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Never before has there been so much uncertainty over the future supply and demand for hydrocarbons – this is particularly the case in transport, which accounts for 50% of primary oil consumption.
There is clear evidence to suggest that science may deliver a range of technologies that could be commercial within just five years – but the potential of new fuels to disrupt the supply and demand for gasoline and diesel will only be realised if innovators and regulators take key steps to ensure rapid commercialisation of these lower carbon alternatives. Melissa Stark summarises Accenture’s recent report comparing the key technologies.
Emerging technologies will challenge petroleum companies – given the natural advantages that biofuels companies have in the access to, and experience with feedstock, and that utilities have with both the supply and infrastructure for electrification. Whereas regulators may have been able to let the market ‘compete and choose’ in the past, they now need to understand technology at a different level of detail. Technology companies now face a competitive threat from the sheer number of alternatives racing to market.
Accenture’s report Betting on science: Disruptive technologies in transport fuels, analysed 150 companies and identified 12 technologies that may have the capacity to disrupt the hydrocarbon market (see Table 1). The criteria considered if the fuels had the potential to impact the demand of the hydrocarbons that they replace by at least 20%by 2030, generate greenhouse gas savings of greater than 30% over those hydrocarbons and be cost competitive at an oil price of between $45/b and $90/b.
Low Hanging Fruit
Perhaps the most surprising disruptive technology is the next generation internal combustion engine. Fuel injection, power train systems and lighter materials will allow it to offer the most immediate and significant emissions reductions. There are two companies in our report who estimate a 30%–50% improvement in fuel efficiency. We believe that the 100 miles per gallon car could be achieved by 2030.
Another underestimated example is next generation agriculture, where biotechnology continues to enable significant increases in yield. The US produces corn at twice the world average yield. If applied to new energy crops and if governments support the extension of these advances further afield, the current generation of biofuels could cost-effectively make a significant dent in the demand for gasoline. Another overlooked fuel source is waste-to-fuel, particularly wood waste, flue gas waste and municipal solid waste (MSW). There are players who anticipate commercial availability before 2014.
Not only do next generation biofuels have the potential to have an impact on the hydrocarbon market, but they also enjoy being able to use today’s existing hydrocarbon infrastructure. Advances in genetic engineering are impacting all aspects of biofuels from feedstock, deconstruction, conversion and upgrading of by-products and co-products (see Figure 1). For example, genetically engineered feedstocks are being developed that increase the yield density while minimising the intensity of pretreatment and required enzyme. Genetic engineering is also playing a role in three other technologies highlighted in the report.
The world has long awaited a biofuel diesel solution and, thanks to synthetic biology which converts sugar cane to diesel, we could see a diesel fuel from sugar cane commercialised before 2014. Given the availability and cost of sugar cane the economics could make sugar cane-to-diesel a disruptive fuel source.
Butanol is highly desirable in that it has similar energy content to gasoline. It is also transported through existing pipelines and can be blended with gasoline at higher ratios than ethanol. Technical issues around toxicity and yield have held back butanol but researchers are applying genetic engineering to overcome these challenges. Butanol could be commercial before 2014.
Algae promises yields up to 25 times greater than soybeans, and introduces a potentially abundant feedstock. We looked at more than 20 different algae companies looking to produce a variety of fuels – ethanol, biodiesel, biocrude – from algae. Genetic modification is being applied to produce strains that are higher yield and easier from which to harvest and extract oil. However, the costs are still very high, and it is unlikely to be a commercial force in less than a decade.
Betting on science covers 12 technologies, of which six are biofuels. The cost and time to commercialisation and scale-up of the biofuel technologies are heavily impacted by a number of factors (see Figure 2). These include the current market situation and specific challenges, and government commitment and support in overcoming these challenges.
Ethanol Blending Wall
For ethanol, the key constraint is turnover of the vehicle fleet. In 2007, the median age of a passenger vehicle in the US was 9.2 years, meaning turnover will be almost a decade. Only flex-fuel vehicles (FFVs) are currently allowed to use blends of more than 10% ethanol, but the American Coalition for Ethanol is pushing to raise the blending wall to 15% and to increase the allowable corn ethanol share of the Renewable Fuel Standard (RFS). This would buy the industry time to commercialise and roll out cellulosic ethanol. If the blending wall does not change, then the pace of the industry will be constrained by the roll-out of FFVs and the ethanol refuelling infrastructure.
Acceptance of Genetic Engineering
Genetic engineering is a key lever in using biomass to produce fuel. Many countries have legislation that restricts the use of genetic modification (GM). For example, in the EU, legislation such as the Regulation on Genetically Modified Food and Feed (2003) demands approval before GM plants can be used commercially. This is only granted under certain conditions (proven safety, freedom of choice, labelling and traceability). However, acceptance ofGMfor fuel production is slowly growing.
With harvesting and reprocessing accounting for up to50%of feedstock costs, the infrastructure and processes required to effectively harvest and transport these materials to refining plants will be a key focus area. Beyond the above challenges facing biofuels, the biofuels industry as a whole will have to address broader obstacles in coming years. Most prominent is competition, from the internal combustion engine and from electrification and plug-in hybrid electric vehicles (PHEVs).
Implications for Innovators
The science has made significant progress, but innovatorsnowhave to turn their attention to business strategies that could make the difference between success and failure.
Leading Roles for Scientists
While R&D capability remains crucial to innovating companies, equally important for successful commercialisation is the ability to communicate effectively with regulators and the public to ensure a fact-based debate at the right level of detail.
Business Model Flexibility
In today’s biofuels, the vertically integrated model has proved resilient to the volatility in feedstock and product prices. However, this model is not available to all companies entering the biofuels market. Given the challenges, a range of options will be relevant with the aim of controlling and managing risk across the value chain, from full vertical integration to joint ventures, to bilateral long-term contracting.
Execution and risk management skills As scientific discovery moves to commercial deployment, and gasoline and diesel costs remain the commercial benchmark, operational excellence can make the difference between success and failure. The high performers will invest in skills needed to optimise their supply chains and maximise operating margins in order to ensure that they remain commercially competitive against gasoline and diesel. They will also have to improve their risk mitigation skills given that feedstock markets and oil prices will continue to be volatile.
Accenture’s research demonstrates that a variety of alternative fuel sources have the potential to transform the supply and demand of hydrocarbons sooner than many expect. However, despite the move towards low carbon policies across the world, many hurdles stand in the way of these disruptive technologies. The innovative pioneers will now have to extend their skills from science to commerce, while governments will have to reinforce their scientific knowledge if they are to regulate effectively. Above all, they will both have to adapt to a market in which an unprecedented variety of alternative fuel sources will pose complexity and commercial threats, as well as opportunities
This article was first published in April 2010 in Petroleum Review and is reproduced by kind permission of the Energy Institute, 61 New Cavendish Street, London W1G 7AR.
April 1, 2010
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