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Introduction To Biofuels

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Introduction To Biofuels

  1. 1. Biofuel Opportunities June, 2009 STRICTLY PRIVATE & CONFIDENTIAL
  2. 2. Agenda 1 Introduction and status of EU biofuels market 3 2 Identifying biofuels opportunities 14
  3. 3. Agenda 1 Introduction and status of EU biofuels market 3 2 Identifying biofuels opportunities 14
  4. 4. The EU biofuels market is policy-driven <ul><li>2003 Biofuels Directive </li></ul><ul><li>National indicative targets </li></ul><ul><li>Reference targets </li></ul><ul><ul><li>2.0% (2005) </li></ul></ul><ul><ul><li>5.75% (2010) </li></ul></ul><ul><li>2003 Energy Taxation Directive </li></ul><ul><li>Allows Member States to grant tax reductions, exemptions or lower excise duties for biofuels </li></ul><ul><li>Common Agricultural Policy (CAP) Reform </li></ul><ul><li>Energy crops on set aside land </li></ul><ul><li>Up to €45/ha subsidy for energy crops </li></ul><ul><li>Trade barriers </li></ul><ul><li>Import duties of €19.2/100l on ethanol from Brazil and the US </li></ul><ul><li>Revision of the Biofuels Directive </li></ul><ul><li>EU Commission Communication in January 2007 proposed mandatory 10% blending target in 2020 </li></ul><ul><li>Sustainability certification </li></ul><ul><li>Revision of the Fuel Quality Directive and EN590 diesel standard </li></ul><ul><li>2007 H1 review </li></ul><ul><li>Incorporation of carbon-reduction requirement </li></ul><ul><li>State aid for Energy Crops (CAP) </li></ul><ul><li>Extended to CEE Member States </li></ul><ul><li>Set-aside to be removed in medium-term, subsidy mechanism simplified and subsidy improved? </li></ul><ul><li>Review of other relevant Directives </li></ul><ul><li>Waste Framework Directive </li></ul><ul><li>Animal by-products legislation </li></ul>EU BIOFUELS MARKET CURRENT FUTURE Support to agriculture, energy security and climate change behind biofuels policies
  5. 5. The EU incentives have been met with an enthusiastic response in biodiesel … Source: EBB, Europa, CCC EU 25 totals (Million Tonnes) Capacity 2005: 5.1 U/C 2.6 Planned: 7.9 Announced: 2.4 Total: 18.0 2010 demand (MS targets) 11.2 2010 demand (5.75%) 10.5
  6. 6. … and, to a lesser extent, in bioethanol Source: EBB, Europa, CCC EU 25 totals (Million Tonnes) Capacity 2005: 1.5 U/C 1.9 Planned: 2.8 Announced: 3.3 Total: 9.6 2010 demand (MS targets) 7.3 2010 demand (5.75%) 10.7
  7. 7. The structure of capacity ownership in the markets reflects historical policy incentives Current capacity: Biodiesel Current capacity: Bioethanol <ul><ul><li>Agriculture majors </li></ul></ul><ul><ul><li>Independents </li></ul></ul><ul><ul><li>VI partnerships </li></ul></ul><ul><ul><ul><li>Acciona-Repsol </li></ul></ul></ul><ul><ul><ul><li>Cargill-Greenergy-Tesco </li></ul></ul></ul><ul><ul><ul><li>Bunge-Diester </li></ul></ul></ul><ul><ul><li>Agriculture players </li></ul></ul><ul><ul><ul><li>Tereos, Cristanol </li></ul></ul></ul><ul><ul><li>Industrials </li></ul></ul><ul><ul><ul><li>Sudzucker </li></ul></ul></ul><ul><ul><ul><li>Abengoa </li></ul></ul></ul>
  8. 8. Industry offers growth, but fundamentals are tough <ul><ul><li>Industry characteristics </li></ul></ul><ul><ul><li>Commodity processing </li></ul></ul><ul><ul><ul><li>Capital-intensive </li></ul></ul></ul><ul><ul><ul><li>Limited product differentiation </li></ul></ul></ul><ul><ul><ul><li>Low value-add </li></ul></ul></ul><ul><ul><li>Plus </li></ul></ul><ul><ul><ul><li>No correlation between input and output prices </li></ul></ul></ul><ul><ul><ul><li>New market opportunity </li></ul></ul></ul><ul><ul><ul><li>High growth/policy risk </li></ul></ul></ul><ul><ul><ul><ul><li>Shift from tax breaks to blending obligations </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Extension beyond 2010? