Download Abstract - International Association for Energy Economics

INVESTMENTS OF OIL MAJORS IN BIOFUELS: SCOPE, INTEGRATION AND
DIVERSIFICATION
Martin Obermaier, Federal University of Rio de Janeiro, +55 (21) 2562-8760, [email protected]
Daniel Fontana Oberling, Federal University of Rio de Janeiro, +55 (21) 2562-8760, [email protected]
Alexandre Salem Szklo Federal University of Rio de Janeiro, +55 (21) 2562-8760, [email protected]
Emilio Lèbre La Rovere, Federal University of Rio de Janeiro, +55 (21) 2562-8760, [email protected]
Overview
The use of biofuels has been justified by high oil prices, geopolitical instability in those countries that hold
most of the proven oil reserves as well as environmental concerns such as climate change or the
improvement of air quality in metropolitan areas (Hazell and Pachauri, 2006). In line with this view
biofuels are typically seen as competitors to fossil fuels and the dominance of oil majors (Mathews, 2007).
However, some argue that biofuels are not a substitute but rather a complementary product to conventional
transportation fuels that is integrated into the commodity chains of automotive fuels (Szklo et al., 2007).
Increasing economic viability of biofuels, government blending mandates and concerns about climate
change regulations have led to adjustments in the strategies of several oil majors and supermajors regarding
biofuels (Hove et al. 2002). Questions therefore arise regarding the main drivers of this changing strategic
behavior. This paper analyzes why and at what stages of the commodity chain oil majors currently enter the
first and second generation biofuel markets. The analysis is based on a careful assessment of the
investments of seven oil majors. Conclusions are drawn regarding the future of conventional fuel and
biofuels markets both regionally and global.
Methods
The data for the analysis is mainly derived from the annual financial and sustainability reports published by
seven oil majors, including ExxonMobil, BP, Shell, Total, Chevron, ConocoPhillips and Petrobras. The
importance of oil majors investments in the biofuels market and its current evolution are discussed in the
context of scope, integration and diversification (Chandler, 1987) as well as by using the technology lockin concept (Unruh, 2000; Szklo and Schaeffer, 2006, Oberling and Obermaier, 2010). Technology lock-ins
occur when economies are faithful to one type of production system due to the gains associated with the
larger number of users of a specific technology or product. The gains in scale and well-being linked to the
development of a certain technology or system end up trapping a system with little flexibility to the entry of
alternative technologies (Unruh, 2000). Therefore, there is an emerging duality between the diffusion of a
“winning technology” and the imprisonment of an entire commodity chain and its demand to the
production model. Public institutions play a fundamental role in technological lock-ins (North, 1990) and
are discussed based on a review on the available literature regarding oil and energy policies.
Results
Our findings indicate that technology lock-ins have an important role in the evolution of the biofuels sector,
particularly when viewed within the context of conventional liquid fuels based on non-renewable sources,
provided by oil majors and supermajors. Transportation and end-consumption infrastructure are firmly
consolidated in the sector. Investments (usually a public expenditure) in infrastructure are capital-intensive
(resulting in large irreversibility) and induce technological lock-ins due to the gains associated with the
larger number of users of a specific technology or product. In general, the investment strategy for biofuels
by oil companies has several causal factors, with different emphases according to the companies. The entry
of oil companies in the first generation biofuels, predominantly in the distribution phase, indicates a
strategy for compliance with governmental binding mandates. Accordingly, they seek to meet their
obligations and make a profit where possible (see the examples of Shell and Petrobras, companies that
invest heavily in the first generation), but with small concern about a possible loss of market share to
market entrants. The perception that first-generation biofuels will not be able to supply a hypothetical
global market for E85 or E100 or comparable biodiesel blends leads the majors not to fear a loss of market
share of petrol or diesel. It explains the small (or absent) levels of investment by oil companies in the
production of first generation biofuels. Moreover, it seems that some industry actors are entering the
production phase only to acquire expertise rather than to win market shares, confirmed by statements in the
annual reports of many oil majors. The investments of oil majors are often much higher in developing
second-generation technology. This indicates a strategy that seeks for the domination of this new
technology, which potentially could lead to new technology lock-ins. Brazilian well consolidated sugarcane
ethanol production seems to be an exception given the recent investment by Petrobras and other oil majors,
where control of the chain of ethanol blends under increasing mandatory gasoline blends in their core
markets follows a clear strategic vision. This is strengthened by the fact that sugarcane ethanol is yet the
only biofuels option that has scale and is economically competitive, in addition to having minimum
guaranteed demand by the obligation of insert oxygenates in gasoline in several main consumer markets.
However, even in ethanol second-generation development of sugarcane seems to be a major driver for oil
major investments in the sector as evidenced by several recent joint ventures or other R&D cooperation
projects. On any account, it is not possible to state that the analyzed companies see second-generation
biofuels as global competitors to gasoline or as other conventional fuels. What can be inferred is that oil
companies can control the development of the whole chain of second generation biofuels, especially for
synthetic fuels from biomass, due to their expertise in termochemical processes for producing high-quality
liquid fuels.
Conclusions
The analysis shows that firms differ in their strategy regarding first generation and second generation
biomass-derived liquid fuels. For first generation fuels, oil majors mainly participate in the market in
conformity with compulsory blending mandates of ethanol or biodiesel. The Brazilian sugarcane market is
an exception: given its commercial competitiveness and guaranteed sales markets several oil majors are
now investing heavily in the sector. Petrobras medium-term plan call even for logistics to export Brazilian
ethanol. As for the second-generation biofuels, although companies show significant differences among
themselves in terms of magnitude of investments and scope of research, all oil majors analyzed invest now
in R&D. Public institutions play a fundamental role in technological lock-ins and need to be analyzed with
care if one tries to understand in detail the motivations of oil major investments in the biofuels sector.
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