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October 08, 2021HVO:Hydrogenated vegetable oil and high value opportunity
Around 15 years ago, when the green fuels market began to take root, the main focus for regulators and producers was on ensuring the bio-based content of fuels. Key regulatory frameworks – notably the Renewable Fuels Standard in the U.S. and the 2003 Biofuels Directive in the EU – incentivized bio-based production via overall biofuels targets.
However, while bio-based content generally is an indication that a process will be less carbon intensive than conventional (petroleum-based) production, it is not a guarantee of reduced emissions. Nor will all bio-based fuels necessarily be sustainable, where sustainability is measured on three metrics (called the 3 P’s): ecological impact (Planet), societal impact (People), and economic impact (Profit).
Recognizing the need for solutions that are profitable and generate the most beneficial impact, regulations around the world have changed to accommodate incentivizing the lower carbon intensity (CI) fuels. Therefore, recently, legislation such as California and other States’ LCFS programs and the EU’s RED II framework has incentivized sustainable fuels based upon the degree to which their carbon intensity (measured in g CO2 eq per MJ) is reduced compared to the conventional standard. This has led to increasing demand for low CI feedstocks and technologies that can easily process them, such as Hydrotreated Vegetable Oils (HVO). Even without existing high credit programs internally, the strong pull for low CI sustainable fuels makes the US a very alluring export market—one that is relatively untapped.
Why HVO?
Of the various routes to renewable “drop-in” alternatives to established petroleum products, the most advanced in terms of commercial scale and momentum are HVO processes. In fact, the term HVO is something of a misnomer, as this technology is able to use a wide range of feedstocks. HVO plants
increasingly process animal fats, in the form of tallows, and waste oils, in the form of used cooking oils (UCO). In fact, HVO processing routes have the ability to easily accept feedstocks that conventional (Methyl Ester, or ME) biodiesel technologies find challenging (requiring process modification to avoid soap formation) due to high levels of free fatty acids (FFAs). HVO processes produce a range of drop-in fuels, led by diesel (known as renewable or green diesel) and jet fuel (known as Sustainable Aviation Fuel or SAF).
While the major focus of current production is on the diesel fraction, interest in SAF is growing very rapidly – thanks to a raft of regulatory and industry-driven initiatives to decarbonize aviation – and is driving capacity growth. Other key products are naphtha and propane. HVO-derived naphtha may be used as a renewable gasoline blendstock or fed to a steam cracker for olefins production, allowing a degree of renewable penetration into plastics production. HVO-derived propane, meanwhile, is produced as a byproduct via the conversion of glycerine produced by the process (by contrast, ME biodiesel production is only able to produce crude glycerine as a byproduct). This propane can be used as fuel as LPG or sent to a propane dehydrogenation (PDH) unit to produce propylene.
What’s fuelling growth?
HVO, due to the nature of the technology, is well suited to be used for production in conventional petroleum refineries. At a time when gasoline demand has been on a significant decline, while diesel has not been as hardly hit, HVO offers an alternative use for some refining equipment (with some modifications), allowing refiners to produce sustainable renewable fuels instead of maximizing gasoline production. This is proving alluring to many refiners who are doing just this. Refineries owned by BP, TotalEnergies, ENI, Kern, and Repsol among others now co-process and/or produce HVO products.
Unlike conventional fatty acid methyl ester (FAME) biodiesel (or even conventional ethanol), HVO is a technology that traditional fuel producers can adapt easily and can produce and ship using typical equipment and logistics. This makes the technology very accessible to the existing industry.
Almost 15 years ago, when the Renewable Fuel Standard (RFS) first reared its head, the HVO market was just planting its seeds, with only a handful of companies tinkering with hydrogen and oils. There are now well over 25 HVO plants around the world, and plans are in place to more than double that amount in the next 15 years, including the construction of large scale standalone plants and a large number of retrofitting projects at existing petroleum refineries. Helping to fuel this rapid expansion is HVO’s relatively low capital costs when compared to other sustainable fuels production, and its high margins (due to high credit values). Modeled returns are currently exceptional for producers.
