Mozambique Biofuels Assessment

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Mozambique Biofuels Assessment Mozambique Biofuels Assessment FINAL REPORT May 1, 2008 Prepared for: Ministry of Agriculture of Mozambique Ministry of Energy of Mozambique Under contract to: The World Bank The Embassy of Italy in Maputo Team Members Econergy International Corporation (Prime) José Zílio, Alf International (Brazil) David Liddell, Blueprint Cape Pty (South Africa) Cardoso Muendane, SICS (Mozambique) André Nogueira, Efficientia (Mozambique) Contact: Edward Hoyt Econergy International Corporation 1850 M Street NW, Suite 1050 Washington, D.C. 20036 Tel. +1-202-822-4980 Fax +1-202-8224986 [email protected] Mozambique Biofuels Assessment EXECUTIVE SUMMARY The objective of this study is to assess the potential competitiveness of Mozambique’s biofuels production in the domestic, regional and international biofuels markets, identifying the most promising feedstocks for development, and recommending a strategy for the promotion of the sector. The study addresses a diverse set of questions raised by the Government of Mozambique (GoM) in the context of increasing investor interest in this sector and rapidly evolving international markets. The study’s scope reflects the priorities endorsed by the Ministry of Energy (the need to develop the national energy sector, reduce oil imports and alleviate the economic burden of imports, and enhance energy security), and those advanced by the Ministry of Agriculture (the need to expand the agricultural sector in a socially and environmentally sustainable way, as well as contribute to rural development and Mozambique is employment creation). The study was funded using resources from the World Bank and a largely rural the Italian Embassy in Mozambique, within the framework of an Italian Cooperation country, and Program with the Ministry of Agriculture of Mozambique. imports the entirety of its Country background. In spite of the impressive economic turnaround achieved over the fossil fuels. past few years, Mozambique remains a largely rural country, suffering from widespread Receipts from poverty, vulnerability to natural disasters and economic shocks, and major socio- income taxes economic imbalances between its rural and urban population. Despite some rapid are growing growth in key sectors such as gas, telecommunications, mining and mineral processing, the country is still heavily dependent on external support to mitigate its structural economic imbalances. The economy continues to rely on imports: the trade deficit in 2006 was approximately 6.5% of GDP, down from 14.5% of GDP in 2000, with fuel imports playing an important role (a recent projection for total imports in 2008 is USD 700 million, compared to exports of about USD 2.4 billion (including large projects) in 2006). Mozambique imports the bulk of its fossil fuels, the bulk of its fossil fuels, which in any case represent a market of very modest size (570 million liters in 2006, of which 66% consisted of diesel), with to date limited use of domestic natural gas, primarily in the industrial sector. As might be expected, the cost of these imports is climbing sharply due to rising petroleum prices. Foreign direct investment has increased substantially, but to date investment has focused on large capital-intensive projects, which require substantial imports of raw materials and make up for the majority of the country’s exports, with little value added (tax revenues, employment and demand for inputs) remaining in Mozambique. The large projects illustrate how the country has made considerable steps towards improving its business climate. The metical has enjoyed stable exchange rates, although the cost of borrowing in local currency is still high. At the same time, the GoM has engaged in Overseas fiscal reforms that are increasing its revenue collection ability: in particular, the and regional relative importance of receipts from taxes on income, investments and value added as a biofuels share of total fiscal revenues is growing, while that of receipts from fuel taxes (less markets are than 10%) is decreasing. Gasoline and diesel are not subsidized (no sales below market expanding price), and they are more heavily taxed than other fuels used by lower-income sectors rapidly of the population. (For a detailed overview of Mozambique’s economy and energy/fuels sector, see Chapter 1.) Potential Markets. The current situation of Mozambique’s economy and energy/fuels sector can be assessed within the broader context of a rapidly expanding international biofuels market, with Executive Summary Page ES-1 Mozambique Biofuels Assessment governments of an increasing number of countries strongly committed to biofuels policies and programs as part of efforts to reduce emissions of greenhouse gases as well as address energy security