Fracking success hits biofuels investment

16:00, Feb 14 2013

Petrol retailer Z Energy says world oil prices could plunge by almost half in the next five years, as United States oil and gas production booms because of "fracking".

Fracking is the hydraulic fracturing of underground formations of shale rock to release the gas trapped within them.

Z Energy called on the Government to support the country's fledgling biofuels industry if it is serious about climate change, especially as oil prices are predicted to plummet in the next five years.

Speaking at the National Energy Research Institute in Wellington yesterday, Z Energy chief executive Mike Bennetts said the link between climate change and greenhouse gases was stronger than ever, but the incentives to invest in carbon neutral fuels were shrinking.

That was chiefly because the Global Financial Crisis (GFC) dried up much of the private funding for biofuel research, with the investment case further weakened by the sudden spike in shale gas production, through "fracking".

He said large-scale fracking in the US had seen oil volumes explode over recent years to the extent that the country could overtake Saudi Arabia as the world's single biggest oil producer by 2017, and become a net exporter by 2020.


"There is a lot more oil available than there was three or four years ago, and shale oil and gas is part of that," Bennetts said. "As a result of that extra supply, prices are likely to be lower than people thought back in 2008."

Brent Crude recently traded at US$118 a barrel, up from US$110 at the beginning of the year, but Bennetts said that could drop as low as US$60 in five years' time, particularly as other countries started exploiting shale reserves.

John Loughhead, an executive director at the UK Energy Research Centre who also delivered a keynote address, revealed that 45 per cent of Britain's land mass was suitable for shale production.

It was potentially bigger than gas deposits in the North Sea before they started being tapped in the 1960s, and represented a massive hurdle for plans to shift the UK economy to non-fossil energy sources.

Bennetts said from Z Energy's perspective, the Government was the only player at the table that could step in to fill the biofuel incentive gap.

"I do not know of any country outside of Brazil that has a biofuels industry, at a scale that makes a difference, that has developed and successfully operated without government support, through either incentives or mandates," he said.

Z Energy, which does not own oil-producing or upstream assets, is looking to replace portions of its fossil energy supply with biodiesel sourced from a tallow plant and a timber mill waste joint venture with Norske Skog.

The tallow project aims to produce 20 million barrels of pure biodiesel a year from inedible animal fat normally used to make candles and soap.

Bennetts said that could easily be ramped up by 40 million barrels, but even at today's prices, computer modelling showed there was a 42 per cent chance of the project making a loss.

The joint venture plans a biofuel test plant on the east coast of the North Island using less-proven wood-waste conversion technology, the "stump-to-pump" strategy.

It has been funded by seed capital from the partners, but Bennetts said it would need to win $50m under the Government's Primary Growth Partnership.