All That Gas

Brazil's Rio de Janeiro is known for its annual February festival, beautiful beaches, and its fun-loving mindset.

It's a city where there's a party on 24 hours despite warnings by locals not to walk alone at nights. But at the state-owned Petrobras (short for Petróleo Brasileiro) headquarters, officials are seriously working on a blueprint to make Brazil a dominant player in the global energy game. For them, the time to act is now; they can party later – that is, once Petrobras cajoles fuel guzzlers like Japan, India and China to adopt ethanol as a petrol substitute to attain energy security (see The Black Gold's Curse by R.K. Pachauri, Page 30).

Exactly 9,441.34 km away in Brussels, policymakers at the European Commission (EC) seem worried. They realise that the EU's increasing thirst for crude oil and gas will make the community dangerously dependent on imports from unstable regions such as West Asia, Central Asia and Africa.

"Fossil fuel, particularly crude oil, is confined to a few areas... (and) supply is governed by political, economic and ecological factors. These factors conspire to force volatile, often high, fuel prices..." states an EC report. So, EC officials feel an urgent need to push member nations to adopt a common strategic agenda to develop new energy sources (hydrogen in fuel cells) in the next 15 years.

In Washington and Tokyo, plans have been concretised and huge investments committed to make the transition to a new era – what's being called the hydrogen economy. India and China are buying stakes in traditional oil- and gasfields abroad, while continuing intense research on possible new fuels. Others like Thailand, Korea, Australia and Russia are looking at alternatives to satisfy their growing appetites. Success implies that they either reduce their dependence on existing energy czars – like Saudi Arabia, Iran, Kuwait and Iraq – or realise an opportunity to upstage them.

There's a visible shift in the manner in which nations are planning their energy moves. The last century was dominated by an irresistible quest to control sources of crude oil and gas – and though this continues today, politics and diplomacy are increasingly being governed by the forthcoming battle for alternatives. Each country is striving hard to win this war; at least it's hoping it won't be on the losing side where it has to depend on powerful and rapacious global suppliers.

Before we delve into the micro aspects of the imminent tussle for energy supremacy, let's look at the reasons why the focus is moving from fossil fuels to alternatives. Colin Campbell, a retired British geologist and a leading pessimist on crude, feels the "overall peak rate" for oil production arrives next year. Which means that from 2007 onwards, supply will get lower and lower. The optimistic estimates put the peak year at between 2013 and 2037. Of course, there are the diehards who believe there'll never be any oil shortages, but no one really takes them seriously anymore.

Whatever maybe the P-date, for consumers the scenario can only get worse. Romano Prodi, former EC president, has predicted that "Europe's oil import dependency is set to grow from around 50 per cent today to 70 per cent or more in 2025." The same will be true for Asia (especially India, China and Japan) and the US, where overseas supplies will form the bulk of their annual requirements. Don't forget that the majority of oil will continue to be produced in West Asia, whose annual production is set to increase two-and-a-half times by 2030.

There's another issue involved. Most countries – 128, excluding the US – are under pressure to reduce their greenhouse gas emissions as per the Kyoto protocol. There's only one way they can do that – by shifting from fossil fuels to alternatives. Says a recent paper by Lindsay Jolly, senior economist at the London-based International Sugar Organisation (ISO), "...governments are proposing and implementing legislation more aggressively, targeting bio-fuels and renewable transport fuels in general, chiefly because the transport sector generates significant greenhouse gas emissions...."

In this scenario, Brazil is ideally placed to push ethanol, made from sugarcane, which can be mixed with petrol in varying proportions. Being the largest and the lowest-cost producer, it could emerge as a global supplier. In the 2004-05 season (May-April), ethanol output is expected to be 16 billion litres, of which 2 billion will be exported. The price at which Brazil sells its ethanol can be competitive at global prices of $22 a barrel. With crude selling much over that mark – it's over $50 a barrel now – ethanol has an edge. Experts think the average crude prices will be $30-35 on a long-term basis.