concerns. On the ethanol side, distributors and regulators are increasingly interested because of the decrease in ethanol prices that has occurred alongside the steady rise in petroleum and gasoline prices. Opportunities in regional and overseas markets are complemented by an attractive biofuels potential for various uses in the domestic market, as shown in Figure ES 1. However, the rate of growth of biofuels consumption, especially in the major European and U.S. markets, may be affected in the near term as a result of heightened concern over increases in food prices and related political disturbances in 2008, since the price increases are frequently tied to the growth of biofuels consumption. The reality, as briefly described in Chapter 8, is more complex; the implications for biofuels policies of these developments, and the widening food- versus-fuel debate, is unclear at present. (For a complete analysis of potential domestic, regional and overseas biofuels markets, see Chapter 2.) Overseas markets. The global demand for ethanol is expected to grow steadily: imports will likely be necessary in the U.S. and the European Union (E.U.), China is likely to turn into a major ethanol importer if its biofuels policy is implemented, and Japan’s commitment to ethanol combined with its lack of feedstocks may also make it a significant importer. The global production of biodiesel is expanding rapidly, led by the E.U. Trade in finished biodiesel is more limited, while that of raw oils is much more noteworthy, and this trend is expected to continue: it is estimated that the E.U. biodiesel industry will import 20-30% of its raw oils (3-5 billion liters) in 2010-2015; that the U.S. will likely display excess production capacity coupled with very high feedstock costs; and that China may also represent a Figure ES 1: Potential biofuels markets Source: Econergy. Notes: Southern African Development Community (SADC), Republic of South Africa (RSA). Page ES-2 Executive Summary Mozambique Biofuels Assessment significant market, again provided its policy framework is enacted. At the same time, as Brazil’s domestic consumption of ethanol continues to increase (driven by prices as well as increased size in the flex-fuel fleet), ethanol exports to major markets may increase more slowly than has been anticipated. Regional markets. For Southern African markets, considerable uncertainties surrounding policy frameworks remain, making projections unreliable. The Republic of South Africa emerges as the key potential market due to the size of its transport fuel market. However, its policy framework has been approved at more modest levels than anticipated, which limits its market and may also delay investment by local players, leading to more limited production capacity in the near-term. The extent to which this gives Mozambique (or other regional countries) a comparative advantage in terms of cost competitiveness in production and feedstock availability, however, will depend on the treatment of imports, which is not entirely clear. Depending on the success of their biofuels programs, as well as regional policy coordination, other countries in the Southern African Development Community (SADC) may either compete with Mozambique for the RSA market, or represent markets for Mozambique’s finished biofuels, or import fossil fuels through Mozambique. Domestic markets. Unlike international markets, the domestic market for biofuels can involve not only the transport sector, but also the residential and rural electrification sectors: renewable fuel standards for ethanol and biodiesel use in motor vehicles could be implemented, “gelfuel” (an ethanol-based residential fuel now being sold in the country) could displace some conventional fuels and biomass consumed for residential uses, and new diesel-powered generation to increase the electrification rate in rural areas could also make increasing use of biodiesel blends, or even of raw vegetable oils. Based on the country’s baseline economic situation and on the existence of potentially interesting biofuels market opportunities, and in the light of key lessons learned from international experience (which are reviewed below), the analysis turns towards a specific assessment of what the actual competitiveness of Mozambique’s biofuels production would be in different markets. Figure ES 2. Biofuels value chain and structure of the analysis Source: Econergy. Numbers indicate the chapters of the study containing more detailed analysis. The various steps of the analysis move along the biofuels value chain, as depicted in Figure ES 2: the numbers shown in the figure refer to the chapters in the report where an extensive analysis of the various issues may be found. The conclusions and recommendations that close the first phase of the study represent
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