Sub-group 6: Indirect Effects of Other Fuels

1. Sub-group 6:Indirect Effects of Other Fuels Presented to the LCFS Expert Workgroup June 17, 2010 Sacramento, CA

2. Subgroup 6 Membership • John Courtis, ARB Staff • Manisha Singh, ARB Staff • Blake Simmons, Sandia (Subgroup Chair) • Bob Larson, EPA (Subgroup Co-chair) • Seth Meyer, University of Missouri • Wally Tyner, Purdue University • Phil Heirigs, Chevron Global Downstream LLC • JesperKløverpris, Novozymes A/S • Paul Wuebben, South Coast Air Quality Management District

3. Presentation Outline • Review of workplan and status update • Focus on indirect effects of oil and gas • Presentation by Bjorn from ERA on their approach • Subgroup presentation • Focus on indirect effects of oil and gas • Conversion technology effects • Supply change effects • Displacement effects • Discussion of table of indirect effects • Next Steps/Conclusion • Q&A

4. Review of Work Plan and Approach

5. Task 1: Establish Criteria for Defining “Indirect Effects of Other Fuels” Effects influencing GHG emissions and the carbon intensity (CI) of fuels: • Direct effects: All significant effects within the primary production chain or life cycle (cradle to grave) • Co-product effects: Significant effects caused by co-products from the production chain (handled by the system expansion – or displacement – methodology) • Other market-mediated effects: Significant effects caused by changes in economic markets, e.g. ILUC or changes affecting marginal electricity or fossil fuel supply. This also includes ‘carbon leakage’ as a function of increased production/consumption. It is recommended to define indirect effects as ‘market-mediated effects other than co-product effects’ (3) It is also recommended to consider carefully if direct and co-product effects (2 and 3) have been overlooked for some fuels

6. Is Everything Outside the Red Line an Indirect Effects under the LCFS? Battery Materials Vehicle Materials Reservoir Depletion Net C Time Lag Albedo Effects Oil Spills Upstream Energy Production + Downstream Energy Production Vehicle Energy Use + Co-products Invasive Species Water Use Black Carbon etc. Deforestation

7. Task 2: Develop a List of Indirect Effects to be Assessed • We have developed an initial list of potential indirect effects as a function of fuel type • Excel spreadsheet – working draft for comment • Need to further refine for division between direct and indirect effects • Need input from ARB on scope for the sub-group on the list • Petition input from the EWG on input thus far as well • Examples: • Gasoline/diesel • Coal • BEVs + Hybrids • Natural gas • Electricity • Hydrogen

8. Task 2: Develop a List of Indirect Effects to be Assessed • We have developed an initial list of potential indirect effects as a function of fuel type • Excel spreadsheet – working draft for comment • Need to further refine for division between direct and indirect effects • Need input from ARB on scope for the sub-group on the list • Petition input from the EWG on input thus far as well • Examples: • Gasoline/diesel • Coal • BEVs + Hybrids • Natural gas • Electricity • Hydrogen

14. Task 3: Indentify Significant Gaps in Current Indirect Effect Analyses • Biofuels – recommended to use update from Prof. Tyner on corn ethanol production scenarios into the LCFS • There is still a lack of robust data sets for almost all elements of monitoring and determining indirect effects • The modeling tools employed to date, for the most part, have not been validated • We are working our way through each fuel conversion technology and developing a prioritized list of indirect effects for consideration under the LCFS • Gaps will not be hard to define – finding solutions will be

15. Subgroup 6 Milestones: Update

16. Presentation by Björn PieprzykEnergy Research Architecture

17. Direct and indirect effects of fossil fuelsEra Energy Research ArchitectureBjörn Pieprzyk www.energy-research-architecture.com 17

18. A. Basis for the analysis of direct and indirect effects of fossil fuels ERA – study: The impact of fossil fuels (November 2009)Analysis of conventional and unconventional fuels: Greenhouse gas emissions Environmental consequences Socio-economic effects Recommended actions: Alternatives to conventional and unconventional oil have to be created: biofuels and efficiency measures Current research - short study: Substitution of biofuels for fossil fuels 18

19. B. Definition of system boundaries of direct and indirect effects of fossil fuels Indirects effects Direct effects Life Cycle Analysis Lower OPEC production ? Lower tar sand production? Fossil fuels Biofuels Raw material production Resource extraction Agriculture Lower future CTL production? Transport Lower deep water oil production ? Processing Lower EOR-production ? Utilisation Lower future GTL production? 19

