Energy’s Role in Transforming the Forest Industry Argentina:

1Don Roberts 613-564-0827 [email protected] CIBC World Markets Inc.

Energy’s Role in Transforming the Forest Industry

Argentina: Forest Sector Investment and Financing Forum

& Bioenergy SeminarPalacio San Miguel – Buenos Aires

November 16, 2010

Don RobertsVice Chairman, CIBC World Markets [email protected]


OutlineOutline

1. The Global Market for Bioenergy

2. A Latin American Perspective

3. What are the Emerging Bio-technologies?

4. Fast Pyrolysis: A Case Study in Commercializing An Emerging Bio-technology


Bio-Energy in the Overall Energy MixBio-Energy in the Overall Energy Mix

.

Nuclear 6%

Renewables 13%

Coal 25%

Gas 21%

Oil 35%

77%

9%8% 4%

87%

15%

Bioenergy

Hydro

Other RenewablesMunicipal and Industrial Waste

Agricultural Crops and By-Products

Woody Biomass

Share of Bioenergy in the World Primary Energy Mix

Source: based on IEA, 2006; and IPCC, 2007.

Today’s biomass supplies ~50 ExaJoules (EJ) globally, which is ~10% of global annual primary energy consumption.


Bio-Energy MarketsBio-Energy Markets

Recovered Wood 6%

Agriculture 10%

MSW and Landfill Gas 3%

Charcoal 7%

Forest Residues 1%

Black Liquor 1%

Fuelwood 67%

Wood Industry Residues 5%

Energy Crops 3%

Agricultural By-products

4%

Animal By-products

3%

Share of the Biomass Sources in the Primary Bioenergy Mix

Source: based on data from IPCC, 2007.

Fuelwood is the main source of bio-energy, and is used for cooking and heating. It is typically >20% of the total primary energy mix in developing countries. In industrialized countries, modern bio-energy is typically <5% of the mix, and is mostly for heat-only and heat & power applications.


Energy OutlookEnergy Outlook Globally, even under a “business-as-usual”

scenario.

— The use of biomass in heat industrial energy applications is expected to double by 2050

— Electricity production from biomass is expected to grow 5-6%/year by 2030.

— Transport fuels are currently the fastest growing bioenergy sector, and biofuel production is expected to increase by 10 to 20 fold by 2030. However, most of the feedstock will come from agricultural crops or residues.


Five key variables shape the economics of investing in bio-energy:

1. The price of fossil fuels (the main substitute)2.The price of carbon3. The conversion technology4. The cost of the feedstock (50%-80% of the variable cost)5. Public Policy

Given the trends in these key variables, the long-term outlook for bio-energy is positive. However, there is also considerable uncertainty.

What Drives The Economics of Bio-Energy?What Drives The Economics of Bio-Energy?


Global BioEnergy Investments (2005-2009)Global BioEnergy Investments (2005-2009)

U.S. and Brazil have dominated the global investment in biofuels (liquid), almost all of which is either corn or sugar-based ethanol

China and Europe have dominated the investment in biomass-based (solid and gas) energy. This is our focus today since it is more relevant for the forest industry. Latin America ~7%.

Biofuels Biofuels Biomass Biomass

Canada2%

EU Europe21%

Central & South

America28%

United States35% China

4%

Rest of Asia7%

Rest of World

3%

Canada2%

EU Europe44%

Central & South

America7%

United States10%

China23%

Rest of Asia9%

Rest of World

5%


Global Bio-Energy InvestmentGlobal Bio-Energy Investment((Project Finance, Public Markets, VC/PE capital)Project Finance, Public Markets, VC/PE capital)

The economic crisis had a major impact on the level of investment in the global bioenergy sector. After exceeding $12 billion in 2008, it fell by ~25% in 2009. It is now rebounding.

Biofuels have historically accounted for the bulk of the global investment in bioenergy, but biomass-based energy has been more important since 2009.

Source: New Energy Finance, CIBC World Markets Inc.

