Changing landscape for chemicals and fuels feedstock production

In a paper for the recent IPGC in Prague, Andy Allen, Foster Wheeler's global business line director, Chemicals, Petrochemcials and Polymers, examined alternative feedstocks for fuels and chemicals production and the impact of possible future environmental legislation. Also considered are the roles that evolving technologies such as gasification and carbon sequestration may play in future project development. Finally, the need of fuels and chemicals producers for more environmentally friendly (reduced carbon emissions) processes, which are technologically and economically viable is discussed:

The history of feedstock selection is an interesting one, dominated by availability and pricing. With global warming increasingly a factor to be considered, feedstock selection is now starting to be influenced by matters originating outside the industry and in general beyond its control. This is making investment planning a more complicated process.

One could almost say that, as we look forward, we are reconsidering the chemical feedstocks that our ancestors might well have viewed as being the most appropriate. Coal – eclipsed by oil, then gas, is starting to make a comeback and biomass – long displaced from its early cottage industry days - is now part of the future. Why is an industry that centred on ever larger-scale production and global investment economics going “back to the future”?

The increasingly loud debate on global warming and its many impacts is starting to change the face of legislation, taxation (or incentives) policies and consumer thinking and it now seems that an industry focused solely on moving forward in a conventional manner is inconceivable in the long run. Five years ago there was little industry debate on this point, but now the problem is that whilst there are a huge number of questions being asked, the answers are increasingly uncertain.

Feedstocks

The start of much of early chemistry was with biomass but the more sophisticated developments in Europe in the 1700s and 1800s were heavily based on the availability of coal. Only at the start of the oil age did the gradual switch over to what we now regard as conventional hydrocarbons begin and for the past 60 years oil, and more recently gas, have been dominant in their role in our industry.

We are now seeing that coal and biomass have a new role to play for a variety of different reasons. It is clear that in terms of oil and gas, the largest consuming nations are not self-sufficient in indigenous resources and are therefore exposed to outside events giving rise to concerns over security of primary energy supplies. Oil and gas resources have a curious habit of generally being remote from the big energy and feedstock users in N. America, Europe, India and China.

The situation for coal is different: these regions are blessed with significant coal resources (in the case of North America and China the reserves are huge). Coal therefore starts to have a possible advantage in energy security politics. The big news for coal however is that with oil testing the US$100/ barrel mark, it is a cheap feedstock for many processes – those typically based on syngas using gasification technology. With this recent attractive cost advantage there has also been a range of new technology developments allowing coal to be a feedstock for clean liquid fuels, synthetic natural gas, and methanol (for olefins and DME).

Concerns about global warming are playing a part in tempering coal’s revival but this same global warming concern is the driving point behind the increasing interest in biomass as a chemicals feedstock. Carbon sourced from biomass does have the potential advantage of lowering carbon emissions though the jury is out as to how efficient the processes are at doing so. Nevertheless biomass feedstock will have an increasing role to play – even if the current economics do not look too supportive.

But it is not just hydrocarbon or carbon that is a feedstock to our industry – some processes are heavily dependent upon power (e.g. caustic chlorine production) and carbon emissions can be equally well reduced by tying into renewable power to lower the product’s carbon footprint. The problem that the future has is that many of the new feedstocks and processes just do not make conventional economic sense – and so need economic support in one way or another – in other words “unconventional economics”.

The first (conventional) rule of feedstocks is that:

• Pricing, availability and suitability determine feedstock choices

• Pricing and availability are driven by conventional markets

• Suitability is subject to technology being available to enable cost effective conversion to

required product chains

And the second (unconventional) rule for feedstocks is that:

• Environmentally driven legislation will mandate certain feedstock sources

• Incentives and taxation are likely to adversely effect conventional feedstock economics

• Security of supply concerns may drive projects (particularly power) to using domestic feedstocks, particularly coal

• Consumer expectations will drive demand for less price-competitive feedstocks for certain products

The implications of this are that various feedstocks start to look more attractive when evaluated on a new and unconventional basis – for example, biomass in Brazil. This could also lead to a significant increase in recycling of products into new feedstock – e.g. waste plastics for reprocessing where it could be considered that this is a carbon neutral feedstock. There is potential for companies operating under carbon emission caps to replace existing processes with newer, less carbon-intensive processes, thus releasing potentially valuable carbon credits for trading or increasing production whilst still maintaining the emissions cap.