20. C. Results of the analysis: 1. Biofuels replace fossil fuels Increase of biofuel produktion Decrease in fossil fuel production in the refineries direct effects Decrease in oil import indirect effects Decrease of global oil price Decrease in global oil demand - due to low price elasticity of oil demand Decrease in oildemandpreventsinvestmentsdueto growingcomericalinterests of NOCs Decrease in oildemandpreventsinvestmentsdueto growingcomericalinterests of NOCs Strongimportance of OPEC for global supplydecisions in the short term Internalization of externalcosts: Strict global climateprotectionobjectives Lower NOC investments in very expensive oil technologies Scenario 1: Lower production of tar sands, extra heavy oil, CTL, oil shale Nationalinterests of OPEC members Decrease in oildemandpreventsinvestments Lower IOC investements in very expensive oil technologies Scenario 2: Lower production of deep sea oil, Artic oil , EOR, GTL Decrease in OPEC production Increase in OPEC production Lack of internalization of externalcosts: Weak global climateprotectionobjectives short term medium and long term 20

21. 2. Biofuels don´t replace the most expensive fossil fuel in the short term Increase of biofuel produktion Decrease in fossil fuel production in the refineries direct effects Decrease in oil import indirect effects Decrease of global oil price Decrease in global oil demand - due to low price elasticity of oil demand Decrease in oildemandpreventsinvestmentsdueto growingcomericalinterests of NOCs Decrease in oildemandpreventsinvestmentsdueto growingcomericalinterests of NOCs Strongimportance of OPEC for global supplydecisions in the short term Internalization of externalcosts: Strict global climateprotectionobjectives Lower NOC investments in very expensive oil technologies Scenario 1: Lower production of tar sands, extra heavy oil, CTL, oil shale Nationalinterests of OPEC members Decrease in oildemandpreventsinvestments Lower IOC investements in very expensive oil technologies Scenario 2: Lower production of deep sea oil, Artic oil , EOR, GTL Decrease in OPEC production Increase in OPEC production Lack of internalization of externalcosts: Weak global climateprotectionobjectives short term medium and long term 21

22. 2. Biofuels don´t replace the most expensive fossil fuel in the short term • Instead a higher biofuel supply would result in OPEC production cuts • The most expensive oil (such as tar sands or deep water oil) will continually be produced as long as the retail price is higher than the operating costs • National oil companies (NOCs) secure mainly risky and marginal oil reserves • Oil supply increasingly depends on credit agreements, such as the delivery of 0,5 million barrel/day from Venezuela to China (Equity Oil). • National energy supply objectives – example: Jordan and Morocco are highly interested in exploiting their oil shale reserves to become more independent of oil imports

23. 3. Biofuels replace the most expensive fossil fuel in the medium and long term Increase of biofuel produktion Decrease in fossil fuel production in the refineries direct effects Decrease in oil import indirect effects Decrease of global oil price Decrease in global oil demand - due to low price elasticity of oil demand Decrease in oildemandpreventsinvestmentsdueto growingcomericalinterests of NOCs Decrease in oildemandpreventsinvestmentsdueto growingcomericalinterests of NOCs Strongimportance of OPEC for global supplydecisions in the short term Internalization of externalcosts: Strict global climateprotectionobjectives Lower NOC investments in very expensive oil technologies Scenario 1: Lower production of tar sands, extra heavy oil, CTL, oil shale Nationalinterests of OPEC members Decrease in oildemandpreventsinvestments Lower IOC investements in very expensive oil technologies Scenario 2: Lower production of deep sea oil, Artic oil , EOR, GTL Decrease in OPEC production Increase in OPEC production Lack of internalization of externalcosts: Weak global climateprotectionobjectives short term medium and long term 23

24. 3. Biofuels replace the most expensive fossil fuel in the medium and long term • OPEC cutbacks are only temporarily possible: • Bilateral contracts between OPEC-countries and NOCs will increase • OPEC countries depend on income from oil export • OPEC have to compensate for their own national increase in oil consumption. • Biofuel objectives will prevent future investments in very expensive oil technologies of international oil companies (IOCs): • Profit chances on very expensive and risky marginal oil sources decrease due to biofuel objectives. • In the future biofuel objectives will also prevent investments in very expensive oil technologies of national oil companies (NOCs): • the yield orientation of demand-NOCs increases • When biofuels can create an alternative to marginal oil, NOCs will participate in biofuel markets

25. 4. But the most expensive oil is not the dirtiest oil 25 Source: ERA 2009

26. 5. The most expensive oil is only the dirtiest oil when costs are completely internalized Increase of biofuel produktion Decrease in fossil fuel production in the refineries direct effects Decrease in oil import indirect effects Decrease of global oil price Decrease in global oil demand - due to low price elasticity of oil demand Decrease in oildemandpreventsinvestmentsdueto growingcomericalinterests of NOCs Decrease in oildemandpreventsinvestmentsdueto growingcomericalinterests of NOCs Strongimportance of OPEC for global supplydecisions in the short term Internalization of externalcosts: Strict global climateprotectionobjectives Lower NOC investments in very expensive oil technologies Scenario 1: Lower production of tar sands, extra heavy oil, CTL, oil shale Nationalinterests of OPEC members Decrease in oildemandpreventsinvestments Lower IOC investements in very expensive oil technologies Scenario 2: Lower production of deep sea oil, Artic oil , EOR, GTL Decrease in OPEC production Increase in OPEC production Lack of internalization of externalcosts: Weak global climateprotectionobjectives short term medium and long term 26