Global BioEnergy Investment (Q1/ 05 - Q1/ 10)

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Q1 05

Q2 05

Q3 05

Q4 05

Q1 06

Q2 06

Q3 06

Q4 06

Q1 07

Q2 07

Q3 07

Q4 07

Q1 08

Q2 08

Q3 08

Q4 08

Q1 09

Q2 09

Q3 09

Q4 09

Q1 10

Tota

l Inv

estm

ent

(US$

mill

ions

)

Biofuels Biomass & Waste


• Most bio-energy investments would not be undertaken without government support.

• In 2009, the whole renewable energy sector received an annual subsidy of ~US$50 billion. However, this is less than 1/10th the ~US$550 billion received by the global fossil fuel industry.

• The EU, U.S. and China are all providing strong support to their domestic bio-energy sectors.

Bioenergy PolicyBioenergy Policy


• Even if Latin American countries were not pursuing similar policies, they would be affected by these international measures. • eg., EU Renewable Energy Target for 2020:

• If target is binding, estimated that EU will have to import ~200 m3 of biomass in 2020 (greater than the annual harvest in Canada).

• Just in the UK, there are 28 biomass projects at various stages of planning & development, with feedstock requirements corresponding to ~ 10% of current European wood demand, from energy, sawn timber, pulp, etc.

• Given the inflexible supply situation, this could put significant upward pressure on biomass pricing.

Bioenergy PolicyBioenergy Policy


Global Trade in Bio-Energy is Growing RapidlyGlobal Trade in Bio-Energy is Growing Rapidly

Main International Biomass for Energy Trade Routes

Source: Junginger and Faaij, 2008. . Intra-European trade is not displayed for clarity.

Biggest growth in the future trade flows? Likely pellets from L. America, Russia, Africa and Australia; and palm oil from Africa.But lots of potential for local consumption.


Source: New Energy Finance, CIBC World Markets Inc.

Levelised Cost of Energy Q4 2009 Levelised Cost of Energy Q4 2009 ($/MWh, by Type of Energy)($/MWh, by Type of Energy)

As of now, Bioenergy is not the lowest cost source of renewable electricity.….and we think bioenergy will become relatively more expensive over time due to differences in variable costs.


Depending on the local conditions, it can make sense to produce electricity from biomass.

However, do not just limit yourself to producing “commodity electrons”.

Exploit biomass’ unique features:

• Dispatchability (peak pricing, complement intermitant sources like solar and wind)

• Optionality (transport fuels, green chemicals)

What to Produce?What to Produce?


.

Situation in Latin America?Situation in Latin America?


0.1

0.4

0.005

0.3

0.01

0.1

0.2

0.1

0.03

0.8

0.1 0.1

0.2 0.2

0.3

0.2

0.5

0.7

Q1 05

Q2 05

Q3 05

Q4 05

Q1 06

Q2 06

Q3 06

Q4 06

Q1 07

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Q3 07

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Q1 08

Q2 08

Q3 08

Q4 08

Q1 09

Q2 09

Q3 09

Q4 09

Q1 10

Q2 10

Four quarter running average

New build asset finance of biomass projects in LATAMNew build asset finance of biomass projects in LATAMQ1 2005 – Q2 2010 ($bn)Q1 2005 – Q2 2010 ($bn)

Source: Bloomberg New Energy Finance Note: Total values include estimates for undisclosed deals

Although there has been considerable volatility in investments due to the global recession, the bulk of the investment since 2008 are for plants that registered to participate in Brazil’s 2008 power auction.


New build asset finance of biomass projects in LATAMNew build asset finance of biomass projects in LATAMQ1 2005 – Q2 2010 ($bn)Q1 2005 – Q2 2010 ($bn)

Source: Bloomberg New Energy Finance

Note: Total values include estimates for undisclosed deals

Brazil69%

Chile13%

Uruguay8%

Argentina3%

Mexico2%

Colombia2%

Peru2% Belize

1%

Total AF new build investment in LATAM = $4.1bn

Argentina has captured only 3%.


