A new 'green' fuel source looks set to shake up the pulp and paper industry as high prices prompt the search for alternatives to oil
February 2007
By Jim Kenny
After a wary start, it looks as though the pulp and paper industry might just be warming up to the idea of using its raw material as an alternative source of fuel.
Although it is clearly still early days for even the most ambitious companies in the sector, announcements from UPM in Finland and Norske Skog in Norway could well herald a new era for the use of wood resources in the region.
Norske Skog is looking at a scheme that could require some 1.5 million m³/yr of wood for biodiesel, while the UPM proposal would most likely be "of a similar magnitude", according to sources close to the project.
Of course, it is hardly groundbreaking for pulp and paper companies to utilize forest resources for energy purposes. Indeed, the industry is already the largest generator and consumer of renewable energy in Europe.
What is new here is that these proposals are specifically focused on creating a large-scale new source of fuel within the existing spectrum of wood-based products that are already derived from forest resources.
Norske Skog's head of communications, Tom Bratlie, puts it into perspective when noting that, "At present, the forest industry uses about 8 million m³ of wood in total each year for the entire industry in Norway. We're looking at planning to extend that by another 1.5 million m³ of wood so obviously that will have a major impact on the sector and we have to be aware of that."
As a result, both companies are being very wary about forging ahead without doing some serious due diligence on the issues involved. As one industry consultant noted, "Potentially, this could be huge. Not just in terms of generating welcome new revenue streams, but also in terms of the knock-on-effects that we could see on prices and wood availability across the region. In Sweden, some companies are already complaining about market distortions created by the subsidies being handed out for renewable energy projects, so schemes on the scale of those being analyzed by Norske Skog and UPM are likely to make a lot of people rather nervous."
Cautious progress
Bratlie cautions that the work being done on the current proposals are very much preliminary at this stage, but there is little doubt that the results will be closely scrutinized across the industry and beyond when they are eventually released.
Norske Skog is undertaking the feasibility study on the potential of producing biodiesel from wood jointly with the power group, Hydro. As the paper company company noted in a joint statement, "Greenhouse gas emissions from wood-based biodiesel will be considerably reduced compared with emissions from current forms of biodiesel made from rapeseed and plant oils."
So far, so good, however, there is no question that there are a number of technical challenges that still need to be addressed before large-scale, wood-based, biodiesel production becomes a reality.
"Because it's something that's never been done on such a big scale before, this is very much a pre-study that we will be financing 50:50 with Hydro," Bratlie points out. "We would hope to have some first conclusions by the summer and then we will decide whether we want to move on with the project or not."
At this stage, the joint study is looking at issues such as market size, the appropriate scope for the project, economic impacts on the group's existing businesses, the regulatory framework imposed by national and European government priorities, tax issues, available technologies, distribution challenges, and the effect of an installation of this scale on the wood market in general.
And on top of all that of course, the project will still have to clear the group's investment hurdles in terms of both risk and return.
At this stage, Hydro is mainly concentrating on technical areas such as construction, processing and distribution, while Norske Skog focuses on the wood related elements of the project. But on paper at least, the rewards look enticing as fuel prices remain high and there is the possibility that such a scheme could easily double the amount of biodiesel used in Norway's fuel tanks alone.
Prime placement
Like Norske Skog, UPM firmly believes that it is ideally placed to play a major role in providing the biofuels of tomorrow. Indeed, as the group's CEO, Jussi Pesonen, explains, "The production of biofuel is a good fit for UPM since its core business is to add value to the wood raw material. Our aim is to maximize the gain from the biomass-based raw material. The importance of renewable fuels is increasing and we consider this an opportunity to further utilize our existing value chain and be part of the future development."
In his recent financial report, Pesonen promised that investments in this area would be "significant", adding that the new opportunities in biofuels, "Build on UPM's strengths: strong vertical integration and know-how in extracting value from biomass."
As UPM's vice president of energy, Anja Silvennoinen, points out, "At the moment, we are looking at the available sites, development concepts and investment proposals and when this is completed we will decide whether we take it forward. I think the magnitude will be similar [to the Norske Skog scheme], but there are a lot of issues that we still need to look at, for example, how to fit such a scheme into the land availability we have. And of course, the same financial rates of return will be required as on our other investment proposals."
UPM outlines a number of areas where the company believes it can secure a superior competitive advantage in refining biomass into biodiesel:
1. As a forest company UPM has a strong role in the value chain
- it has its own forests
- advanced wood procurement systems
- production of various end-products.
2. Integrated mills with the capability to optimize
- getting the right wood fractions to right products
- ensuring energy balances.
3. The group's mills are located in main markets and close to raw materials.
4. The company has advanced project and process know-how and R&D resources.
5. UPM has the financial strength to follow through.
As Silvennoinen explains, the next steps for the company involve: developing the business concept; defining the technical concept; prioritizing the location(s) from among the potential UPM mill sites; and then making the investment decision on the first commercial-scale plant.
Given the complexities and risks involved, it will not be a process that will be completed with undue haste, but Pesonen is already on record saying that he hopes that the first plant will be realized, "Within the next few years, rather sooner than later".
UPM still has to decide whether to locate the plant adjacent to one of the company's sites in Finland, France, Germany or the UK. Norske Skog meanwhile, believes that its plans for a biodiesel facility in southeast Norway could take up until 2012 to come onstream at the earliest.
Clearly, biodiesel is not about to transform the industry overnight. But it looks certain that the impact of these and other schemes will hit the industry in the medium term, with a host of consequences-good and bad-that may take some time to sort out.
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