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Other criteria? </li></ul></ul></ul></ul><ul><ul><ul><li>Inexperienced sector </li></ul></ul></ul><ul><ul><li>Implications </li></ul></ul><ul><ul><li>Projects require </li></ul></ul><ul><ul><ul><li>Lower unit capital costs </li></ul></ul></ul><ul><ul><ul><li>Lower short-run marginal costs </li></ul></ul></ul><ul><ul><ul><li>Product differentiation </li></ul></ul></ul><ul><ul><ul><li>Control over the value chain </li></ul></ul></ul><ul><ul><li>Long-term owners require </li></ul></ul><ul><ul><ul><li>Large balance sheets </li></ul></ul></ul><ul><ul><ul><li>Diversified portfolios </li></ul></ul></ul><ul><ul><ul><li>Track record/expertise </li></ul></ul></ul><ul><ul><ul><li>Strong customer relationships </li></ul></ul></ul>
  9. 9. The market environment is becoming more challenging <ul><ul><li>Market environment getting worse, especially for ‘independent’ projects </li></ul></ul><ul><ul><ul><li>Germany policy change </li></ul></ul></ul><ul><ul><ul><li>Adverse commodity price movements </li></ul></ul></ul><ul><ul><ul><li>Big players moving swiftly, making aggressive statements of intent </li></ul></ul></ul><ul><ul><li>We expect the news flow to get worse as a consequence </li></ul></ul><ul><ul><ul><li>BFC </li></ul></ul></ul><ul><ul><ul><li>Bankruptcies in Germany? </li></ul></ul></ul><ul><ul><ul><li>Difficult IPO market for European players </li></ul></ul></ul><ul><ul><li>However </li></ul></ul><ul><ul><ul><li>Development in Eastern Europe </li></ul></ul></ul><ul><ul><ul><li>EU Commission proposed 10% mandatory target in 2020 </li></ul></ul></ul><ul><ul><ul><li>Good projects will still get built: current capacity shortfall remains </li></ul></ul></ul><ul><ul><ul><li>Consolidation? </li></ul></ul></ul>
  10. 10. Feedstock has long been flagged as an issue for biodiesel 33% 34% 71% 79% 121% 2010 volume implied by 5.75% target 2005 EU25 biodiesel production 1 1 Source: Frost & Sullivan Sources for chart: UKRA, US Department of Agriculture, CCC estimates Vegetable oil and animal fat production, 2004/5 EU25 target % of world market
  11. 11. Recent commodity price dynamics are testing for biodiesel Source: Reuters
  12. 12. Although ethanol does not face the same availability problems, current pricing is challenging Source: Reuters Source:
  13. 13. Recent market sentiment has been poor <ul><li>Bearish IPO market due to concerns </li></ul><ul><ul><li>on biodiesel oversupply </li></ul></ul><ul><ul><li>oil price decline </li></ul></ul><ul><ul><li>German policy uncertainty </li></ul></ul><ul><li>Recent IPOs have underperformed on issuance </li></ul><ul><li>In addition to IPOs below, a number have been pulled </li></ul><ul><li>Market remains active with IPOs planned for coming monthsⁿ </li></ul>Source: Reuters 1 Including BKN Biokraftstoff (Feb) Issued European biofuels IPOs IPO pricing trends Market update Recent biofuels IPO performance Company Date Million € Petrotech Nov '06 95 Verbio Oct '06 264 Cropenergies Sep '06 200 BDI Sep '06 83 Biopetrol Nov '05 74 EOP Sep '05 26 Initial price range (rebased)
  14. 14. Agenda 1 Introduction and status of EU biofuels market 3 2 Identifying biofuels opportunities 14
  15. 15. What makes a good biofuels opportunity? 1. Lower unit capital costs <ul><ul><li>Difficult to secure a meaningful advantage through technology, especially for independent projects </li></ul></ul><ul><ul><ul><li>Limited number of established technology providers </li></ul></ul></ul><ul><ul><li>Potential strategies: </li></ul></ul><ul><ul><ul><li>Scale (INEOS) </li></ul></ul></ul><ul><ul><ul><li>Re-use of sites with existing process infrastructure </li></ul></ul></ul><ul><ul><ul><li>Single EPC contractor for multiple sites </li></ul></ul></ul><ul><ul><ul><ul><li>“ Copy” > ”Paste” approach to plant development results in savings </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Potential for modular approach (D1) </li></ul></ul></ul></ul>