Biomass availability per country by feedstock, Biomass availability per country by feedstock, 2008: m tonnes2008: m tonnes

Source: FAO, Cenbio, GTZ, Bloomberg New Energy Finance. Note: Only considers existing residues; does not consider native forests or degraded areas.

384.2

14.7

16.6

6.0

2.8

Brazil

Argentina

Chile

Colombia

Peru

Sugarcane Agricultural residues Forestry and wood industry residues

Woody biomass is only a fraction of the total biomass available in Latin America. Break out of your “forestry silo” when thinking about bio-energy


Should the Forest Sector Invest in Bio-Energy?Should the Forest Sector Invest in Bio-Energy?

Lessons Learned from the Canadian Future Bio-Pathways Project

WARNING! Generalizations are difficult…location matters


Alternative Pathways to Bio-EnergyAlternative Pathways to Bio-Energy

Thermo-Chemical

Combustion Gasification Pyrolysis

Fuel Gases (CO + H2)

Char & Liquids

No AirPartial airExcess air

Liquid transport fuels

SNG, Hydrogen

Bio-Chemical Physical

Hydrolysis & Fermentation Pelletization

Heat & Power

Heat & Power

Heat & Power

Liquid transport fuels

Heat & Power

1

2

3 4

5 6 7

8

9


Solid Energy ProductsSolid Energy Products

Energy Content GJ/odt pellet

Energy Usage GJ/odt pellet

Pellet 19 0.8

Torrefied Pellet 24 4.5

Biocarbon 30 29

Coal (anthracite) 31

What form of solid-biofuel is best? •Desirable to increase energy density in order to decrease the effective cost of transportation, so consider moving beyond regular pellets.

• Utilities like the fact that torrefied pellets and biocarbon do not decompose when exposed to water.

•Bio-carbon requires a significant amount of energy in the manufacturing process. Only makes sense if biomass is very cheap.

•Torrefied Pellets will be the preferred form of solid biofuel in the future. However, will they be able to pay the most for the biomass compared to alternative uses?


ROCE Traditional Technologies

BC Central Interior

Cost of Capital = 11%

Do We Need To Change?Do We Need To Change?

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-10%

0%

10%

20%

30%

40%N

ewsp

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BC

TMP

+ H

&P

Med

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&P

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ROCE Emerging Technologies

BC Central Interior


Are The Emerging Options Any Better? Are The Emerging Options Any Better?

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Eth

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ROCE Traditional + Emerging Technologies Earning Their Cost of Capital

BC Central Interior


What Is The Best From Both Worlds? What Is The Best From Both Worlds?

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EBITDA $/ODT Residual Fiber Users

BC Central Interior

The traditional users of residuals (eg., MDF) are expected to lose the auction going forward, with the strongest potential bids coming from from bio-energy and bio-chemical producers. However, torrefied pellets not high.

Who Would Win The Auction For Residual Who Would Win The Auction For Residual Fiber?Fiber?

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EBITDA $/ODT Chips + Pulpwood

BC Central Interior

NBSK pulp mills (with H&P) have historically won the auction for chips/pulpwood. However, Full Fractionation bio-refineries, OSB and LWC are generally better positioned. Newsprint, BCTMP and NBHK pulp, and pellets would generally lose the auction for chips/pulpwood.

Who Would Win The Auction for Chips and Who Would Win The Auction for Chips and Pulpwood?Pulpwood?

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If we look at the “best” of both the traditional and emerging biomass-based technologies in terms of ROCE, all of the top ten produce some form of bio-energy/bio-chemicals.

•Many of the traditional users of wood will “lose the auction” for fiber (eg., MDF, newsprint, smaller scale pulp mills).

•We think solid wood mills which also produce some form of energy are the most interesting types of forest product complexes.

•In terms of emerging bio-energy technologies, we are most interested in:

• Fast-pyrolysis• Small scale gasification• Torrefaction

If you are in the forest industry and you are not involved in the production of bio-energy, you are not maximizing your profit.

