GLOBAL AUTOMOTIVE SEMINAR. Potential and Challenges of Biofuels for Sustainable Mobility Over the Next 30 Years

GLOBAL AUTOMOTIVE SEMINAR 16 NOVEMBER 2007 SHANGHAI AUTOMOBILE EXHIBITION CENTRE ANTING Potential and Challenges of Biofuels for Sustainable Mobility Over the Next 30 Years Simon Wardell Director, Global Oil

Presentation Outline Global Insight Biofuels Study Government Policies Biofuels Demand Outlook Biofuels Production Outlook Sector Responses and Challenges Conclusions Copyright 2007 Global Insight, Inc. 2

Biofuels Study Coverage FUEL TYPES FEEDSTOCKS BIO-ETHANOL BIO-DIESEL 2nd GENERATION BIO-FUELS CORN SUGAR CANE SUGAR BEETS SOYBEANS SWITCH GRASS & WOOD CHIPS (NEXT GENERATION FUELS) CROP RESIDUES (NEXT GENERATION FUELS) WHEAT & BARLEY RAPESEED, JATROPHA OIL & PALM OIL (BIO-DIESEL) OTHER NON- CONVENTIONAL SOURCES (E.G., ALGAE, FARM & MUNICIPAL WASTES) (Study does not include alternative fuels such as LPG, LNG, CNG, hydrogen, gas-to- liquids, or coal-to-liquids) Copyright 2007 Global Insight, Inc. 3

Technologies Reviewed Biomass Propagation, Growth, Harvesting and Collection Biomass Pretreatment Biomass Conversion Biochemical (Sugar) Route Biomass Conversion Thermochemical Route Biodiesel and Renewable Diesel Other 2 nd Generation Products Copyright 2007 Global Insight, Inc. 4

Key Points and Observations The future of biofuels depends on the future of climate change regulations, continued energy security concerns and oil prices high enough to support biofuels Future efforts to reduce greenhouse gas emissions are very likely, particularly in the U.S. Energy security concerns have sufficient momentum now to be continuing factor for the foreseeable future Oil prices in both scenarios in this study support higher returns on investments for conventional energy than for most biofuels under anticipated policy initiatives Copyright 2007 Global Insight, Inc. 5

Two Global Oil Price Scenarios The Industry Must Consider the Alternatives Dramatically Different Implications, Paths and Consequences Alternative Future Scenarios Based on Market s Current Views Market Re-Managed Reference Case OPEC re-emerges as the market governor OPEC Price Management: Attempts to manage price in the low $60/bbl range Supply Constrained New Oil Market Era: Supply/demand balance on demand, not supply. Prices Spike: Unprecedented price levels of more than $100/bbl Global Climate Change regulations are taken as a predetermined condition in both scenarios Copyright 2007 Global Insight, Inc. 6

Global Insight Oil Price Scenarios 100.00 90.00 2004 $ 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 Market Remanaged Supply Constrained Cornucopia 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 2022 2026 2030 Market Remanaged Supply Constrained Cornucopia Copyright 2007 Global Insight, Inc. 7

Three Major Policy Drivers 1. Energy Policies Energy Security Reduce dependency on petroleum-based energy sources Diversify energy sources 2. Environmental Policies Reduce criteria emissions at local, urban, metropolitan, and national levels Reduce greenhouse gas emissions 3. Agricultural Policies Create new markets for agricultural crops Create employment opportunities and rural development Copyright 2007 Global Insight, Inc. 8

A Global Biofuels Strategy Will Be Difficult to Define Biofuels drivers are national or local and a mix of policy of objectives National, regional and local government policies and regulations for biofuels Mandates, targets and limits National and regional climate change policies and regulations Country level agricultural policies National level energy security concerns Varying feedstock comparative advantages across countries and regions Copyright 2007 Global Insight, Inc. 10

Summary of Major Government Programs & Policies United States Agricultural goals Energy security goals Greenhouse gases (emerging issue) Energy Policy Act 2005 7.5 billion gallons by 2012 Pres. Bush State of Union 35 billion gallons by 2017 (renewables and alternative fuels) $0.51 per gallon bioethanol tax credit; $1.00 per gallon for biodiesel Vehicle fuel efficiency (CAFE) standards proposed to increase to 35 mpg European Union Greenhouse gases (Kyoto Protocol) Energy security issues Biofuels Directive 10% biofuels target by 2020 Fuel Quality Directive Vehicle fuel efficiency proposed to increase to 120 g CO 2 /km Brazil 20-25% ethanol mandate in all petrol sold 2% biodiesel blend increasing to 5% (mandatory) blend from 2013 Tax incentives Copyright 2007 Global Insight, Inc. 11