While the market for renewable diesel is and continues to be the largest by far of all the HVO products, there is now significant interest as a solution for lowering the carbon intensity of air travel as well. HVO presents some of the lowest barriers to aviation decarbonization from a technological complexity and capital intensity standpoint, as well as being an already commercially proliferated technology. Additionally, unlike electrification of road vehicles, or the use of biodiesel in shipping, the aviation industry needs a product that performs, essentially, exactly as conventional jet fuel does. Setting aside the trillions of dollars of sunken capital currently invested in existing airline fleets and the infrastructure supporting them, the general consensus is that current alternatives presented to liquid jet fuels such as hydrogen and electrification have some potential for niche applications (e.g., short commuter flights). However, these alternatives do not have the appropriate characteristics to be reasonably used for a majority of commercial air travel and shipping. Accordingly, the potential scale of demand for renewable drop-in jet fuel solutions is very large, particularly given the increasing willingness of governments to countenance the introduction of mandated levels of renewable jet fuel consumption (as evidenced by the EU’s RefuelEU policy package and others).
What’s happening in Latin America?
Currently, there is no HVO production, and only a few plants planned.
Paraguay: ECB Group’s Omega Green Project is a planned 250 million gallon plant that intends to produce HVO products renewable diesel and SAF for export to the US and European markets, starting in 2022. Produced renewable fuel byproducts will be used to generate green hydrogen, thus reducing the CI of the process.
Bolivia: YPFB’s Project is a planned 125 million gallon plant in Santa Cruz that aims to produce HVO products from local discarded oils, vegetable and animal fats, starting in late 2024.
Brazil: Petrobras ran a coprocessing pilot using its own HBIO technology (patented in 2006) in 2020. Petrobras coprocessed 500 thousand gallons of soybean oil with conventional petroleum to produce 10.5 million gallons of diesel with partial renewable content (approximately 5 percent) at its Repar refinery. The Repar refinery is one of the refineries that Petrobras is planning to sell to the private sector, though the company can use this technology in its other existing refineries.
What’s the opportunity for Latin America?
Amidst the limited supply coming on stream in the near future, there is significant feedstock in the region and excellent access to export markets such as the US. Latin American countries are key global producers and exporters of many agricultural products. Among them are oilseeds and animal products (e.g., meat). Oils produced from these oilseeds, as well as animal fats that are byproducts of meat production (e.g., tallow, lard, and poultry fat), and used cooking oils represent potentially significantly low carbon intensity feedstocks for HVO—this means high value credits if sold into the US or EU. Local prices in the US and EU of low CI feedstocks such as tallow and UCO have already been significantly driven up due to the pull into high credit products. With the trail already blazed by FAME biodiesel, and the pull from red hot markets as strong as it’s ever been, there now exists a large opportunity for the production of HVO. The low CI feedstock is abundant and low cost, the technology is commercial and well understood by the refining sector, a high credit market is nearby and clamoring for more product, and the existing competitors are none and planned competitors few—but for this last point, it is doubtful this will remain a static case. Among the renewable feedstocks suitable for the HVO process are vegetable oils from palm, canola, corn, soy, rapeseed, tall oil, jatropha, inedible tallow, camelina, animal fats (e.g., tallow, poultry fat, and lard) obtained from food processing facilities. Argentina has the capability of leveraging its extensive soya cultivation, while Brazil has notable corn and tallow production. Oil palm is increasingly growing in Brazil and Colombia, and does not currently suffer from the same sustainability issues that its Southeast Asian cousin does (e.g., orangutan habitat destruction, rainforest destruction). As long as the Brazilian oil palm production stays away from the Amazon, it should remain sustainable. Jatropha and Pongamia have also been seen as potential alternative oilseeds that can be used and grown on marginal lands with little or no irrigation. Jatropha is originally from the Americas but has become pan-tropic and can be found growing wild in Brazil. In Paraguay, there is significant availability of Pongamia, grown beside farm animals.
