Crisis Energética Foros

Biofuel Costs Hurt Effort To Curb Oil Price
By PATRICK BARTA
November 5, 2007; Page A2

Rising costs of biofuels and other alternative energies are making them less viable as substitutes for crude oil, a development that could frustrate efforts to bring oil prices down in the years ahead.

A few years ago, many energy economists predicted that higher oil prices would ensure the success of alternative energies such as biodiesel or wind power by making them more financially attractive. In many cases, though, the opposite has occurred: Even as crude-oil prices approach $100 a barrel, some alternatives look less attractive than in the past.

It's all relative: Some alternative fuels look less attractive than in the past because of a sharp rise in raw-materials costs.

One example: Crude oil would now have to be $130 a barrel before palm-oil-based biodiesel was competitive.

Not just crops: Costs of uranium for nuclear power and silicon for solar-power cells are up, too. One reason: Energy demand is now so intense that supplies of just about every kind of fuel are in short supply, driving up prices of the raw materials involved in making many alternative energies. Some biofuels also rely on agricultural commodities that already are facing higher demand as foodstuffs, a situation which drives up prices further.



The problem is most acute for crop-based alternative fuels, like ethanol and biodiesel, though it has also proved true to some degree for solar power, nuclear power and other competing energy sources.

Biodiesel, a fuel made from farm crops like soybean oil and palm oil, was in some cases supposed to be economically competitive with crude-oil prices as low as $50 a barrel, according to analysts who studied the industry.

But a sharp rise in the price of biodiesel raw materials -- including a more than 90% jump in palm-oil prices over the past three years -- has dramatically altered the economics of the industry. M.R. Chandran, former head of the Malaysian Palm Oil Association, says crude oil would now have to be as much as $130 a barrel before palm-oil-based biodiesel is competitive.

Other alternatives to oil, including relatively dirty ones such as coal, have also become more expensive. Coal prices have more than doubled over the past four years, and prices for uranium, a crucial ingredient in nuclear power, have increased more than sevenfold in that time frame. The cost of solar-power cells has been pushed up in the past few years by a tight supply of silicon, the main raw material in such cells.


"The cost goal posts have certainly shifted," and that is making it harder for alternatives to oil to gain traction, says Peter Tertzakian, chief energy economist with ARC Financial Corp., a Calgary, Alberta, private-equity investor. As a result, "the rate of adoption that people expected is going to be a lot slower than people think."

Of course, many types of alternative energy have made considerable progress over the past three years, and crude-oil prices would almost certainly be higher now if such fuels weren't in the mix. Asia and other parts of the world have rolled out billions of dollars for new nuclear-power plants and liquefied-natural-gas facilities over the past several years, and spending on solar and wind power also has soared.

Global ethanol production rose 25% from 2004 to 13.5 billion gallons last year, and biodiesel capacity more than doubled to 6.1 million metric tons in that period, though the two combined still only make up about 1% of the world's transportation-fuel supply. Biofuels -- along with oil from the former Soviet Union and Brazil -- are expected to account for much of the new energy supply developed outside the Organization of Petroleum Exporting Countries next year, the International Energy Agency says.

Perhaps most important, huge sums of venture-capital cash have flooded into the alternative-energy sector since 2004, raising the odds that technological advances will bring down costs in the years ahead.

"It's early in the game; it's only been four years since energy prices have risen, and I think we're all just too impatient," says Mark Zandi, the chief economist of Moody's Economy.com, a West Chester, Pa., research firm.

Still, the latest surge in alternative-energy costs -- along with growing concerns about their environmental sustainability -- are forcing governments to rethink their commitment to such fuels. Some have begun to question whether they will play as big a role in the future as first hoped.

In Malaysia, an important center for palm-oil biodiesel production, the government has held back on plans to require biodiesel blends at petrol stations because of a fear it could drive palm-oil prices too high, imperiling the country's nascent biodiesel industry.

Malaysia issued roughly 90 permits for biodiesel refineries in the past three years, but only about five are in operation. It appears that most of the others will remain on hold until palm-oil prices come back down.

In Europe, officials are still committed to a plan to meet 10% of the region's transportation needs with biofuels by 2020. But Germany has cut back on some tax incentives for biofuels, and some EU officials have questioned whether subsidies for biofuel crops are necessary in the future. Spanish energy company Abengoa SA recently suspended production at one of its biofuel facilities in Spain because of high grain prices. Similar projects have stalled elsewhere, including Hungary.

The U.S. has its own alternative-fuel woes. The price of corn, a key raw ingredient, has increased even as the market price for ethanol has been held down by oversupply. That has squeezed the profitability of ethanol producers and forced new players to cancel or delay construction of more facilities.

Some economists now fear that the current problems may remain as long as oil stays expensive and won't be easily fixed in the short term. They note that some nonoil fuels face the same supply constraints as crude oil. There may not be enough land or water to produce all the crops needed to keep biofuel prices low. Coal, while still plentiful, faces deteriorating grades and rising costs in older mines. Uranium supply is limited by the long lead times required in developing new mines, among other factors.

Another concern is that as more nonoil commodities evolve into oil alternatives, they will start to be priced the same way as crude, keeping their costs in line with international oil prices.

Before the latest energy boom, for instance, palm oil was viewed primarily as a source of cooking oil, and its value didn't rise and fall with crude oil. Now, it is increasingly seen as an energy source. Over the past three years, palm oil's price has risen by roughly the same amount as crude oil.

