Sub-group 6: Indirect Effects of Other Fuels

1. Sub-group 6:Indirect Effects of Other Fuels Presented to the LCFS Expert Workgroup July 15, 2010 Sacramento, CA

2. Subgroup 6 Membership • John Courtis, ARB Staff • Manisha Singh, ARB Staff • Blake Simmons, Sandia (Subgroup Chair) • Bob Larson, EPA (Subgroup Co-chair) • Seth Meyer, University of Missouri • Wally Tyner, Purdue University • Phil Heirigs, Chevron Global Downstream LLC • JesperKløverpris, Novozymes A/S • Paul Wuebben, South Coast Air Quality Management District • Participating External Experts: Mark Delucchi, Björn Pieprzyk, Brooke Coleman

3. Presentation Outline • Review of workplan and status update • Focus on indirect effects of oil and gas • Presentation by Bjorn from ERA on their approach • Subgroup presentation • Focus on indirect effects of oil and gas • Conversion technology effects • Supply change effects • Displacement effects • Discussion of table of indirect effects • Next Steps/Conclusion • Q&A

4. Review of Work Plan and Approach

5. Task 1: Establish Criteria for Defining “Indirect Effects of Other Fuels” Effects influencing GHG emissions and the carbon intensity (CI) of fuels: • Direct effects: All significant effects within the primary production chain or life cycle (cradle to grave) • Co-product effects: Significant effects caused by co-products from the production chain (handled by the system expansion – or displacement – methodology) • Other market-mediated effects: Significant effects caused by changes in economic markets, e.g. ILUC or changes affecting marginal electricity or fossil fuel supply. This also includes ‘carbon leakage’ as a function of increased production/consumption. It is recommended to define indirect effects as ‘market-mediated effects other than co-product effects’ (3) It is also recommended to consider carefully if direct and co-product effects (2 and 3) have been overlooked for some fuels

6. Is Everything Outside the Red Line an Indirect Effects under the LCFS? Battery Materials Vehicle Materials Reservoir Depletion Net C Time Lag Albedo Effects Oil Spills Upstream Energy Production + Downstream Energy Production Vehicle Energy Use + Co-products Invasive Species Water Use Black Carbon etc. Deforestation

7. Task 2: Develop a List of Indirect Effects to be Assessed • We have developed an initial list of potential indirect effects as a function of fuel type • Excel spreadsheet – working draft for comment • Need to further refine for division between direct and indirect effects • Need input from ARB on scope for the sub-group on the list • Petition input from the EWG on input thus far as well • Examples: • Gasoline/diesel • Coal • BEVs + Hybrids • Natural gas • Electricity • Hydrogen

8. Task 2: Develop a List of Indirect Effects to be Assessed • We have developed an initial list of potential indirect effects as a function of fuel type • Excel spreadsheet – working draft for comment • Need to further refine for division between direct and indirect effects • Need input from ARB on scope for the sub-group on the list • Petition input from the EWG on input thus far as well • Examples: • Gasoline/diesel • Coal • BEVs + Hybrids • Natural gas • Electricity • Hydrogen

14. Task 3: Indentify Significant Gaps in Current Indirect Effect Analyses • Biofuels – recommended to use update from Prof. Tyner on corn ethanol production scenarios into the LCFS • There is still a lack of robust data sets for almost all elements of monitoring and determining indirect effects • The modeling tools employed to date, for the most part, have not been validated • We are working our way through each fuel conversion technology and developing a prioritized list of indirect effects for consideration under the LCFS • Gaps will not be hard to define – finding solutions will be

15. Subgroup 6 Milestones: Update

16. Presentation by Björn PieprzykEnergy Research Architecture

17. Direct and indirect effects of fossil fuelsEra Energy Research ArchitectureBjörn Pieprzykwww.energy-research-architecture.com 17

18. A. Basis for the analysis of direct and indirect effects of fossil fuels ERA – study: The impact of fossil fuels (November 2009)Analysis of conventional and unconventional fuels: Greenhouse gas emissions Environmental consequences Socio-economic effects Recommended actions: Alternatives to conventional and unconventional oil have to be created: biofuels and efficiency measures Current research - short study: Substitution of biofuels for fossil fuels 18

19. B. Definition of system boundaries of direct and indirect effects of fossil fuels Indirects effects Direct effects Life Cycle Analysis Lower OPEC production ? Lower tar sand production? Fossil fuels Biofuels Raw material production Resource extraction Agriculture Lower future CTL production? Transport Lower deep water oil production ? Processing Lower EOR-production ? Utilisation Lower future GTL production? 19

