Biofuels are nothing new to world energy markets. Ethanol first became widely regarded as a partial solution to petroleum supply problems during the short-lived but chaotic Arab oil embargo, which began in October 1973. As is almost always the case, the embargo was not seamless, but it was strong enough to send shockwaves through the West and effective enough to convince the Arab states of their oil-derived strength and influence. Most important of all, the whole world came to realize that the elasticity of prices on the demand side was much greater than had ever been imagined and that relatively higher prices could be extracted from the world’s captive oil markets indefinitely.
Soon thereafter, so-called gasohol, a product made from a 90% petroleum base married with a 10% pure alcohol additive entered the market in some parts of the United States. After an approximate 25-year period in which growth was incremental, ethanol production and use are now booming as never before.
While most that is said and written today uses the term biofuels, in reality the terminology really applies primarily to two related but different products.
Ethanol is a product that can be derived from almost any vegetable matter. However, the preferred and most widely used ethanol feedstock is corn – or in European parlance, maize.
The other major item, biodiesel, is a product derived from agricultural sources such as vegetable oils (mostly rapeseed oil, sunflowerseed oil, etc.), or other raw materials (used frying oils, animal fats) that can either be mixed with conventional fuels or used in a pure form. It performs efficiently as both a transport fuel and heating oil and represents a concrete solution to tackle climate change and promote sustainable development.
Support from high places
With the enthusiastic backing of everyone from George W Bush to small agribusiness, and with huge subsidies coming from the US Treasury, the United States is currently enthusiastically building ethanol plants which will allow them to process corn and other feedstocks into an alcohol pure ewnough to make it an excellent additive for gasoline – or benzin as it is known in Ukraine. America’s farmers are enjoying some of their highest profits in decades, with corn production forecast at 13.1 billion bushels, 10.6% above the previous record of 11.8 billion bushels set in 2004, according to an August 10 report by the USDA National Agricultural Statistics Service.
Brazil leading the way
While the United States has certainly become the world hot spot for ethanol, Brazil has long been a major booster of ethanol, with sugar cane bagasse making an excellent feedstock. Brazil was the world pioneer in the use of 100% alcohol fuels and there are already many thousands of alcohol-only cars on Brazil’s highways today.
Ethanol has its critics and they have more than adequate facts to back up their criticisms. First and foremost is the question of ethanol's fuel efficiency, which is lower than traditional gasoline. Added to this is the fact that corn production requires large amounts of nitrogen fertilizer, which can seriously contaminate groundwater.
However, the major concern is that so much land is being sacrificed to corn production that in many areas is crowding out other, unsubsidised crops, leading to charges that America is sacrificing it ability to feed its people in order to fill the needs of its gas-guzzling sports utility vehicles that now number in the millions.
Europe pursuing breakthrough
While ethanol has played a commanding role in the United States, Europe has been dancing much more to the biodiesel tune. European Biodiesel Board (EBB) official figures confirm that overall biodiesel production in EU has increased from 3.2 million tonnes in 2005 to nearly 4.9 million tonnes in 2006. This represents a 54% yearly growth for EU biodiesel production, which follows on from a record 65% growth rate in the previous year 2005.
As a result EU biodiesel production has more than doubled in the last two years. In 2002, 2003 and 2004 biodiesel production had risen by the relatively lower rate of 30-35%.
Today in Europe there are already 185 fully operational biodiesel plants. Another 58 plants are currently under construction. In 2007, capacities for biodiesel production reached 10.2 million tonnes, laying the foundations for a further strong expansion of the EU biodiesel industry that according to projections should be able to meet 2010 EU targets with at least two years to spare. Once the many plants which are currently under construction begin to operate, production capacities are expected to reach much higher levels accordingly, with industrial output growing by the same exponential rate at least until the end of 2008.
Ukraine a beneficiary of the boom?
This growth in biofuel production capabilities bodes well for Ukraine, with the country’s huge agricultural industry capable of meeting the commodities needs of the biofuel boom.
Because ethanol may be made from so many different sources worldwide prices for the agricultural commodities that Ukraine excels in have seen some appreciation. And there is a consensus that, with the world’s burgeoning population and the continued growth of demand from China, commodity prices appear on the verge of a higher plateau that may remain indefinitely.
One of Ukraine’s most respected agricultural leaders, Leonid Kozachenko, a former vice prime minister of agriculture and current president of the Ukrainian Agrarian Confederation, told Business Ukraine that he sees Ukraine on the brink of a period in which it could enjoy greater agricultural success than at any time in its history, both as a producer of agricultural commodities and also as a producer of feedstocks for the biofuels market domestically.
“Wheat will always be important for Ukraine, but we need no more than 20% of Ukraine’s land to grow sufficient wheat and other foodstuffs to feed our population. We have the land, the people and the capacity to become one of the world’s greatest exporting countries without sacrificing our ability to supply our own market quite adequately,” Kozachenko says.
He also points out that Ukraine’s farmers are capable of producing large quantities of corn, the preferred feedstock for ethanol, with a high level of profitability. There are, however, some changes that need to be made in order to make the Ukrainian role more productive.
