China is Interested in Biofuels - Why Not the West?

Biofuels remain the orphan child of western energy interests - like adopting children, everyone agrees that it's a good idea, but not many want an alien rugrat in the house.

Now China, arguably the world's most influential and dynamic economy, is beginning to eye renewable as a partial solution to its voracious and growing energy needs. If Beijing determines that biofuels represent the future, expect to see the current modest western investment field to change dramatically.

As yet, China's involvement is modest. According to a PetroChina company official, the firm intends to increase its production of biofuels by 2015 to 1.1 million tons and import and additional 470,000 tons. PetroChina, a traditional hydrocarbon company, is clearly thinking outside the box to increase its alternative energy portfolio.

According to PetroChina's Petrochemical Research Institute deputy chief engineer Fu Xingguo, China is looking at generating 933,000 tons annually of fuel ethanol and 165,000 tons of biodiesel.

According to Fu, China is looking to import biofuel from countries such as Brazil, the world's largest producer of ethanol, which will then be blended with regular hydrocarbon-derived traditional fuels and sold to southern Chinese provinces.

Looking towards the future, Fu added that some PetroChina Jet A-1 civilian aviation biofuel will be used in a test flight next month, but gave no further details, such as the feedstock used to produce the fuel.

Finally, Fu noted that China has around 1.52 million tons of fuel ethanol capacity, which mainly use grains as feedstocks.

In those accustomed to reading between the lines, Petrochemical Research Institute deputy chief engineer's last comment is the most significant.

Grains as feedstocks.

The United States now devours approximately one-third of its corn output to produce ethanol, thanks in large part to a bloated bureaucracy and an influential farm lobby sucking down subsidies.

China has no such luxury to shift agricultural land from food production to renewables, as its arable land is needed to support the appetites of approximately 1.3 billion people.

Chinese indigenous production of domestic biofuel will accordingly remain marginal at best.

That said, should China determine that renewable biofuels are an important future component of the country's diversified energy portfolio, the fiscal resources that it could throw at the issue would completely transform global biofuel production, particularly in the Third World.

A number of issues are blunting the introduction of increased biofuel production in developed countries.

First and foremost is that no one has yet figured out how to produce biofuel on an industrial scale that could compete with oil prices, even at $100 a barrel. Like solar and its kilowatt issues, biofuels at present remain a more expensive option.

Secondly, particularly in the United States, the biofuel market has been captured by the ethanol lobby, which provides farmers not only with subsidies, but crop insurance as well.

Last but hardly least is the fact that no single potential biofuel feedstock has emerged as a clear winner, although camelina seems to moving increasingly into first place.

That said, even in the U.S., a slow groundswell of support for renewable biofuel production is emerging, with both the Carlyle Group and Goldman Sachs selectively investing in various projects. Neither firm is overly adventurous in risk-taking, which indicates that eventually biofuels will receive the funding which it currently lacks.

Should China exercise its immense fiscal clout, particularly in the developing world where it has spent decades cultivating governments and contacts, the picture could change quickly. A major focus of Chinese investment over the past decade has been Africa, and if Beijing decides that biofuel is the way to go to diversify is energy portfolio, given the land constraints within China itself, expect to see a major drive to produce renweables on the Dark Continent.

Furthermore, expect to see China completely ignore environmentalists' concerns about shifting land from food production to biofuel.

Amongst China's many economic accomplishments, an overriding signal concern for human rights, either in China or in the countries it invests in, is notable by its absence.

By. John C.K. Daly of OilPrice.com