Port Integration in the Biofuel Supply Chain

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Port Integration

in the

Biofuel Supply Chain

Thesis M.Sc. Technology Management

Faculty of Economics and Business

University of Groningen

April 2012

Name: Leonie Stevens

Van Kinsbergenstraat 24-3 1057 PR Amsterdam +31 6 4573 4549

Leonie_stevens@hotmail.com

Student number: s1539841

Supervisor University of Groningen: Prof. dr. Iris Vis Co-assessor University of Groningen: Dr. Gwenny Ruël Supervisors Accenture: Jeroen Fidder

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2 | M.Sc. Thesis Leonie Stevens: Port Integration in the Biofuel Supply Chain | April 2012

Preface

In June 2011, I’ve started this research in order to finalize the Master Technology Management and graduate at the University of Groningen. Ten months later, with great pleasure and due pride, I present my research findings in this report. Conducting this research and writing my thesis have been a great experience both professionally and personally. Besides extremely challenging, insightful and interesting, I’ve perceived (most of) this project as a lot of fun.

The opportunity to have visited and interviewed such a large number of interesting people and organizations, have made every minute of this research valuable. I would like to thank all the interviewees for their time, expertise-sharing, openness and interest in this research. I can honestly say that without your commitment, this project would not have been such a success.

Many thanks to my supervisor, Prof. dr. Iris Vis, for all your input during our discussions. You have challenged me –with a pragmatic approach- to aim for high academic achievements. The opportunity to have several feedback moments, and the flexibility of their locations is highly appreciated. I would also like to thank you for the chance to take this research to the next level, and I’m looking forward to working with you the next months.

Also a big thank you to dr. Gwenny Ruël, who has been significantly more than a second reader. Your input during both the start-up and finalization phase of this research has really helped me. Also, I would like to thank you for all our cooperating during the TM-curriculum, which I have enjoyed.

Last, but certainly not least, I would like to thank my supervisors at Accenture: Jeroen Fidder and Edwin Knoop. Jeroen, thank you for your time, knowledge and sharing of experience. Your enthusiasm in this project and eagerness to find out the results were truly inspiring. Edwin, thank you for challenging me to aim high and think big. You really showed me that the sky is the limit, and I believe that the Round Table was a great step towards it.

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Management Summary

This research determines the role of ports in the biofuel supply chain. A literature study on supply chain management and port development, as well as interviews with businesses, port authorities, (academic) research institutes and (non) governmental organizations have been conducted to: (1) provide an understanding of the composition of the biofuel supply chain and its development based on the macro-economic environment; (2) identify the roles, activities and corresponding resources and characteristics that a port needs to integrate in the biofuel supply chain and encapsulate these in an Integration Matrix; and (3) test and acknowledge the validity and applicability of the Matrix in a case study and a Round Table.

Part I: The Biofuel Supply Chain

The biofuel supply chain consists of several nodes: feedstock production and processing; feedstock trading & transportation; biofuel production; biofuel trading blending & distribution; and biofuel retail & consumption. The biofuel supply chain is immature, constantly developing and consists of a large number of (changing) players and types of product at different locations, which make it a complex chain. The biofuel industry is mainly regulation driven and geopolitical issues (driven by environmental and economical agenda’s) make the biofuel supply chain extremely uncertain. This uncertainty in the supply chain and its strategic environment result in the need for leanness and agility. Organizations need to cooperate in the supply chain, and take a holistic approach to supply chain management: supply chain integration.

Part II: Ports in the Biofuel Supply Chain

Because of the global imbalance in biofuel (feedstock) supply and demand, an international biofuel market is developing. This includes overseas shipping of biofuel and feedstock and makes ports vital parts of the biofuel supply chain. Ports are conceptualized as a network of actors which produces value. This value creation is enhanced by integrating in a supply chain. Port supply chain integration is defined as the extent to which a port plans and organizes activities, processes and procedures beyond its boundaries, in the supply chain. Ports should integrate in the biofuel supply chain by increasing their involvement in this chain and evolve from transshipment points to a logistical Hub for biofuel flows and/or a biobased Industrial Cluster. They can achieve this by creating a clear vision and by extending their role from facilitating, to more initiating, coordinating and orchestrating activities in order to (1) facilitate flows; (2) create new flows; (3) execute value adding activities of the supply chain in the port area; (4) develop bio-industry cluster; and (5) act as a knowledge center. The main academic contribution of this research is the Integration Matrix, with the activities that are needed to fulfill these roles that achieve these goals, and the resources and characteristics needed to do so.

Part III: Validation

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List of Figures

Figure 1.1: Industries involved in the biofuel supply chain Figure 1.2: Research framework

Figure 2.1: Conceptualization need for supply chain integration Figure 3.1: Nodes in the biofuel supply chain

Figure 3.2: Global ethanol production (*1000 MT) 2009 Figure 3.3: Development global ethanol production (mln MT) Figure 3.4: Global biodiesel production (*1000 MT) 2009 Figure 3.5: Development global biodiesel production (mln MT) Figure 3.6: European biofuel production (MT) 2010

Figure 3.7: Process steps between European biofuel production/import and retail Figure 4.1: Blending targets EU member states

Figure 4.2: Overview of commercialization status of biofuel technologies Figure 4.3: Life-cycle GHG balance of biofuels

Figure 4.4: Global population growth

Figure 5.1: Increasing integration of ports into the supply chain

Figure 5.2. The relation between cargo handling, transportation and logistics Figure 5.3: Interactions of channels in an integrated port management system Figure 5.4: Conceptualization need for port supply chain integration

Figure 5.5: Building blocks Integration Matrix

Figure 6.1: Nodes of the biofuel supply chain that can be executed in the port area Figure 6.2: Overview of port roles in the biofuel supply chain

Figure 6.3: Roles and goals of aggregated activities for ports in the biofuel supply chain Figure 6.4: Integration Matrix

Figure 8.1: PoR ethanol throughput of sea going vessels Figure 8.2: PoR biodiesel throughput of sea going vessels Figure 8.3: Rotterdam storage capacity in million m3 Figure 8.4: Biobased industry in the PoR

