Advanced biofuels: A silver bullet for refiners?

ENERGEN EXCLUSIVE 💡 | Biofuels have been around for quite some time. Driven by the oil shocks in the 70’s and questions around energy security, biofuels attracted quite some interest but also significant investment.

Currently there are three types of biofuels produced at commercial scale:

  • Ethanol: Brazil’s government in 1973 started an ambitious ethanol production program to potentially replace gasoline in the transport sector with the sugarcane-based fuel

  • Biodiesel: Biodiesel was made commercially available in the 1990’s starting from the US due to advances in technology, and Europe followed shortly

  • Hydrotreated Vegetable Oil (HVO) or renewable diesel which is currently the smallest in terms of production but has the greatest growth potential

What do the three have in common?

Well, the similarities are mostly around feedstock required. Ethanol is by majority produced by sugarcane while biodiesel is mostly sourced from processing vegetable oils and fats. HVO is more flexible in the sense that it can be produced by both vegetable oils, fats but also waste oils such as used cooking oil. Therefore, they can all be considered “renewable” fuels.

All of them are also considered to have a lower emissions profile compared to their fossil-based equivalent fuels. Although, the debate is still ongoing regarding the environmental benefits of ethanol.

What are the main differences?

Ethanol and biodiesel have significant disadvantages when compared to HVO. Firstly, they can only be used blended with conventional fossil fuels in different quantities. Ethanol can be blended with gasoline in a maximum ratio of 85:15 while most commonly it is around 20:80. On the other hand, biodiesel is thought to be able to mix with conventional diesel at a maximum ratio of 30:70. Currently, the most common biodiesel to diesel blending ratio is 10:90.

Secondly, ethanol and biodiesel directly compete with other industries for feedstock and most importantly with the food industry, compromising in a degree food security. China’s recent case of reversing their biodiesel blending mandate is a prime example of food security concerns.

HVO on the other hand is a “drop-in” fuel, meaning it has the potential to replace conventional diesel completely. And this is without any further modification in the diesel engines or any danger for engine degradation. Its main advantage is that compared to simple biodiesel it contains no oxygen making it easier to store, transport and ultimately combust in conventional diesel engines. And from an energy content perspective, it is actually more efficient than diesel.

From a technology perspective, HVO is more capital intensive as the technology required resembles more that of the conventional oil refineries while ethanol and biodiesel are more easily produced.

Why we see great potential in HVO

Europe is the frontrunner in HVO production with significant capacities in Finland, Netherlands and Italy. Neste, a Finish refiner, has been developing HVO plants since the early 2000’s with great success. Eni has also converted two of its refineries into HVO refineries due to the lack of profitability, while Total has also recently started HVO production in its La Mede refinery in France.

However, growth in HVO production will come from the US, driven by significant policy incentives that reward HVO producers with tax credits – both at a Federal level and also at the state level.

More than 20 projects have been announced in the United States either as greenfield or conventional refinery conversion. Another benefit of HVO which can lead to significant capital costs savings. Refineries that currently don’t generate any profits can be switched to HVO with simple retrofits offering a new earnings stream for the badly hit refining industry.

Investors will also be happy as HVO has the potential to completely eradicate emissions related with diesel engines, ticking the ESG investing boxes.

Lastly, HVO answers two key questions that remain unanswered regarding energy transition: heavy duty vehicles and aviation decarbonization can be achieved with the usage of HVO. An HVO derivative bio-jet is currently at an early stage but developments are expected in that field before 2030.

So, what’s the catch with HVO?

Despite its potential to be sourced by processing of waste oil, these waste oils are not currently collected in a large-scale. In Europe only 5% of the used cooked oil is collected and converted into HVO. Supply chains and logistics are therefore imposing a barrier in large scale HVO deployment.

Secondly, the spur in the US HVO investment is driven by policies that currently favor biofuels by generating tax credits for every gallon of biofuel produced. With uncertainty post 2022 regarding the renewal of policies, the commerciality of these plants will come into question.

Lastly, since HVO is a one-to-one alternative for diesel it is understood that oil price swings affect the price of this biofuel as well with recent cases of used cooking oil being more expensive than diesel fuel.

With technology advancements and supply chain for feedstock maturing, we do think that HVO has the potential to be a game changer in the transport industry but requires various elements to align first..

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