Shell to Pause Construction on One of Europe's Biggest Biofuels Plants

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July 02, 2024

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by Carl Surran (Seeking Alpha) Shell (NYSE:SHEL) said on Tuesday it will stop construction of a major biofuels production facility in the Netherlands, as it seeks to ensure the project's competitiveness in a market that faces an anticipated flood of sustainable fuels from the U.S.

"Temporarily pausing on-site construction now will allow us to assess the most commercial way forward for the project," said Huibert Vigeveno, Shell's (SHEL) Downstream, Renewables and Energy Solutions Director.

Upon completion, the facility at the Shell Energy and Chemicals Park Rotterdam is set to become one of Europe's biggest biofuels production facilities, behind the 1.4M metric tons/year plant owned by Neste, which is also in Rotterdam.

The Shell (SHEL) plant was expected to produce 820K metric tons/year of biofuels, including sustainable aviation fuel and renewable diesel made from waste such as cooking oil; production was expected to start in 2025.

Rival BP said recently that it was pausing two biofuel projects in Germany and the U.S.

UBS analyst Joshua Stone said the pause is consistent with Shell's (SHEL) strategy of placing a greater focus on returns, and "the delays further highlight that the advanced biofuels market is not an easy one." READ MORE

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Excerpt from Shell: Shell Nederland Raffinaderij B.V., a subsidiary of Shell plc, is to temporarily pause on-site construction work at its 820,000 tonnes a year biofuels facility at the Shell Energy and Chemicals Park Rotterdam in the Netherlands to address project delivery and ensure future competitiveness given current market conditions.

As a result, contractor numbers will reduce on site and activity will slow down, helping to control costs and optimise project sequencing.

“Temporarily pausing on-site construction now will allow us to assess the most commercial way forward for the project,” said Huibert Vigeveno, Shell’s Downstream, Renewables and Energy Solutions Director.

“We are committed to our target of achieving net-zero emissions by 2050, with low-carbon fuels as a key part of Shell’s strategy to help us and our customers profitably decarbonise,” added Vigeveno. “And we will continue to use shareholder capital in a measured and disciplined way, delivering more value with less emissions.”

Following the decision to pause on-site construction, an impairment review will be conducted for this project. Further guidance will be included in Shell’s second quarter update note scheduled for publication on Friday, July 5, 2024.
Shell took a final investment decision for the planned biofuels facility in September 2021. The facility is designed to produce sustainable aviation fuel (SAF) and renewable diesel made from waste. Additional information regarding project status and timelines will be communicated in future updates.
Shell is one of the world’s largest energy traders and blenders of biofuels. Through its Raizen joint venture in Brazil, Shell is the largest producer of second-generation ethanol and the leading sugar cane ethanol producer globally.
As announced at Capital Markets Day in June 2023, Shell plans to invest $10-$15 billion across 2023-2025 to support the development of low-carbon energy solutions including e-mobility, low-carbon fuels, renewable power generation, hydrogen, and carbon capture and storage. READ MORE

Excerpt from Daily Mail: Shell gave the project the green light in September 2021 as part of its plan to provide more low-carbon fuels for transport and hydrogen across Europe.

Should the facility be finished, it will produce enough renewable diesel to eliminate 2.8 million tonnes of carbon dioxide each year, equivalent to taking more than one million cars off the road.

However, Britain's oil and gas industry has been rethinking its low-carbon energy ambitions, partly motivated by investor concerns over weak returns.

Last week, BP announced it was freezing all new offshore wind power schemes and investment in two biofuel projects in Germany and the United States.

Its chief executive, Murray Auchincloss, said the FTSE 100 business would instead prioritise investment in fossil fuel assets.

His approach represents a stark departure from his predecessor, Bernard Looney, who introduced the company's target to cut emissions to net zero by 2050.

Shell has also been scaling back energy transition projects and targets under its new Wael Sawan, who succeeded longtime boss Ben van Beurden last year.

Although the firm is still aiming for net zero in 2050, it recently ditched a target to reduce the net carbon intensity of its energy products by 45 per cent by 2035. READ MORE

Excerpt from Bloomberg: The oil company declared its traditional business was all but over. “The demand for fossil oil products will continue to decline,” it said in late 2020 as the pandemic slashed consumption. Even when Covid-19 is over, consumption wouldn’t “recover to previous levels.”

