As a result of regulatory changes associated with global climate change initiatives, energy majors and commodity traders are jostling to invest in carbon-neutral alternatives like biofuels. In this first installment of a new series looking at transition fuels, Laura Berger, Director - Liquid Fuels EMEA, and Jamie Tranter, Director - Liquid Fuels Americas, explore the sub-industry forming around biofuels and the effect it is having on talent.
Biofuels (ethanol and biodiesel) can be produced from agricultural goods such as corn, wheat, vegetable oils, or other agricultural commodities and traded globally for use as auto or aviation fuel in a similar way to their dirtier predecessors. Some waste-grade feedstocks like used cooking oil or tallow can also be used to produce alternative biofuels with a low carbon footprint. As a result, the biofuels space is rapidly expanding, creating demand for talent to source and trade both feedstocks and end-products. But with experienced professionals almost non-existent, employers are struggling to hire talent and are prepared to pay a premium.
Regulations drive growth
Governments around the world are getting tougher on emissions, implementing carrot and stick legislation that will drive greater demand for biofuels and other renewable energy sources. Most are opting for market-based systems such as ‘cap-and-trade’ that set increasingly strict limits on pollution but let companies buy and sell emission allowances.
The European Union unveiled on 14 July its ‘Fit for 55’ package of climate and energy laws with a view to cutting emissions by 55% by 2030. The main proposals include a revamp of the bloc’s emission trading scheme, under which companies are charged for the carbon dioxide they emit, as well as the introduction of taxes on shipping and aviation fuels and the effective phasing out of gasoline and diesel fueled cars by 2035. Part of the package is a proposal that there be an exemption to the tabled jet fuel tax if run purely on advanced biofuels and e-kerosene rather than vegetable oils. This will have a knock-on effect particularly with the ABCD firms as, for the most part, they do not have the necessary familiarity with waste products. As a result, these agri players are now formalising the way they trade what were considered by-products – distillers corn oil being a prime example.
Energy players rush to reposition
Traditional hydrocarbon players have little choice but to get on board and demonstrate to increasingly demanding shareholders that they are proactively investing money and effort into the energy transition. This has led many traditional energy market participants to invest in biofuel refineries, traders and/or trading teams with an expertise in the bio area and even to rebrand their household names.
For example, Finnish frontrunner Neste already generates over 90% of its operating profits from renewables, including biodiesel and sustainable aviation fuel. It is currently expanding its renewable diesel refinery in Singapore with capacity to produce > 1 million tonnes per annum of sustainable aviation fuel and renewable raw materials for polymers and chemicals. Italian major Eni also revealed in October 2020 plans to accelerate domestic refinery conversions to build new hydrotreated vegetable oil (HVO) plants.
Total announced in May that shareholders had approved its rebranding as TotalEnergies to mark the company’s shift to renewable energy and also signing off its roadmap to achieve carbon neutrality by 2050. Total already took a first step into this direction, very much like Eni, to revamp its Lavera refinery to an hydrotreated vegetable oil (HVO) plant.
While Human Capital has seen an increase in hiring at US refiners and majors, the US energy majors have been slower to change when compared to their European counterparts. Chevron - which remains focused on oil and gas, despite launching a Future Energy Fund in 2018 to invest in green technologies - lost a vote in June calling on the company to cut the carbon emissions of its products. They have since created a new business division focused on scaling up new technologies such as carbon capture and hydrogen, and Jeff Gustavson will become president of the unit, called Chevron New Energies.
Activist investor Engine No. 1, which recently won a third seat on the board of ExxonMobil, is also pressuring Exxon to accelerate its energy transition work. Exxon has made little headway in renewable power but is active in biofuels and has agreed to buy 2.5 million barrels of renewable diesel per year from Global Clean Energy Holdings from 2022.
Lenders incentivise ESG
With banks, funds, and other investors under pressure to distance themselves from fossil fuels, energy companies will find it harder and more expensive to finance non-renewable projects.
US bank JPMorgan Chase has committed to aligning its financing activities with the Paris Agreement’s climate goals, publishing 2030 carbon intensity targets for its funding of the oil and gas, electric power, and auto manufacturing sectors. The bank aims to cut the carbon intensity of its auto manufacturing funding portfolio by 41% between 2019 and 2030. Other banks are incentivising investments in projects or sectors that meet environmental, social, and corporate governance (ESG) criteria by offering lower lending rates.
Funds are making similar shifts. The New York State Common Retirement Fund pledged in December that its investments would achieve net-zero greenhouse gas emissions by 2040. Private equity giant Blackstone is gradually diversifying away from fossil fuels with a string of investments in firms with an energy transition focus, such as energy storage provider Aypa Power.
Investor interest in ESG is simultaneously creating alternative funding opportunities for energy firms and traders, with Neste issuing its first green bond in March.
