Will the Crash in the Price of Oil Affect the Move to Alternative Fuels in Aviation?
The price of oil has fallen dramatically since the summer of 2014, with a slight recovery in early 2015. While the latest price drop is nothing out of the ordinary from a historical perspective, the cause and effect might impact the move to alternative aviation fuels if prices persist at a low point for a long period of time.
A Quick Historical Perspective
While we all rejoice at paying 30 to 50 percent less at the pump as compared to a year ago, we know that this will not last. (Fill ’er up while you can at these reduced prices.) The root cause of this rapid price drop is a large increase of drilling in the United States and Canada — this has tipped the oil market into having too much supply for not enough demand. While demand is continually increasing due to global population growth, the combination of economic slowdowns in many countries with increased fuel efficiencies in many vehicles, maritime vessels, power-generating plants (and not to mention more energy-efficient buildings and electronics that affect natural gas usage, and heating oil in parts of the world) have lessened the demand for oil and gas. At times, the capitalistic markets work the way they should, causing prices to collapse when you have too much of a good thing (as shown in Figure 1).
As of early 2015, the International Energy Agency (IEA) Oil Market Report forecast average demand for the year of more than 93 million barrels of oil and liquid fuels per day worldwide, which comes to more than 34 billion barrels per year (roughly translating to 1.428 trillion gallons, although not all oil is used in fuel production due to other uses). Globally, the aviation industry consumes 85 to 95 billion gallons of fuel each year (Y2010 data), including nearly 14+ billion gallons for U.S. civil aviation, so the industry should be performing long-term planning in regards to its second-largest expense (after labor). Aviation accounts for 15 percent or less of the global oil market customer base.
With the drop in price from ~$115/barrel in June 2014 to roughly $48 in late February 2015 (at the time this article was written), aviation is certainly enjoying the unexpected gift from the oil gods. Most of the aviation industry is experiencing booming profit margins due to the recent market consolidations (and shedding of costs). Airlines are increasing their ancillary fees (baggage, IFE, food/drinks and perhaps trying to find ways to charge us to use bathrooms if Ryanair ever gets its way), squeezing in additional seats into aircraft, etc., and now, the icing on the cake, the reduction fuel, their second-largest expense. This is truly a great time to be an executive at an airline or an investor in this market. (How often do you hear such a statement?) It is a great time to invest in the future while everyone is flush with profits. The question is, does the industry have the fortitude to do so?
In the past, the aviation industry in general has been notorious for poor business planning, by over-ordering aircraft into the future, and either cancelling orders later, or taking aircraft which were not needed. Many operators did not hedge fuel costs when prices were climbing, and then hedged too much when prices were starting to fall. This not only depressed the bottom lines of these businesses, but the entire industry suffered accordingly, from aftermarket service providers to OEMs. This can also be said for the airlines and operators that are resisting the move to FAA’s NextGen and its dependence upon updated avionics and new procedures, since it has been claimed that the business case for many operators is not positive to support these pricey avionic upgrades. Part of this is posturing to have the government subsidize equipment upgrades but part of it is short-sightedness.
This argument also boils over to the recent advances in alternative or biofuels use in aircraft.
Are We Still Pursuing the Use of Alternative Fuels in Aviation?
The alternative fuels movement for aviation use had been driven by two major factors initially: the price of fuel and concerns over emissions. (The military is also concerned about supply issues.) With the price of oil dropping significantly, and expected to stay relatively low for the next year or more due to an oversupply situation caused by new drilling, some of the pressure is off in developing alternative fuel options for aircraft. The question remains, for how long?
The research and development of various alternatives has been going on for years, and some of these are promising from a reduced emissions standpoint. Many airlines, operators and OEMs have successfully demonstrated the safe use of a blend of Jet-A and various alternative fuels, such as synthetic fuels, vegetable or nut oils, algae, bacteria or oil derived from weeds that grow in salty, marshy wastelands.
We are also seeing new research developments that focus on various aspects of the process to grow the raw material (plants or algae), process it and deliver it where it is needed.
Researchers at the University of California-Riverside have invented a novel pretreatment technology that could cut the cost of biofuels production by about 30 percent or more by dramatically reducing the amount of enzymes needed to breakdown the raw materials that form biofuels. While this is still in the research phase, this is a breakthrough that can be applied soon enough to existing biofuel production efforts if it proves economically feasible, and make biofuels much closer to petroleum in price.
The challenge with developing alternative fuels is two-fold. One challenge is to develop a viable fuel to meets the operational and safety guidelines of aircraft. The second is to develop an economically-viable means to producing such a fuel source. The need to meet the first part of this challenge should not be underestimated, since aviation fueling needs must meet specific conditions, including not freezing at altitude, not becoming too viscous to flow correctly, and not shortening the operating range of an aircraft owing to low bulk energy density. Such fuels must also be compatible with legacy aircraft, many of which are decades old.
The second part of the challenge is a thorny one, due to the controversy experienced by the ethanol industry when it tried using feedstock from corn and other consumable crops, thereby negating some of the positive overall effect on the environment. Earlier efforts driven by the military centered around developing a means to produce synthetic fuel (from coal or biomass usually) to alleviate potential supply issues for warfighters, and less so on keeping the air clean.
Projects Abound Around the World
One of the pleasant surprises from researching information for this article was the discovery of just how many announced projects are moving forward at this time. These are happening all around world. Some touch on the developing supply chains of fuel stock and others address commercial use of biofuels by airlines and operators. Here is an abbreviated list of notable announcements:
Southwest Airlines recently signed a contract with Red Rock Biofuels to procure three million gallons per year of low carbon renewable jet fuel, developed from forest residues that will help reduce the risk of destructive wildfires in the Western U.S. This biofuel will be used at Southwest’s Bay Area operations with first delivery expected in 2016.