Carbon sequestration

That global warming exists now appears to have the support of most of the scientific community which leads the thinking that carbon sequestration is an essential part of our response. Sequestration is a new technology and one that has little track record. It does represent an additional cost and those undertaking the exercise will be looking to cover this cost penalty to justify the additional investment.

There is significant industry discussion on this point. Whilst sequestration is typically discussed in terms of power generation, there is a developing list of chemical processes which would enable CO2 to be removed and then sequestered. Leading these is the gasification family of technologies which can be applied to a wide variety of carbon containing feedstocks. If sequestration is to attract incentives – or CO2 emissions to atmosphere are to be penalised, then there has to be some advantages for processes that enable cost-effective removal of CO2. In such cases the reduction in the carbon footprint of the process has to be a valuable economic evaluation point.

If carbon sequestration is to play a significant part in future investment decisions then it can be expected that the introduction of a combination of financial encouragement and reliable and cost effective technologies would provide a tipping point leading to large-scale investments – but only if the financial encouragement can be depended upon for much of the asset’s life.

Legislation

Legislation has been the driving force behind much investment for many years but as legislation becomes more widespread the implications become fundamental. Possibly the best example of the impact of environmental legislation is the many improvements made to transport fuel quality in the recent past – reductions in sulphur in particular have been almost entirely driven by legislation arising from concerns over emissions, though engine manufacturers have been supportive of fuel quality improvements. Few fuel quality investments would have been proposed for purely on a return on investment basis.

In a similar manner, emissions from producing facilities have been gradually tightened over the years, generally in response to emissions legislation, which has improved the environmental impact of the processes – but until recently CO2 was not regarded as a pollutant. Renewable energy (power and fuels) targets are now a common requirement of legislation and the developing carbon trading market will be driven further by stricter legislation. Throughout history there is a common theme of technology developing answers to meet industry demands and the current CO2 position is and will be no different to this.

But legislation that affects our industry is driven by more than simple environmental concerns. Many governments are looking to reduce dependency on imports so encourage domestic energy sources. Much of the attraction of biofuels in certain countries is to support agriculture and provide new markets for their products.

Sustainability of Newer Feedstocks

There has been a headlong rush into investing in bioethanol and biodiesel so it might be considered that the benefits of these products displacing hydrocarbon fuels are fully established – but this is certainly not the case. An increasingly loud debate is being conducted in the media about the sustainability and ethics of these biofuels. Concerns are centred on two key points.

Firstly there is concern that using grain for fuel competes with food use and is driving up food prices in many regions. Secondly the global warming benefits appear to be a lot less than originally claimed – wheat for bioethanol might be providing only marginal benefits whilst removal of forest to plant for palm oil production (for biodiesel) appears to be hugely negative. Only sugar cane currently delivers any significant benefit in addressing global warming. This position will improve further when new technology is commercialised. Much effort and investment is being made in this area.

Feedstock / Tonnes of anhydrous bioethanol per tonne of emitted CO2

Wheat / 1.2

Corn / 1.6

Sugar beet / 1.9

Sugar cane / 8.3

• Emissions of oxides of nitrogen from agriculture, which contribute to global warming, are not included

Sugar cane is now starting to be used as a feedstock for olefins (via bioethanol). The resulting products might have a significant advantage in the market place due to consumer acceptance and a willingness by retailers to pay an enhanced price for polymers. Gasification or bioethanol production from the whole plant would represent significant progress regarding the use of biomass feedstocks and much investigation is proceeding on this technology.

For both technologies there are a series of serious developers, many being supported by government grants. Should commercialisation be achieved over the next few years then investments made on first generation technology bioethanol and biodiesel technology might be distressed in the marketplace – relying on higher cost feedstocks competing with the food chain.

Advantages of alternative hydrocarbon-based fuels?

There has been an increasing drive to develop alternative fuels and feedstocks from other primary energy sources. In global warming terms these developing alternative fuels are not necessarily a positive move. Traditional liquid fuels are delivered to the market with great efficiency in retention of calorific value. Apart from LNG, most of the other alternative fuels involve chemical reactions resulting in significant loss of calorific value – some 30% in most cases, significantly increasing global warming potential. What place these alternative fuels and feedstocks have in the market place could be adversely affected by possible future legislation or financial penalties based on global warming potential.

