Biofuels: Food to burn? Part 1

“So far, no one seems able to satisfactorily calculate how much food price inflation is due to growing food crops to turn into biofuels…Whatever the actual impact, it is clear the political backing for biofuels is weakening and, while a more balanced approach is desirable, it does mean that over the next few years expansion of biofuels supply is going to be much smaller than recently believed” [1].

Where are biofuels going? Will European and American politicians now hesitate to turn more food into fuel, as food shortages in the third world create continued headlines? Is Chris Skrebowski, the internationally known editor of “Petroleum Review” correct when he says that the expansion of biofuels' supply will be much smaller than recently believed? Or are the millions of new motorists that are expected in rapidly developing countries such as India, China, Russia and elsewhere going to decide the issue, by creating a huge new demand for fuels: just as oil supplies around the world are becoming scarcer and more expensive to exploit. [18, 4]?

Briefly, nobody knows but everyone cares. Many of the key issues linked to biofuels have become obscured by a haze of emotion, as people strive to blame someone or something for the increased food prices they have to pay. Suddenly, there is not enough maize, wheat or rice to meet the demand for food, particularly in poorer countries. And, as we shall see, biofuels are not blameless, and are linked to some food price increases.

But blaming biofuels for all food price increases is another matter entirely. As Skrebowski rightly points out, nobody really knows how to calculate how much food price inflation is due to growing food crops to turn into biofuels. He notes that estimates of this range from a fairly implausible 3% all the way to an improbable 70%, and that the WWF estimate of 30% is perhaps the most plausible [1].

We need to try and focus on some of the key issues that have become hidden beneath an emotional fog of accusations and counter-accusations. That is what these chapters will try to do. One inconvenient truth is that the world is slowly but surely starting to run out of oil, and something will have to be found to replace it. Therefore this article, the first in a series of five, will try and make some sense of often contradictory information about whether oil supplies have already peaked, are about to peak, or may never peak. And, how the idea of using rubbish to make oil actually does not stink.

I will then outline one of the main users of fuel – our vehicles – and point out something that will surprise many readers: electric cars, hybrid cars and cars using bioalcohol and biodiesel are actually very old news indeed. In fact, even older than the petrol-powered internal combustion engine. And rechargeable electrical vehicles are not something for tomorrow or even today: they were already used for public transport in London, albeit briefly, before 1900.

Last but not least, I will focus on so-called “good” and “bad” biofuels: and why bad economics can give even the best of fuels a bad name. And, some very basic points about global warming, economics and agricultural yields that are often forgotten in all this.

But, for the moment let us forget about old electric cars and what makes a “good” biodiesel “bad” and try and focus once more on the slippery and confusing world of oil production statistics. For, if the International Energy Association (IEA) is right, then the key issues are quite a lot simpler than many would have us believe. The millions of new motorists in India and China and the increased demand for oil they cause is actually less important than something less visible: the declining outputs of ever more oil wells, the decrease in supplies this causes, and the increasing investment costs to find and develop new oilfields. In short, the costs of replacing four times the current oil exports of Saudi Arabia by 2030.

“Despite all the attention that is given to demand growth, decline rates are actually a far more important determinant of investment needs. Even if oil demand was to remain flat to 2030, 45 mb/d – roughly four times the current capacity of Saudi Arabia – would need to be built by 2030 just to offset the effect of oilfield decline” [3].

Where on earth will anyone find four times the current oil exports of Saudi Arabia, arguably the world's largest exporter of oil? It is enough to make one's brain seize up, and reject all such energy statistics as being too numbing to contemplate.

Here, the saying “I feel so much better now that I've given up all hope” comes to mind. Is one not better off ignoring all doom and gloom pronouncements about the earth's oil supplies running out, and concentrate instead on enjoying driving one's gas guzzler now? After all, there does appear to be enough oil to supply the world for more than 40 years at current rates of consumption [4]. And the closest energy alternative to Saudi Arabia, Iraq, has already been occupied by the United States, albeit in the name of promoting democracy.