But there are signs some of these fears may be overblown. The price of sugar, a key element of ethanol, has dropped more than 40% since early 2006 as supply expands in places such as India.

High prices don’t alter majors’ output fall

Third-quarter liquids production off 6% at 7 big companies

Houston—The peak oil debate attracted new data to consider November 2 as a Platts survey showed third-quarter global production of oil liquids at seven key publicly traded international majors declined 6% from last year, with output down 664,000 b/d at a time when some officials are calling for increased production from OPEC.

But the implications appear more complicated than indicated by the raw numbers, with the largest producer, ExxonMobil, citing theimpact of reduced shares of actual production from African entitlements for its 4% downturn in the quarter. Excluding those special factors, ExxonMobil said its liquids output actually would have risen 3%.

Still, peak oil enthusiasts took note, with Charles Maxwell, the senior oil analyst for Weeden & Company, warning that the downturn simply underscores fundamental changes afoot that the major producers want to ignore.

“They can’t tell you why this is happening,” said Maxwell, a noted peak oil lecturer and observer. “It’s like a tennis player who can’t explain why he is losing to someone he has beaten all the time. They haven’t figured it out.”

He said he is surprised to see the decline emerging in production data earlier than he had expected, and predicted the implications include continued rising oil prices.

Besides ExxonMobil, the Platts review focused only on liquids production comparisons for integrated majors BP, Shell, Chevron, ConocoPhillips, Eni and Marathon Oil. It determined those companies reported collective liquids output of 10,338,000 b/d for the quarter ended September 30, down from 11,002,000 b/d in the same period a year ago.

Liquids production fell at six of the seven companies and stood flat at Chevron, leaving Barclay’s Capital analyst Paul Horsnell to question the ability of the international oil companies to respond to increasing demand and pricing.

“Barclays Capital has taken a very deadbeat view on non-OPEC supply growth in recent years, mainly due to our view that the rate of decline in mature fields was being underestimated by consensus,” said Horsnell, responding by email from London to questions.

He added: “The weakness appears consistent to us with what has been a long period of output underperformance.”

In a short report October 31, Horsnell had noted a 9% decline at Shell and wrote: “To announce a 9% fall in crude oil output and then put higher prices down not to any fundamentals but to speculation does seem a little strange to us.”

Horsnell wrote: “After years of rising prices, the announcement by a major oil company that field decline rates were enough to counteract all of the accumulated supply response to higher prices and were at the heart of a large crude oil output reduction, might be seen as a further signal that prices have not yet been bid up enough.”

He added that recognition of weakness in non-OPEC output might underscore the view that continued price increases are justified. And he challenged remarks from Shell CFO Peter Voser attributing higher crude prices to speculation and politics.

“The entire crude oil price curve has been on a march upwards for several years,” wrote Horsnell. “To see that long and consistent process as the result of speculation and some indefinable so-called political premium does not seem a sustainable position in our view.”

John Felmy, the chief economist for the American Petroleum Institute, cited three factors he believes might be responsible for some of the decline: rising costs of production, the transfer of producing properties from the majors to independents, and a concentration in recent years in production of natural gas instead of oil. But he also said he wanted to review the specific numbers for a more detailed reaction.

Representatives from the companies, besides ExxonMobil, were not immediately available to offer elaborations focused specifically on liquids output.
The review comes just four months after a study by analysts at Bear Sterns revealed that 2006 marked the third consecutive year in which the major oil companies failed to fully replace production with a combined reserves replacement ratio of just 91% (ON 6/22).

“Reserve bookings and production growth go hand in hand,” Bear Sterns analyst Nicole Decker said. “We are just not seeing enough new production.” And it emerges as the industry debates OPEC’s future role in meeting demand as oil prices continued to rise (ON 11/1).

Localized factors may explain some of the decline, the specific company reports indicate. ExxonMobil, for example, suffered a 14% decline in third-quarter liquids production from Africa, which also ranks as its top producing region with 27% of total production. Citing the impact of mature field declines and lower entitlements, the company noted in its earnings announcement that liquids production actually rose 3% excluding the impact of entitlements, divestments, OPEC quota effects and Venezuela.

ExxonMobil represented 25% of the total liquids output by the seven companies in the review with 2.5 million b/d, down from 2.6 million b/d a year ago. “It’s not like the oil was not produced, our share is reduced,” said ExxonMobil spokesman Alan Jeffers.

Across the board, ExxonMobil’s liquids output fell 4%, as a 9% decline in Europe and a 1.3% decline in the US joined the African downturn to balance gains of 5.6% in Canada, 5% in Asia Pacific-Middle East and 42% in the Russia-Caspian region, where output of 178,000 b/d represented just 7% of the major’s total.

Analyst Maxwell challenged that the major oil companies must adjust to new industry dynamics that include control of most reserves by national oil companies and the geological realities of a dwindling resource base (ON 3/5). He said the majors continue to focus more on their share prices than on the difficulties of finding new resources, rejecting opportunities that appear unable to provide less than a 20% return in an era of rising costs.

“They are using criteria designed to make them fail,” Maxwell said. “The criteria is like setting the high jump bar at 10 feet.

They aren’t going to invest a lot of money because they can’t find the projects to show a rate of return. So they are just going to sit.”