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List of Tables

Table 3.1: Overview of conventional biofuels Table 3.2: Overview of advanced biofuels

Table 3.3: Overview of the organizations and locations that provide the ethanol-feedstock Table 3.4: Overview of the organizations and locations that provide the biodiesel-feedstock

Table 3.5: Overview of the organizations and locations that provide trading and transportation of the ethanol-feedstock

Table 3.6: Overview of the organizations and locations that provide trading and transportation of the biodiesel-feedstock

Table 3.7: Location and scale of biofuel and feedstock production

Table 3.8: Overview of the organizations and locations of ethanol production Table 3.9: Overview of the organizations and locations of biodiesel production

Table 3.10: Overview of the organizations and locations of ethanol trading, blending & distribution Table 3.11: Overview of the organizations and locations of biodiesel trading, blending & distribution Table 4.1: Political factors influencing the biofuel supply chain.

Table 4.2: Economical factors influencing the biofuel supply chain Table 4.3: Social factors influencing the biofuel supply chain

Table 4.4: Technological factors influencing the biofuel supply chain Table 4.5: Environmental factors influencing the biofuel supply chain Table 4.6: Demographic factors influencing the biofuel supply chain Table 4.7: PESTED Analysis of the biofuel supply chain

Table 5.1: Port activities to integrate in supply chains

Table 5.2: Literature overview conceptualization port supply chain integration Table 6.1: Resources and characteristics needed to provide Operating Flexibility Table 6.2: Resources and characteristics needed to provide Multimodal Transportation

Table 6.3: Resources and characteristics needed to provide Seamless Communication and Information Flow Table 6.4: Resources and characteristics needed to provide Cooperative Thinking

Table 6.5: Resources and characteristics needed to provide Advanced Operating Flexibility Table 6.6: Resources and characteristics needed to Create Market / Initiate Flow

Table 6.7: Resources and characteristics needed to provide Value Added Activities

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8 | M.Sc. Thesis Leonie Stevens: Port Integration in the Biofuel Supply Chain | April 2012 Table 6.10: Resources and characteristics needed to Promote Bio-initiatives

Table 6.11: Resources and characteristics needed to Act as a Knowledge Center: Create & Exploit Knowledge Table 8.1: Biofuel producers in the PoR

Table 8.2: Ranking resources related to Operating Flexibility

Table 8.3: Ranking resources related to Facilitating Multimodal Transportation

Table 8.4: Ranking resources related to Seamless Communication and Information Flows Table 8.5: Ranking resources related to Cooperative Thinking

Table 8.6: Ranking resources related to Advanced Operating Flexibility Table 8.7: Ranking resources related to Creating Market and Initiate Flow Table 8.8: Ranking resources related to Value Added Activities

Table 8.9: Ranking resources related to Developing Relationships/Network Table 8.10: Ranking resources related to Cooperative Thinking

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Figure 1.1: Industries involved in the biofuel supply chain (Accenture, 2007)

Chapter 1: Introduction

1.1 Research Context

Biofuels are a small but growing part of the European energy mix. In 2009, the European Union (EU) consumed around 4 billion liters of ethanol and 11 billion liters of biodiesel, together accounting for around 3 percent of the total EU road fuel consumption (Accenture, 2010). Under the strict condition that biofuels meet certain sustainability criteria designed to eliminate pressure on food and biodiversity, the EU will encourage further use of biofuels and has set a biofuels target of 10 volume-percent for road transportation by 2020, a significant increase.

Biofuel Supply Chain

Meeting this extra demand has a considerable impact on three separate industries (agri-food, biofuel production and integrated oil) that together create the biofuel supply chain, as shown in figure 1.1).

The biofuel industry is highly volatile, largely regulation-driven, dependent on several variables and therefore, its future is hard to predict. Many macro-economic

factors, such as legislation, environmental issues and technological developments, are influencing the demand and supply of biofuels. Experts state that “biofuels are here to come”, but no-one actually knows where demand is going. Still, the stakeholders in the supply chain should, and are preparing for increased volumes of biofuels produced and consumed.

The global demand and supply for biofuels are dislocated and an international market is developing. Large amounts of biofuel and biofuel feedstock are shipped in from locations with a surplus into demanding areas. Efficient seaports are often critical to enabling cost effective transportation of biofuels. The most advanced ports can accommodate large ships and offer a range of facilities for handling and storage as well as excellent land transport connections (IEA, 2009).

Port supply chain integration

There have been a number of authors acknowledging the important role of ports in the context of supply chain management (Robinson, 2002; Carbone & De Martino 2003; Marlow & Paixao, 2003; Paixao & Marlow, 2003; Bichou & Gray, 2004, 2005; Panayides, 2006; Cullinane & Wang, 2006; Tongzon, Chang & Lee, 2009). To fulfill this role ports must evolve from the traditional functions of facilitating operations, to become links in a larger logistics chain and part of a global distribution channel. In order to be successful, such chains need to achieve a higher degree of integration (De Souza, Beresford & Pettit, 2003). Despite the importance of port supply chain integration for ports as well as for port users and other members of the supply chain, there has been limited empirical investigation in this area (Panayides & Song, 2009).

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1.2 Research Objective

The aim of this research is to investigate which roles a port can have in the biofuel supply chain. A schematic overview of the biofuel supply chain is provided and the possible roles of a port in it, are determined. The study investigates the activities, and corresponding port resources and characteristics needed to fulfill these roles, and integrate in the biofuel supply chain. The output of the study is an ‘Integration Matrix’ with the determined roles, value-added activities, resources and characteristics a port needs to integrate in the biofuel supply chain.

The Integration Matrix, and its applicability, are validated through a case study on the Port of Rotterdam and a Round Table, supported by Accenture. This research stage is used to validate the research findings and discuss their possible generalization.

This study contributes to the knowledge on port supply chain integration with empirical findings. The research investigates the integration of a port in a supply chain, that is quite different from the commodities and cargo chains which are familiar to ports. The biofuel supply chain is relatively new, consist of nodes from different existing chains (see figure 1.1), is constantly developing, and largely regulation-driven. Also, this study will provide in the highly-demanded academic point of view on the logistics and supply chain management of the biofuel industry.

