Rich on Biofuels

by Jens Ulltveit-Moe

Jens Ulltveit-Moe (Norwegian, born 1942) is founder and CEO of Umoe, The group has a turnover of USD 1 billion and 7,000 employees. The company invests counter cyclically, proven lately by its switch from oil tankers and oil seismic to renewables including biofuels and solar PV.

The current disenchantment with the environment in general and biofuels in particular represents a major business opportunity.

Conventional first-generation biofuel from Brazil and southern Africa—in other words, sugarcane ethanol—is the most promising.

Those investors who chose to enter the ethanol game in 2010–11 were able to invest at very attractive prices. On top of that, I believe, they will benefit from the aggressive investment in biofuels that will follow accelerating climate change and technological advance in the 2020s. As a consequence there will be in 2052 global fortunes made on sugarcane ethanol.

The Time Is Now

The essence of profitability is to acquire assets at low cost, preferably in a growing market. As I write this, the cost to enter the biofuels market is low. This can be traced in part to the setback for climate policy at the Copenhagen and Cancun climate summits, which stranded many projects initiated by unrealistic (as it turned out) optimism. But the inherent conservatism of the investment community and a disbelief in climate change have also kept investors at bay and prices down— creating a unique opportunity to both earn a profit and help save the climate at the same time.

The opportunity was further helped by the poor image of biofuels. It was in part richly deserved. At the peak, corn ethanol in the United States received USD 6 billion in annual subsidies—despite the fact that this type of biofuel gives next to no reduction in carbon emissions and increases the cost of food. Similarly in the EU, the farm lobby pushed through high import duties for corn ethanol, vegetable diesel, and sugar-beet ethanol, to protect their own dubious product.

All helped to destroy the reputation of biofuels as an effective means to reduce climate emissions from transportation.

Investors got even more reticent after the financial crisis, since tighter public budgets meant a cut in subsidies to renewables. The shortage of public money—and in the absence of pressure for more climate policy from the electorate—investors saw sharp reduction in subsidies in Italy, Spain, and Germany. As a consequence there arose many good investment opportunities, primarily for those few renewables with lower (or at least similar) cost than the fossil alternative. I believe sugarcane ethanol was one of them.

Advantages of Sugarcane Ethanol

This biofuel does not need established agricultural land, is relatively cheap to produce, and is undergoing rapid technological advance. In addition it is truly carbon neutral: the CO2 emitted from the use of sugarcane ethanol in one year is absorbed in the sugarcane growing the next year, and the production of sugarcane ethanol does not require much fossil fuel or fertilizer. It is also truly sustainable: rained sugarcane production has continued for decades in Brazil without destroying the soil.

Brazil is, in fact, the world’s premier producer of sugarcane ethanol, and sugarcane is grown there on so little land that food production is not significantly impaired. Nor is such growth a cause of deforestation.

While occupying only 0.9% of agricultural and pastureland in Brazil, sugarcane already powers more than half of Brazilian cars.

At the global level, IEA estimated that it will require 100 million hectares (Mha) or 6% of the available suitable land to provide 27% of transportation fuels in 2050. In 2010, 30 Mha were used for energy crops. Of this some 20 Mha were in the United States and European Union. The negative attitude to energy crops in the United States and European Union will probably lead to the discontinuation of this land use, and thus there is a need for 120 Mha of new land for energy crops.

Fortunately the rest of the world has huge underutilized areas.

Brazil alone has more than 200 Mha in pastureland. Much of this can be converted to sugarcane, because current meat production can be maintained on a substantially smaller area—through technological advance in grass and water. Eastern Europe has 40 Mha of underutilized land, and there is a similar potential in southern Africa.

Providing 120 Mha of new land for biofuels, even after discontinuing the use of land for biofuels in the United States and European Union, is well within reach.

Today, sugarcane ethanol competes successfully with gasoline at the pump in Brazil without subsidies. The production cost is below USD 60 for the energy equivalent of a barrel of oil, and it is expected to fall toward USD 40 as technology advances. Brazil is easily the lowest-cost producer of biofuels in the world. The production cost of a tonne of its sugarcane ethanol is 35% of the cost of corn ethanol in the United States and 23% of the cost of sugar-beet ethanol in Germany.

Still the ramp-up on the global use of biofuels will be costly. IEA estimated an investment cost of 1%–2% of the total cost of transportation up to 2030, and in the ensuing twenty years a production cost equivalent to an oil price of USD 120 per barrel. For the period 2010 to 2030 seen as a whole, the IEA foresaw a net savings of about 1% of the total energy transportation cost. The societal benefit would be substantial, since this would reduce climate emissions from transportation by a quarter.

The technological advances in sugarcane ethanol production have been substantial and look likely to continue. Up to 2011 the yield per hectare doubled every twenty years, and even at half that rate of advance, yields will double again by 2052.

Next, the current technology focuses primarily on the sucrose content of the sugarcane, which means that only a third of the solar energy absorbed by sugarcane is utilized. By burning the leftover grass, the bagasse, another quarter of the solar energy can be converted to electricity, thus almost doubling the energy output from sugarcane production.

Finally, the fermentation process that creates the ethanol from sugarcane generates CO2 emissions with a high concentration of CO2. This CO2 can be captured and stored more simply and cheaply than emissions from the combustion of fossil fuels. This could make some biofuels net carbon negative in the future.

Looking Ahead

So how will the human exploitation of the wonders of sugarcane ethanol play out over the next forty years?

A willingness to act, in spite of short-term costs, will result when dire scientific warnings finally emerge as observable reality for people in the rich world. This will happen already in the 2020s because global temperature will have risen notably, extreme weather will be frequent, and methane will start emerging from the previously frozen tundra of Siberia and Canada and scare the voter.

At that time China will have surpassed the EU leadership in fighting climate change. The Communist Party’s prior sensitivity to the climate challenge, and a succession of floods and droughts, will ensure urgent action around 2020. The United States will be the bottleneck delaying global collaborative action for CO2 reduction.

But even American voters will eventually demand action against fossil emissions, albeit a decade after China and Europe.

The price of fuels will increase sharply in the 2020s because high carbon prices and mandatory blending of biofuels will be demanded by a scared majority of the voters.

The public image of biofuels will have shifted to the better, after the proven success of Brazil’s large-scale use of sugarcane ethanol over the prior decades. This will ensure a healthy profit margin for a number of biofuels, and rapid expansion in their production and use.

The energy-crop sector will become increasingly high-tech, and the crop yield and the crop’s resistance to adverse conditions will continue their dramatic increase. Genetic modification will be universally accepted—except in the EU—and will contribute significantly to increased yields in Brazil and Asia. Residuals from sugarcane, forestry, and agriculture will increasingly be valuable sources of electricity and heat.

By 2052, the sugarcane industry will make a contribution to transportation fuels on par with key OPEC states today. If Brazil by 2052 uses 7% of its agricultural and pastureland and ethanol yield increases by 1% per year during the next forty years, the Brazilian output of sugarcane ethanol will be fifteen times larger than today.

The total energy content will be equivalent to some 2.5 million barrels of oil per day, or the current export of Iran or Nigeria. I believe this is a likely scenario.

In sum, sugarcane ethanol will have created substantial wealth for those early investors in Brazil and southern Africa, much to the disappointment of those who invested in the United States and Europe.