First-movers will capture outsized returns in South-East Asia’s biofuels market

When it comes to biofuels, supply and demand factors both fall in South-East Asia’s favour, companies that stake a claim in the market early could capture outsized returns

THE path to decarbonisation is constrained by harder-to-abate sectors, such as trucking, shipping, and aviation. Transport contributes more than a third of carbon dioxide (CO2) emissions from end-use sectors, according to the International Energy Agency (IEA), and these sectors aren’t reducing emissions at the rate needed to achieve global decarbonisation goals.

If “business as usual” continues, emissions in these sectors are projected to rise, or even double. To get on track with climate goals, the transport industry needs a dramatically new energy mix—with biofuels taking up a larger share of the basket.

Biofuels can play a pivotal role in decarbonisation

Biofuels are derived from biological materials, such as crops and agricultural waste. The process of capturing CO2 from biofuels is more cost-effective than other carbon capture options. And, in liquid form, biofuels can be used in existing engines with minimal modification.

Combined, that makes biofuels a viable energy source for aviation, heavy-duty trucking, and deep-sea shipping—all heavy-hitting emitters that otherwise have only nascent or unproven paths to decarbonisation.

Government policies and climate commitments are both fueling demand. In Europe and the United States, transport companies have been mandated to shift towards renewable energy sources, while tax credits and other incentives are spurring progress. In the private sector, climate commitments in industries from aviation to mining are also driving demand.

All told, global demand for biofuels is expected to grow 3% to 5% per annum through 2050, with sustainable aviation fuel (SAF) and hydrotreated vegetable oil (HVO) projected to see the largest growth.

Tanguy Morin is a member of Bain and Company’s Energy & Natural Resources practice, and the co-leader of the practice in South-East Asia.

Feedstock is the biggest constraint on supply

In 2022, global SAF production was between 300 million and 450 million litres—enough to cover 0.1% to 0.15% of total jet fuel demand. By 2050, the International Air Transport Association estimates that up to 450 billion litres of SAF will be needed to keep up with demand. Even optimistic production scenarios show a sizable supply gap. Without transformative changes to technology and agricultural systems, there will not be enough biofuel supply to meet global demand in 2050. Even mature markets like Europe, Japan and the US are likely to become net importers of feedstock and finished biofuel products.

In South-East Asia, private companies have announced or committed over US$3bil in capital expenditures for SAF and HVO pipeline infrastructure projects in the coming years. They are also exploring cultivation and collection innovations to help unlock supply.

South-East Asia’s biofuel opportunity

Increasing the production of first-generation (1G) biofuels faces several uphill battles, including the ethical dilemma of diverting farmland and crops away from the world’s food supply. These 1G fuels are suboptimal for aviation, and they have significantly lower carbon abatement potential compared to second-generation (2G) crops—35% to 50% abatement versus 70% to 90%, respectively. The future of biofuels will include a mix of 1G and 2G fuels, with 2G taking an increasing role. And this is where South-East Asia’s natural advantage unfolds. South-East Asia is the world’s largest producer of SAF and HVO feedstocks, generating about 35% of global supply.

South-East Asia also has the world’s largest feedstock supply for 2G biofuels, such as palm oil mill effluent (POME) and palm fatty acid distillate (PFAD). POME and PFAD are produced with byproducts or wastewater from palm oil production—an industry South-East Asia easily owns.

About 85% of the world’s palm oil supply comes from Indonesia and Malaysia. In addition, Thailand and Vietnam are leading producers of sugarcane, which can be turned into ethanol. The region also has an abundance of used cooking oil (UCO). With better collection methods, South-East Asia could increase its supply of biofuel from UCO. And with the right support, South-East Asia could become a global leader in biodiesel production and exports. South-East Asia could become the top HVO and renewable diesel producer by 2030, and it could claim a leadership position in global SAF production by 2050.