These aims lead to the following research objective:

To design an Integration Matrix with the roles a port can fulfill in the biofuel supply chain, and the resources and characteristics a port needs, to provide the value-added activities required for integration in the biofuel supply chain.

1.3 Research Questions

The research objective is converted into the following research question:

Which roles can a port fulfill in the biofuel supply chain, and which resources and characteristics does a port need, to provide the value-added activities required for integration in the biofuel supply chain? Several sub questions support this research by answering the main research question and realizing the research objective:

1. What are the characteristics of the biofuel supply chain?

2. How does the macro-economic strategic environment influence the biofuel supply chain? 3. Which roles can a port fulfill in the biofuel supply chain?

4. Which value added activities could a port provide, to fulfill the roles that are needed to integrate in the biofuel supply chain?

5. Which resources and characteristics does a port need to provide the activities that are required to fulfill the roles needed to integrate in the biofuel supply chain?

6. How can the roles, activities, resources and characteristics that a ports need to integrate in the biofuel supply chain be captured in an Integration Matrix?

7. How does the Port of Rotterdam score on the roles, activities, resources and characteristics of the Integration Matrix?

1.4 Research Method

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Figure 1.2: Research Framework

three will test the validation of the Integration Matrix using a case study and a Round Table to answer sub question 6 and 7. The case study verifies which of these roles, value added activities, and corresponding resources and characteristic the Port of Rotterdam already has or should develop in order to successfully integrate in the biofuel supply chain. This case study tests the applicability of the designed matrix. At the Round Table, the findings are further validated and the (in the study involved) stakeholders discuss the implications and generalization of the Matrix.

Data gathering method

This research is partly descriptive, and provides a literature overview on port supply chain integration based on a desk study. This reveals the ‘building blocks’ of the Integration Matrix. The actual Matrix is composed based on input from academics, practitioners and (non) governmental organizations in the both the (bio) fuel and port industry. During multiple interview rounds the expertise of all stakeholders is gathered, resulting in a multi-perspective view on the development of the biofuel supply chain, and the opportunities for ports in it.

Since the topic of the research is relatively new, with uncertain development, the researcher expects diverse outcomes from interviews with different stakeholders. Therefore, consolidation of the findings is expected to be needed. The researcher has conducted multiple rounds of interviews, similarly to the Delphi-principle (the Delphi method is a research tool for gathering and consolidating interviewee opinions order to develop a set of alternative future scenarios (Okoli and Pawloski, 2004)). The results of each round are analyzed, consolidated and used as input for the following interview round. This gives the interviewees an opportunity to further explain or revise their opinion.

1.5 Interview Methodology

Chapter 3 provides an overview of the biofuel supply chain and its composition. From each ‘node’ (see section 2.2 and 3.2), interviewees of at least two organizations have participated in this research. Also, the expertise of parties ‘outside the supply chain’ (which are not a node), which have been found to have influence on the chain in the PESTED-analysis (see chapter 4), such as the government, research institutes and universities is included in this research. Of course, the vision of several port authorities on biofuels and their role in the supply chain is also captured. More information on the selection of interviewees and the list of participants can be found in appendix A.

Two rounds of interviews, with a total of 51 experts from 40 organizations, have been conducted. The first round consisted (with a few exceptions) of face-to-face interviews and aimed at gaining a thorough understanding of the biofuel supply chain, the activities of the actors in it, and the role of ports (based on the information gathered in chapter 5). More information on the questions asked during the first interview round is provided in chapter 6.

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This second round of interviews was largely conducted through telephone conversations, and –based on the information needed from the interviewee- some face-to-face interviews, as well as some specific validation questions by email. Based on the information needed, and the available time of the interviewees, 20 of the 40 organizations were included in the second round of interviews. This second round had several goals:

1. Confirm the overview of the biofuel supply chain and the factors found in the PESTED-analysis. 2. Test contradicting statements found in interview round I.

3. Test and confirm the preliminary ‘Integration Matrix’.

4. Ask follow-up questions on the ‘resources and characteristics needed’, and therewith completing the Matrix.

5. Ask the questions needed to conduct the Rotterdam Case-study (see chapter 8).

The research is based on the researcher’s interpretation and analysis of the opinions of the interviewees. Not all statements were shared equally amongst all interviewees, and not all are backed by literature findings. Therefore, some statements are presented as general agreed upon, and for others an explanation is added to clarify which part of the supply chain or which type of company has supported the statement. Part III of this report discusses the validation of results at the Round Table, where direct interaction between the participants was facilitated.

1.6 Outline Report

The contributions of this research are divided into three parts, and so is this report. This report will continue with an introducing chapter which explains the theories that are used as fundaments for this research. Chapter 2 introduces some of the academic definitions that are used throughout this report. This chapter is based on the relevant academic work in the field of logistics and supply chain management.

Part I of this report delivers the first objective of this research by presenting an overview of the biofuel supply chain and its development. Chapter 3 applies the academic knowledge of chapter 2, and gives an overview of the composition and characteristics of the biofuel supply chain. Chapter 4 presents an overview of the macro-economic environment of the biofuel supply chain and the factors influencing its development. Both chapters in the first part of this report are the researcher’s interpretation and consolidation of industry reports and stakeholder interviews.

Part II of the report determines the role of ports in the biofuel supply chain. Chapter 5 discusses the academic definitions of ports and the roles of ports in supply chain in general. In chapter 6, these literature findings are combined with the results from the first part of the research, when the roles of a port in the biofuel supply chain are discussed. This results in the main academic contribution of this report: the Integration Matrix, with roles, activities, resources and characteristics of ports in the biofuel supply chain. Part III validates the Integration Matrix. In Chapter 7, the output of the Round Table and the implications of the Integration Matrix are discussed. Chapter 8 of this report determines the role of the Port of Rotterdam in the biofuel supply chain. The ‘general’ Integration Matrix is applied to a specific case: the Port of Rotterdam. This case study determines how the Port of Rotterdam can (further) integrate in the biofuel supply chain. Also, the conclusions on the validity and applicability of the Matrix that are drawn based on the case study are discussed in this chapter.

