In our final installment examining the issues surrounding the creation of a Russian biofuels market, we examine the “green shoots” of a nascent industry-domestic production for export and domestic interest in development of an industry.

The Russian National Biofuels Association, which monitors biofuel developments in the country, held the IV International Conference “Fuel Bioethanol 2009″ in mid-April 2009 in Moscow.  Aleksey Ablayev, president of the Association, noted on the sidelines of the conference that there is still strong opposition to the creation of a grain-based ethanol market in the country and that much of the discussion today has shifted to cellulosic biofuel.  Projects in this area do exist, though funding difficulties in particular have affected their ongoing pace  in various parts of Russia.

The most recent and ambitious biofuel initiative was launched by OJSC Biotechnologies Corporation, which is controlled by the state corporation Russian Technologies (Rostekh).  Having acquired the Tulun Hydrolytic Plant in Irkutsk (Eastern Siberia), the corporation last September produced and tested experimental butanol as a fuel additive in cars.  No information has been provided on the total cost of the butanol as compared to the cost of gasoline sold locally, nor is it clear whether the chosen method of producing butanol is cost efficient.

Titan, an Omsk Group of Companies, reportedly completed the construction of a grain-based ethanol plant in Omsk. This export-oriented project was launched in 2006, with an initial plan to build a production capacity of 150,000 metric tons of ethanol per year.  (A Czech company, Alta, was chosen as an equipment supplier for the plant.)

Funding Difficulties Slow Biofuel Projects 

A  plan to produce about 30,000 tons of butanol at the Tulun plant (in addition to other products) reportedly had difficulty last year obtaining the funds needed for the purchase and installation of equipment.  Biotechnologies Corporation also announced plans to set up butanol production at other sites, including at existing hydrolytic plants, by 2017.  The corporation’s long-term plan is to attract about $1.5 billion for its biofuel initiative.  If implemented as planned, this initiative would produce about 2 million tons of butanol annually.  The corporation reportedly has asked the authorities for subsidies, including reductions in future profit and property taxes during the initial investment period.

Bioethanol Ltd, a daughter company of the agricultural firm “Vinogradov,” launched a project in 2007 to construct a bioethanol plant in the Lipetsk Special Economic Zone, but halted construction in 2008, reportedly due to funding difficulties.  The initial plan was to produce wheat and/or corn-based ethanol as a biofuel additive.  The Moscow Oblast-based engineering company NPK Ekologia announced in April 2009 that it had an order to do the planning for a project with a production capacity of 250,000 tons of bioethanol per year in Tambov Oblast (in the Western part of Russia), and another order for a project with a capacity of 200,000 tons in Stavropol in Southern Russia.  The country’s financial crisis may put a hold on these projects as well.

Non-Food Based Biofuels

Several Russian companies have expressed interest in biodiesel.  For example, in May 2008, the Konti Group of Companies said that it was interested in producing rapeseed-based diesel in Ivanovo Oblast.  The plan was to construct a plant with an annual production capacity of up to 200,000 tons of biofuel.   In June 2008, the Masloprodukt Group of Companies signed a memorandum of cooperation with the National Reserve Bank (NRB), with the goal of increasing production of sunflower-seed oil at an existing plant in Voronezh Oblast.  The Masloprodukt-Bio initiative envisioned an annual production capacity of 100,000 tons of biodiesel and 10,000 tons of raw glycerin.

Domestic constraints of the development of the biofuel sector, including a lack of favorable legislation, explain why recent initiatives on bioethanol or biodiesel production have primarily been export-oriented.  Agro-businesses find it less risky and more profitable to export non-food grade wheat or rapeseed oil as raw materials, some of which are then processed into biofuel abroad, than to launch a biofuel production business domestically.

Biofuels Abroad

The list of Russian companies that have invested or have plans to invest in foreign biofuel businesses remains small.  For example, Biotechnologies Corporation expressed interest in building a biofuel plant in Vietnam in partnership with PetroVietnam and Metropol.  ITERA Ethanol LLC, a subsidiary of Russian gas producer ITERA, announced in early 2008 that it had joined other members of an investment group to finance construction of a bioethanol plant in Clearfield, Pennsylvania, in addition to plans to develop “similar projects in Russia and the CIS.” In April 2007, Gazprom Marketing & Trading signed a six-year agreement with Propower do Brasil to acquire emission credits under the Kyoto Clean Development Mechanism by investing in Propower’s biomass power generation plant in Guarapuava, Brazil.

Biomass Projects

In recent years the number of domestic Russian plants that produce wood fuel products, such as pellets, from wood waste, has grown.  There is also greater interest in the use of biomass for electricity and heat generation.  For example, the Danish Energy Agency is participating in a proposed Joint Implementation (JI) project to replace an old, mazut-fired combined heat and power plant in the city of Priozersk (Leningrad Oblast) with three new boilers, including a wood-chips boiler house and a combined biomass (wood-waste and bark) and gas boiler house.  Wartsila Corporation has delivered bio-energy boiler units for heat production to wood processing plants in Russia, including a significant order for the Irkutsk region.  In 2007, the Finnish company won a contract to deliver a 20 MW Wartsila BioEnergy boiler plant to the sawmill company LDK Igirma Ltd in the Irkutsk region.

Projecting the Future-Opportunities and Challenges

Russian oil companies continue to have significant influence over the investment priorities of the Russian state. Currently, the oil companies are more interested in raising the level of crude processing at their oil refineries than in purchasing bio-additives for blending with gasoline at the refineries.  Improving the quality of gasoline and modernizing the country’s refining industry remains a challenge. Clearly, for the biofuel sector to grow, cooperation between oil companies and biofuel producers is required.  This was true even in the case of energy-dependent Japan, where the need to diversify is much greater.

Looking ahead, the biofuel sector may also have to address the concerns of a small, but increasingly vocal, group in Russia that believes “total ecological damage from production and use of biofuel is greater than that from gasoline.”  This view is bolstered by concerns over a dramatic shift in the use of arable land from food to non-food purposes and fear of future spikes in prices for grain because of government support of biofuels.

For further information about this topic, please contact Akin Gump.