How China is Establishing Biofuel Leadership

China, the world's second-largest oil consumer, is expected by some analysts to import over 65% of its crude oil by the year 2020.  Although its crude oil importation has slowed recently, China continues to drive towards building a biofuel manufacturing infrastructure that could supply as much as 15% of its fuel by the year 2020, from 2% today. 

China’s focus on developing second-generation biofuels, while helping to alleviate its thirst for fossil fuels, is also creating business opportunities for a variety of companies globally. One such example is Denmark-based Novozyme’s partnership with Chinese companies COFCO and Sinopec. Novozyme is providing its partners with enzymes that facilitate the conversion agricultural waste into ethanol-based biofuels. It is believed that the use of ethanol-based fuels in cars reduce China’s reliance on imported petroleum by as much as 10% by the year 2020.  A demonstration conversion facility is expected to be online by 2011.  COFCO is a leading grain, oils and foodstuffs import and export group in China, while SinoPec is the world's third largest oil refiner.

Another example is the CNOOC Biolux Project, a joint venture between CNOOC New Energy Investment Co., Ltd. and Austria-based Biolux for the purpose of developing biodiesel fuel using oil producing seeds. Funded at a cost of $118.5M USD in 2008, the plant began its trial production in March 2010.  In addition to building global biofuel partnerships, China has developed its own in-country initiatives that include the Integrated Renewable Biomass Energy Development Sector Project, which recently received a $66M loan from the Asian Development Bank.

Although China’s primary purpose for developing its biofuel infrastructure is to reduce its reliance on foreign oil, it could stand to benefit in other ways. According to Al Bryant, Boeing’s VP of Research and Technology in China, Boeing has started to shift its focus on biofuel based aircraft research from the United States to China because "they (China) have made the decision to move faster.” The speed at which China is driving its biofuel agenda combined with the potential for arrested growth in the EU due to environmentalists’ concerns over re-purposing land from food production to fuel production is likely to provide China with a competitive advantage in the world biofuel market as it matures.  A recent International Energy Agency (IEA) report states that “current IEA analysis sees a shortfall in domestic production in both the US and EU that would need to be met with imports” by 2020.  Should this analysis hold true, China will become a net exporter in a new category (biofuels) sometime during the next decade.

Despite China’s potential to become the world’s biofuel leader and largest exporter within the next decade, it still faces challenges that include uncertainty of oil prices, feed stock supply, and government policies. As oil prices fall, biofuels become a less attractive alternative and the government becomes more likely to slow the development of biofuel infrastructure. The Chinese, given their large population also have a natural tendency to reserve land for food production, rather than fuel production. However China is more likely to find new options for biofuel creation than to slow its programs or change its targets. One such example is ZTE Agribusiness Company Ltd’s lease of 6.91 million acres in Africa to develop the world’s largest palm oil plantation. While there has not been any announcement as to whether the palm oil will be used to develop biofuels or for food, it appears that the Chinese have a plan that eventually will establish them as the leader in the biofuel space.  It is not too late for the U.S. or the E.U. to catch up, but they must work quickly to create a business environment that allows entrepreneurs to develop this emerging market with speed and effectiveness.