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Chapter 2: Supply Chain Management and

Integration

This chapter elaborates on the principles of supply chain, logistics and supply chain management and therewith provides the academic backbone and scope of this research. Definitions are provided, as well as academic guidelines on how to map a supply chain in order to understand it. The status quo of research in this field is discussed, and the relevant trends and development in supply chain management are outlined.

2.1 Supply Chain Management

The research on logistics and supply chain management is extensive. Many authors have developed their understanding on what encompasses a supply chain and its management. This first paragraph provides the definitions of supply chains, logistics and supply chain management which are used in this report.

2.1.1 Supply Chains and Logistics

Several authors have contributed in defining the chain of events that a product runs through, from feedstock to final product. In the view of the researcher, the following definition, based on Handfield & Nichols (1999) and Christopher (2011), provides a good understanding of this principle:

“The supply chain encompasses all activities associated with the physical and information flow and transformation of goods from the raw materials stage, through to the end user, as well as the associated information flows. The supply chain is a network of connected and interdependent organizations mutually and co-operatively working together to control, manage and improve these flows and activities.”

Firms increasingly understand that their business part is of a ‘bigger picture’ and are actively trying to manage their supply chain. Handfield and Nichols (1999) note that, from a firms perspective, the supply chain consists of internal functions, as well as upstream suppliers and downstream customers.

A concept which goes hand in hand with supply chains is logistics, which is defined by Handfield and Nichols (1999 p. 46) as:

“…the process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements.”

A logistic ‘chain’ can have many compositions, differing from a pipeline in which sequential processes are fully integrated, to a network in which many actors are intertwined in the processes towards delivering customer value (Hoekstra & Romme, 1992).

2.1.2 Supply Chain Management

Supply Chain Management (SCM) is a broader concept which encompasses logistics and “emphasizes the co-operative and coordinated role of channel participants in facilitating goods and information both upstream and downstream” (Panayides and Song, 2008 p. 564). There are many definitions of SCM which are used in academic research and practice. Van Goor (2003, p. 50) refers to an all-embracing definition:

“Supply Chain Management is the management of a network that links customers and suppliers as one ‘single entity’ with the objective to create value through the voluntary integration and co-ordination of the objectives of independent parties in the network.”

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2.2 Supply Chain Mapping

In order to create an understanding of a supply chain, a supply chain process map or flowchart, with the major processes in the chain, can be developed (Handfield and Nichols, 1999). Supply chains are a complex web (network) of interconnected ‘nodes’ and ‘links’. Nodes represent the entities or facilities such as suppliers, distributors, factories and warehouses which are active in the chain. The links are connections between two supply chain nodes based on their relationships over time. These links can be physical flows, information flows or financial flows (Christopher, 2011). A supply chain node can be distinguished by the following attributes (Li and Kumar, 2005 p. 109):

1. Product/service: refers to the material produced or the service provided by supply chain organizations.

2. Organization: refers to the supply chain entities that produce customer-required products/services. 3. Location: the place where supply chain activities are conducted.

2.3 Trends in SCM

SCM has gained momentum in the business environment. Developments in global markets and technologies have brought SCM to the forefront of management’s attention (Christopher, 2011). These developments and their impact on supply chains and SCM are discussed in more detail in the following sections. This section will show that the increasing complexity of supply chain and logistics results in the need for lean and agile supply chains and supply chain integration. It should be noted that only those trends that are relevant for this research, e.g. of importance to the biofuel supply chain or the role of ports, are included.

2.3.1 Changing Competitive Environment

A development in many markets is the trend towards ‘commoditization’. A commodity market is characterized by perceived product equality in the eyes of customers (Christopher, 2011). This results in a high preparedness of these customers to substitute products, and hence a fierce competition between competitors –mostly on price.

There is also a trend for customers to reduce their supplier base. Customers want to do business with fewer suppliers, preferably on a longer-term basis (Christopher, 2011).

The competitive landscape is becoming more and more global which drives prices to low levels. The continuing trend towards globalization poses a strategic challenge for logistics management. Companies are seeking to grow their business by extending their markets, whilst at the same time seeking cost reduction through scale economies in purchasing and production. Globalization tends to lengthen supply chains as companies increasingly move production offshore or source from more distant locations (Christopher, 2011) and presents certain challenges: (1) World markets are not homogeneous and there is still a requirement for local variation in many product categories. Van Goor (2003) stresses that taking national and regional differences in market approaches and customer service into account will be essential to European physical distribution structures. (2) Unless there is a high level of coordination, the complex logistics of managing global supply chains may result in higher costs and extended lead times.

2.3.2 Supply Chain Complexity

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Christopher (2011) defines complexity as a condition of interconnectedness and interdependency across a network. He identifies several types or sources of complexity in a supply chain (network, process, range, product, customer, supplier, organizational and information) which result in uncertainty and vulnerability in a supply chain. Supply chain vulnerability can be defined as the exposure to serious disturbance, arising from risks within, as well as external to the supply chain (Christopher, 2011).

2.3.3 Supply Chain Agility

Market trends and the resulting complexity in supply chains have forced organizations to take on highly flexible new approaches. Companies must be able to respond quickly to new customer requirements and new markets by producing new products (Van Goor, 2003). Christopher (2011) sees this as a fundamental shift away from the economies of scale model, which is volume based, to the economies of scope model, which is based upon producing small quantities of a wider range, hence requiring more changeovers.

Christopher (2011) advocates a change of focus from ‘efficiency’ to ‘effectiveness’. In his view, efficiency is always desirable, but in the context of unpredictable demand it may have to take second place to ‘effectiveness’ as the main priority for supply chain management. He defines effectiveness as the ability of an organization to respond rapidly to the precise needs of an often fragmented marketplace. This is translated in a challenge for today’s business environment of combining ‘lean’ practices with an ‘agile’ response. According to Marlow and Paixão (2003) agility can strengthen the links between the internal and external business environment, as it is a knowledge-based strategy that helps any business to move quickly in a new economy. The agile supply chain is market sensitive, virtual, network based and has aligned processes (Christopher, 2011).