20. C. Results of the analysis: 1. Biofuels replace fossil fuels Increase of biofuel produktion Decrease in fossil fuel production in the refineries direct effects Decrease in oil import indirect effects Decrease of global oil price Decrease in global oil demand - due to low price elasticity of oil demand Decrease in oildemandpreventsinvestmentsdueto growingcomericalinterests of NOCs Decrease in oildemandpreventsinvestmentsdueto growingcomericalinterests of NOCs Strongimportance of OPEC for global supplydecisions in the short term Internalization of externalcosts: Strict global climateprotectionobjectives Lower NOC investments in very expensive oil technologies Scenario 1: Lower production of tar sands, extra heavy oil, CTL, oil shale Nationalinterests of OPEC members Decrease in oildemandpreventsinvestments Lower IOC investements in very expensive oil technologies Scenario 2: Lower production of deep sea oil, Artic oil , EOR, GTL Decrease in OPEC production Increase in OPEC production Lack of internalization of externalcosts: Weak global climateprotectionobjectives short term medium and long term 20

21. 2. Biofuels don´t replace the most expensive fossil fuel in the short term Increase of biofuel produktion Decrease in fossil fuel production in the refineries direct effects Decrease in oil import indirect effects Decrease of global oil price Decrease in global oil demand - due to low price elasticity of oil demand Decrease in oildemandpreventsinvestmentsdueto growingcomericalinterests of NOCs Decrease in oildemandpreventsinvestmentsdueto growingcomericalinterests of NOCs Strongimportance of OPEC for global supplydecisions in the short term Internalization of externalcosts: Strict global climateprotectionobjectives Lower NOC investments in very expensive oil technologies Scenario 1: Lower production of tar sands, extra heavy oil, CTL, oil shale Nationalinterests of OPEC members Decrease in oildemandpreventsinvestments Lower IOC investements in very expensive oil technologies Scenario 2: Lower production of deep sea oil, Artic oil , EOR, GTL Decrease in OPEC production Increase in OPEC production Lack of internalization of externalcosts: Weak global climateprotectionobjectives short term medium and long term 21

22. 2. Biofuels don´t replace the most expensive fossil fuel in the short term • Instead a higher biofuel supply would result in OPEC production cuts • The most expensive oil (such as tar sands or deep water oil) will continually be produced as long as the retail price is higher than the operating costs • National oil companies (NOCs) secure mainly risky and marginal oil reserves • Oil supply increasingly depends on credit agreements, such as the delivery of 0,5 million barrel/day from Venezuela to China (Equity Oil). • National energy supply objectives – example: Jordan and Morocco are highly interested in exploiting their oil shale reserves to become more independent of oil imports

23. 3. Biofuels replace the most expensive fossil fuel in the medium and long term Increase of biofuel produktion Decrease in fossil fuel production in the refineries direct effects Decrease in oil import indirect effects Decrease of global oil price Decrease in global oil demand - due to low price elasticity of oil demand Decrease in oildemandpreventsinvestmentsdueto growingcomericalinterests of NOCs Decrease in oildemandpreventsinvestmentsdueto growingcomericalinterests of NOCs Strongimportance of OPEC for global supplydecisions in the short term Internalization of externalcosts: Strict global climateprotectionobjectives Lower NOC investments in very expensive oil technologies Scenario 1: Lower production of tar sands, extra heavy oil, CTL, oil shale Nationalinterests of OPEC members Decrease in oildemandpreventsinvestments Lower IOC investements in very expensive oil technologies Scenario 2: Lower production of deep sea oil, Artic oil , EOR, GTL Decrease in OPEC production Increase in OPEC production Lack of internalization of externalcosts: Weak global climateprotectionobjectives short term medium and long term 23

24. 3. Biofuels replace the most expensive fossil fuel in the medium and long term • OPEC cutbacks are only temporarily possible: • Bilateral contracts between OPEC-countries and NOCs will increase • OPEC countries depend on income from oil export • OPEC have to compensate for their own national increase in oil consumption. • Biofuel objectives will prevent future investments in very expensive oil technologies of international oil companies (IOCs): • Profit chances on very expensive and risky marginal oil sources decrease due to biofuel objectives. • In the future biofuel objectives will also prevent investments in very expensive oil technologies of national oil companies (NOCs): • the yield orientation of demand-NOCs increases • When biofuels can create an alternative to marginal oil, NOCs will participate in biofuel markets