• Traditional liquid fuels 95%

• LNG 90%

• Methanol 65%

• DME <65%

• GTL 65%

(All efficiencies very approximate)

These replacement fuels and feedstocks are not as carbon efficient, but some processes offer CO2 recovery potential. Emerging technology routes to chemicals via syngas also suffer with a lower calorific efficiency. There has been recent mention that there might be moves to improve on an annual basis the carbon efficiency of fuels to increase the incentives to use biofuels driven either by mandate or fiscal incentives and penalties. Should this occur, the use of the less carbon efficient alternative fuels would be a real problem for industry whilst biomass-based fuels would become more attractive.

The central concern for investors where conventional economics do not support project investments is whether the financial incentives (or advantages, if alternatives are penalised) can be regarded as being firm and predictable throughout the life of the asset. This concern is proving to be justified. The case of German biodiesel producers is illustrative of the problems being experienced with incentives (reduced taxation being gradually removed).

According to a quote from a press cutting January 2008 (source ICIS): “A large percentage of Germany's biodiesel producers are battling for survival. Just two weeks after the tax on biodiesel was increased by 6 cts to 15 cts, the expected has happened: the market for pure biodiesel is dead. Many producers are heading for insolvency. Biodiesel is now no longer competitive with normal diesel. Producers can no longer cover costs. Their existence is threatened and thus so are jobs. The tax on biodiesel is to increase to 45 cts by 2012.”

Elsewhere there is an uncomfortably long history of investment encouragement in national projects for alternative fuels only for these to be ended when oil prices fall or national energy security fears subside. (For example, in the US the Carter administration encouraged the investment in synfuels from coal and shale oil but this was subsequently reversed.)

At this point there are more questions than answers – a clear conclusion is that a significant degree of due diligence by investors should be undertaken. One would expect that this situation will significantly blunt investors’ interest in projects that depend upon incentives/penalties outside  investors’ control to make the projects economic - or that significantly higher margins will be required to offset the risk of changing incentives/penalties.

We can expect that certain countries will move far more rapidly to address global warming or energy supply security than other countries and that this will directly affect a widening range of processes located in those countries and products sold in those countries. We can also expect moves to penalise products from countries that do not adopt similar policies.

Role of consumers, campaigners and retailers

Consumers, campaigners and retailers are starting to play an influential role in determining investments in products that might struggle to compete on conventional price and performance terms. Good examples of this are new routes to plastics based on biomass feedstocks or those plastic formulations that degrade in the environment. This is being compounded by moves by concerned retailers and by various communities and countries to ban (for example) plastic bags, or to charge for their use. Either way there is the potential for some end markets to be either dramatically changed impacting on chemicals use and production, and for new markets to be created.

Technology developments and economics have steadily driven larger and larger scale investments. What would have been regarded as a world-scale ethylene plant or polyethylene plant some 10 years ago would now be regarded as unattractive in economic terms – typical plant sizes having almost doubled over this period. The potential use of biomass feedstock has significant disadvantage due to the economics of the required logistics. Ethylene from biomass is possible but feedstock density will not allow plant sizes that compete with current hydrocarbon-based feedstocks.

Many new processes will also suffer from reduced efficiency of conversion. Clearly in economic terms biomass feedstock plants require significant economic support. It seems strange that the first decades of the 21st century could potentially deliver a significant step back in size and efficiency.

Investment planning

This paper has outlined some potential changes, primarily driven by security of energy and feedstock supply and also global warming concerns, that are likely to affect investments being made in the chemicals industry in the longer-term. The nature of these changes are such that the individual investor will have less control over matters that might determine feedstock and product pricing and will be completely unable to influence the spread of changes resulting from global warming. The latter can be expected to include financial penalties and incentives driven by legislation and a key concern of investors will certainly be the extent to which these incentives or penalties will be in place and unchanged through the life of their planned asset.

With the nature of these uncertainties there will be a requirement to widen the areas for due diligence and also to undertake radically different scenario setting when addressing economics and project risks.