To achieve an agile supply chain, there is a need for resilient processes that are flexible and able to change quickly. In this respect, velocity is not enough. Supply chain resilience also requires ‘slack’ at the critical points that constitute the limiting factors to changes in the rate of flow (Christopher, 2011).

Agile supply chains aim for structural flexibility, which reflects the ability of a supply chain to adapt or reconfigure its architecture in response to major changes on the demand or the supply side. Agility is not a single company concept but rather it extends from one end of the supply chain to the other. According to Christopher (2011) key enablers of flexibility are:

- Visibility

- Information sharing - Access to capacity

- Access to knowledge and talent

- Inter-operability of processes and information systems - Network orchestration

2.4 Supply Chain Integration

The changing markets, and the changes associated with the European unification (such as transport policies) have led shippers to review their European logistics strategies (Van Goor, 2003). Supply chains are moving from internal integration towards external integration with customers, suppliers and transport and distribution companies which leads to an increasing importance of logistics partnerships (Van Goor, 2003). Christopher (2011, p. 15) states: “Real competition is not company against company but rather supply chain against supply chain”. Logistic operations that were previously separated should be linked as common systems:

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Figure 2.1: Conceptualization need for supply chain integration

Van Goor (2003) and Christopher (2011) refer to the steps (or stages) towards an integrated supply chain identified by Stevens (1989):

1. Baseline, with complete functional independence and where each business function operates on its own, in complete isolation from other business functions.

2. Functional integration, where the need for at least a limited degree of integration between adjacent functions is recognized.

3. Internal integration, where the establishment and implementation of an end-to-end planning framework results in an integrated enterprise.

4. External integration, where the concept of linkage and coordination is extended upstream to suppliers and downstream to customers, leading to true supply chain integration.

5. Virtual networks, where information technology is used to share data between multiple suppliers and customers to create value.

Literature acknowledges the positive reinforcing relation between integration across the supply chain and firm performance (Narisimhan & Jayaram, 1998; Johnson, 1999; Frohlich & Westbrook, 2001), and the dangers for suppliers and customers of not fully integrating their business processes (Armistead & Mapes, 1999). According to Song and Panayides (2008) these findings, demonstrate the overriding importance of the concept of supply chain integration in the field of SCM.

There has been considerable debate regarding the specific performance measures required to manage an integrated supply chain. Organizations recognize that future competition is likely to put different supply chain against each other in pursuit of the customer’s business (Handfield and Nichols, 1999). Therefore, it is critical to assess and continuously improve the performance of the entire chain. Handfield and Nichols (1999) and Christopher (2011) have identified four broad key performance areas in complex supply chains: (1) customer satisfaction/ quality, (2) time, (3) costs, and (4) assets/relationships. These drivers result in the ‘4 R’s’ -principles that guide supply chain managers: responsiveness, reliability, resilience and relationships (Christopher, 2011).

2.5 Conclusion

This introducing chapter provided the definitions that are used throughout this research. This research uses ‘supply chain’, ‘logistics’ and ‘SCM’ as broad, all-encompassing terms. Section 2.2 has provided the methodology for mapping a supply chain, using the attributes of each node, which will be used in the first part of this research, when an overview of the biofuel supply chain is provided.

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Part I:

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Chapter 3: The Biofuel Supply Chain

This chapter gives an overview of the biofuel supply chain. The literature findings of chapter 2 are applied to this specific chain.

Because of the complex nature of the biofuel industry, and the many factors influencing it, a ‘System of Systems’ approach is taken to describe the supply chain. System of systems applies to a system of interest whose elements are themselves systems; typically these entail large-scale inter-disciplinary problems with multiple, heterogeneous, distributed systems (Riley and Sandor, 2008). This approach results in two ‘parts’ of the biofuel supply chain description: 1) “capability”; the supply chain with systems and stakeholders from feedstock to end-use (e.g. the nodes and their attributes) and 2) “context”; the systems in the strategic environment influencing the supply chain (Riley and Sandor, 2008). This context is discussed in chapter 4. This chapter starts with a brief description of biofuels and an overview of the types of biofuels that are currently produced and consumed. This should give the reader enough background to for section 3.2: the overview of the biofuel supply chain.

The work presented in this chapter is based on the researchers’ interpretation and consolidation of industry reports and stakeholder interviews. The following industry reports have been used most extensively: European Biofuel Barometer (Eurobserver, 2011); Biofuel Technology roadmap (IEA, 2011); Impact Biofuels on Oil Refining and Fuel Specifications (EC Wood Mackenzie, 2010); JEC Biofuels Report (JEC, 2011); and Sustainable Production of Second Generation Biofuels (IEA, 2010); Gain Biofuels Annual Report (USDA, 2011).The data used throughout this chapter is gathered from the National Renewable Energy Action Plans of EU member states, the European Biofuels Technology Platform (EBTP), the European Biofuel Board (EBB) and the European Renewable Ethanol Association (ePURE).

3.1 Biofuels

Biofuels are fuels, mainly used for transportation, which are derived from some sort of biomass. This research specifically focuses on liquid biofuels and leaves solid and gaseous biofuels out of its scope. There is considerable debate on how to classify biofuels. Biofuels can be categorized into 1st, 2nd and 3th generation or by conventional/advanced biofuels. This research follows the technical distinction between conventional and advanced biofuels. Ethanol can be used as a substitute fuel for gasoline and biodiesel for fossil diesel. Tables 3.1 and 3.1 give an overview of the different types of biofuels that are currently produced and consumed. More information on these biofuels and their conversion process can be found in appendix C.

Conventional Biofuels

Conventional biofuels usually refer to those fuels made with well-established technological processes and are produced on commercial scale. They are commonly referred to as first generation biofuels from agricultural crops grown for food and animal feed purposes (IEA, 2008; Pelkmans et al., 2007; Turcksin et al. 2011). The most commonly produced and consumed conventional biofuels are sugar- and starch based ethanol and biodiesel based on vegetable oils.

