Supply Chain Implications of Moving From Traditional Fossil Hydrocarbons to Biofuels for Energy Companies

Biofuels as a decarbonization solution

Biofuels are a type of renewable energy source and one of the most popular low-carbon alternatives to conventional hydrocarbon-based fossil fuels. With transportation being a “hard-to-abate” sector, biofuels can play a key role in decarbonizing various modes of transportation, such as road, air, and sea.

Total biofuel demand in 2022 reached a record high of 4.3 EJ (170 billion liters). However, to get on track with the IEA’s Net Zero Emissions by 2050 Scenario, this demand needs to rise to more than 10 EJ (about 400 billion liters) by 2030, requiring approximately 11% CAGR.¹ Additionally, the demand needs to cover multiple types of biofuels such as bioethanol, biodiesel (FAME), sustainable aviation fuel, and marine fuels. Growth in the global biofuels market will be driven by government-mandated regulations, and financial incentives (such as subsidies and tax credits), as well as customer interest in operating their supply chains and business travel across more sustainable transportation modes.

Biofuels alone, however, will not be sufficient to replace fossil fuels. Leading biofuel producers like BP, Neste, and TotalEnergies rather see biofuels as a key component of a portfolio of renewable solutions, which also includes green electricity, hydrogen, and e-fuels, etc.² The size and timing of the biofuels opportunity also varies across different market segments. For example, within light-duty transport, standard blended biofuels, such as ethanol or FAME, have relatively limited long-term potential due to competition from alternatives like electric vehicles and renewable diesel (HVO). However, they will still have sizeable demand in the short and medium terms as long as internal combustion engines are not fully phased out. At the same time, in hard-to-abate sectors like air and sea transportation, sustainable aviation fuel, HVO, etc. are seen as attractive long-term solutions due to other alternatives having a very low maturity as well as limited technical feasibility and performance improvements. Consequently, these solutions are expected to contribute to a large share of future growth in the biofuels market.

One of the main challenges is that all these biofuels end up competing for the same type of feedstock. As a result, feedstock allocation as well as the development of new production technologies are always a challenge, due to large variations in the expected CO2e reduction for various biofuels.³

However, from the perspective of energy companies, a key advantage is that all types of biofuels are ultimately hydrocarbon-based liquid fuels, just like the traditional fossil fuels they have been handling for the last several decades. This is important, because it means that a substantial part of the existing hydrocarbon fuel infrastructure – the production facilities, distribution pipelines, and more – can be reused for biofuels, which is not the case with other alternatives like green energy (solar, wind, etc.), hydrogen, and ammonia. However, there are still some core differences between the biofuel versus hydrocarbon supply chains, which are described in more detail in the next sections.

Biofuel supply chain overview

As mentioned in the previous section, many energy companies, like BP, are on the path to becoming integrated energy companies offering a portfolio of solutions rather than just relying on traditional hydrocarbon fuels.² An important part of this portfolio is biofuels, for which many companies have already announced ambitious production goals and future investment commitments. The required capabilities to meet these goals can be built either via large-scale organic transformations, as Neste⁴ is doing, or via M&A in the case of Chevron⁵. In either case, energy companies need to now manage a new end-to-end supply chain for biofuels, which brings its own set of challenges.

The biofuels supply chain has high geographical complexity and spans the entire globe. On a macro level, the USA is seen as self-sufficient and able to meet all demand with locally developed feedstock. Europe, however, shows growing demand due to government policies and will become a net importer of feedstock as well as finished products from Brazil, China, and other Asian countries.2,6 Emerging markets, for instance Africa, could also play a vital role as feedstock suppliers in the future.⁶ Hence, as we can see, each region has its specific set of market dynamics and needs to be closely monitored by all energy companies, from both the feedstock supply as well as the finished product distribution point of view.

Furthermore, other factors might need to be considered for some biofuels. For example, in road transportation, the demand evolution across regions will be largely determined by the pace of internal combustible engine phase-out and electric vehicle adoption by the general public.

As a high-level overview, the biofuels supply chain consists of the following four key stages:

Supply chain challenges for biofuels and how companies can overcome them

Based on our interviews with some of the world’s largest biofuel producers, the majority of their supply chain transition challenges exist in the feedstock cultivation and aggregation step. Some of the key challenges:

Feedstock selection and sourcing

Biofuel feedstock supply is still catching up to the rising demand in most regions, which makes finding economical feedstock a key cost driver. Furthermore, the trade-off between fuel efficiency (energy output per kilogram of feedstock) and volumetric density (tied to shipping costs) makes a company’s feedstock choice a crucial part of its strategy.

A key indicator, which especially European feedstock importers should be worried about, is the pace of biofuel demand growth in China, currently a large feedstock exporter to Europe. If China’s production capacity grows rapidly, it could likely lead to feedstock shortages and other supply chain resiliency issues for many types of biofuels.

Most companies today are taking a very short-term and price-driven approach to feedstock sourcing, irrespective of which feedstocks they are using as input in their production sites. However, some companies are also actively trying to promote circularity in this area. One example is TotalEnergies, which primarily focuses on sourcing feedstock locally instead of transporting it over long distances from other regions.2 Although this might not always be the cheapest solution, it is the most sustainable approach from a feedstock logistics perspective.

Feedstock quality variations

Compared to fossil hydrocarbons, feedstock for biofuels shows much larger quality variations across suppliers. These variations are a problem, as they increase the cost and level of difficulty of the pre-treatment step.

The temporary solution adopted for now is for energy companies to monitor feedstock aggregators to verify and achieve the desired quality level, following which they can carry out pre-treatment at their own facilities. Initiatives are being developed, especially in Europe, to improve traceability and transparency in biofuel supply chains.⁷ However, their effectiveness in addressing feedstock quality issues remains to be seen.

Fragmented inbound logistics network

Biofuel feedstock is often generated in small quantities by a large number of producers and then typically consolidated by an intermediary player and sold to energy companies. In comparison to fossil hydrocarbons, this results in a highly fragmented inbound logistics network, especially at the collection and consolidation steps. This creates several challenges, such as the need to create a flexible feedstock transport network to optimize costs, service levels, and the associated carbon emissions, as well as to ensure customs compliance.

Nearly all energy companies usually partner with local players for both of these steps. Depending on the nature of the partnership and expertise, the resources of the local players and the overall performance and costs of this feedstock sourcing process could vary significantly.