An Analysis of Alternative Fuels Promotion: The Case of Synthetic Gasoline Production in New Zealand by Takeshi Sugiyama M. Eng., Science and Engineering (Materials Science) University of Tsukuba, Japan 1989 Submitted to the Department of Materials Science and Engineering in Partial Fulfillmentof the Requirements for the Degree of Master of Science in Technology and Policy at the Massachusetts Institute of Technology May 1994 C 1994 Takeshi Sugiyama. All rights reserved. The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part. Sianature of Author . .. Department of Materials,§Cienceand Engineering May 6 1994 Certified by . A. Dennv Ellerman Executive Director, enter for Energy and Environmental Policy Research f Thesis Advisor Certified by . .. Michael C. Lynch, Cnter for Inte Studfcs ......Thesis Advisor Certified by \. ... ...... Joel P. Clark, Professor of Materials Systems Thesis Reader Accepted by . RiLd de Neufville, Professor of Civil ah Environmental Engineering Chair, Technology and Policy Program Accepted by . ..I . Carl V. Thompson II, Professor of Electronic Materials Chair, Departmental Committee on Graduate Students !WST!TUTF Science I 'AUG 1 8 994 An Analysis of Alternative Fuels Promotion: The Case of Synthetic Gasoline Production in New Zealand by Takeshi Sugiyama Submitted to the Department of Materials Science and Engineering on May 6 1994 in partial fulfillment of the requirements for the Degree of Master of Science in Technology and Policy ABSTRACT During the 1980s, many nations attempted to promote alternative fuels because of energy security concerns incited by the oil crises in the 1970s. Countries which had substantial technical and financial capability promoted synthetic fuels derived from non- oil fossil resources to replace crude oil in conventional energy systems. However, with the decline of world oil prices after the mid-1980s, most synthetic fuel projects became infeasible and were either terminated or canceled. Returns from such huge investments were minimal, if any. Consequently, the promotion of synthetic fuels in the 980 is perceived as a failure today. New Zealand also promoted synthetic gasoline during the 1980s in order to reduce its dependence on imported oil. The synthetic gasoline process, among other synthetic fuel processes, was known to be technically and economically feasible. The process proved to be a technical success after its start-up in 1985 as it supplied one-third of gasoline needs in the country. Although still in operation today, the process has been uneconomical because oil prices remained low since 1986. This research focuses on the general approaches the New Zealand government used to promote alternative liquid fuels derived from indigenous natural gas resources as substitutes for imported crude oil and oil products. Other alternative fuels that were considered by the government included CNG, LPG and methanol. The research also evaluates technology, policy and management aspects of the alternative fuels promotion. Based on the evaluation, the snthetic gasoline process possessed the designed economic performance standards. Hence, the main cause of the unsuccessful outcome was the misjudgment in economic planning. The results of the sensitivity analysis show that the same goals could be economically achieved by other means in theory. Therefore, the synthetic gasoline might not be the optimal solution to the nation's energy security concerns. The policy and management issues involved in the promotion also largely influenced the success of each alternative fuel program. The overall results of the research have implications for alternative fuels promotion in the future. Thesis Advisor: A. Dennv Ellennan Title: Executive Director. Center for Energy and Envirorumental Policy Research Thesis Advisor: Michael C. vnch Title: Center for International Studies Thesis Reader: Joel P. Clark Title: Professor of Materials Svstems 2 ACKNOWLEDGMIENT First, I would like to thankfacultyand staff of the Technologyand Policy Program for the ftuifful two years I have had since entering the program. Equally, Dr. Denny Ellermanfor accepting an advisor rolefor my thesis and giving me constantadvice and support throughout my research, Prof. Joel Clark for being a thesis reader, and the DepartmentofMaterials Scienceand Engineeringfortheir assistance. I would especiallylike to thankMr. MichaelL vnchfor being my thesis advisorfor nearly a year and providing me a lot of opportunitiesto broaden my scope into energy economics and policy fields. A so, Mr. CharlesPiec.ulewski and Mr. Edmund Chenfor helping me correct my English grammar, and Mr. Yoshihiko Hashimotofor giving me some ideas and informationfor my thesisftom Holland. Lastly, I would like to thank my employer, Showa Shell Sekiyu K.K., for their support throughoutmy years at MIT, and my parents and parents in lawfor their everlasting encouragement. I would like to dedicate this thesis,to my wife, Hroe, for helping me accomplishmy goals and supportingme all the time. 3 TABLE OF CONTENTS Page ABSTRACT 2 ACKNOWLEDGMENT 3 TABLE OF CONTENTS 4 1. INTRODUCTION SYNTHETIC FUELS AS ALTERNATIVE FUELS 6 1. 