The solution? Abandon fossil fuels and pivot to biofuels. That’s exactly what oil refiner Neste Oyj did. For a while, investors loved the shift: It was the peak of the environmental, social and governance (ESG) bubble, when money poured into anything with the slightest shade of green. The company’s market value roughly doubled to more than $60 billion from mid-2020 to mid-2021. But soon it became clear that oil wasn’t going away.

Now, the hangover. After the stock market debacle for wind companies in 2023, the biofuel sector is the next deflating green bubble. The industry is battling several problems: significant cost overruns and engineering shortcomings, and a glut of biofuels as rosy forecasts for demand never materialized. Oil consumption, instead, is rising. Biofuel margins have tumbled.

Neste is paradigmatic: Its market value has plunged more than 75% to about $15 billion. Green Plains Inc., one of the largest US ethanol makers, has seen its shares halve over the last year1. Others have fared worse: Several companies have either filed for bankruptcy or are teetering on the verge of collapse. Fulcrum BioEnergy Inc., an American company that raised $1 billion in funding — from BP Plc, among others — with the promise to turn waste into green jet fuel has effectively stopped operating.

Major energy companies that also embraced biofuels are scaling back their bets. In one of the most striking examples, Shell Plc last week said it was halting the construction of what was meant to be one of the largest biofuel plants in Europe. The pause, as the company called it, came remarkably late — the factory was due to start churning biofuel by late this year. Shell expects to take a writedown of as much as $1 billion as a result. Chevron Corp., which in 2022 bought the Renewable Energy Group for $3.15 billion in cash, closed two plants earlier this year due to what it described as poor market conditions.

The problem is that the 2020-2022 biofuel stock mania rested on a faulty assumption — that the world of Covid-19 was the new normal. Rather, the steep drop in fossil-fuel consumption then was simply the reflection of lockdowns, rather than acceleration in the energy transition. Contrary to what some magazine covers foolishly predicted, oil demand hadn’t peaked. As soon as economies reopened, citizens traveled again with a vengeance. Oil consumption jumped.

By 2023, oil demand had hit an all-time high, reaching more than 102 million barrels a day, compared with an average of about 100.5 million in 2019. Under even conservative forecasts, global oil demand will post annual record highs every year until the end of the decade, climbing to more than 105 million barrels a day by 2029, according to the International Energy Agency.

Thus, the world is today consuming more gasoline, diesel, and jet fuel than ever. Their green equivalents are costly, with prices two to six times higher, according to industry estimates. Only government blending mandates and tax breaks sustain their consumption. Both are at risk of policy U-turns, particularly as green-skeptic governments are gaining power in Europe.

Demand isn’t the only problem. The rush to build biofuel plants, particularly in China, has created a wave of supply that has depressed prices elsewhere, hurting the profitability of projects. American and European companies complain about unfair Chinese competition — another sign of the geopolitical green rivalry. READ MORE

Excerpt from Wall Street Journal: Hydrogen and biofuel projects have become money pits, threatening climate progress --

Startups promising to power planes, ships and trucks with clean fuel are sputtering before they get off the ground, showing how hard it will be to wean many industries off oil and gas.

A company backed by United Airlines that raised hundreds of millions of dollars to turn trash into jet fuel appears to have shut down. Another, backed by Airbus, JetBlue and GE Aerospace, that was working on using hydrogen to power planes went bust. Chevron, BP and Shell, meanwhile, are scaling back projects to make biofuels from cooking fats, oils, greases and plant material.

“The excitement of the early days has not lived up to the hype,” said Andy Marsh, chief executive of Plug Power, a startup that recently opened one of the country’s first plants making green hydrogen, a potential replacement for fossil fuels in industries such as steel making and chemical production.

...

Shares of Plug Power have tumbled more than 90% since the passage of the U.S. climate law two years ago. Shares of biofuels startup Gevo, where Marsh is a board member, are down about 80% in that span.

The failures and delays are all but extinguishing the early optimism after the climate law passed. Rising costs have pushed out project timelines and made it more difficult for companies to raise money. The government’s delays in completing tax credits are adding to the challenges.

Without clean fuels, emissions at many companies are expected to keep climbing, threatening U.S. and global climate targets. Industries including aviation and shipping are counting on the new fuels because wind and solar power and batteries can’t meet their huge energy needs.

...

Shipping company Maersk recently said it would order up to 60 new ships that could run on liquefied natural gas and bunker fuel, in part because of uncertainty about the development of green fuels. Air New Zealand became possibly the first airline to withdraw its 2030 emissions target, citing the limited availability of alternative jet fuels.