Let us leave these mind-numbing, gloomy statistics for a moment, and look at something that far more comprehensible, especially if you live in South Africa. For in gold and gold production one can find images and facts that are easier to understand, and use to explain the terms of production peaking, declining outputs, and the huge investments that will be necessary to exploit reserves sitting at great depths, depths far greater than anyone has reached before.

“Oil will remain the world's main source of energy for many years to come, even under the most optimistic of assumptions about the development of alternative technology. But the sources of oil, the cost of producing it and the prices that consumers will have to pay for it are extremely uncertain” [1].

Oil is often described as ‘black gold”. But a glance at real gold, and specifically gold production in South Africa, will help us comprehend many of the issues confronting “black gold”.

On paper, South Africa still has huge reserves of gold: roughly, half the world's. The problem is not how much gold is left, but where it is, and what it costs to produce. The first gold deposits to be exploited, usually the richest, were often near the surface and reasonably easy to access.

A case in point was the “Golden quarry” gold mine in Barberton, found in May, 1885. This was an incredibly rich gold deposit, yielding approximately 7 ounces per ton of gold, about 217 grammes per ton. Today, mines of the much bigger Witwatersrand basin count themselves very lucky if they can produce 7 g per ton. But, like many other easily exploitable rich gold deposits, the “Golden Quarry” did not last long. By 1887, it and most of the gold mines in Barberton were mined out, and miners departed en masse for the newly discovered goldfields of the Witwatersrand.

Again, richer deposits near the surface were mined first. And as these and other deposits were mined out, miners were forced ever deeper into lower yielding grades of ore. Now, mines in the Witwatersrand are working some four kilometres below the earth's surface, with even deeper mines planned, as gold ore exists to a depth of more than seven kilometres.

Gold production peaked in 1970, reaching just over 1000 tonnes, and then, as the richest deposits were depleted, slowly but surely began to drop, particularly after 1973. Today, South African mines – those that are still operating – produce less than a quarter of their peak output [6]. Very roughly, the same thing has happened, or is happening, with oil. The first oil deposits were called “gushers” because the oil, often close to the surface, gushed to the surface of its own accord.

Now, that easily exploitable oil is long gone. More and more oilfields are past their peak production, and tensions are mounting as more and more countries are finding it difficult to expand production [1]. It is thought that the [global]oil industry will reach peak production some time during the next 10 to 15 years and then start to decline. As the US Office of Petroleum Reserves put it, “we consume three barrels of oil for every barrel discovered” [8].

Like gold, new deposits of oil are located deep down, and in very inhospitable places. And reaching that oil is a very expensive business. It often means drilling kilometres beneath the sea bed, below deep oceans. Or setting up hugely expensive infrastructure in places where there is no infrastructure. In short, going boldly where no man has gone before. This can be a very expensive business, as we shall soon see.

“Europe's domestic gas production, meanwhile, is in steep decline. By 2020, it is likely to be only about half of 2006's output of 218 bn m3, Cera [Cambridge Energy Research Associates] believes” [9].

A picture is worth a thousand words, the saying goes. The briefest glance at one particular map (“Natural gas trade movements, 2007” on page 3 of the Financial Times newspaper of 5 September 2008), shows something very obvious that news articles and long analyses often miss: Europe and Russia are strongly linked by natural gas pipelines.

Yes, there are also natural gas pipelines linking Norway and Algeria, both producers of natural gas, to Europe. But, a glance at the map shows they are dwarfed by the network of Russo-European pipelines. As the European Union has welcomed former communist Eastern European states within its boundaries, it has also absorbed those countries' natural gas pipelines from Russia. The Czech Republic, Slovakia, Poland, what was East Germany, Hungary, Romania, Bulgaria, Lithuania, Latvia and Estonia, all received their natural gas from what was the USSR.

Now, as Europe's own natural gas supplies are starting to decline, Russia is the logical supplier. Basically, while the two don't like each other, they need each other. Europe needs energy, particularly natural gas, while Russia needs the income from regular sales of its natural gas: particularly when oil prices drop or very expensive new oil fields need to be developed.

