Second Generation Biofuels and Biomass

Essential Guide for Investors, Scientists and Decision Makers

Roland A. Jansen

• Publisher: Wiley-VCH
• Year: 2012
• Print ISBN:
  9783527332908
• eBook ISBN:
  9783527652990
• Edition: 1
• Topic: Physical Sciences
• Subtopic: Industrial & Technical Chemistry

This guide to investing in the bioenergy market covers the topic from both a scientific, economic and political perspective. It describes the increasing number of second generation biodiesel projects which are now emerging in anticipation of growing sustainability concerns by governments, and in response to market demands for improved process efficiencies and greater feedstock production yields.

The book also closely examines the science and technology involved in second generation biofuels and gives concrete examples, such as in the aviation industry. The result is an essential guide for scientists, investors, politicians and decision-makers in the energy sector.

Chapter 1

The Commodity Case – Introduction

We have to change towards a low-carbon society. The problem with carbon dioxide is: we don’t smell it, we don’t see it, it is colorless, tasteless and invisible.

Al Gore – Speech at the Paul Scherrer Institute, Switzerland, 21 June 2010.

1.1 Commodity Cycles – Past and Present

In August 1998, John Wiley & Sons, New York published my first book on commodities called Profits from Natural Resources. Oil was trading at $10 a barrel, nobody was paying attention to natural resources, and the high-tech bubble was in full swing. Every investor jumped on the bandwagon of the Internet and computer stocks like Microsoft, Yahoo, Oracle, and Amazon. In those days Amazon was trading at $5 a share – in August 2012 it was trading at $230 a share (and by owning Amazon stock for 10 years you would have enjoyed a few stock splits on the way up as well)! At the beginning of the first decade of this century very few people were seriously investing in the basic resources of our world. Although my timing was a little ahead of what was going to unfold, the analysis of the book (i.e. the coming commodity boom) was 100% correct.

This book is not about speculation. This is not another commodity book about trading techniques in gold, silver, or copper. This book is not about exchange-traded funds (ETFs), leverage, selling short, or high-frequency trading. This book is a guide to liquid renewable energies called second-generation biofuels and solid biomass. I think this is one of the best investments you can make today. Such an investment is “early stage.” It is like buying Microsoft at $5 a share. However, those investors who have the vision and the courage to get in early will reap the biggest benefits.

Before we dig into the subject of this book, I first need to give you the big picture of the commodity world. I shall give you the top-down view of the global commodity world before we make our feet wet in biofuels and biomass.

It is essential to understand that natural resources are raw materials. It is only after their transformation from raw to a pure material that they can be used in industrial or consumer products. Depending on the sector, the resources we collect from Mother Earth first need to be found, then undergo one or more of processes like pumping, refining, drilling, harvesting, melting, roasting, drying, crushing, spinning, pressing, recycling, and condensing. In addition, the finished goods need to be transported and stored safely to become valuable basic materials. Raw materials are called “commodities” when they are traded uniformly in bulk, in large quantities. Wheat is a commodity, but diamonds are not. Is water a commodity? Some people say yes, other people say no. Open for debate!

This transformation of a raw material into a pure basic material can take many years. With the exception of fast-growing staple goods like soybeans, sugarcane, and wheat, so-called natural commodity cycles are long cycles. For instance, it takes 5 years to grow a coffee tree and 7 years for a rubber tree before we can collect the latex. Oil in the North Sea was found in 1967 and it was only in 1977 that you could fill up your tank at the gas station with North Sea gasoline. Thus, it takes years and huge investments before additional supplies of commodities become available, and sometimes billions of dollars are invested just to keep the present supply intact or to bring new supplies on stream with very meager results. This is case today with copper and oil.