Advanced Biofuels

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Table 3.1 and 3.2: Overview of conventional and advanced biofuels

Feedstock Production & Processing Feedstock Trading & Transportation Biofuel Production Biofuel Trading, Blending & Distribution Biofuel Retail and Use Figure 3.1: Nodes in the biofuel supply chain

conventional and advanced biofuels is made based on their technology. The GHG emission balance of biofuels (an important ‘performance indicator’, see section 4.5) and their considered sustainability depends on the feedstock and processes used, and it is important to realize that advanced biofuels performance is not always superior to that of conventional biofuels (IEA, 2011). Advanced biofuels can be produced from ‘conventional’ feedstock which is not considered sustainable.

Conventional Biofuels

Ethanol (sugar- and starch based) ETBE (Ethyl Tertiary Butyl Ether)

Biodiesel (FAME- Fatty Acid Methyl Ester) Straight/Pure Vegetable Oils

3.2 Biofuel Supply Chain

As discussed in chapter 2, an overview of a supply chain can be given by mapping its node and links and determining its attributes. This chapter will identify each node in the biofuel supply chain and determine the several attributes (product, organization and location), as well as the links that connect the nodes. Many reports, industry outlooks and some academic work (Huang, Chen & Fan, 2010; Dal-Mas, Giarola, Zamboni & Bezzo, 2011; and Turcksin et al., 2011) have provided some overview of (parts of) the biofuel supply chain and describe the nodes that provide the feedstock, produce the biofuel and distribute it for usage. However the exact descriptions and level of detail differ from report to report. This research provides a high-level overview, but with enough detail to determine the attributes of each node. This should give the reader a thorough understanding of the composition of the chain and its expected development, without being overloaded with details on each of the nodes. The description of the biofuel supply chain is broken down into five nodes or process stages (see figure 3.1 below):

1. Biofuel feedstock production stage, where the biomass is grown, harvested and –if necessary- preprocessed.

2. Biofuel feedstock transportation stage, where the biomass is traded and transported to its destination of use (one of which is the conversion to biofuel).

3. Biofuel production stage, where the biomass is conversed into biofuel.

4. Biofuel distribution stage, in which the biofuel is stored, transported and blended with conventional fossil fuels and distributed to terminals and retail sites.

5. Biofuel retail and end-use stage, where consumers buy and use gasoline and diesel with a blend of ethanol or biodiesel.

The next sections discuss each node, and its attributes in more detail. Although all biofuels roughly follow the same nodes mentioned and we can speak of ‘a’ biofuel supply chain, differences between types of biofuel can be identified per node. Therefore, the composition of each node and the accompanying attributes are discussed separately for biodiesel and ethanol. In each section, a table is presented with the type of organizations which execute the processes in the node (the organization attribute), the type of product handled at that node (the product attribute) and the location at which this handling takes place (the

Advanced Biofuels

(Ligno) Cellulosic Ethanol

ETBE (Ethyl Tertiary Butyl Ether) Hydro-treated Vegetable Oil (HVO) Biomass-to-liquid (BtL) Diesel Algae-derived biofuel Methanol / Bio DME Butanol

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location node). Furthermore, the organization of the logistics at each node is explained. The composition of the supply chain and nodes as they are today is provided, as well as the situation expected in 2020. This relatively short term’ outlook is chosen with the high uncertainty of the biofuel industry and supply chain taken into account. With an outlook to 2020, the researcher aims at looking forward, while at the same time delivering practical applicable findings and including data sources with reliable estimates.

The trends and challenges that are identified for each node are discussed. The focus of this research is on flows trough (the North-West of) the EU. However, the biofuel (or its feedstock) consumed there, is often sourced from locations elsewhere in the world. All streams relevant for the consumption of biofuels the EU are discussed.

3.3 Feedstock Production & Processing

The biofuel supply chain starts with the cultivating and harvesting of different types of biomass. The feedstock that is used for EU consumed biofuel is cultivated all over the world. After harvesting, the ethanol-feedstock is used ‘directly’ by the ethanol producers. Many biodiesel ethanol-feedstocks need an additional processing stage where the oil is extracted from the bean/seed that is harvested.

The feedstock that is used for biofuels is provided by the ‘traditional’ agricultural industry; (independent) farmers, and agricultural organizations (commodity houses). The cereals, sugar-derivatives, and vegetable oils that are used for biofuels are known agricultural commodities, which have been produced and traded for decades in established (food and feed) markets. Most biofuel feedstock providers are integrated producers (e.g. the same organization supplies the feedstock and converses it to biofuel) and therewith encompass a powerful node in the chain.

Trends and Challenges in Feedstock Production & Processing

The number of individual farmers which operate independent on the market tends to decline at all of the locations mentioned. Most of these farmers are incorporated in some way in large agricultural organizations (this is conform the supplier-consolidation-trend identified in paragraph 2.3).

Another trend is that of National Oil Companies (NOC’s) and International Oil Companies (IOC’s) getting involved in the cultivation of biofuel feedstock. These companies understand that the supply of feedstock is essential for successful production and commercialization in later stages of the chain. These often powerful companies do not wish to be dependent of other companies for their biofuel (and feedstock). The larger part of these upstream integration initiatives includes involvement in the production of ethanol-feedstock, instead of biodiesel. Some interviewees state that this might be an indication of ‘where the biofuel market is going’.

Independent producers also have identified the need for getting involved in the supply of feedstock and are expected to integrate upstream in the supply chain. This means that all types of biofuel producers (see section 3.5) will integrate upwards in the supply chain. By getting involved in the production of the feedstock, they not only wish to capture some of the upstream value but also can assure the sustainability of the used feedstock.

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around 100 Mha in 2050, corresponding to an increase from 2% of total arable land today to around 6% in 2050 (IEA, 2011; FAO, 2009).

Table 3.3 and 3.4 provide an overview of the type of feedstock that is used for the biofuel consumed in the EU, together with their producing organizations and locations. Both the current situation, as well as the situation in 2020, with the changed supply chain attributes, is provided.