25. 4. But the most expensive oil is not the dirtiest oil 25 Source: ERA 2009

26. 5. The most expensive oil is only the dirtiest oil when costs are completely internalized Increase of biofuel produktion Decrease in fossil fuel production in the refineries direct effects Decrease in oil import indirect effects Decrease of global oil price Decrease in global oil demand - due to low price elasticity of oil demand Decrease in oildemandpreventsinvestmentsdueto growingcomericalinterests of NOCs Decrease in oildemandpreventsinvestmentsdueto growingcomericalinterests of NOCs Strongimportance of OPEC for global supplydecisions in the short term Internalization of externalcosts: Strict global climateprotectionobjectives Lower NOC investments in very expensive oil technologies Scenario 1: Lower production of tar sands, extra heavy oil, CTL, oil shale Nationalinterests of OPEC members Decrease in oildemandpreventsinvestments Lower IOC investements in very expensive oil technologies Scenario 2: Lower production of deep sea oil, Artic oil , EOR, GTL Decrease in OPEC production Increase in OPEC production Lack of internalization of externalcosts: Weak global climateprotectionobjectives short term medium and long term 26

27. 6. Greenhouse gas emissions does not suffice for evaluating the indirect effects of fossil fuels What is the dirtiest oil? Photo: Suncur Photo: U.S. Coast Guard • Improvement of current LCA methodology is necessary to evaluate environmental effects of catastrophes like in the Mexican gulf and in the Niger Delta. • Further indicators such as aquatic toxicity are needed. 27

28. E. Conclusion • The replacement of marginal fossil fuels with biofuels is an indirect effect which depends on many factors • The replacement of the fossil fuel with the highest greenhouse gas emissions and environmental impact with biofuels depends on the internalization of costs and therefore on political decisions. • The biggest environmental benefits that biofuels can provide through indirect effects, will only be achieved in cooperation with international climate and environment protection objectives. • The opposite is also true: international climate and environmental policy can only be achieved when alternatives to conventional and unconventional oil resources are created. 28

29. Thank you for your attention! www.energy-research-architecture.com 29

30. Sub-group report out

31. Indirect Effects of Oil and Gas

32. Summary of Lifecycle Associates Report Developed for New Fuels Alliance LCA.6004.3P.2009 February 2009

33. Defining the System Boundaries

34. Petroleum: Fuel Attribution Characteristics for Calculating CI

35. Estimated Direct and Indirect Effects of Petroleum

36. Energy Input Assumptions

37. Estimated Flaring Emission Intensity

38. Calculated GHG Emissions

39. Summary of Calculated Total GHG Emissions

40. Calculated Ranges of GWI as a Function of Fuel Type

41. Calculated Impact/CI of Persian Gulf Conflict

42. Estimated Impact and Carbon Emissions from Deepwater Horizon Incident

43. Summary of Deepwater Horizon Impacts • Current leak estimates# • 1,470,000 gal/day (DOE) • 2,520,000 gal/day (BP worst case) • 4,200,000 gal/day (experts’ worst case) • Est. 91,653,582 gallons leaked total (@ DOE leak rates) thus far# • 718,520 gal/day captured/flared# • Clean-up mobilization (July 11, 2010 update)*: • More than 46,000 personnel • Oil-water mix recovered: 30,250,000 gallons • Response vessels mobilized: > 6,400 • Response aircraft mobilized: 123 • Dispersant deployed: > 1,770,000 gallons #http://www.ecy.wa.gov/programs/spills/Special_Focus/BP_LA_Oilspill/index.html *http://www.thegovmonitor.com/world_news/united_states/florida-releases-july-11-2010-gulf-oil-spill-situation-update-35318.html

44. Current Oil Spill Trajectory Source: NOAA, http://response.restoration.noaa.gov/dwh.php?entry_id=809

45. Impacted Coastal Areas and Est. Trajectories http://www.thegovmonitor.com/images/bp_oil_spill_flroida_gator_july11_2010_big.jpg

46. Indirect Carbon Intensity Increase Associated With Gulf of Mexico CH4 Release 100% Gasoline Allocation Case

47. Petroleum Impacts of Biofuel (and Other Alternative Fuel) Production and Use

50. Indirect Petroleum Impacts • Slippage (aka “Shuffling”) • Higher carbon fuels go elsewhere • Price induced changes in feedstock demand • Higher demand for low carbon petroleum increases price • But relative price advantage of high carbon petroleum fuels then also increases, impacting (i.e., increasing) their demand • What is the marginal barrel supplied / replaced ? • Rebound • Biofuel use decreases demand for petroleum, decreasing price of petroleum • Passing lower cost of petro on to consumers decreases their cost of driving • Driving goes up