Even when Europe and the former USSR were in the grip of the cold war, Russian gas was used to heat Western Europe. And, regardless of what Russia does in Georgia or elsewhere, this dependency is likely to grow in future. As Ed Crookes notes in the article above the map, “Geography and economics dictate that the EU is dependent on Russia for gas, whether her politicians like it or not” [9].

Crookes could just as well have been referring to another dependency on energy on the other side of the world. The USA's oil supplies (excluding the new oil fields in Alaska), peaked in roughly the early 1970s. Since then, the USA is also dependent on foreign oil to make up the shortfall. And, as with Europe, the shortfall is getting bigger.

So, until the USA manages to slow or even reverse its increasing need for foreign oil, the shortfall must be imported: even from countries that are persistently hostile to the USA, like Venezuela. Even the “Great Satan”, as the USA is often called by Iran, cannot afford to ignore Iran's oil supplies, as non-OPEC supplies are declining fast and supply will be concentrated in a few countries in a turbulent Middle East [8].

What has all this to do with biofuels? Simply this. As long as the European Union and the USA are forced to import energy from countries or groups hostile to their interests, then any means of replacing these imports will remain important: including nuclear power and biofuels.

Granted, the current ways of producing biodiesel from oilseeds in Europe don't make good economic sense, and producing bioalcohol from maize in the USA makes even less economic sense. But producing more biofuels in both these areas will remain a priority: as long as energy suppliers are seen to threaten clients with cutting energy supplies, or imposing price increases as they see fit.

And, as we shall see, that is precisely what is likely to happen more in future, as countries with oil and gas try to force new agreements onto international oil companies.

“A sea change is underway in the upstream oil and gas industry with international oil companies facing dwindling opportunities to increase their reserves and production. In contrast, national companies are projected to account for about 80% of the increase of both oil and gas production to 2030” [1].

Gone are the days of the 1950s and 1960s when the mighty international oil companies could intimidate local rulers into granting favourable terms to exploit oil: which then cost less than $3 per barrel. Now, it seems as if the roles have been reversed. Russia and the Russian national oil company, Gazprom, seem to be using every trick in the book, and several that will not be found in any book, to force foreign international oil companies to renegotiate oil contracts.

For example, Royal Dutch Shell had a particularly unpleasant surprise in 2006. After spending billions of dollars to develop Sakhalin 2, one of the biggest oil and gas developments in the world, offshore of the Russian island of Sakhalin, just north of Japan, the entire project was threatened by a negative environmental impact report.

Obviously, there are gigantic and very genuine environmental concerns at developing a huge oil and gas industry in an area teeming with salmon and grey whales. But, the timing of the action was suspicious. It came just as Shell was trying to get extended funding for the project. The result? Shell couldn't get the funding, and was forced to renegotiate the contract, and effectively sell half its stake in the project to Gazprom, the Russian oil and gas company, for a payment of $7,4-billion, while most outside analysts estimated that Shell's share was worth $15-billion to $17-billion [12]. And then, once the deal had been signed and support obtained from banks, there was a sudden loss of interest in the environmental problems that had caused it in the first place.

Granted, the Russians did have a valid point in forcing Shell to renegotiate the deal. Costs of the project had doubled, from $10-billion to $20-22-billion, and this would push the time horizon when the Russian state starts receiving its share of revenue beyond 2010 [17]. This was because the original contract had meant that Russia would not receive its share of income until Shell had recovered its costs. Not being prepared to wait four years, the Russians unleashed a campaign of bureaucratic harassment against Royal Dutch Shell, and won [13, 14].

That same year, several other international oil companies received surprising news when Gazprom announced that it would construct the world's largest offshore gas field, Shtokman, on its own, rejecting its entire shortlist of potential foreign partners after years of detailed negotiations. Gazprom obviously had second thoughts, as it later selected French oil major Total as its foreign partner [15, 16].

