Cover story: Biofuels, the choice of the future

"Motorists can buy these fuels of the future from over 300 Caltex service stations"

Motorists' choice of fuels in the future may not really be so complicated! But a bigger variety of ethanol and biodiesel blends will almost certainly be on the forecourt menu because renewable fuels will form part of the solution to climate change.

Australian motorists can make a contribution to solving the problem right now – by buying these fuels of the future from over 300 service stations in the Caltex network.

Their availability represents a remarkable success story. Caltex reseller Bowen Petroleum started selling a ten per cent ethanol petrol blend under its own brand in the mid-90s. Then four years ago E10 Unleaded, the first Caltex branded biofuel product, made its appearance in a few service stations in Cairns.

How things have changed since then! Quietly, steadily, the Caltex biofuels business has been growing. Today about 1.2 per cent of Caltex petrol and diesel volume in New South Wales contains biofuel and this volume is likely to grow strongly.

Consider these sales achievements:

• In 2007, Caltex will sell approximately 750 million litres of biofuels blends.
• Caltex has met its targets for 2006 and 2007 for sales under the former federal government's Biofuels Action Plan that aimed for 350 million litres of "pure" biofuels sold in Australia by 2010.
• Over 200 Caltex sites now sell the ethanol blended petrol Bio E10 Unleaded in New South Wales, Queensland and the ACT and the network is expanding.
• All diesel supplied from Caltex's Newcastle terminal is New Generation Diesel (NGD), a two per cent biodiesel blend. Over 150 service stations sell this product and many also sell Bio E10 Unleaded.
• Caltex sells B5 – a blend of five per cent biodiesel and ordinary diesel – in New South Wales and South Australia and B20 (a 20 per cent blend) to commercial customers including truck and bus fleets in South Australia. Caltex Energy based in Newcastle is now also selling B5 at the retail level.
• In November Caltex launched a sub brand, "Bio", which will prefix all its biofuels products in future. "Over time we expect we will be launching more biofuel products, so with 'Bio' we're building a platform for future growth," explains Acting General Manager Marketing Mike McMenamin.

Coping with surging demand

As retail customers appreciate the lower price of Bio E10 Unleaded, and others recognise that biofuels can help to reduce greenhouse gas emissions and the nation's reliance on fossil fuels, demand for them is growing.

"A number of our major mining customers in particular are interested in reducing their carbon footprint," says Mike. "We are developing our supply and distribution chain to meet our customers' needs."

National Sales Manager Mining Scott Nicholls agrees. "Mining is looking for us to invest in biodiesel capability so we can provide a quality product at a competitive price, and to work with them so they understand the benefits of using it in their equipment."

Caltex is investigating ways in which it can supply more to the mining and transport sectors, and to continue growing the biodiesel business profitably.

It will also continue to identify and convert service stations to sell Bio E10 Unleaded, with country Queensland, country New South Wales and Victoria among the priorities and with a price discount an added retail incentive.

That can't happen without planning and expenditure – and plenty of it. Here again Caltex has been proactive in meeting infrastructure demands for storing, handling and blending products.

Here's what's happening at Caltex terminals:

• At Lytton terminal in Brisbane, a team is working on installing ethanol facilities. This $2.3 million project includes automating the E10 blending process and upgrading existing tanks, pipes, bunds and safety systems. The work will be completed in the first half of 2008 and is expected to allow Caltex to meet ethanol demands in south-east Queensland and northern New South Wales for years to come.
• At the Banksmeadow terminal in Sydney, ethanol facilities are being built and an option to install a facility at Silverwater is being reviewed. This will cut transport costs and loading time enabling economic supply to Sydney and southern New South Wales.
• At Newcastle terminal, a project to allow "ratio blending" of ethanol and biodiesel is nearing completion. This $900,000 project will eliminate the current practice of loading ethanol or biodiesel then adding petrol or diesel from a separate hose.
• In Adelaide, Caltex currently has a B5 facility where trucks drive in, five per cent biodiesel is loaded and then it's topped up with regular diesel. "However, I expect automated 'ratio blending' will eventually be available here and at a number of other terminals," says National Operations Development Manager Lisa Mason. • Caltex has plans to supply biofuels from other facilities by late 2008. Those being considered include ethanol in Mackay as part of the existing expansion project, ethanol for Victoria and biodiesel for Brisbane, Gladstone and Perth, depending on the availability in those markets of biofuel supply.
• Integrating these fuels into the supply chain and blending them imposes extra effort, time, costs and dedicated resources because they can't be moved via multi-product pipelines, says National Fuels Marketing Manager Michael Ridley-Smith. In addition, tallow based biodiesel needs to be kept in heated tanks to stop it solidifying at low winter or overnight temperatures.

"Caltex has been proactive in meeting infrastructure demands for storing, handling and blending products" Some areas of Australia are better suited for biofuels expansion than others.

With its sugar plantations, Queensland is a logical place for further growth. So are grain-growing areas and Caltex has committed to taking at least 30 million litres a year from a big new grain-to-ethanol plant at Dalby in Queensland. See story on $100 Ehtanol plant to feed Caltex.