ISO officials told Outlook that "Brazil is trying to foment ethanol growth. It supplied to the US (the second-largest producer) last year, and it has signed agreements with Japan. Negotiations are on with China and the EU (which plans to buy one billion litres a year from South American sources)." Adds a commodities trader at Coimex, Brazil's largest private ethanol exporter, "We can double the acreage under cane to 10 million hectares, commit the crop for ethanol to increase supplies."

The tide will turn in Brazil's favour once Petrobras steps in. The conglomerate is, as an Indian embassy official in Sao Paulo puts it, "ONGC, IOC, OIL, HPCL and BPCL all rolled into one". Having helped the country become self-sufficient in oil and gas, it's looking seriously at ethanol. Petrobras top brass revealed says the company plans to spend $330 million to build four new pipelines to transport ethanol to domestic ports. It may tie up with China to build ethanol-handling logistics there to handle the latter's imports. By 2008, Petrobras hopes to export 8-9 billion litres annually, compared to a target of 2 billion litres this year. Oil giants like Shell, BP and Texaco are talking to Petrobras to join hands in the ethanol business.

To meet domestic demand, the US is upscaling ethanol production too; only, it has to use new raw materials (like cellulosic materials) instead of cane since the latter's supplies are limited. China has set up the world's largest distillery based on corn. But it's trying tapioca as a raw material, as Brazil is with bagasse (residual after cane crushing). Thailand and India nurture ethanol ambitions too, but more for domestic use. EU, which will have to stop sugar subsidies due to wto compulsions, may protect its farmers' interests by diverting cane for ethanol. But most consumers may turn net importers – the US may buy 8-10 billion litres annually in the next few years, Japan 14 billion litres by 2011, and EU 8.5 billion litres by 2006.

Since ethanol is only a petrol substitute, several nations are working to develop bio-diesel from different sources like soyabean, mustard and rapeseed. Petrobras' thinking is that rapeseed will be most suitable for Brazil since the crop can grow easily in the northeast tip of the country, where most of the populace is poor and has little employment avenues. This will allow social upliftment and remove the yawning gap between the rich and the poor. India is trying a local plant, jatropha curcas, which grows in abundance here. The US and EU have optimistic bio-diesel plans too.

At the same time, developed nations are also hedging their bets on hydrogen as the next big viable, clean alternative. The US wants a full-fledged hydrogen economy by 2015, while Japan plans to have 5 million cars running on the fuel by 2020.Japan's 2005 budget for it is 260 million euros, and the US may commit the equivalent of 190 million euros in 2005 (excluding individual state fundings). In comparison, EU is just waking up and plans to invest nearly 3 billion euros over the next few years to fuel its hydrogen aspirations. Now China has entered the fray, and initial research has started in India. Canada too may become a major player.

However, the race for hydrogen itself is prompted by the desire of each nation and community to set the global standard for this technology. For, whosoever manages it will logically become the near-monopolist supplier. Compare it to the telecom sector, where gsm and cdma technologies have fought hard to leave their imprints on the world arena. "The battle is to be the first to set technology standards, and that's the reason for the conflict between the US and EU," says an EC official in Brussels. (It's a different matter that both the US and EU have joined hands in an international agreement to jointly develop and promote hydrogen and fuel cells.)

So, what does the future hold for these fuels? Experts Outlook spoke to seem to believe that all of them will coexist in varying ratios in different countries. Traditional fossil fuels will remain important until technology forces down the prices of alternatives. For example, hydrogen costs have to come down by a factor of 10 before it can be a commercial success. Similarly, ethanol costs in the US and EU are quite high; they can only remain viable at respective crude prices of $30 and $40 a barrel now.

But the use of ethanol, bio-diesel and hydrogen will increase rapidly. Each nation will have to find its own mix, based on political, diplomatic and economic factors. Japan and EU may wish to increase their dependence on hydrogen. The US may rely on a mix of ethanol and hydrogen. So may China and India. And bio-diesel will coexist in all these countries. Whatever might be the respective energy blends, the traditional oil producers are looking to lose their stranglehold.