However, there is one big difference from all the previous cycles: all the three super-cycles in the twentieth century were caused by supply constraints. Commodity shocks like the Middle East oil embargo in 1973 and the Great Grain Drought in the Ukraine in 1972 were typically problems in the supply chain. This time, however, we not only have supply bottlenecks, but additionally we are witnessing a huge new demand from new markets. In Asia, the demand for raw materials is growing exponentially. Thus, I think this super-cycle will be very powerful in nature. Not only Asian countries, but also the United States, Brazil, India, and other large economies are experiencing rapid growth that is fuelling demand for all sorts of commodities. Energy is needed to drive growth, whereas metals and other basic materials form the inputs for what has been an explosion in infrastructure investments.

Imagine there is a lack of semiconductors in this world. We can go to India or China, build a factory, buy machines and robots, hire software and production people, and within 2 years we can produce as many semiconductors as the market can absorb. With raw materials it is a whole different story – the supply cycles of many commodities are very long, and at the same time the global demand for raw materials is exploding with rapid developing economies in China, India, and Brazil.

The global shortage of raw materials might not be resolved for some years also because of infrastructure bottlenecks and the long lead-time needed for new natural resources projects. A lack of investments in ports, in particular in Australia and Africa, is holding back imports and exports of important commodities such as iron ore and coking coal. If you go to cities like Singapore or Shanghai you can witness hundreds of ships waiting to unload or load cargo. A good example is steel. The current global bottleneck in the steel industry had its roots in the 1980s when the last commodity bull cycle ended and the former Soviet bloc economies opened up to the West, making available extra capacity that took years to absorb. Since that time we have had 25 years of deflation, disinvestment, and lack of investments in drilling and mining. Now this oversupply of commodities has been consumed and absorbed. We are currently in a general supply squeeze, demand is booming, and it will take a decade before a sufficient supply of commodities or alternative energies comes on stream.

1.2 The Most Precious Commodity: Energy

The most precious commodity in the world is energy. Most energy comes from fossil fuels like crude oil and coal. When you take inflation into consideration and calculate the real price of oil, today’s brent crude oil price should be well over $140 a barrel.

Estimating proven reserves in the ground is an art that even oil majors have not mastered. In 2004, Royal Dutch Shell had to revise its reserves by 20% downwards. Great Britain has been an oil exporter for the last 25 years and now the country has become an oil importer again because supplies from the North Sea are dwindling. Indonesia, a former OPEC (Organization of the Petroleum Exporting Countries) member, is also importing oil again and Mexico has the same problem. On the demand side, China is the second largest oil importer in the world today, although most Chinese do not yet have a car. Many Chinese do not even have electricity. When the per capita oil consumption in China rises to the level of Mexico, oil production must increase by 50%. China is the biggest energy consumer in the world and may import a total of 275 million tonnes crude oil in 2012. At the beginning of the new century this import figure was a modest 70 million tonnes.

According to many research reports from international think tanks and oil companies the demand for crude petroleum is forecast to increase by 35–40% by 2030 to around 120 million barrels per day. According to the “Peak Oil” believers, it is estimated that the worldwide conventional oil supply will be depleted within 40–60 years and we are within a few years “before or after” the peak in conventional oil reserves.

Most experts project a continuing rise, apart from short-term fluctuations, in the price of oil. They argue that prices of nonrenewable commodities, like crude oil, will rise significantly as the inventory (reserves) of the commodity decrease.

I think we have to deal with several oil scenarios:

1. If the global economy stays subdued in the coming 5 years, I do not believe we will see significant price rises in oil.

2. If the global economy grows steadily in the coming 5 years, I believe oil could move up to $120–140 a barrel.

3. In 5 years time 11 million new barrels of oil from Canada, the United States, and Brazil will come on stream daily, providing an extra supply to the market. Thus, I think in 5 years we will have ample supplies and oil will move down to $50 a barrel.

4. This downward trend will be reinforced by the increased production of second-generation biofuels and biomass coming on stream, replacing oil supplies.

5. Geopolitics play an important role: if for, instance Iran, has developed nuclear weapons and if we face a new war with the Middle East, the oil price can easily double.

