Navigant Research Blog

Keystone Opponents Should Focus on U.S. Oil Consumption

— March 17, 2014

Last month, the contentious debate over the Keystone XL Pipeline resurfaced as the U.S. State Department concluded its final environmental impact analysis, finding the construction of the pipeline will have no significant impact on U.S. greenhouse gas emissions.  The assumption underlying the analysis is that the oil, derived from Athabasca oil sands in Canada, is going to be consumed regardless of development of the pipeline.  Opponents of the Keystone project decried the decision, but they are overlooking a key lever for slowing production from the oil sands: just use less oil in the United States.

Canada is determined to develop the resource, which has been slowly ramping production since 2003.  As such, advocates of the pipeline point out that if not transported via pipeline to the United States, it will be transported via rail (as is the current method) or via a combination of rail and tanker.  An additional scenario involves exporting the oil across the Pacific to meet growing demand in China.  While this is not a near-term prospect, its realization would increase global carbon emissions, not to mention the potential for oil spills because of increased oil tanker transport.  And, oil demand in the United States that would be met from a stable partner, and the largest source of U.S. petroleum imports, would have to be sourced from unstable supply lines from the Middle East.

Opponents argue that oil sands development is not yet a done deal, since alternative transport options besides the pipeline also face opposition.  Opponents take particular exception to the oil sands, as their development is far more carbon-intense than other forms of oil  production.  However, if it is true that the pipeline itself is irrelevant to oil sands development, then opposition efforts should shift to confronting consumption in end-use markets – specifically the U.S. road transportation sector.

Demand Side

In 2012, the United States  accounted for almost 20% of global oil consumption, the majority of which is consumed by vehicles on the roads.  Government programs and policies designed to blunt U.S. demand for oil, such as the Renewable Fuel Standard, can be highly influential on global oil prices, since the United States is the world’s largest consumer.  An increase in global oil supply, due to either increased domestic production of non-oil sand liquid fuels or a significant fall in U.S. demand, would lower the global price of oil.  A price dive in oil would dampen interest in costly oil sands development.

Although the existence of the oil sands has been known for almost a century, widespread development has not been economically viable until the last decade.  The cost of oil production from the oil sands is higher than production from more accessible reserves elsewhere.  Past oil price spikes have sparked interest in tar sands development, but those spikes have been short-lived and interest has faded with falling prices.  The steadily increasing price of oil over the last decade has sustained interest in the oil sands, leading to the development now taking place.  However, oil sands development is still a risky gamble, as shown by the losses incurred by Total and China Investment Corporation in 2013.

Increasing oil supply and cutting demand through increased domestic production of shale gas, rising biofuels penetration in the fuel supply chain, improved fuel economy of conventional gasoline- and diesel-powered vehicles, and spreading adoption of electric and other alternative fuel vehicles could effectively slow, if not halt, further development in Canada’s tar sands.  Oil consumption in the United States has declined since its peak in 2005; accelerating that decline, to more than offset increasing consumption in China and other growing economies, could displace much of the economic rationale for tapping Canada’s oil sands.  That would be more effective than asking the federal government to cancel a pipeline.

 

China’s ‘Solar Bubble’ a Coal Bubble in Disguise

— March 14, 2014

Tremors rippled through global financial markets this week after Shanghai Chairo Solar Energy Science and Technology defaulted on its corporate debt.  The first Chinese company to default on domestically issued bonds, Shanghai Chairo is seen as a signal of the over-inflation of China’s red-hot solar market – and, worse, as an indication that the whole edifice of “shadow banking,” shaky corporate debt, excessive property lending, and unsustainable economic growth in China could come crashing down, leading to another global financial meltdown.

That seems overly alarmist.  China’s leaders have for some time been forecasting a modest slowdown in economic growth for 2014, to the 7%-8% range, which would still be the envy of any Western economy.  And Chinese premier Li Keqiang warned on Thursday that future corporate debt failures are “unavoidable” as the country deregulates its financial markets and the government stops propping up unprofitable enterprises.  China’s economy is maturing beyond export-led growth based on cheap commodities, and some regrettable bankruptcies aside, that’s good not only for the Chinese people, but also, ultimately for the stability of the global financial system.

At least that’s the official, reassuring line.  In the energy sector things are slightly more complicated.

