significantly between wood species and age structure of the forest. Pine Spruce Birch Source: Metla

Local Production Available Harvesting Residue Volumes In reality, the economic harvesting residue potential is significantly lower than the theoretical/biological potential. Technical potential Technical potential indicates the share of logging residues from the biological potential that can be realistically extracted from the site. Depending on the harvesting and forwarding method, part of removable material will be rejected due to small particle size and part of residues fall off during handling and loading. Also lease holders willingness to sell can restrict the available volume Economic potential The economic potential is the share of the technical potential which is economically profitable in given conditions. Economic potential depends on the other hand from the sourcing cost of biomass and on the other hand the paying capability of the bioenergy plant. t Location Iswepe 1 Hermannsburg Location 2 Theoretical potential Technical potential Offered Economic volume potential

Local Production Harvesting Residue Processing Decentralized processing solutions dominate globally. Centralized processing solutions are effective when a large volume of biomass is closely available to the processing location. Supply Chain In-field chipping Roadside Terminal chipping Mill-site chipping chipping Supply chain Decentralized Decentralized Centralized Centralized Cost Low investment cost Low to medium investment cost Efficiency Inefficient chipping Cost efficient method for longer transport distances Transport distance High investment cost Cost efficient method for large volumes in small areas < 150 km < 150 km Chips < 150 km Loose material < 50 km High investment cost Cost efficient method for large volumes within short transport distance < 50 km

Local Production Transportation of Biomass The required space is the restricting factor when transporting harvesting residues whereas weight is typically the restricting factor. Logging residues are the main wood raw material in global CHP production. Venäjäksi Venäjäksi Venäjäksi Venäjäksi Photo: Metla Note: All loads have the same solid content.

Local Production CHP Optimal Processing Location South African example Harvesting residue transportation is economical only in short distances. Cost (ZAR/MWh) Breakeven Distance 8,2 km Logging Residues Chips 0 5 10 15 20 25 30 35 40 45 50 Lead Distance (km)

Local Production CHP Biomass Types and Transport Distances Southern African example Harvesting residues viable option and available very close to the planned plant location. 40 Average distance (km) X MWe Y MWe 35 30 Company s own resources Sawmill residues (others*) Pulpwood (others*) Harvesting residues/ thinnings (others*) 25 20 Unwanted species from northern estates** 15 10 5 Own sawmill residues Pulpwood (Own) Harvesting residues/ thinnings (Own) 0 0 100 200 300 400 Volume (1 000 m³)

Local Production CHP Harvesting Residues in Southern Africa

Local Production CHP Harvesting Residues in Southern Africa

Local Production CHP Bush(saw)mill Residues in Southern Africa

Local Production CHP Mobile Sawmill Residues in Southern Africa

Local Production CHP Sawmill Residues in Southern Africa

Local Production CHP Sawmill Residues in Southern Africa

Local Production CHP Pulpwood from Final Felling in Southern Africa

Local Production CHP Unwanted Roundwood in Southern Africa

Local Production CHP Unwanted Roundwood in Siberia, Russia

Local Production CHP Biomass Cost Curves in South Africa Harvesting residues are cost effective wood fuel type cheaper than firewood in this example. Cost (Chipped at Millgate), ZAR/MWh Firewood Dry offcuts Logging residues within 120 km (Mondi) White chips Logging residues within 40 km (Sappi) Logging residues within 30 km (NCT) Pine tops, offered Spent bark 0 100 000 200 000 300 000 Cumulative Volume, MWh Weighted average

Local Production CHP Biomass Cost Curves in South Africa Harvesting residues are cost effective wood fuel type All targeted volume can be found within 100 km radius. Cost (Chipped at Millgate), ZAR/MWh Firewood Logging residues within 50-80 km Chips Logging residues within 30 km Logging residues within 15 km Bark Weighted average 0 100 000 200 000 300 000 400 000 Cumulative Volume, MWh

Global

Global Business Wood based Biomass in Energy Production in EU In Europe, wood raw material is a scarce resource due to high competition. Increase of the wood based energy production will be largely dependent on imported wood biomass. In Europe, wood raw material is a scarce resource due to high competition About 2/3 of the wood energy use is connected with the processes of the forest industry Supply of residues from the wood processing industry (sawmills) is not going to increase drastically due to stagnant total production Thus, increase of the wood based energy production will be largely based on imported wood biomass 6 % 7 % Use of wood based biomass in energy production in the EU 21 % 7 % 3 % 6 % 15 % 35 % Fire wood Forest chips Industrial pellets Pellets - individual houses Pellets - heat and electricity Recycled wood Bark Black liquor Total: 722 TWh

Global Business Transportation of Biomass Economically feasible transportation distance is typically less than 100 km, except pellets. Chips 100 km 500 700 km Pellets 2 000 3 000 km 15 000 km

Global Business Wood Pellets Supply and Demand EU comprises nearly half of the global pellet production and app. 75% of consumption. North America and Asia form nearly 20% of the whole market. Pellet markets have been steadily growing in Japan and South Korea. 13,5 18,8 1,5 0,9 0,6 mil. t Russia and CIS 0,5 mil. t EU28 8,0 2,8 0,35 mil. t 1,2 0,5 Other Europe 2,6 2,4 North America Asia 0,3 0,0 1 Other world Production, mil. t Consumption, mil. t