Similarly New Generation Diesel is supplied from Newcastle because it's close to Caltex's main biodiesel feedstock supplier. But Caltex aims to sell NGD elsewhere when supply arrangements and infrastructure modifications have been completed.

The Caltex difference

A number of biofuels strategies set Caltex apart from, and ahead of, the competition. The first is making biofuel blends available to customers. "We're well ahead of most competitors in the number of sites at which ethanol blends are available," says Michael. "We're also more active in supplying and planning for biodiesel blends."

Another important differentiator is choice. So where the company has introduced Bio E10 Unleaded into its retail network, it has tried to ensure the site also offers ULP and the Vortex 95 and Vortex 98 premium products – four grades of petrol.

To date the strategy has been met positively by customers and governments. "Almost all Caltex E10 sites with four petrol grades outperform the competition," says Michael.

E10 is sold at a discount to regular unleaded petrol, though it is not cheap to produce and biodiesel producers are struggling because of very high feedstock costs. Biofuels are currently only viable because of government subsidies and excise concessions. "We need to move away from regarding biofuels as discount products," says Michael. "They are quality products that offer environmental and air quality benefits over unblended fuels. Discounts may not always be possible if supply costs are high."

Replacing ULP with Bio E10 Unleaded

As the E10 network grows, what about sites equipped to sell only three grades of petrol? (Some sites, particularly in regional Australia, sell only two.) Caltex can't economically support installing tanks at these sites to offer the additional choice. At the same time it doesn't want to remove either of the premium products Vortex 95 and Vortex 98 which are performing well and serving a growing market as more and more vehicles require high octane fuel.

In these cases a preferred option could be to replace ULP with Bio E10 Unleaded. This will be trialled at service stations where research shows customer acceptance is high and E10 sales are likely to be strong, and where other Caltex sites nearby offer the four grades.

Bio E10 Unleaded Ambassadors

Another strategy to boost sales and customer awareness is the Ambassador Program, a marketing and promotional campaign currently promoting Bio E10 Unleaded at selected service stations in New South Wales. It's being conducted at franchisee sites with the help of government grants designed to support the growth of ethanol petrol blends.

Caltex "Ambassadors" in green livery offer information about Bio E10 Unleaded and advice to customers on forecourts and hand out brochures. The idea is to educate motorists at the point of purchase and to change negative perceptions of ethanol they may have. They get a chance to win $1,000 of the fuel plus $50 StarCash each week in onsite promotions.

Big issues for the industry

Regulation

Issues of concern to Caltex include mandated supply of ethanol blends. The New South Wales Government requires two per cent of the total volume of petrol sold in the state to be ethanol-blended. Queensland Government policy is for ethanol use equal to five per cent of ULP by 2010. Other states including Victoria and Western Australia have biofuels targets for the end of the decade but have not regulated their use.

Caltex is opposed to mandates because they don't allow market forces to dictate the pace of change and ultimately could lead to higher costs for consumers and marketers.

At present competitors selling biofuel blends use a variety of approaches, including those based on octane grades, discounts and choice of products.

"We're already seeing a distortion in how the ethanol market in New South Wales might otherwise have developed," says Mike McMenamin.

"Mandates push regular unleaded petrol out of the market and limit consumer choice, which is one reason Caltex opposes them," he says. "We want customers to shape the market, not have products forced on them."

Cost

Many of the raw materials to make biofuels are in short supply, which puts upward pressure on prices. Overseas, biofuels mandates are pushing up prices of raw materials like corn, tallow and palm oil. Though biofuels are currently profitable for Caltex – albeit less so than other products – a big challenge is to ensure it can make money out of them over the long term.

Currently, biofuels producers are caught in a squeeze between oil prices and feedstock prices. A number of ethanol and biodiesel producers have stopped operating or abandoned plans for new plants. There is not enough money in the supply chain to make many plants viable, which has led to calls for mandates and industry protection by banning imports or cutting taxes.

Biofuels need research and development for new feedstocks and advanced technology. Some additional transitional financial assistance may be warranted to help overcome the current financial squeeze. However, a sustainable biofuels industry can't be built behind protective barriers – Australia learnt this lesson many years ago.

Consumer confidence

Many end users still don't fully trust ethanol blends, Caltex research shows. The industry has more work to do to overcome concerns about their suitability for vehicles and equipment.

Nevertheless acceptance of the blends is steadily increasing among drivers. Caltex research indicates that, nationally, acceptance grew from 43 per cent in 2004 to 64 per cent in April-May 2007.

A government study shows all aspects of E10 use are satisfactory for 60 per cent of Australia's vehicle fleet. In the case of fuel-injected vehicles, the percentage is much higher – at around 80 per cent.

"The biodiesel market must avoid the mistakes made with early ethanol blends that were unlabelled, and ensure biodiesel blends of over five per cent have appropriate pump labelling and that the industry operates to uniform quality and standards," says Mike. "A major benefit of New Generation Diesel is that all diesel vehicles can use it."

Sustainability

An ongoing, increasingly vocal global debate surrounds the sustainability of biofuels. Creating them requires vast amounts of plant based material like sugar cane, wheat, sorghum, canola, jatropha or palm oil. There is concern that "monoculture" of key ethanol and biodiesel crops in developing countries could increase deforestation, reduce biodiversity and displace small farmers and food production. Life cycle greenhouse gas emissions could also be increased.