Global Biofuels Demand Demand driven by government polices and mandates Fuel efficiency standards for vehicles will limit growth in demand for biofuels Bioethanol projected to average 23% of gasoline by 2030 and biodiesel to average 7% High volumes of biofuels in the U.S. will almost certainly require flexfuel vehicles (FFVs) capable of running on blends up to 30% (E30) In Europe, ethanol content is held for most countries to 10% (E10), which is technically compatible in current vehicles Biodiesel levels of 5% (B5) are possible in virtually all vehicles, and new vehicles can be developed to accept higher blend ratios up to 30% (B30) currently under development provided that fuel quality standards are met Copyright 2007 Global Insight, Inc. 12

Supply/Demand Forecasts: Bioethanol Regions Covered: World United States European Union Brazil China India Africa 80 70 U.S. Bioethanol Supply/Demand Market Remanaged 4 EU Bioethanol Supply/Demand Market Remanaged 60 3 Billions of gallons 50 40 30 20 Demand Forecast Supply Billions of gallons 2 1 Demand Forecast Supply 10 0 2005 2010 2015 2020 2025 2030 Potential Production U.S. growth in bioethanol projected to reach 15 billion gallons by 2015 (about 1 mmb/d) 0 2005 2010 2015 2020 2025 2030 Potential Production EU growth to be limited by local supply and must rely on imports from Africa and South America Copyright 2007 Global Insight, Inc. 13

Supply/Demand Forecasts: Biodiesel 10 U.S. Biodiesel Supply/Demand U.S. Biodiesel 8 EU Biodiesel Supply/Demand EU Biodiesel 8 6 Billions of gallons 6 4 2 Demand Forecast Supply Billions of gallons 4 2 Demand Forecast Supply 0 2005 2010 2015 2020 2025 2030 Potential Production Biodiesel demand and potential supply can be based on nonedible oils such as jatropha, algae, wood waste, and other non-food products 0 2005 2010 2015 2020 2025 2030 Potential Production New refined-based technologies employing biomass conversion into liquids look promising Copyright 2007 Global Insight, Inc. 14

Implications On-Road Petroleum Demand Biofuels will increase significantly possibly reaching 17% of motor fuel pool worldwide Under different scenarios, U.S. could reach 35% of on-road petroleum demand in same range as Brazil Rest of the World Middle East Africa Other Latin America Biofuel Shares of On-Road Petroleum Demand in 2030 Market Remanaged Supply Constrained Biomass producers will be in advantageous position to produce renewable fuel feedstocks The move will affect oil and gas producers and refiners by shifts away from petroleum-based fuels Brazil Asia-Pacific Europe United States World 0% 5% 10% 15% 20% 25% 30% 35% 40% Percent by Volume Copyright 2007 Global Insight, Inc. 16

Global Biofuels Production Bioethanol production is expected to be met with a portfolio of 1 st and 2 nd generation technologies -- both of which are commercially viable U.S. corn-based ethanol will continue to be dominate in U.S., and sugarcane will continue to be the lowest cost source Brazil will continue to be the largest supplier of ethanol to the international market EU must import bio-oils to meet requirements of European targets Thermochemical conversion of biomass is likely to become the lowest cost technology in the next few years Algae is a 2 nd generation technology with good potential for volume and cost reduction Copyright 2007 Global Insight, Inc. 17

World Ethanol Production Billions of Gallons 140 120 100 80 60 40 20 Mix of 1 st & 2 nd Generation Technologies Rest of World U.S. Corn Stover & DDG Thermochemical EU BTL Mixed Alcohols U.S. BTL Mixed Alcohols Brazil Sugar Based EU Crop Based U.S. Potential High Case U.S. Corn Base Supply Constrained Demand Market Remanaged Demand Demand 2 nd Gen Sugarcane Corn 0 2005 2010 2015 2020 2025 2030 Potential Supply Copyright 2007 Global Insight, Inc. 18