Global Business Wood Pellets EU Market Development The competitiveness of both European energy producers as well as North American pellet exporters has decreased due to currency developments pellet producer prices have decreased and consumer prices have increased. Production and consumption of wood pellets in the EU Prices (CIF) for North American imported pellets in Belgium and Holland Mil. t 1/2014 = 100 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Production Consumption Index EUR Index USD

Global Business Liquid Biofuel The primary driver of producing biofuels is to displace liquid fossil fuels which is largely driven by political decisions. Only a few wood based liquid biofuel plants exist in commercial scale. The primary driver of producing biofuels is to displace liquid fossil fuels The biofuels are substituting the fossil fuels thus the market price reference is the fossil oil prices. So far only few pyrolysis oil, bioethanol mills based on lignocellulosic (woody) feedstock are operating commercially. Biorefinery concepts based on lignocellulosic feedstocks will require more time to become technically mature and competitive against fossil fuels production. Brent Crude Global Market Price USD/bbl

Global Business Liquid Biofuel Russian Market Russian domestic market is only at its development phase and production will be export driven. Russia is developing regulatory norms and standards for bioenergy and biofuels. The bioenergy and biofuel targets by 2020 are: 10% share in motor oil 10% share in generation of thermal power 20% share of solid biofuels in the European market 5% share of the world market of motor biofuels and its components. The Russian targets by 2020, 10% share in motor oil and 5% share in the global biofuel market, would be about 1 500 000 toe oil and about USD 7 billion market share. However, biomass and biogas facilities will not get financial support from Russian Federation by 2020 as the technology is not considered yet commercial, which makes challenging to reach BIO 2020 targets.

Global Business Liquid Biofuel European Market HFO is considered a near term opportunity based on the expected pyrolysis oil quality, whereas LFO could be replaced in the medium term (5+ years). Portugal Denmark Consumption of HFO in selected European countries Italy Finland Sweden UK Norway 1 000 tonnes/a United Kingdom HFO Market Price in selected European countries Sweden Portugal Denmark Finland EUR/t Netherlands Tax Price of fuel

Global Business Liquid Biofuel Blending of Bark and Sawdust in Russia

Global Business Liquid Biofuel Dumped Residues outside Mill in Russia

Global Business Liquid Biofuel Sawmill Residues at Landfill in Russia

Global Business Liquid Biofuel Old Sawmill Residues at Landfill in Russia

Global Business Liquid Biofuel Low Quality Roundwood in Russia

Global Business Liquid Biofuel Raw Material Mix in Russia Planned wood biomass composition for a pyrolysis oil plant. 90 000 m³/a mill: About 50% of raw material is roundwood and the rest industrial residues 350 000 m³/a mill: Ca. 85% roundwood and 15% industrial residues. Ca. 60% of roundwood is pulpwood and the rest low quality roundwood. 1 000 m³ Sawdust Wood chips HW Firewood SW Firewood HW pulpwood SW pulpwood 90 BTG 000 (90 m000 3 /am³) Envergent 350 000 (350 m 3 /a 000 m³)

Global Business Liquid Biofuel Mill Gate Cost in Russia Processing residues from close by sawmills would be enough for a smaller pyrolysis oil mill and would dominate also the raw material mix for the bigger mill size. However, various roundwood assortments needed also. RUB/m³ Roundwood Industrial residues Ex-mill/Roadside price W. Avg. 90 000 m³ W. Avg. 350 000 m³ 0 50 100 150 200 250 300 350 1 000 m³

Key messages

Conclusion Knowledge and understanding of a realistic wood biomass situation has the utmost importance have to be done before machinery selection etc. Correct mill size has to be considered carefully. Wood cost increases with mill size and other cost savings become marginal once a certain size has been passed. Transportability of different wood fuel types varies significantly Harvesting residues local Pellets and liquid biofuels global Increase in the wood based energy production in the EU will be largely dependent on imported wood biomass EU targets for liquid biofuels in transportation create demand in medium/long term

Indufor Oy Tel. +358 9 684 0110 Töölönkatu 11 A Fax +358 9 135 2552 FI-00100 Helsinki indufor@indufor.fi FINLAND www.indufor.fi Indufor Asia Pacific Ltd Tel. +64 9 281 4750 7th Floor, 55 Shortland St Fax +64 9 281 4789 PO Box 105 039 indufor@indufor.fi Auckland City 1143 www.indufor-ap.com NEW ZEALAND Indufor Asia Pacific (Australia) Ltd PO Box 425 Flinders Lane, Melbourne VIC 8009 AUSTRALIA www.indufor-ap.com

Local Production CHP Raw Material Types and Suitability/Availability Strong dependence of the wood raw material streams of the local forest industry operations. Logging residues are the main wood raw material in global CHP production. LISÄÄ KUVIA Copyright 2009 Indufor Oy

Local Production CHP Bush(saw)mill Residues in Southern Africa POIS

Global Xxx Pellets Raw Material Euroopassa ja Venäjällä lähes exclusively processing residues (from sawmills), Amerikassa myös from roundwood. Ja muutama kuva alle? POIS! POIS