Today there is a gap between the demand for renewable fuels and the actual available supply. As a result, investors are rushing to build biofuel plants and secure the necessary raw materials to produce Sustainable Aviation Fuel (SAF) and renewable diesel, two products in high demand but low supply. At the beginning of 2022, airlines agreed to 14 billion liters of forward purchasing agreements of SAF, even though annual production stood at only 125 million liters. At current production rates, it would take over 100 years to fulfill those orders.
Uncertainty over the availability of the main feedstocks used to produce these fuels, such as virgin oils (e.g., soybean oil, corn), waste oils (e.g., used cooking oil) and animal fats (e.g., beef tallow, lard), has been a key factor delaying strategic investments in new production. In fact, Goldman Sachs predicts a 13-billion-pound feedstock deficit in the U.S. by 2024, as competition over these products increase.[1] Investors also say it takes at least five years to build a SAF plant from scratch, which in Latin America might prove longer in light of the potential for political interference, a lack of regulatory consistency, and/or local community opposition.
For those reasons, most of the additional production that will come online will come from Europe and the U.S., who currently account for all of the SAF produced. Even so, Europe and the US lack sufficient feedstock to service the massive supply gap. Therefore, by 2030, AMI estimates that Latin America will be producing 2.3 billion liters of SAF per year, accounting for 10% of global supply. SGP BioEnergy, who seeks to develop a production plant in Panama’s Caribbean coast, claims to have secured a contract to procure the needed feedstocks for its refinery. Two additional planned facilities in Latin America, the Omega Green Refinery in Paraguay, and Vibra’s Biorefinery in Northern Brazil, will use a mix of virgin oils, waste oils and animal fats, all sourced locally.
Given that the local demand for biofuels (excluding Brazil) is underdeveloped and lagging, biofuel plants in Latin America will primarily focus on exports. Regulatory changes and biofuel mandates may increase local demand considerably, but in the meantime, Latin America’s commodity-based export economy is well-positioned to become a major feedstock supplier for global production. In fact, the region is already the largest exporter of soybean oil in the world.
Securing feedstock supplies in Latin America will not be easy, however. In most countries, the collection and processing of feedstock is either nascent and fragmented or a tightly controlled oligopoly. In Mexico, it is common for small local producers to send a few trucks around town to collect Used Cooking Oil (UCO) from nearby restaurants. Once in production, these small biodiesel entrepreneurs are often subject to theft and blackmail from cartels. Animal fat, which accounted for 8% of the United’s States total biofuel feedstock in 2019, can be even harder to procure. In Brazil, JBS Biodiesel, a subsidiary of the largest food processor in the world, uses its animal fat for animal feed and its own biofuel production, limiting access to external parties. These contrasting market dynamics are challenging to navigate from the point of view of buyers looking to the region for new supply.
For those reasons, multinational biofuel producers need to find areas with limited competition, abundant and flexible feedstock supply, as well as a developed supply chain—a rarity in many parts of Latin America. Those that act strategically will have a first-mover advantage when it comes to finding a stable, relatively cheap, and long-term feedstock supply contract. If investors also decide to produce locally, they should focus on brownfield assets (i.e., retrofitting an existing refinery) with close proximity to feedstock supplies (that are preferably a flexible mix of waste and residue).
The Most Promising Solution to Decarbonize Aviation: e-Fuels
Another appealing option for a plant in Latin America are eFuels: a fuel produced using renewable electricity that leads to GHG emission savings of 99-100%. Porsche-backed HIF Global is doing just that. Capitalizing on Southern Chile’s cheap wind power with capacity factors of up to 70%, it seeks to build an eFuel plant in Punta Arenas to supply the U.S. and European markets with green methanol. The major challenge for e-Fuels continues to be the cost—up to five times more expensive than traditional jet fuel—forcing producers to find areas with both cheap and consistent renewable energy. Latin America has plenty of both.
Costs are much more likely to come down for e-Fuels than biofuels, as economies of scale reduce technology costs and the price of renewable electricity continues to fall. Since eFuels are produced using “unlimited” sources of energy such as the sun or the wind, instead of limited feedstock, they are also more scalable. With electric aviation limited to short-haul flights, hydrogen-power commercial aircrafts available only in 2035, and SAF struggling with limited feedstock, many believe that eFuels are the “winning” bet for the long-term decarbonization of the aviation and maritime industries.
Whether it is helping companies secure a long-term feedstock supply for renewable fuels, finding the optimal location for a production plant, or conducting competitive intelligence on industry leaders, AMI has over 20 years’ experience in Latin America’s energy sector. AMI has a proven track record of helping both multinationals and investors understand the changing market dynamics to ensure a successful low-carbon strategy in the region.
Contact info@americasmi.com for a free consultation.
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The Road to Net Zero in Latin America
How investors, energy companies and suppliers can maximize opportunities while avoiding pitfalls in the region's top 6 markets
Sources
[1] Reuters, April 2021. “U.S. renewable fuels market could face feedstock deficit.”