King Dethroned

There’s no question that the Chinese solar industry finds itself in a situation of overinvestment and overcapacity.  The spectacular bankruptcy of Suntech, previously headed by China’s “Solar King,” Zhengrong Shi, signaled clearly that the dot-com phase of China’s solar power boom is officially over and a period of sober reassessment – and disinvestment – must inevitably follow.

Still, overseas solar markets, particularly the United States, are enjoying sustained growth, largely thanks to innovative leasing models.  And last month the Chinese government upped its target for new solar installations for 2014 to 14 gigawatts (GW) – a mark that would surpass last year’s total of 12 GW, which itself was the most any nation had added in a single year.  China’s solar industry must adjust to market realities going forward; but the market is growing.

That’s not necessarily true of the coal sector, which could be the real bubble now threatening China’s sustained economic growth.  Nearly 40GW of new coal-fired power generation capacity was added last year, and it’s no longer obvious that demand will continue to grow to soak up all that power.  China has actually closed down more than 80 GW of coal capacity in the last dozen years, and the government reportedly plans to shutter another 20 GW in the coming years.

Wobbly Steel

Indeed, within 5 years there may well be a nationwide cap on coal consumption in China – an extraordinary development in a country whose economic miracle of the last 20 years has been powered almost completely by coal. The less-noticed default of Haixin Steel, a steelmaker based in the coal-producing region of Shanxi Province, China’s Appalachia, could be a more troubling episode than Shanghai Chaori.  Haixin was involved in “triangular debt” arrangements with coal producers and other investors, and its failure could forebode turbulence in China’s heavy industry – and its commodities markets, including coal.

“The truth is Chinese coal consumption is peaking,” writes Justin Guay, of the Sierra Club, “and its plans to build the world’s largest coal pipeline is a bubble that may have already burst.”

If the coal/steel nexus that has fueled China’s growth turns into a bubble, concerns over solar companies going belly up will look minor by comparison.

 

Another State Bans Tesla’s Sales Model

— March 14, 2014

This week the New Jersey Motor Vehicle Commission (NJMVC) voted to ban Tesla’s direct manufacturer-to-customer sales model, starting April 1.  The move places New Jersey alongside Arizona and Texas as the only states to ban direct sales of the Tesla Model S.  The upstart automaker has been selling its Model S through showrooms where customers can experience the vehicle.  They are then directed to the company’s website to purchase the vehicle.  Subsequently, it is delivered to the customer’s home directly from Tesla.  This sales model bypasses traditional dealers altogether, much to the dismay of state dealer associations across the country.  Accordingly, since Tesla first began production and distribution of the Model S in 2012, it has been fighting legal battles in many states to permit its sales model under existing dealer franchise laws, with varied success.

Dealer franchise laws exist in almost all states and were first created to prevent automakers from forcing excess inventory unlikely to sell on dealer lots.  Tesla’s rationale for the allowance of its direct sales model under state franchise laws is premised on the unique characteristics of the company’s Model S and future vehicles.  Tesla argues existing dealers are not adequately incentivized to sell the company’s vehicle due to the lower servicing requirements of electric vehicles; thus, the direct sales model is critical.  While this may be true, Tesla’s struggles with state franchise laws raise questions about the legitimacy of the laws and the value of the dealerships they protect.

Between You and the Automaker

The president of the New Jersey Coalition of Automotive Retailers (NJCAR), a primary opponent of Tesla’s sales model, has claimed that an important reason for franchise laws (and therefore dealerships) is that car dealers act as consumer representatives vis-à-vis the automaker.  If that argument is true, then it follows that if all vehicles were sold directly to the consumer rather than through a dealer, consumers would lose their primary automotive advocate and be more susceptible to automaker abuse.

The validity of NJCAR’s argument assumes that consumers are ill informed about manufacturers’ products, warranties, etc.  While that’s sometimes true, it’s hardly absolute, particularly in the Internet age.  Consumer preferences are strongly shifting toward online purchasing platforms rather than brick-and-mortar retail – a sign that consumers are not always interested in dealer interactions in the first place.

Clean My Windshield

As my colleague Dave Hurst points out in a blog on this matter, dealers provide “important services within the new vehicle purchase process” that may not be as easily or adequately provided by automakers or by the web.  That’s undoubtedly true, but whether these services are indispensable is a question best answered by consumers rather than politicians.