Thomas Luedi is the Asia head for Chemicals and Commercial Excellence Practices at Bain & Company

Regulation and competition can encourage biofuel development

Few South-East Asian countries have policies to encourage consumption or production, even for the most promising biofuels. Singapore aspires to become the frontrunner and to build a SAF hub, but it lacks formal policies to stimulate the market. In contrast, other governments have used regulation and incentives to encourage demand. In Europe, the Renewable Energy Directive established a minimum threshold for renewable energy consumption—whereby 14% of energy consumed in road and rail transport in Europe must come from renewable energy by 2030. In the US, tax credits were expanded and grants were introduced to drive demand for lower-carbon fuels.

In South-East Asia, private companies are making progress towards biofuels, even without government incentives. Singapore Airlines, Cebu Pacific, and Garuda Indonesia have all trialled SAF in flights. In shipping, Pacific International Lines and PSA Singapore tested a blend of biofuels on the Singapore Qinzhou Shuttle.

Neste, which has a large-scale biorefinery in Singapore, stands out as a regional and global leader in the biofuel market.

In addition to increasing capacity and building up commercial capabilities, it invested heavily in feedstock production (its core business) through partnerships, mergers and acquisitions (M&A), as well as research and development. Through a series of acquisitions and investments, Neste has created a comprehensive, global sourcing platform for biofuels.

Companies that remove bottlenecks along the supply chain will be able to capitalise on the region’s natural advantages and capture outsized returns.

Emily Wu is also a member of Bain and Company’s Energy & Natural Resources practice.

First-mover advantages

There are winning opportunities for every role in the biofuel value chain. In South-East Asia:Upstream suppliers can leverage their unique access to feedstock to maximise supply. For example, farmers and agriculture companies can find ways to optimise their land yields and crop production. Waste management firms can streamline or consolidate collection.

Midstream producers can build new facilities, partner with refiners that are closer to feedstock sources, or retrofit existing refineries. They need to create reliable and affordable access to feedstock and increase their export capacity.Traders can secure contracts and offtake agreements with suppliers and key customers to steady supply and demand. They can encourage loan origination with financing agreements for farmers, and they can support education and programming to reduce carbon intensity.Downstream users can secure the volume they’ll need in the future through long-term agreements with upstream and midstream players. They can also de-risk by securing multiple sources for biofuels and investing in biofuel development and refineries.

South-East Asia’s feedstock market is severely fragmented, especially when it comes to collection. To bring winning strategies to life, organisations across the entire value chain need to consider partnerships. Companies may need joint ventures, partnerships, or M&A to access feedstock, secure offtake strategies, innovate and gain scale.

Retrofitting refinery assets can kick-start production

Refineries in South-East Asia are likely to face utilisation pressure as demand for conventional oil slows after 2030. Given the gaps in global biofuel supply versus demand, retrofitting current assets seems like a target opportunity when technology and regulations allow for it. Conversion can also be more cost-effective for producers than establishing greenfield biofuel plants.

To make the conversion, refineries need to consider four key elements: compatibility, compliance, feedstock supply and the business case.

Compatibility: Refiners need to determine what infrastructure modifications are necessary, keeping in mind that each conversion process requires different feedstock, equipment and operational conditions. Distribution infrastructure, such as storage and transportation, should be evaluated as well.

Compliance: Biofuel production is held to different regulatory standards than traditional fuel production, and criteria may vary by region. For example, Europe has a minimum greenhouse gas emission-savings threshold, caps on crop-based biofuels and restrictions on the types of land that can be used for feedstock production.

Feedstock supply: Refiners need easy access to feedstock materials, plus space, logistics and infrastructure for storage. Supply is one area where refiners may need to lean on partnerships or long-term offtake agreements to ensure retrofitting plans are viable.

The business case: Demand for biofuels is likely to grow substantially, but that doesn’t mean the opportunity is risk-free. Refiners need to carefully weigh the risks and the rewards, as well as the environmental impacts of retrofitting. Refiners that operate in South-East Asia can transform themselves into sustainable, future-proof businesses if they meaningfully reduce emissions when they retrofit.

When biofuel demand takes off, refiners can turn stranded assets into growth engines. For the greatest returns, they need to build the right infrastructure, partners and capabilities now. This is the right time to start.

Thomas Luedi is a Bain & Company partner based in Bangkok, Tanguy Morin is partner based in Singapore and Emily Wu is an associate partner based in Jakarta. The views expressed here are the writers’ own.