World Biodiesel Production Billions of Gallons 35 30 25 20 15 10 5 Jatropha, Algae, and Woodwastes EU Woodwaste U.S. Wood BTL Other Algae U.S. Algae Indonesia Jatropha Brazil Jatropha China Jatropha Africa Jatropha India Jatropha Market Remanaged Demand Supply Constrained Demand Demand Woodwaste Algae Jatropha 0 2005 2010 2015 2020 2025 2030 Potential Supply Copyright 2007 Global Insight, Inc. 19

Biodiesel Total Costs $1.00 $0.90 $0.80 Palm Oil Paper Mill FT Algae to Green Diesel Jatropha BTL Soybean Oil $0.70 2006 $/liter $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $- 2006 2010 2015 2020 2025 2030 Copyright 2007 Global Insight, Inc. 21

Implications for Agricultural Sector Corn yields are expected to increase an average of 2% annually Research at seed companies with new varieties and technologies, indicates that corn yields could improve even further Improved crop yields will allow greater production of bioethanol for fuel as well as food Second generation technologies will use non-food biomass feedstocks (e.g.., jatropha) Copyright 2007 Global Insight, Inc. 22

Food vs. Fuel: Contest Is with Edible Oils As incomes increase, demand for food grows from grains to vegetable oils to meat Vegetable oil demand growth has accelerated and growth is rising at a faster rate than per capita GDP Per capita vegetable oil consumption in the poorest countries is used by the IMF as a measure of changing living standards Edible oils cannot compete and will not be competitive in the fuels market under any scenario Biodiesel demand growth will be fueled by non-edible feedstocks Technologies are economically viable, but will take a few years to develop volumes sufficient to displace edible oils from biodiesel Copyright 2007 Global Insight, Inc. 23

Biofuels Will Have Little Impact on Offerings of the Car Makers Biofuels are one part of a diverse technology strategy Recognition that a diversity of technical solutions will be required Diesel, hybrid, compressed natural gas, electric vehicles, advanced compression, renewables, and synthetics Biofuels have little impact on most of these development, but uncertainty about future fuel characteristics frustrates developments With a few exceptions, auto makers not leading developments in the biofuel industry Following rather than leading because the impacts on current technology are minimal Market demand is generally uncertain With respect to renewables, auto makers are responding to legislative and/or market demand High biofuel content adds cost but gives no tangible benefit to the customer Need long term vision Good for green image Limited by resource constraints Saab FIAT Copyright 2007 Global Insight, Inc. 24

Biofuels Challenges: Auto Makers Perspective Ethanol In general, there are no adverse technical impacts at blends up to 10% Higher blend ratios Add cost Result in decreased range (higher fuel consumption on a volume basis) Therefore, the business case for the consumer is questionable without government subsidy or mandated requirement Biodiesel Need to adopt and enforce a Unified Fuel Standard to ensure adequate fuel quality B5 is currently accepted A number of auto makers are currently testing the long-term effects of B30 in fleet use B100 presents nitrogen oxide challenges which would require a dedicated engine and fuel distribution system in order to meet emissions regulations Copyright 2007 Global Insight, Inc. 25

Conclusions Biofuels production potential will be adequate to meet market and regulatory requirements First generation bioethanol is the lowest cost and expected to remain the low cost source of ethanol Second generation biodiesel fuel is the lowest cost and will supplant first generation technologies Thermochemical produced ethanol from cellulose will always be lower cost than biochemical produced ethanol Agricultural commodity prices are not expected to be impacted over the long-term from biofuels demand Adequate land is available to meet production forecasts without competing with acreage for food production Copyright 2007 Global Insight, Inc. 26

Conclusions (continued) Food versus fuel issues will be more important for biodiesel than ethanol. Edible oils are not expected to be used for biodiesel production in significant volumes due to higher food value For blends up to E10 and B10, automakers will not be a barrier to biofuels in all regions Except possibly the U.S. market with respect to the ramp-up of FFVs over the next few years Need a clear signal of ensured demand from the market and the regulators Copyright 2007 Global Insight, Inc. 27

GLOBAL AUTOMOTIVE SEMINAR 16 NOVEMBER 2007 SHANGHAI AUTOMOBILE EXHIBITION CENTRE ANTING Thank You Simon Wardell Director, Global Oil E-mail: simon.wardell@globalinsight.com