  16. 16. What makes a good biofuels opportunity? 2. Lower short-run marginal costs <ul><ul><li>Short-run costs driven by: </li></ul></ul><ul><ul><ul><li>Feedstock (c.80%) </li></ul></ul></ul><ul><ul><ul><li>Energy </li></ul></ul></ul><ul><ul><ul><li>Logistics </li></ul></ul></ul><ul><ul><li>Feedstock </li></ul></ul><ul><ul><li>Low cost and secure </li></ul></ul><ul><ul><ul><li>‘ Unusual’ </li></ul></ul></ul><ul><ul><ul><li>Term contracts </li></ul></ul></ul><ul><ul><ul><li>Tariff avoidance </li></ul></ul></ul><ul><ul><ul><li>Feedstock-flexible plant with port-side location </li></ul></ul></ul><ul><ul><li>Energy </li></ul></ul><ul><ul><li>CHP </li></ul></ul><ul><ul><li>Integrated site </li></ul></ul><ul><ul><li>MSW/RDF </li></ul></ul><ul><ul><li>Logistics </li></ul></ul><ul><ul><li>Match supply with regional demand </li></ul></ul><ul><ul><li>Proximity to feedstock supply (port?) </li></ul></ul><ul><ul><li>Proximity to customers </li></ul></ul><ul><ul><li>Proximity to markets for by-products </li></ul></ul><ul><ul><li>Good logistics for backup </li></ul></ul>
  17. 17. “ Good” project schematic Refinery/ distribution Port Crop-growing hinterland Integrated industrial site to share services and use co-products Project
  18. 18. What makes a good biofuels opportunity? 3. Product differentiation <ul><ul><li>Basics </li></ul></ul><ul><ul><li>Consistency of supply </li></ul></ul><ul><ul><li>Customer relationship </li></ul></ul><ul><ul><li>Longer-term value </li></ul></ul><ul><ul><li>Sustainable sourcing with an audit trail </li></ul></ul><ul><ul><li>Low carbon with independent assessment </li></ul></ul><ul><ul><li>Quality? </li></ul></ul>
  19. 19. What makes a good biofuels opportunity? 4. Control over value chain <ul><ul><li>Stable input costs (output costs easier to hedge) </li></ul></ul><ul><ul><li>Additional margin/margin flexibility </li></ul></ul><ul><ul><li>Reduces exposure to competitive pressure from agriculture majors </li></ul></ul><ul><ul><li>Stable output costs (alternative to hedging) </li></ul></ul><ul><ul><li>Reduces exposure to competitive pressure from oil majors </li></ul></ul><ul><ul><li>Additional margin/margin flexibility </li></ul></ul><ul><ul><li>Crushing </li></ul></ul><ul><ul><ul><li>Own </li></ul></ul></ul><ul><ul><ul><li>Toll </li></ul></ul></ul><ul><ul><li>Seed </li></ul></ul><ul><ul><ul><li>Longer-term contracts </li></ul></ul></ul><ul><ul><ul><li>Farmer equity </li></ul></ul></ul><ul><ul><li>Captive demand (fleets etc.) </li></ul></ul><ul><ul><li>Distribution/marketing agreements </li></ul></ul><ul><ul><li>Longer-term contracts </li></ul></ul>Upstream Downstream Strategies Strategies
  20. 20. What makes a good biofuels opportunity? 5. Company characteristics <ul><ul><li>Large balance sheet </li></ul></ul><ul><ul><li>Diversified portfolio </li></ul></ul><ul><ul><li>Track record/expertise </li></ul></ul><ul><ul><li>Strong customer relationships </li></ul></ul><ul><ul><li>Management with capital project experience and understanding of commodity markets </li></ul></ul><ul><ul><li>Size matters… </li></ul></ul>
  21. 21. Size matters – but who wins? Feedstock supply Crushing Biodiesel refining Bioethanol production Distribution and blending Marketing Participants The biofuels value chain Agriculture majors Independents Oil majors Chemicals majors Fuel traders/ distributors Supermarkets ?