Restructuring to supply Europe
“Ideally, farmers should consider organising themselves into cooperatives for turning their corn into ethanol and other products. Experience has shown that farmers may earn USD 100 per tonne on corn under the right circumstances. And that is just on the corn as it leaves the field. If we then add value by turning the corn into fuel alcohol with the residual miller’s grain available for animal feed, we have a win-win situation for both individual farmers and the country as a whole,” Kozachenko adds.
“Even if we use half of our production capacity to meet local needs, we can still build up ethanol plant capacity, pay for the plant investment within three years, and export as much as two million tonnes of ethanol per year to Europe and other buyers. Also, we can develop the capacity to export as much as 3 million tonnes of biodiesel based on rapeseed,” Kozachenko explains.
Kozachenko says that some reforms are needed to provide legislation which will support export efforts, while change is also needed in the attitudes of some of Ukraine’s neighbours over their import policies. “The Europeans talk about helping Ukraine, but I would suggest that they take concrete steps to do so. The best thing that Europe could do would be to lift the EUR 0.18 per litre tariff that effectively blocks Ukrainian ethanol exports to Europe today,” he argues.
Time to end Soviet stereotypes
While some private interests may be considering a revitalization of interest in ethanol in Ukraine, there are still major problems that must be overcome, not least the attitudes of many in parliament who view the entire alcohol sector, for both potable and fuel purposes, as inseparable. Unless the new parliament is willing to act decisively, an industry that is booming worldwide may remain mired in old Soviet-era thinking in Ukraine.
A well-informed source who spoke on condition of anonymity told Business Ukraine that recent government efforts to turn some old potable alcohol plants into ethanol plants are doomed to failure. All of the government’s efforts are based on old technology that is highly dependent on increasingly expensive natural gas. “The state has no money to upgrade plants and, at least until we get a more enlightened parliament, we are unlikely to see any change in the current law that gives the government an absolute monopoly over both ends of the alcohol market,” the source says.
Not all convinced
As many in Ukraine look for ways in which they may turn the country from an onlooker into a major player on the increasingly expanding biofuels market, at least one of the best-known and most progressive agricultural firms has taken a hands-off attitude after studying the situation in depth several years ago.
A source within Agro-Soyuz, considered one of the most technology driven agricultural firms in Ukraine, located in the village of Majskoye in Dnipropetrovsk province, said that the company made an intensive evaluation that could have led to a major investment in ethanol production. However, we “placed it on the back burner,” the source says. “We spent most of 2001 and 2002 engaged in serious investigation of ethanol possibilities, including personnel on the ground in the United States looking at operations there. At the end of the day, the company was simply not willing to undertake the kind of investment that would have been necessary while all of the decision-making was left in the hands of Ukrainian government agencies,” the source adds.
Another of the major agricultural players, Alexei Sizov, a banker with a background that includes work throughout the CIS with Renaissance Capital and J. P. Morgan who was recently named CEO of Ukrainian Agrarian Investments, LLC, told Business Ukraine that his firm is taking what it considers the correct approach in view of the current Ukrainian reality and the worldwide surge in biofuels interest.
“In our planning, our major consideration is the energy capacity of the crops we plant. We produce corn, rapeseed, and other crops with high energy potential for the regular markets. However, we always take into consideration the possibility that a crop has for diversion as a feedstock for the biofuels industry,” Sizov says.
An industry crying out for subsidies
Yuriy Alatortsev, an independent agricultural analyst who covers agriculture in the CIS for publications in Europe and the United States, summed the situation up, “It is generally accepted that the biofuel industry, both in Ukraine and abroad, has little chance of survival without governmental subsidies. The low production cost of grains and oilseeds in Ukraine has attracted neighbours from countries where biofuel laws are in place to come and buy raw materials, mostly rapeseed. These include the Baltics, Germany and Poland.”
“The world energy market drives the prices for grains and oilseeds and this game has started to involve Ukraine more and more. If Ukrainian farmers learn to increase their yields from lands they are farming now they can potentially triple their yields of rapeseed, soybeans and possibly corn and thus enjoy higher margins and profits from farming, in spite of highly negative domestic biofuel legislation.”
“What Ukrainian farmers really need is for the government to stay away from the market, stop playing banning games, and listening to the crushing lobbies that want to introduce a rapeseed export quota and other restrictive measures.”
Most crushing companies in Ukraine prefer to crush rapeseed, soybeans and trade vegetable oils. Currently Ukraine is considering duplicating already existing German legislation in this sector but it is unclear how soon it will be passed given the political instability. So Ukraine needs to sit tight, increase yields and enjoy the high prices paid by richer neighbours who can afford it, thanks to their subsidies for biofuel production and processing.
The other biofuel, biodiesel, has enjoyed some success but so far has had nothing like the market-moving attention of ethanol. Many scientists believe that some of the technical problems with biodiesel will eventually be solved, but, for the time being at least, it remains a less important but growing player on the biofuel energy field.