Conclusions?Conclusions?


..

Ensyn Corp:

A Case Study in Commercializing the Fast-Pyrolysis Technology


EnsynEnsynTechnology: Pyrolysis (Rapid Thermal Processing – converts soild biomass to a liquid in less than 2 seconds.Eight small scale pyrolysis plants in operation

Largest under construction uses 400 ODMT/day of biomass (~$50 million for 14 MW of power, 585,000 GJ of steam)

Principal Products: Food flavouring - commercial Fuel oil substitute - commercial Electricity Production (Orenda turbine) - commercial Electricity Production (Cummins slow speed diesel) – 2010 “Drop-in” gasoline, diesel, jet fuel – 2012 target


EnsynEnsyn

Strengths:

Clear leader in a platform technology

Credible strategic technical partners for growth

Already commercial in some applications, with good value proposition.

Significant potential for higher value-added products.

Can handle a range of homogeneous feedstocks.


EnsynEnsyn

Pyrolysis oil economics when producing electricity:

Contains 55% of energy content of fuel oil, by volume.

Currently estimated to be 25-30% cheaper than #2 Fuel Oil on an energy basis.

With feedstock at $60/ODMT, breaks even with #2 Fuel Oil @ ~$70/barrel. If feedstock is free, breaks even with oil at $28/barrel.


EnsynEnsyn

Compared to a Combustion Boiler/Steam power plant, an RTP advanced cycle power plant is expected to:

Produce ~70% more power from the same amount of biomass

Use ~70% less biomass for every kWe produced

Have a capital cost ~20% lower per unit of electricity produced.


• Joint Venutre Partner is Honeywell, and strategic investors include Chevron.

• In the process of transforming from a bio-technology company to a bio-energy/chemical operating company.

• Sold the rights to Ivanhoe Energy (for $100 million) to use the technology to upgrade oil sands to light oil

• Sold the rights to Red Arrow to use the technology to produce food chemicals

• JV with Tolko Industries to produce power and chemicals from forest biomass in Canada

Ensyn


EnsynEnsyn

Guarantees for the pyrolysis plant by Honeywell Uptime of the plant (>90%) Percent liquid yield from the particular feedstock used (22 examined) Quality of the pyrolysis oil (ASTM D7549-09 standard, plus 6 months shelf life).


• Joint Venture with Premium Renewable Energy to produce power and transport fuels from oil palm biomass in Malaysia

• Roughly 60 million tonnes of biomass is produced yearly by the Malaysian palm oil industry:

• 32 million tonnes is in the form of empty fruit bunches and fiber:

• This could produce 11 million tonnes of pyrolysis oil/year;

• Equivalent of 41 million barrels of crude oil;

• Annual revenue of ~$3 billion at today’s prices.

Ensyn


Central to all bio-energy strategies is a competitive price for delivered biomass……. True regardless of the type of bio-energy being produced – or where.


Appendix C: Bio Of Don RobertsAppendix C: Bio Of Don Roberts Mr. Roberts is a Vice Chairman and Managing Director with CIBC

World Markets. In addition to leading the Bank’s Renewable Energy and Clean Technology Group, he also provides senior coverage for the global forest industry.

In addition to his work with CIBC World Markets Inc., Mr. Roberts is also— An Adjunct Professor in the Department of Forest Resource Management at the University of British Columbia (Vancouver); — On the Board of Directors of the Rights & Resources Institute (Washington, D.C.) and— Serves in an advisory capacity for a range of government, industry, and NGO groups.

Mr. Roberts has a Bachelor’s degree in Agricultural Economics from the University of British Columbia, a Master’s degree in Forestry Economics from the University of California at Berkeley, and both an MBA and doctoral studies in International Finance and Economics from the University of Chicago. He is also a certified Corporate Director through the Institute of Corporate Directors.

Energy’s Role in Transforming the Forest Industry Argentina:

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