“It’s really challenging to get new technology to do what the fossil-fuel industry has been doing for 80-plus years,” said Jimmy Samartzis, CEO of LanzaJet, a startup backed by Shell, Southwest Airlines and Microsoft.

LanzaJet will soon start production at a Georgia plant, one of the first for sustainable aviation fuel in the U.S. Construction ended up being a lot more expensive than the company expected. The company’s fuel, which is made from ethanol, costs about twice as much as conventional jet fuel without subsidies.

...

At United Airlines, one of the biggest backers of biofuel and hydrogen startups, the pace of investments has slowed this year. That reflects policy uncertainty going into the November presidential election and cash-flow and fundraising challenges for many companies, said Andrew Chang, managing director at United’s venture arm.

“If you can’t find money, there is nothing to talk about,” he said.

Many clean-fuel projects have become money pits, in part because of the great amounts of power they need. High interest rates, supply-chain disruptions and expensive power-grid upgrades have driven up electricity prices.

...

Clean-fuel producers are also competing for renewable electricity with big technology companies that operate artificial-intelligence data centers and can often pay higher prices for power.

“The only way to fix it is by lowering the cost of green electricity,” said Andrew Forrest, one of the most vocal advocates of hydrogen.

Forrest, the billionaire founder of Australian iron-ore giant Fortescue, said his company’s 2030 hydrogen production target now looks unrealistic. Fortescue is planning to produce its own clean power to make hydrogen in Australia and is considering doing the same in Arizona.

...

Falling credit prices for many clean fuels under California and Environmental Protection Agency regulatory programs are also squeezing finances.

...

Universal Hydrogen, a startup that worked on using hydrogen in aviation, was attempting to solve logistical and engineering problems that became too difficult because hydrogen prices have remained stubbornly high. READ MORE

Excerpt from Independent Commodity Intelligence Services: Fresh upcoming legislation in the EU and UK from 2025 are set to galvanise the biofuels sector by setting minimum targets for sustainable fuels usage in the aviation sector, but hesitance remains among the larger players.

New mandates set to galvanise sector growth
Larger incumbents still cautious about big bets
Pace of demand growth after SAF mandates remains to be seen

The EU sustainable aviation fuels (SAF) mandate will set a minimum floor for fuel at EU airports to contain at least 2% from 2025 and gradually tick up each year, to hit 6% by 2030.

These targets ratchet up dramatically from that point, with the 2030-35 period likely to be a transformational period for the aviation sector, as the SAF mandate to increase from 6% to 20% in just five years.

By 2050, SAF is expected to become the dominant form of aviation fuel, with the EU mandating that airport fuels be 70% SAF by the midpoint of the century.

Over the next 26 years, aviation firms and fuels producers will need to solve many colossal questions, including the precise composition of the fuels and how those raw materials can be sourced and scaled.

Although the European Commission’s ambitions for SAF growth over the next half-decade are a far cry from the step changes required between 2030 and 2050, the introduction of those first minimum targets will be transformational.

“I think it’s widely seen as a game-changer in the sector,” said ICIS markets editor for biofuels Nazif Nazmul.

SAF currently makes up 0.1% of the global aviation fuel mix and approximately 0.5% in the EU, according to Nazmul, so a 2% target for next year means that airport fuel providers will be under pressure to ramp up capacity quickly.

SLOWING AMBITIONS
Despite this, the last few months have seen a spate of delays and cancellations from some of the largest entrants to the sector, in Europe and elsewhere.

BP announced in June that it is dramatically scaling back its bet on SAF, in the wake of taking full ownership of Brazil-based sugarcane and ethanol major Bunge Bioenergia.

The company has paused planning of two projects and continues to assess three others, which it attributed to a desire to simplify its new fuels portfolio.

Shell also announced a pause to work on its flagship Rotterdam, Netherlands biofuels plant as part of a bid to control costs, but also “to assess the most commercial way forward for the project,” according to Shell downstream renewables and energy solutions director Huibert Vigeveno.

...

Like the rest of the bio-based materials sectors, the question of what feedstocks and technologies will be viable as the market grows remains unclear, with players betting on different routes.

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The wider world is observing the steps taken in Europe and the US to develop a viable commercial market for SAF, but few moves have been made outside those regions so far.

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Biofuels are increasingly popular across many industries but especially in the transportation sector. This is due to concerns over the impact and supply of fossil fuels, and the fact that many of these fuels are compatible with existing systems.

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Despite incentives, the global transition to biofuels faces challenges. High costs and uncertainty about profitability hinder vital investments. Long-term take-up goals have also increased concerns over supply capabilities. READ MORE