  22. 22. There is still space for new, independent projects <ul><ul><li>“ Good” projects will still attract investment </li></ul></ul><ul><ul><li>Smart thinking is required by developers: </li></ul></ul><ul><ul><ul><li>Find niches </li></ul></ul></ul><ul><ul><ul><li>Exploit the best untapped sites </li></ul></ul></ul><ul><ul><ul><li>Use specific expertise or relationships, particularly in feedstock supply </li></ul></ul></ul><ul><ul><ul><li>Integrated concepts </li></ul></ul></ul><ul><ul><ul><li>Others… </li></ul></ul></ul><ul><ul><li>Expect a bumpy ride </li></ul></ul><ul><ul><ul><li>Supply-demand imbalances as capacity additions balance policy shifts </li></ul></ul></ul><ul><ul><ul><li>Consolidation, but potential opportunity for good independent players to exit through M&A </li></ul></ul></ul>
  23. 23. Biodiesel SWOT analysis <ul><ul><li>Well-established market </li></ul></ul><ul><ul><li>Expected growth in diesel demand </li></ul></ul><ul><ul><li>EU short of diesel refining capacity </li></ul></ul><ul><ul><li>Policy drivers compelling for EU </li></ul></ul><ul><ul><li>Potential overbuild and commoditisation </li></ul></ul><ul><ul><li>Limited feedstock availability </li></ul></ul><ul><ul><li>Uncorrelated input and output price with limited availability of hedging instruments </li></ul></ul><ul><ul><li>Limited value-added in refining </li></ul></ul><ul><ul><li>Value can be created through vertical integration and strategic partnerships </li></ul></ul><ul><ul><li>Value can be created through asset consolidation </li></ul></ul><ul><ul><li>Used cooking oil and tallow will occupy advantageous position on supply curve if availability and quality issues can be overcome </li></ul></ul><ul><ul><li>Demand dependent on EU policy </li></ul></ul><ul><ul><li>Supplier and customer market power and market entry </li></ul></ul><ul><ul><li>Competition from developing countries </li></ul></ul><ul><ul><li>Vehicle standards remain unchanged </li></ul></ul><ul><ul><li>First-generation technology risk </li></ul></ul><ul><ul><li>Overbuild? </li></ul></ul>Strengths Weaknesses Opportunities Threats
  24. 24. Bioethanol SWOT analysis <ul><ul><li>No feedstock availability constraints </li></ul></ul><ul><ul><li>No fuel quality issues </li></ul></ul><ul><ul><li>Technology well-known </li></ul></ul><ul><ul><li>Distribution network </li></ul></ul><ul><ul><li>EU long on gasoline </li></ul></ul><ul><ul><li>Lower energy content than gasoline </li></ul></ul><ul><ul><li>EU wheat surplus </li></ul></ul><ul><ul><li>Market short on bioethanol </li></ul></ul><ul><ul><li>Increasing popularity of flex fuel vehicles </li></ul></ul><ul><ul><li>Resistance from oil majors </li></ul></ul><ul><ul><li>Policy-driven market </li></ul></ul>Strengths Weaknesses Opportunities Threats
  25. 25. Contact <ul><li>RE-Fin Limited </li></ul><ul><li>Highfields Farm </li></ul><ul><li>Back Lane </li></ul><ul><li>Swarby </li></ul><ul><li>Sleaford NG34 8RT </li></ul><ul><li>United Kingdom </li></ul><ul><li>Tel: +44 (0)1529 455 289 </li></ul><ul><li>Fax: +44 (0) 0529 455 289 </li></ul><ul><li>www.re-fin.com </li></ul>Renewables | Finance | Advisory

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