According to the FAO, Brazil is the largest agricultural and food exporter in Latin America, followed by Argentina, Mexico, Chile, Ecuador, and Peru. Agriculture ranges from 5-20 percent of the GDP in most Latin American countries, and around 15 to 30 percent of the labor force is employed by the agriculture industry. The region is a large net supplier of coffee, sugar, bananas, and oilseeds—the last of which is of particular interest. Soybean has grown rapidly in Brazil, Argentina, and Paraguay with these three countries accounting for more than 95 percent of all soybean production in the region. Oil palm has been expanding rapidly in the Caribbean, however they remain secondary producers. Livestock production has also grown substantially in Latin America, with the largest growth in poultry, pork, and beef (growing by over 30 percent, over 100 percent, and over 300 percent respectively over the past 20 years). Brazil is responsible for about half of the production of poultry and pork in Latin America. Though several countries in the region are net importers of agricultural products (e.g., Peru, Mexico, Colombia, Chile), there are significant agricultural exports out of the region. Brazil and Argentina have remained key exporters of beef and poultry, soybeans, corn, and vegetable oils from the region as Latin America has steadily increased in agricultural exports over the past two decades, and vegetable oil exports are expected to grow significantly in the coming years.
In 2020, North American consumption of HVO fuels stood at an estimated 1.9 million tons, accounting for around 34 percent of global demand. Demand has grown rapidly over the last decade, at an annual average of about 53 percent since 2010. North America stands, when compared to other key HVO consuming regions, in that almost all its consumption is currently concentrated in the U.S. state of California. It is foreseen that California will continue to lead the country’s consumption of HVO due to its size of transport fuels market and the established nature of LCFS. With an estimated growth of approximately 45 percent during the 2020-2025 timeframe, regional HVO demand is projected to outpace capacity developments, with the region’s overall HVO deficit continuing to grow.
Find out more...
Market Insights: Hydrotreated Vegetable Oils – 2021 provides analysis and forecast to 2035 of the global market for hydrotreated vegetable oil (HVO), including the markets for renewable diesel, bio-based aviation fuel and bio-based naphtha. This report includes discussion regarding key market drivers and constraints, as well as demand analysis for nine regions: North America, South America, Western Europe, Central Europe, Eastern Europe, Middle East, Africa, Asia Pacific, and China. Analysis also includes the competitive landscape, capacity listing and cost competitiveness along with a snapshot of latest pricing trends by region and price forecasts to 2035.
Biorenewable Insights: Sustainable Aviation Fuels (SAF) – 2021 provides analysis of several HVO (including technologies developed by Neste, Haldor Topsoe, UOP, Axens, as well as others) and other emerging SAF technologies (e.g., ATJ, FT, Pyrolysis, etc). Process descriptions, cost of production models, and a capacity analysis are included. Economics for all products are prepared on a total hydrocarbons produced basis, to evenly distribute the production cost and capital burden across all products.
Cost Curve Analysis: Hydrotreated Vegetable Oils (HVO) – 2021 compares HVO plant cost of production with plant capacity and assembles them into an insightful cost curve that shows the relative competitiveness of producers, different regions, and general characteristics of the market. The interactive cost curve model combines operating plant details and market data from the Market Insights report with process technology and production cost information from NexantECA’s Biorenewable Insights services to provide an understanding of how feedstock selection, market destination, and process technology impact the cost competitiveness and profitability of industry participants both historically and on a forecast basis.
The Authors
Steven Slome, Program Manager Biorenewable Insights
Marisabel Dolan, Senior Consultant
About Us - NexantECA, the Energy and Chemicals Advisory company is the leading advisor to the energy, refining, and chemical industries. Our clientele ranges from major oil and chemical companies, governments, investors, and financial institutions to regulators, development agencies, and law firms. Using a combination of business and technical expertise, with deep and broad understanding of markets, technologies and economics, NexantECA provides solutions that our clients have relied upon for over 50 years.