But that is not the real problem. Nor, surprisingly, was the recent Russian incursion into Georgia, which can be interpreted as threatening and possibly blocking the southern or non-Russian routes for getting oil and gas out of Central Asia. This incursion, which included rockets blowing great holes either side of the BTC line, the main oil pipeline carrying oil through Georgia to Turkey with a gas pipeline running alongside it, certainly showed the Russian ability to cut off supplies of oil and gas to the West if it felt like it [10].

But the real problem is not the ability of the Russian armed forces to blow up pipelines when they feel like it. After all, this does not require much ability, as Iraqi insurgents have repeatedly demonstrated. The real problem is the ability of the Russian national oil company, Gazprom, to finance and build new pipelines and develop new supplies, such as Shtokman. And that requires a very different set of abilities to that of the Russian defence forces in invading a far smaller, weaker country, sinking a few ships, and blowing up a key bridge on the railway line across Georgia.

As Chris Skrebowski puts it in more technical terms, the main concern is increasing dependence on Russian supplies and uncertainties about whether Gazprom will be able – and willing – to develop new supplies fast enough to offset the decline in the old western Siberian fields and also meet the growth in demand [7].

It remains an open question whether Gazprom will be able to do this, at a time when oil prices have suddenly dropped, the Russian economy has increased its dependence on oil and gas instead of building up domestic production [11], and a global recession of uncertain length and severity looms, longer than the usual 18 months [19]. All this at a time when current Russian oil production appears to have peaked and now be dropping very slightly, with June [2008] production 1% below year earlier levels [1].

Russia could soon be facing other problems than stimulating its oil output. Its invasion of Georgia has sent alarm bells ringing in several of its former satellites. One of the biggest and most important, the Ukraine, has been considering joining the EU and NATO for some time, despite strong Russian pressure to the contrary. Maybe, just maybe, the invasion of Georgia could jolt the Ukraine into not merely talking about joining the EU, but actually taking decisive steps in that direction.

“The Russian authorities have been encouraged by the experience of Bolivian President Evo Morales, who forced oil and gas majors to acquiesce to a rapid and full nationalisation of the country's natural resources in May [2006]” [16].

Half a world away, in Venezuela, oil companies were threatened with nationalisation of the oil and gas they were exploiting. While one cannot really blame Russia or Venezeula for using crude, heavy-handed techniques to try and get more bucks for their crude, all this is upsetting for those considering investments in those countries: especially banks and governments linked to the international oil companies. Small wonder international oil companies are considering what would have been unthinkable only ten years ago: investing in alternative sources of energy: renewable energy, and, more recently, nuclear energy.

But those predicting the imminent end of the multinational oil companies have forgotten one thing: money. Developing new oil fields, and even maintaining production levels in existing oil fields that are declining, is a hugely expensive business. And, it is very doubtful whether even Gazprom has the necessary funds to do this for Russian fields, let alone less wealthy countries that produce oil. The International Energy Agency estimates the costs as $26,3-trillion to 2030, or over $1-trillion/year [3].

These huge costs, for which Western oil companies and OECD countries will supposedly have to help finance, make setting up huge solar energy or nuclear power schemes cheap by comparison. Will the national oil companies be willing to make this investment themselves or to attract sufficient capital to keep up the necessary pace of investment?

That is an open question. And this is the real point. The crunch is going to come long before the world runs out of oil, as the sources of oil, the cost of producing it and the prices consumers will have to pay for it are extremely uncertain [3].

Like a couple of diners squabbling over a restaurant bill, it really comes down to who is going to pay, what they are prepared to pay for, and when they are going to pay.

Regardless of how you look at it, something will have to be produced to provide energy for transport as less oil is available. And at least some of that energy will need to be grown as biofuels.

But there is another source of biofuels that has only recently begun to be exploited, and that is, quite literally, rubbish. And, like diners in a restaurant unable to pay a bill and forced to wash dishes to pay, we may all be forced to look closer at wasted food and other organic rubbish. Much rubbish has been written about oil supplies. But not much has been written about how rubbish, particularly agricultural waste, can be turned into oil supplies. And, strangely enough, this bizarre biofuel could well become increasingly important source of energy as our oil supplies become more and more expensive to produce.

References

For a list of references, see the end of the article in the next issue of Energize.