Airbus has teamed with Emerging Fuels Technology (EFT) for U.S. sustainable aviation fuels production. EFT has developed an advanced system that can convert synthetic gas from virtually any carbonaceous feedstock into transportation fuels such as renewable diesel and sustainable jet fuel (so it claims).
Blue Sun Energy, ARA and Chevron Lummus Global achieved a key development milestone with their 100 barrel/day demonstration-scale facility in St. Joseph, MO. This will provide commercial scale production of 100 percent drop-in diesel and jet fuel from industrial and waste oils at competitive prices.
Vertimass received a grant of up to $2 million from the U.S. Department of Energy to commercialize “green” catalyst technology that converts ethanol into gasoline, diesel and jet fuel blend stocks, while retaining compatibility with the current transportation fuel infrastructure.
Recently the Department of Defense awarded $210 million to Emerald Biofuels, Fulcrum BioEnergy and Red Rock Bio towards the construction of biorefineries that produce cost-competitive, drop-in military biofuels. The companies will build biorefineries producing 100 million gallons of military-spec jet fuel and marine diesel which will be cost competitive with petroleum-based fuels, with availability expected as soon as 2016.
Three airlines (SAS, Lufthansa Group and KLM) recently signed an agreement with Statoil Aviation for a regular supply of biofuel at Oslo Airport. Statoil Aviation is planning on supplying 2.5 million liters of bio-fuel to the refueling facility at Oslo Airport. With a 50 percent bio-fuel mix, this will fuel around 3,000 flights between Oslo and Bergen and make OSL the first major airport to offer a regular supply of bio-fuel.
Also, Norwegian Air and SAS Airlines both flew their first flights on biofuels with a 48-percent blend with 52-percent fossil aviation fuel. Their stated intent is to promote demand so fuel will be produced from Norwegian forests.
In the United Arab Emirates (UAE) there is a project to use seawater systems in desert or salinized land for the production of food, energy and other bioproducts. This will use nutrient-rich wastewater from raising fish and shrimp to fertilize oil-rich salt tolerant plants that can be harvested for renewable oil production.
Another in the UAE, UOP declared that its green fuels process technology was selected by Petrixo Oil & Gas to produce renewable jet fuel and diesel at a new refinery. Petrixo will use UOP renewable jet fuel (also known as Honeywell green jet fuel/diesel) process technology to convert approximately 500,000 metric tons per year of renewable feedstocks into renewable jet fuel/diesel.
Boeing and Commercial Aircraft Corp. of China recently opened a demonstration facility that will convert waste cooking oil (referred to as “gutter oil” in China) into sustainable aviation biofuel. It is estimated that 500 million gallons of biofuel could be made annually in China from used cooking oil.
Japan’s Initiatives for Next Generation Aviation Fuels recently launched with the aim to produce and supply aviation biofuels. Partners in the initiative include the University of Tokyo, Boeing Co., Japan Airlines Co., Nippon Cargo Airlines Co., All Nippon Airways Co., Narita International Airport Corp., and Japan Petroleum Exploration Co., along with government agencies and observers.
In 2014, Boeing and Embraer opened a joint sustainable aviation biofuel research center in São José dos Campos, Brazil, and will coordinate and co-fund research with Brazilian universities. The research will focus on existing gaps in creating a sustainable aviation biofuel industry in Brazil.
Boeing and South African Airlines (SAA) publicized that South African farmers will soon harvest their first crop of energy-rich tobacco plants, an important step towards using the plants to make sustainable aviation biofuel. Boeing and SAA, along with partners SkyNRG and Sunchem SA, also officially launched Project Solaris, their collaborative effort to develop an aviation biofuel supply chain with a nicotine-free tobacco plant named Solaris. Oil-derived Solaris seeds will be converted into bio-jet fuel in 2015, with a test flight performed by SAA as soon as possible.
All is Well in the Land of Alternative Fuels
Despite the drop in pricing for legacy fuels, it seems as if alternative fuels are moving forward for aviation. This is an encouraging sign that aviation is participating in long-term initiatives that address two of its biggest issues: the long-term view on fuel pricing and aircraft emissions.
Once the industry settles on a smaller number of economically-viable solutions, or perhaps several regionally-viable types of solutions, we can expect prices for biofuels to drop due to economies of scale. Support from the world’s governments and industry groups is still needed due to the certification and liability costs, not to mention in providing emerging companies with enough funding to eventually stand on their own.
We can conclude that aviation is doing its part to not only ‘green’ itself, but also in weaning itself partially off the large price swings driven by the oil industry.
John Pawlicki is CEO and principal of OPM Research. He also works with Information Tool Designers (ITD), where he consults to the DOT’s Volpe Center, handling various technology and cyber security projects for the FAA and DHS. He managed and deployed various products over the years, including the launch of CertiPath (with world’s first commercial PKI bridge). John has also been part of industry efforts at the ATA/A4A, AIA and other industry groups, and was involved in the effort to define and allow the use of electronic FAA 8130-3 forms, as well as in defining digital identities with PKI. His recent publication, ‘Aerospace Marketplaces Report,’ which analyzed third-party sites that support the trading of aircraft parts, is available on OPMResearch.com as a PDF download, or a printed book version is available on Amazon.com.