Allowing Tesla to demonstrate that its innovative (and yes, disruptive) sales model is beneficial for both the consumer and the automaker is an appropriate step in determining whether dealer franchise laws are actually meaningful or simply protectionist.  It’s possible for the direct-to-consumer sales model to exist alongside the dealer retail model.  The Internet hasn’t put realtors out of business; it has just changed their business practices.  Requiring Tesla to sell through dealers is akin to requiring gas station attendants to pump gas rather than allowing vehicle owners to pump their own gas.  Interestingly enough, New Jersey is also one of the two states that still have this law.

 

Targeting Aviation, Dedicated Energy Crops Take Root

— March 10, 2014

In our forthcoming report on aviation and marine biofuels, we forecast that global nameplate production capacity will reach 2.3% of global jet fuel demand.  This is just shy of 2.5 billion gallons of installed production capacity, up from just under 750 million gallons in 2014.  Depending on whom you speak to, this would be either a significant achievement or an abject disappointment.

For the optimists, surpassing a critical threshold of 1% is viewed as an important milestone in the emerging aviation biofuels market.  Experience with the commercialization of new technologies demonstrates that 1% to 2.5% market penetration often represents a technology inflection point, leading to accelerated market acceptance and diffusion.  Current nameplate production capacity for aviation biofuels stands at 1%, beating Boeing’s target to do so in 2015 by nearly 2 years.

For the pessimists, 2.3% in 2020 falls well short of aspirational industry targets.  The International Air Transport Association (IATA) has set a goal of meeting 6% of aviation fuel demand by sustainable aviation biofuels by 2020; Boeing’s primary competitor in the aircraft manufacturing business, Airbus, is targeting 5% by 2020.

Below Threshold

Adding further fodder for the pessimists, actual bio-derived jet fuel (biojet) production at emerging advanced biorefineries will fall below nameplate capacity.  Note that petroleum jet fuel – a high-performance kerosene-based product tailored for turbine engines – represents roughly 10% to 15% of the refined gallons produced from a barrel of crude oil.  Based on forecasts, the actual production of biojet fuel in 2020 is likely to represent just 1% of total jet fuel consumption.  ASTM certification of green diesel as a blend fuel with jet fuel would increase this share to just below 2%, still a ways off from achieving a technology diffusion threshold.

One of the primary obstacles impeding growth in the aviation biofuels market is feedstock availability.  It’s a multifaceted problem with no single solution.  While aspirational targets may prove lofty, based on recent developments, they may have accomplished their primary purpose: to stimulate industry investment, innovation, and development.

Two developments, in particular, show significant potential despite scant attention in the U.S. media.

From Prairies to Desert

Brassica carinata, or simply carinata, is an industrial oilseed mustard crop with two subtle characteristics: its oils produce long carbon chain molecules (C22) that can be tailored to match the carbon length (C9-C15) of petroleum-based jet fuels (picture a sawmill using whole logs rather than scrap timber); and it produces more fuel per acre on semiarid lands than any other oilseed in existence today.  The result is better yields of finished fuel than soy or other conventional oilseed crops, a significant achievement for an industry aiming to reach a production threshold measured in the billions of gallons.

Agrisoma Biosciences, a Canadian-based crop company, currently has exclusive global rights to commercialize carinata.  This effort is gaining traction in North America.  Technology developed by Applied Research Associates (ARA) and Chevron Lummus Global is processing test batches of carinata into renewable fuels that are 100% replacements for petroleum based fuels.  In 2012, Canada’s National Research Council (NRC) flew the world’s first 100% biojet civilian flight powered by carinata-derived fuel.  While Popular Science magazine named the milestone one of the top 25 scientific events of 2012, the event was overshadowed by a surge of aviation biofuels tests and commercial flights logged that same year.  More than 15 individual aviation biofuels initiatives took place that year, each relying on a fuel blend of no more than 50% biofuels.

Halfway around the world, a team of researchers in Abu Dhabi led by the Masdar Institute, Boeing, and Etihad Airways is studying the potential of halophytes, a salt-resistant desert crop that can be grown on marginal land.  Scientists leading the effort plan to build an integrated aquaculture ecosystem in which waste seawater from a fish and shrimp farm will nourish halophyte crops, which in turn, act as a filter that cleans the water for discharge into mangrove swamps.  The consortium recently announced that halophytes show even more promise than originally expected as a source of renewable fuel for jets.

 

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