Traders seek feedstock opportunities
As biofuel producers ramp up, there is an opportunity for commodity traders to supply them with feedstock, and potentially to produce that feedstock too. Investing in production however carries a risk. As the biofuels market matures and technologies evolve, feedstocks in high demand now may later fall out of favour. Forming joint ventures with biofuel producers is one way to mitigate that risk. Cargill, for example, announced in April it will supply tallow as feedstock to a 50/50 venture it joined in Nebraska that will produce 80 million gallons of renewable diesel per year.
Record high prices in many agricultural commodity markets - with Glencore-owned Viterra predicting in June that prices for corn, soybeans and wheat could be entering a mini-supercycle – are also a double-edged sword. High prices may attract more traders into biofuel feedstocks but could hurt their margins, as well as draw unwanted attention from politicians who will cite food inflation as a risk of the green initiative.
Greater diversity in feedstock markets is ultimately needed for independent traders to thrive without the big-four ‘ABCD’ traders dominating. Over the past few years, we have witnessed additional incentives given by both the US and EU to run biofuels on waste and residue feedstock as opposed to vegetable oil. This has triggered new sourcing developments centred around waste hydrogen, green methanol, and ammonia for conversion into alternatives to biofuels. However, the overwhelming supply of veg oils (relative to wastes) coupled with the forward hedgability/tradeability will likely force them to be a cornerstone of this renewable diesel buildout.
View from the US
In the US, the Biden administration revealed in April sweeping climate goals that include aiming for a carbon-neutral economy by 2050. The implementation of the Renewable Fuel Standard (RFS) is a key driver towards this, paving the way for the Renewable Identification Number (RINS) and Low Carbon Fuel Standard (LCFS) credit trading platforms. Several states, such as Washington, are now looking to emulate these long-running cap-and-trade programs.
Trevor Plath, Director of Trading and Supply for Crimson Renewable Energy and SeQuential Biodiesel said: "We have seen exponential growth in biofuel projects and growth especially in the LCFS and OCFP markets of California and Oregon. Crimson Renewable Energy in California and our sister company Sequential Biodiesel have been extraordinarily busy forming strategic partnerships with major oil companies and trading houses that are building and expanding their biodiesel and renewable diesel foothold within the space. I cannot speak highly enough about the importance and value of our team from a collection, production, operations, and trading standpoint. Finding and retaining those key individuals is paramount to success."
In this market, energy traders are also leveraging existing gasoline and diesel trading capabilities, infrastructure, and relationships to build a presence in trading biofuel directly. Retail fuel businesses are uniquely positioned to take advantage of renewable diesel and biofuels opportunities, and as a result they have been able to attract some of the best trading talent in the space.
Regulatory requirements are meanwhile creating good arbitrage opportunities for trading houses and private equity players, not only in the US but in Canada and Europe too. By investing in assets and secure tolling agreements, they are able to produce credits - such as those associated with California’s Low Carbon Fuel Standard (LCFS) - and trade around these assets.
Biofuel producers similarly are looking to exploit strong prices for Renewable Identification Numbers (RINs) - the credits traded under the Renewable Fuel Standard (RFS) - by bringing supply online and trading them around production. RINs hit a 13-year high in June.
Scarce talent commands a premium
As with any new or rapidly growing industry, finding the right talent is vital, but difficult. For biofuels trading, the ideal hire would combine regulatory knowhow with experience in related refined products such as jet, diesel and gasoline or agricultural commodities like vegetable oil for first generation biodiesel. Feedstock originators should be able to aggregate a wide range of feedstocks to optimise blending and provide optionality and margins. More importantly they need to be able to forecast price/basis movements in an ever-changing landscape from both a supply and demand standpoint. Originators in the US will need the flexibility to work remotely away from traditional trading hubs, to be closer to their rolodex of contacts at producers.
Skill matches are not exact however, with even agricultural commodity traders often lacking significant experience in tallow, as an example. And as producers and traders seek to build biofuels teams quickly, they are often fishing from the same ponds. Fierce competition is pushing up salary expectations for would-be hires, who may also be reluctant to join untested teams, particularly if firms have not demonstrated their commitment to the energy transition by investing in physical production assets.
Excellent career advancement opportunities for the right talent may however prove a draw. Traders with just four years’ experience could find themselves leading biofuels trading desks. This contrasts with more mature markets and commoditised products like crude, where achieving a leadership position will require many more years of experience.
With the number of organisations presently looking to enter the space, coupled with limited talent available in the market capable of developing a business, we are in a talent driven market. The organisations that have been the most successful in attracting individuals to build and/or develop their portfolio are those who have already invested in assets or have a strong appetite to do so as this shows there is a clear, long-term commitment to the market.
Human Capital’s Liquid Fuels and Chemicals practice is busier than it has ever been in Green Energy mandates, including renewable fuel and feedstock trading roles, executive leadership roles to run renewable diesel assets, and analytics talent that can combine agri and fuel expertise to support commercial biofuels businesses.