1. Emergence of Synthetic Fuel Projects 6 1. 1. 1. The oil crises and synthetic fuels 1 12. History of synthetic fuels production 1 13. The turning point 1.2. Future of Synthetic Fuels Promotion - Thesis Theme 10 2. ENERGY SCENES IN NEW ZEALAND 12 2. 1. After the Oil Crises 12 2. 1. 1. New Zealand's energy resources 2.1.2. Energy scenes 2.1.3. Energy policy 2.1.4. Decision on synthetic gasoline 2.2. Synthetic Gasoline Project 17 2.2. 1. Planning and construction 2.2.2. After the start-up 2.3. The 1980s and Now 20 3. SYNTHETIC GASOLINE PRODUCTION 23 3. 1. Natural Gas-To-Gasoline Process 23 3. 1. 1. Process 3.1.2. Infrastructure 3.1.3. Technical feasibility 3.1-4. The M[TG process among other synthetic fuel processes 3.2. Product 28 3.3. Project Costs 29 3,3. 1. Production costs 33.2. Investment costs 3.4. The Production Today 32 4. ALTERNATE CHOICES 35 4. 1. Liquid Fuels Promotion 35 4, 1. 1. Goals and the programs 4,1.2. Liquid fuel programs 4 .1 3. Allocation of natural gas use 4 4.1.4. Energy conservation programs 4.2. Government's Choices 41 4.2. 1. CNG (Compressed Natural Gas) 4.2.2. LPG (Liquefied Petroleum Gas) 4.2.3. Methanol and gasohol 4.3, Economic Feature of the Promotion 43 4.4. In the Long Term 44 5. ANALYSIS - NEW ZEALAND'S ALTERNATIVE FUELS PROMOTION 46 5. 1. Reviewing the Liquid Fuel Programs 46 5. 1. 1. Goals and the achievements 5.1.2. Economic aspects - sensitivity analysis (1) 5.1.3. Same achievement without synthetic gasoline - sensitivity analysis 2) 5.1.4. Technology issues involved in the decision-makings 5.2. Policy and Management 54 5.2. 1. Mismanagement in economic planning 5.2.2. Effect of the government policy 5.3. Synthetic Gasoline for the Future 57 5.3. 1. The policy required 5.3.2. Necessity - the production today 5.3.3. The role of the synthetic gasoline 6. CONCLUSIONS 63 6.1 Lessons from Synthetic Gasoline Promotion 63 6. 1. 1. True market value of oil 6.1.2. Replacement of oil by oil 6.1.3. Energy promotion and deregulation 6.1.4. Energy security 6.2. Conclusion 65 APPENDICES 67 Appendix 1. Sensitivity Analysis (1) 67 A. 1. 1. Notes A. 12. Analyzed data Appendix 2 Sensitivity Analysis 2) 68 A. 2. 1. Notes A.2.2. Analyzed data BIBLIOGRAPHY 72 5 1. INTRODUCTION SYNTHETIC FUELS AS ALTERNATIVE FUELS 1.1. Emergence of Synthetic Fuel Proiects 1. 1.1. The oil crises and synthetic fuels The oil crises in the 1970s alarmed many oil importing countries about their energy and national security. Oil prices escalated from $3/barrel in 1972 to $30/barrel by the late 1970s, and peaked at $36/barrel in late 1980 as seen in Figure 1-1. Oil was no longer a cheap and accessible energy supply as once thought. As a result, nations began searching for the alternatives to crude oil. On the basis of their domestic energy resources, each nation proposed a strategy to remedy this perceived problem, but, not too surprisingly, they came up with similar strategies - to synthesize fuels oil from alternative fuel resources. This outcome was a direct consequence of the permeation of oil used throughout the world. US$/bbI An -- -- 30 20 10 n L I I I 1970 1975 1980 1985 1990 1995 Year Figure I - . Arabian Light/Dubai Spot Crude Prices Source: BP Statistical Review of World Ener June 1993 6 Many synthetic fuel projects were pursued during the period between the late 1970s and the early 1980s. They were particularly significant in the United States and Canada. With substantial coal and other non-oil fossil reserves, financial resources and technical capabilities, these countries had a strong potential for developing synthetic fuels. Also, many other nations in the world attempted to promote synthetic fuel projects, and some industrialized countries like Japan and West Germany began to develop their technologies to enter a future competition of the synthetic fuels industry. In most cases, synthetic fuel projects were conducted under the administration of governments. These projects required anywhere from hundred million to a few billion dollars in start-up, and the pvate energy industries were not willing to take the risk alone to invest heavily in unproved technologies into the uncertainties of the market without government support. However, the promotion of synthetic fuels continued to be enhanced because of the world wide anticipation that oil prices would continue to rise in the future. Many oil economists predicted that the oil prices would be $40- 55/barrel by the mid- 1980s and continue upwards afterwards. In addition, the possibility of oil scarcity in the near future, which was widely believed at the time, supported the movement.