"Acceptance of the blends is steadily increasing among drivers."

And if feedstock is imported, how will biofuel producers know it's been sustainably produced? Caltex has not purchased imported palm oil based biodiesel and won't unless it can be shown to be sustainable to the satisfaction of key stakeholders in the countries in which it's produced.

Developing technologies for producing fuels from waste material hold great promise, though these could be five to ten years away.

"When we can make ethanol from any cellulosic plant material, not necessarily valuable food grain, we'll be in a more sustainable position," says Mike. "Current technologies will need to be replaced so Australia has to be careful with subsidies to current ones. This is another reason not to mandate biofuel use."

Long term outlook

Caltex believes the government should prepare a comprehensive plan for biofuels in Australia through to 2020. Failure to do so could hold the biofuels industry back or – ironically – even make it unsustainable.

"The plan would consider some pressing short term regulatory and financial issues including the biodiesel blend standard and the longer term transition to non-food biofuels feedstocks," says Government Affairs Manager Frank Topham.

Caltex supports the development of a market-driven, sustainable biofuels industry based on consumer confidence, reliable supply and competitive prices. It looks to a commercial "win-win" for producers and marketers in an industry that is economically, environmentally and socially sustainable.

"Biofuels must be environmentally sustainable in the long term to justify their existence," observes Frank.

"This means production that has no adverse effects on land, water supply or ecosystems. These fuels must have real, scientifically demonstrated benefits for the environment and be cost effective."

Biofuels must also be socially sustainable. Stakeholders must be cautious about diverting food or water to fuel and driving up food prices at a time when pressure on natural resources is increasing.

With these caveats in mind, the company foresees a biofuels business that continues to expand. While there's no prospect of them replacing all fossil fuels, it believes there is potential for these products to occupy a larger portion of the market than its current small percentage.

To this end Caltex is committed to meeting its annual targets under the former government's biofuels action plan targets and will continue to invest in its supply chain to maintain and expand supply efficiently. Caltex advocates incorporation of this plan into a longer term plan under the new Labor government.

How plants become fuel

Any plant material containing sugar or carbohydrates can be fermented to produce ethanol, in the same way that liquor producers make ethyl alcohol for beer, wine and spirits.

At present most ethanol from Queensland is made at distilleries owned by sugar company CSR from molasses feedstock. Molasses is a thick, dark syrup produced by boiling down juice from sugar cane (pictured being harvested on our cover this month) during the sugar refining process.

The carbohydrates in the molasses are fermented with the use of yeast in special fermentor tanks, a process that produces carbon dioxide and ethanol. The ethanol – a clear, colourless, flammable spirit – is recovered by distillation.

The same method is used to create ethanol from wheat, but the principal ingredient in this case is waste wheat starch, a byproduct of the manufacturing process for the starch that's used for making paper and in other industrial applications.

Ethanol from grain in Australia comes mainly from the milling group Manildra, which operates a distillery near Nowra in New South Wales, says Stephen Roe, Manildra's Ethanol Promotions Coordinator.

'Over the moon' about Bio E10 unleaded

"I was over the moon when we found out we'd been accepted to sell Bio E10 Unleaded," says Todd Stewart, franchisee at the Caltex service station and Star Shop in the north Brisbane suburb of Redcliffe.

The reason for Todd's enthusiasm is that Bio E10 Unleaded offers him and his 11 staff an opportunity to boost overall petrol volumes along with revenue. Early signs are promising. The site began to offer Bio E10 Unleaded at five pumps in early November – making it one of the newest in the Caltex network to sell the product – and it immediately began moving 8,000 litres a week.

"That's significant seeing as we're a 100,000 litres of petrol a week site," says Todd.

"There's a big Caltex Woolworths site accepting vouchers about a kilometre away, so this presents us with an opportunity to grow our volume and offer our own customers a discount. At the same time I'm elated to be working with Caltex to meet volume and environmental targets set nationally. Every bit we can do as consumers contributes towards our planet's future."

$100m ethanol plant to feed Caltex

A vital new source of ethanol for Caltex's Queensland operations next year will be a $100 million biorefinery currently under construction at Dalby on the Darling Downs. The grain-to-ethanol plant is expected to be in production by the end of September 2008, producing up to 80 million litres a year.

Caltex is contracted to buy at least 30 million litres from the plant annually for three years, an undertaking that underpinned the facility's development. However demand for ethanol is such that production has already been forward-sold.

Dalby Biorefinery will produce ethanol from grain, mainly supplied by Queensland growers via the publicly listed Australian agribusiness Graincorp, according to Dalby Biorefinery director Chris Harrison. At least 205,000 tonnes of grain will be required to feed it each year. "We expect to be running at close to full production in the first year," Chris told The Star. "More and more motorists are discovering the benefits of ethanol blended petrol, not just for the environment but in providing Australia with a secure and sustainable fuel supply that helps regional communities. We look forward to working with Caltex to expand the use of renewable fuels in the state."

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