27. 6. Greenhouse gas emissions does not suffice for evaluating the indirect effects of fossil fuels What is the dirtiest oil? Photo: Suncur Photo: U.S. Coast Guard • Improvement of current LCA methodology is necessary to evaluate environmental effects of catastrophes like in the Mexican gulf and in the Niger Delta. • Further indicators such as aquatic toxicity are needed. 27

28. E. Conclusion • The replacement of marginal fossil fuels with biofuels is an indirect effect which depends on many factors • The replacement of the fossil fuel with the highest greenhouse gas emissions and environmental impact with biofuels depends on the internalization of costs and therefore on political decisions. • The biggest environmental benefits that biofuels can provide through indirect effects, will only be achieved in cooperation with international climate and environment protection objectives. • The opposite is also true: international climate and environmental policy can only be achieved when alternatives to conventional and unconventional oil resources are created. 28

29. Thank you for your attention! www.energy-research-architecture.com 29

30. Sub-group report out

31. Indirect Effects of Oil and Gas

32. Summary of Lifecycle Associates Report Developed for New Fuels Alliance LCA.6004.3P.2009 February 2009

40. Impact of Persian Gulf Conflict

42. Considerations regarding displacement of gasoline (and diesel)

43. ILUC and displacement of gasoline • Indirect land use change: A market-mediated effect taking place outside the biofuel production chain (life cycle). The change in (global) land use determines the ILUC factor. • Displacement of gasoline: The market-mediated change in demand is likely to cause a change in crude oil refining. Should the change in refining or the new average impact (CI) of gasoline production be considered in the LCFS?

44. Crude oil refining - distillation Petroleum gas Naphta or ligroin Gasoline Kerosene Fractional distillation ”Distillation co-products” Crude oil Gas oil or diesel distillate Lubricating oil Heavy gas or fuel oil Residuals • The ratio between distillation is ”fixed” and depending on the specific crude oil • There are many different types of crude oil with very different characteristics • The ratio between distillation co-products is unlikely to fit the market demand for petrochemical products • Chemical conversion of some co-products into others are therefore required (next slide)

45. Crude oil refining - chemical conversion • Examples • CokingResiduals → heavy oil, gasoline and naphtha • Fluid catalytic crackingHeavy gas oil → gasoline and diesel • HydrocrackingHeavy gas oil → gasoline and kerosene The refining steps mentioned above can all be used to increase the output of gasoline from a crude oil refinery

46. Implications for the LCFS • If gasoline constitutes 40% of the distillation output but 50% of the aggregate demand for petrochemical products, chemical conversion is required to adjust to the market (numbers chosen for illustration only). • Under those conditions, gasoline displacement will reduce the need for chemical conversion. • The change will thereby be less chemical conversion - • …and the average carbon intensity (CI) for gasoline will therefore go down.

47. Estimating CI Changes from Reduced Gasoline and Diesel Demand • Given the complexity of modern refineries, such an analysis must be conducted through refinery modeling. • The RFS 2 rulemaking included a detailed analysis of the U.S. refining sector in response to an increase in biofuels and a decrease in refined product (i.e., gasoline and diesel). • Initial review of those results show only a small decrease in energy use per bbl of crude as gasoline and diesel demand decreases (e.g., a decrease from 554 to 552 MBTU/bbl average in the U.S. under ‘Control Case A’ – 34 BGY ethanol).

48. Additional Potential Responses toReduced Gasoline and Diesel Demand • Lower refinery utilization rates – this has been observed over the last several years (EIA data indicate 89% in 2007 and 83% in 2009). • Decreased imports/exports of finished product – EPA’s RFS 2 analysis assumed 2/3 of the gasoline reduction would be from reduced imports. • Refining capacity reduced.

49. Question for discussion • Should the new (lower) average CI of gasoline be used as the number to which other alternative transportation fuels should be compared? OR - • Should the change in refining emissions (i.e. the marginal impact) be ascribed to the displacement of gasoline?

50. Conclusions/Next Steps • We have taken a two-tiered approach to defining prioritized targets of indirect effects of other fuels as a function of type • Currently working on defining gaps in existing data sets • There are numerous potential indirect effects that will have significant difficulties in developing robust values and attribution • Dynamic response to supply and production changes will be an essential element of this effort • Displacement of gasoline and crude sources should be evaluated as a function of type