Ethanol Feedstock Production and Processing

Current Situation

2020 Situation

WHO?

Independent Farmers Independent Farmers

Agricultural Industry Agricultural Industry NOC’s and IOC’s

WHAT & WHERE?

Corn – US Corn – US

Sugarcane – Brazil Sugarcane – Brazil

Cereals – (Eastern) Europe Cereals – Eastern Europe Cellulose – Brazil/Europe/US Sugar – Latin America/Thailand

Table 3.3: Overview of the organizations and locations that provide the ethanol-feedstock

Biodiesel Feedstock Production and Processing

Current Situation

2020 Situation

WHO? Independent Farmers Independent Farmers

Agricultural Industry Agricultural Industry

Soy - Argentina Soy – Argentina

Palm – Malaysia & Indonesia Palm – Malaysia & Indonesia

Rapeseed - Europe Rapeseed – Europe

Animal Fats – Europe Animal Fats – Europe Used Cooking Oil - Europe Used Cooking Oil – Europe

Sugar – Latin America/ Thailand Grain – Africa

Table 3.4: Overview of the organizations and locations that provide the biodiesel-feedstock

3.4 Feedstock Trading & Transportation

After harvesting (and processing) the biofuel feedstock is transported to the production locations. Ethanol-feedstock can be used directly by the producers. In fact, the main part of the ethanol producers is located in proximity of feedstock production/cultivation. Feedstock is supplied to the conversion plant by truck or train, or by barge in the case of more distant locations. In some situations (which rather are an exemption) the production of ethanol is dislocated from supply and located in an area near demand. In these cases feedstock is usually (globally) sourced and supplied by vessels. Since biodiesel producers are more located in demanding areas, large volumes of vegetable oil are traded and exported to biodiesel-producers at overseas locations by vessel. Still, significant volumes of biofuel are also produced at the ‘supplying locations’. These often are biodiesel-producers which are (physically) integrated with the vegetable oil-producers.

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experience with cross-commodity trading and risk management. The uncertainties in the supply of agricultural commodities is substantially different from that of oil supply, where supply (once drilled) is fairly certain and risks are relatively manageable.

Trends and Challenges in Feedstock Trading & Transportation

The logistics of supplying conventional feedstock from conventional locations is not expected to be a barrier in the industry. Volumes can be scaled up, resulting in more shipments, larger batches and more (storage) capacity needed. Infrastructure constraints might develop itself in new developing areas, such as Latin America and Africa. These locations, which are expected to play an increasing role in the supply of feedstock, often have poor infrastructure and lower (transport) efficiency.

The supply of feedstock for advanced biofuels, and cellulosic material in specific, is expected to generate more problems. A logistical barrier is a general lack of technically mature pre-treatment technologies to compact low value (dry) bio-mass at low cost and facilitate transportation (Junginger et al., 2011). Table 3.5 and 3.6 give an overview of the global biodiesel and ethanol feedstock flows that eventually will be produced (within or outside Europe) into biofuel destined for EU consumption and the parties that execute the trading and transportation.

Ethanol Feedstock Trading & Transportation

Current Situation

2020 Situation

WHO?

Agricultural Industry Agricultural Industry

Traders Traders

NOC’s and IOC’s

Corn – within the US Corn – within US

Sugarcane – within Brazil Sugarcane – within Brazil Cereals – within Europe Cereals – within Europe

Cellulose – within Brazil/Europe/US Sugar – within Latin America/Thailand

Biodiesel Feedstock Trading & Transportation

Current Situation

2020 Situation

WHO? Agricultural Industry Agricultural Industry

Traders Traders

Soy Oil – within Argentina / to Europe Soy Oil – within Argentina / to Europe Palm Oil – within Malaysia & Indonesia / to

Europe

Palm Oil – within Malaysia & Indonesia / to Europe

Rapeseed Oil – within Europe Rapeseed Oil – within Europe Used Cooking Oil – within Europe Used Cooking Oil – within Europe Animal Fats – within Europe Animal Fats – within Europe

Sugar - Latin America & Thailand / to Europe

Table 3.6: Overview of the organizations and locations that provide trading and transportation of the biodiesel-feedstock

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Figure 3.3: Development global ethanol production (mln MT) (Source: OECD/FAO, 2011)

Figure 3.2: Global ethanol production (*1000 MT) 2009 (Source: Eurobserver, 2011)

3.5 Biofuel Production

Biofuel production can be regarded as the ‘connecting node’ between two existing value chains: 1) feedstock supply, which is largely dominated by the agricultural industry and their value chain; and 2) biofuel blending and distribution, which is mainly done by the oil companies in the fossil fuel value chain. Several players are involved in the production of European consumed biofuels:

- Agricultural Industry, which has the scale in the agricultural sector, interest in feedstock supply chain and risk management expertise.

- Farmer cooperative groups, who have government support, but face the challenge of growing/building scale.

- International Oil Companies (IOC’s) and National Oil Companies (NOC’s), who have the distribution in place but biofuels erode gasoline and diesel volumes.

- Independent producers, who have the benefit of developing focused strategies for this market, but they also face the challenge of scale.

Development Global Biofuel Production

Globally, biofuel production has increased fast over the last 10 year, mainly supported by ambitious government policies (see section 4.1). When demand was rising, several industries (oil industry and agribusinesses) as well as new parties (backed by investors) dove into the market by building production facilities. Many of these initiatives turned out to be negative investments, because of a lack of achievable scale, or poor chosen location. The demand for biofuels did not turn out to be as fast growing as initially expected by investors; partly because of the sustainability discussions (see sections 4.1; 4.3 and 4.5). These poor market conditions have caused many producers to lower their production, or stop production entirely and many producers have been bankrupted.

Figures 3.2, 3.4 and 3.5 show the current volume split between the areas that produce biodiesel and ethanol. Figure 3.3 and 3.5 show the future development of the global ethanol and biodiesel production. It should be noted that the current large share of European biodiesel production is expected to decline, and that Europe will also be dependent from imports, as explained in the next section.

