The building block for the bio-industry
By Evridiki Dimitriadou, Callum Colford, Luke Milner
Bio-naphtha demand exceeds supply
Bio-feedstock allows ‘drop-in’ production
Currently most bio-based petrochemicals are produced from what are known as “first-generation” feedstocks, typically food crops such as corn or sugar cane. According to industry association European Bioplastics, this is the most efficient production method at the moment, producing higher yields than second-generation feedstocks.
Second-generation feedstocks can be either non-food crops or waste materials from first-generation feedstock such as waste vegetable oil, while third-generation feedstocks are defined as biomass derived from algae or cellulose. Though third-generation feedstocks haves the potential for a significantly larger yield than either first- or second-generation feedstock, there are considerable technical and geographical challenges that have so far prevented industrial adoption.
The choice of feedstock also impacts the premium the product commands from end-users, with feedstocks derived from first-generation material such as palm oil attracting lower premiums than those from second-generation material, both due to lower production costs and consumer perception.
A key petrochemical feedstock for bio-production is bio-naphtha, which can be used as a direct substitute for fossil-based naphtha, either as a gasoline blending component or a petrochemical cracking feedstock.
Bio-naphtha allows the full traditional range of petrochemicals to be produced and, similarly to fossil-based products, yields can be altered depending on a product’s current marketability and price.
Bio-naphtha is primarily produced as a byproduct from the manufacture of Hydrotreated Vegetable Oil (HVO), otherwise known as renewable diesel. It can be also be produced as a byproduct of Sustainable Aviation Fuel (SAF) production, or as a standalone product via gasification, although this method is typically uncompetitive on a pricing front.
European producers use a wide variety of feedstocks to produce bio-naphtha including used cooking oil, vegetable oils such as palm and rapeseed, and waste residues from sectors such as wood pulp production (known as crude tall oil, or CTO) and animal fats.
Current European bio-naphtha supply is estimated to range between 150,000-250,000 mt annually, with expectations for supply to double or even surpass 1 million mt/year in the coming years, according to the NOVA Institute. Current notable producers in Europe include Neste, Eni, Preem and UPM, while multiple plants are set to come online over the next 3-5 years including TotalEnergies’ Grandpuits site, Shell’s site in Pernis, and Repsol’s Cartagena plant.
Available bio-naphtha supply is not sufficient to meet growing demand. Large European petrochemical producers such as BASF, Borealis, Dow and Sabic have already begun utilizing bio-naphtha for bio-based intermediates production.
On the road fuel blending front, demand also is also set to grow, alongside tightening regional regulations for transportation fuels stipulated in the EU’s RED II directive. However, as supply is currently insufficient and costs significant, most bio-naphtha buyers blend a portion of bio-naphtha with fossil naphtha to produce fuels and petrochemicals.
Bio-naphtha is commonly priced at steep premiums against its fossil alternatives, which can range between twice and three times the price of the Platts naphtha CIF NWE benchmark. The main cost component of bio-naphtha and other biofuels (commonly between 65%-80%) is feedstocks.
However, feedstock may vary significantly in price depending on source, availability and regulatory environment, and some feedstocks, notably, palm oil, are deemed by some consumers to be unsustainable and so may be priced at a discount to other bio-sources.
One example of a bio-feedstock producer responding to the public criticism of palm oil is Neste, which is aiming to increase its use of waste and residue raw materials to 100% by 2025, noting that in 2019 and 2020 palm oil accounted for under 20% of its raw material input, though demand in the market continued to exist.
The variability in bio-naphtha pricing is particularly important for blending demand. Specifically, ETBE and ethanol components can be supplemented but also substituted with bio-naphtha in the gasoline blending pool while still meeting the European gasoline EN 288 specification. Several blenders — notably Shell and Preem — are producing gasoline with such characteristics.
However, as gasoline can be composed of several substitutable components, bio-naphtha can often price itself outside the pool if blenders deem it uncompetitively priced. Demand for bio-naphtha in the cracking pool on the other hand is less price elastic due to the lack of available alternatives, although chemical recycling is an emerging possibility that could offer an alternative.
Currently demand for bio-naphtha and other biofuels is on the rise in Europe, but other regions — particularly the US — are also aggressively increasing HVO and by extension bio-naphtha capacity.
Prominent producers in the US include Marathon Petroleum and Valero Energy, while new entrants such as Gevo are coming on to the scene, adding to capacity expansions. Asian interest in bio-naphtha is increasing as well, albeit at a slower pace. One of Europe’s leading biofuels producers, Neste, recently signed a deal to supply Mitsui Chemicals with 10,000 mt of bio-naphtha for its ethylene cracker in Japan between October 2021 and March 2022.
Bio-naphtha currently does not frequently flow across continents, although other bio-feedstocks such as used cooking oil often arrive in Europe from Asia and particularly South American countries such as Argentina. Within Europe, bio-naphtha commonly arrives in Northwest Europe from Scandinavia and the Mediterranean, according to industry sources, with spot market activity also developing.
Other traditional cracker feedstocks such as LPGs are also developing bio-based alternative petrochemical feedstocks with bio-propane a notable byproduct from HVO production.
As with bio-naphtha, market sources have noted consumer pressure in shifting from “first-generation” feedstocks such as sugarcane or corn to “second-generation” material, with research taking place into third-generation feedstocks such as cellulose and algae.
