IEA forecasts world biofuel output to double from 2006 to 2012

The International Energy Agency (IEA) just released its Medium-Term Oil Market Report in which it forecast global biofuel output will double from 2006 levels to 1.75 million barrels a day in 2012. In the Market Reort, the agency, which is the energy security watchdog for the Organization for Economic Cooperation and Development (OECD), included its second annual report on biofuels in.

The IEA projects increasing tightness in the market for petroleum and sees OPEC spare capacity decline to minimal levels by 2010. For the first time, the agency elaborates on the concept of 'Peak Oil'.

Biofuel outlook
The IEA raised its 2006 biofuel supply baseline by 79,000 barrels a day to 863,000 barrels a day due to stronger-than-expected growth and more detailed capture of projects. Still the agency warned while the forecasts showed a "considerable rate of growth" for global biofuel production they were significantly below capacity planned for 2012.

Technology for significant production of second generation biofuels based on lignocellulosic feedstocks isn't expected by the IEA to come into play by end of the 2012 outlook period.

The IEA projects an actual 2012 output of 1.75 million barrels a day to fall short of potential capacity of 2.92 million barrels a day. IEA forecasts 50% global biofuel supply growth between 2007 and 2009, mostly in the U.S. IEA projects daily U.S. biofuel production to grow from 330,000 barrels in 2006 to 533,000 barrels in 2009, but to then remain steady to 2012.

We anticipate that ethanol (about 78% of total biofuels on average) and biodiesel will displace altogether 1.1 mb/d of oil product demand in 2007, rising to almost 1.8 mb/d in 2012. Ethanol is expected to displace roughly 27% of incremental gasoline demand; by contrast, biodiesel will only displace about 5% of incremental gasoil demand. Despite its rapid growth, however, ethanol consumption will only account for about 6% of global gasoline demand by the end of the forecast period, while biodiesel use will represent even less (slightly more than 1%) as a proportion of global gasoil consumption. Overall, biofuels demand will be concentrated in OECD countries.

The agency said U.S. ethanol profit margins should further retreat over the next two years with the high price of corn. "Recent news reports have indicated that the U.S. is already experiencing a surplus of ethanol," the report said.

However due to Brazil's competitive advantage in production costs, agriculture and infrastructure, IEA expects supply growth to continue beyond 2009. Brazil's daily biofuel output is forecast to rise from 293,000 barrels in 2006 to 421,000 barrels in 2009 and 528,000 barrels in 2012.

The agency expects Europe to maintain its share of half the world's biodiesel production through 2012, approximately doubling biodiesel output from 2006 to 213,000 barrels a day from 2009. But starting in 2008, IEA looks for strong output growth in Europe's ethanol output:
biomass :: bioenergy :: biofuels :: energy :: sustainability :: ethanol :: biodiesel :: oil :: petroleum :: OPEC :: OECD :: IEA ::

IEA forecasts Europe's overall daily biofuel output at 377,000 barrels by 2009, up from 150,000 barrels in 2006. However daily European output is seen steady from 2009-2012. The agency said it has the greatest doubts for proposed projects being realized in the Asia-Pacific region.

IEA projects only a third of 2012 proposed daily output capacity of 604,000 barrels will be produced. And about a third of this unrealized production will be in China, as enthusiasm for biofuels is tempered by awareness of growing food and water needs, IEA said.

IEA said while biofuels will still only account for 2% of global oil supplies by 2012, they will account for 13% of volume growth in gasoline and gasoil/diesel demand near-term. "This is causing investors to reevaluate the need for incremental refinery capacity," said IEA.

Petroleum
The IEA anticipates “increasing market tightness” beyond 2010 for oil, due to stronger demand and OPEC spare capacity declining to minimal levels by 2012.

The IEA forecasts that global oil product demand will expand by 1.9 mb/d or 2.2% per year on average, reaching 95.8 mb/d by 2012. Growth will be driven by the stronger oil demand growth in non-OECD countries, particularly in Asia and the Middle East, where demand will grow more than three times faster than that of the OECD economies. Transportation fuels will account for the bulk of demand growth in both OECD and non-OECD countries.

Peak oil
The IEA report notes that “The concept of peak oil production and its timing are emotive subjects which raise intense debate.”

Much rests on the definition of which segment of global oil production is deemed to be at or approaching peak. Certainly our forecast suggests that the non-OPEC, conventional crude component of global production appears, for now, to have reached an effective plateau, rather than a peak.

Having attained 40 mb/d back in 2003, conventional crude supply has remained unchanged since and could do so through 2012. While significant increases are expected from the FSU, Brazil and sub-Saharan Africa, these are only sufficient to offset declines in crude supply elsewhere. Put another way, all of the growth in non-OPEC supply over 2007-2012 comes from gas liquids, extra heavy oil, biofuels (and, by 2012, 145 kb/d of coal-to-liquids from China). As overall non-OPEC liquids capacity increases, this plateau reduces the share of non-OPEC conventional crude supply from 77% in 2000, to 74% in 2006 and 67% in 2012.

While there might be a temptation to extrapolate this trend, citing a peak in conventional oil output, a degree of caution is in order. Firstly, the concept of ‘conventional’ oil changes with time, technology and economics. In the early 1970s, much offshore production was deemed unconventional, but this portion of global supply has since grown to account for 30% of the total. Evolving economies of scale and infrastructure development could do the same for GTL, oil sands and ultra-deepwater reserves in the future, shifting today’s unconventional resource into tomorrow’s conventional supply category.

Moreover, rapidly-growing condensate and NGL supply is scarcely ‘non-conventional’ in a technical sense now. We also note that for certain regions, notably the FSU and West Africa, the turn of the current decade is likely to mark a hiatus in crude supply growth. Strong growth is expected to resume here towards the middle of the next decade. Whether this will be sufficient to offset the declines expected for mature OECD crude supply, preventing overall decline for non-OPEC, is less easy to predict.

Finally, we note that focussing on non-OPEC crude alone is a rather selective way of considering the sustainability of global oil production. Peak or plateau production is frequently taken as shorthand for impending resource exhaustion. While hydrocarbon resources are finite, nonetheless issues of access to reserves, prevailing investment regime and availability of upstream infrastructure and capital seem greater barriers to medium-term growth than limits to the resource base itself.

Refining capacity
The IEA forecasts global crude distillation capacity to rise by 10.6 mb/d between 2007-2012. New investments add 9.1 mb/d of crude distillation capacity and existing refineries in North America, Europe and the Pacific are assumed to add a further 1.5 mb/d through capacity creep. The Middle East and Asia will account for 6.7 mb/d of new crude distillation.

References:
IEA: Medium-Term Oil Market Report - July 2007