Energy use in the transportation sector includes the energy consumed in moving people and goods by road, rail, air, water, and pipeline. The transportation sector is second only to the industrial sector in terms of total end-use energy consumption. Almost 30% of the world’s total delivered energy is used for transportation, most of it in the form of liquid fuels.

The transportation share of world total liquids consumption increases from 53% in 2007 to 61% in 2035 in the US Energy Information Administration (EIA)’s IEO2010 Reference case, accounting for 87% of the total increase in world liquids consumption. Thus, understanding the development of transportation energy use is the most important factor in assessing future trends in the demand for liquid fuels. Figure 1.1 shows that renewables will be the fastest growing energy source.

Figure 1.1 Renewables are the fastest growing energy source, although from a relatively small base (world primary energy consumption in quadrillion BTU; 1 BTU = 1.055 kJ).

Source: US Energy Information Administration, International Energy Outlook 2010.

Another good example is the International Energy Agency (IEA)’s outlook for American electricity generation from renewable sources. In Figure 1.2 we see that the largest share have biomass and wind. All renewable energy sources combined will increase substantially from 140 billion kW/year in 2009 to over 400 billion kW/year in 2035. Also the energy generation from wind and biomass will increase the most and in about the same proportion. According to the IEA’s beliefs the electricity generation from waste, geothermal and solar power will increase a lot less.

Figure 1.2 US renewable electricity generation, 2009–2035 (billion kW/year).

Source: US Energy Information Administration, International Energy Outlook 2011.

1.3 Cheap and Expensive

Many commodities are still cheaply priced. Prices are often well below the all-time highs, especially when we take inflation into consideration. Traditionally, commodities are priced in US dollars – a currency that gets cheaper versus most other currencies all the time.

When Bunker Hunt was trying to force a silver squeeze in 1979, he was holding 100 million ounces of the white metal, which skyrocketed to over $50 an ounce. So silver prices at $29 an ounce in August 2012 are still cheap (Figure 1.3).

Figure 1.3 Long-term silver prices.

Source: www.futuresbuzz.com/silverlt.html.

The picture looks even more extreme when we take inflation into consideration. If we compare the price of silver in 1980 at $48, today’s silver price is insignificant. On 21 January 1980 at its all-time high, $48 silver translates into $135 in today’s dollars. In other words, it would take $135 today to equal the purchasing power of $48 three decades ago. Looking at the Consumer Price Index (CPI), it takes $2.81 now to buy what a single dollar bought then. Let us thank the Federal Reserve for this enormous stealth tax that has eroded all the capital we have saved ever since. Even crude oil, trading at all-time highs in 2008 at $149 a barrel, looks cheap today, especially as it is priced in cheap dollars as well (Figure 1.4).

Figure 1.4 Long-term oil prices.

Source: www.futuresbuzz.com/crudelt.html.

Is it wise to invest in commodities? Selectively – absolutely. I think it is best...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Acknowledgments
• Abbreviations
• Chapter 1: The Commodity Case – Introduction
• Chapter 2: First- and Second-Generation Biofuels
• Chapter 3: Biofuels Feedstock: Jatropha curcas
• Chapter 4: Other Biofuel Feedstocks
• Chapter 5: Cropping Methods
• Chapter 6: Socially Responsible Investing
• Chapter 7: Sustainability
• Chapter 8: Biomass
• Chapter 9: Carbon Credits
• Chapter 10: Biofuels in Europe – EU Policies
• Chapter 11: Biofuels in the United States
• Chapter 12: Biofuels in China
• Chapter 13: Biofuels in Brazil
• Chapter 14: Biofuels and Biomass in Africa
• Chapter 15: General Aviation and Biofuels
• Chapter 16: Aviation and Carbon Credits
• Chapter 17: Biokerosene
• Chapter 18: Fermenting Fuels
• Chapter 19: Airline Test Results with Biofuels
• Chapter 20: Investment Opportunities
• Chapter 21: Jatropha Projects, Research, and Joint Ventures
• Chapter 22: The Future
• Glossary
• Index