14 178 21.776 1.532 3.584 217 1 0 38.951

Global Ethanol Production 2009

(*1000 MT) _Africa Argentina Brazil China Europe India Indonesia Malaysia USA -10 10 30 50 70 90 110 130 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

World Ethanol Production World Ethanol Trade

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Figure 3.5: Development global biodiesel production (mln MT) (OECD/FAO, 2011)

Development European Biofuel Production

The European ethanol and biodiesel production per country is shown in figure 3.6 below. Because of complexity and uncertainty of the biofuel industry (see chapter 4), estimating future biofuel production and flows is extremely difficult. Politics that stimulate, or mandate the production of biofuel are the main driver of this industry, but are known to be very volatile and uncertain. Most estimates expect European to roughly double between 2010 and 2020 (from 15 million MT to 30 million MT). Interviewees believe that two thirds of this demand will be fulfilled by European production (ca 20 million MT) and that Europe will rely on import for the rest. These figures are based on an analysis of data from, Eurobserver, FAPRI, Hart Energy, IEA and OECD/FAO.

Biofuels as feedstock

Some biofuels are not directly used as transport fuels, but are used as a feedstock themselves. The main example of this is ETBE, which is produced from (ca. 50%) ethanol. Since ETBE is produced from bio-ethanol, it is considered as a (transport) biofuel. Ethanol can serve as feedstock for several other products, mainly in the chemical industry. Currently, the largest part of biofuels produced is used as transportation fuel, while the ‘other’ opportunities are little exploited.

Location trade-offs

For biofuel producers, being close to supply usually means locating processing/production facilities within the area where the feedstock is grown to create a higher security of supply. To obtain a certain (economy of) scale, a large patch of land is needed to supply this plant. However, with the increase of the area needed for feedstock production, so do transport costs (which locally encompass high trucking costs). Especially in the case of producing technologies which are capital-expensive, scale is required and being ‘landlocked’ is a disadvantage. A location which is optimized for logistics might be more attractive for these facilities. At the moment an overall picture on the locations of production facilities can be drawn with the following observations (see table 3.7):

- Most ethanol feedstock producers/processors are located at the ‘supply locations’ and produce at smaller scale facilities.

- The production of (conventional) ethanol also is located near the supply of feedstock, in smaller scale plants (although there is a trend towards larger conversion facilities). There are two main reasons for ethanol production being located near supply: 1) some feedstocks (such as sugarcane) 0 1.697 1.980 229 9.457 9 323 252 2.367

Global Biodiesel Production 2009 (*1000 MT) Africa Argentina Brazil China Europe India Indonesia Malaysia USA

Figure 3.6: European biofuel production (MT) 2010 (Eurobserver, 2011) 0 5 10 15 20 25 30 35 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

World Biodiesel Production World Biodiesel Trade

Mln MT

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need to be processed quickly after harvesting; and 2) the value of the feedstock is considerably lower than that of ethanol, which makes ethanol shipping preferable over the shipping of feedstock. - The biodiesel feedstock producers/processors are located at the ‘supply location’. The cultivating

and harvesting is executed on a small scale and the processing (e.g. the soy/palm oil extraction) is done in larger facilities near the cultivation area.

- The production of biodiesel is usually in central locations, closer to demand. The value of biodiesel and its feedstock (the vegetable oils) is more or less the same. The vegetable oil is exported to demand areas (e.g. Europe) where they are used as biodiesel feedstock in large scale conversion plants.

Table 3.7: Location and scale of biofuel and feedstock production

Trends and Challenges of Biofuel Production

Overall, there is a tendency towards economies of scale and the (petrochemical) belief of ‘bigger = better’ also has its influences on the biofuel industry. Also, the general belief is that the production of biofuels will increasingly be located at the location which supplies the needed feedstock.

Most interviewees predict a major role for conventional biofuels, at least in the upcoming decades. Conventional biofuels are also expected to play a major role in ramping up production in many developing countries because the technology is less costly and less complex than that of advanced biofuels (IEA, 2011). The commercializing of advanced biofuel production is timely and costly and the full replacement of conventional biofuels with advanced ones is not expected before 2050.

Table 3.8 and 3.9 give an overview of the biofuels, their producers and locations that are destined for EU consumption.

Ethanol Production

Current Situation

2020 Situation

WHO?

Farmer Cooperatives Farmer Cooperatives Agricultural Industry Agricultural Industry

NOC’s and IOC’s NOC’s and IOC’s

Independent Producers Independent Producers (possible new producers)

Corn Ethanol - US Corn Ethanol – US

Sugarcane Ethanol - Brazil Sugarcane Ethanol – Brazil Cereal Ethanol - Europe Cereal Ethanol – Europe

Cellulosic Ethanol – Brazil/Europe/US Sugar Ethanol – Latin America/Thailand

Table 3.8: Overview of the organizations and locations of ethanol production

Biodiesel Production

Current Situation

2020 Situation

WHO?

Farmer Cooperatives Farmer Cooperatives Agricultural Industry Agricultural Industry

NOC’s and IOC’s NOC’s and IOC’s

Independent Producers Independent Producers (possible new producers)

Biofuel Production Ethanol Feedstock Ethanol Biodiesel Feedstock Biodiesel

Location: Supply/Demand area Supply Supply Supply Demand

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SME – Argentina /Europe SME – Argentina /Europe

PME – Malaysia & Indonesia / Europe PME – Malaysia/Indonesia / Europe

RME - Europe RME – Europe

TME - Europe TME – Europe

Waste-to-Diesel -Europe Waste-to-Diesel –Europe

Sugar-to-Diesel – Latin America/Thailand /Europe

Table 3.9: Overview of the organizations and locations of biodiesel production

3.6 Biofuel Trading, Blending & Distribution

After production, the biofuel is stored at the production facility or (often) in tanks from third party storage providers. Ethanol is stored in (coated) chemical tanks, like conventional alcohols. Biodiesel (FAME, see section 3.1) can be stored in tanks which are suitable for conventional diesel or vegetable oils. Different types of FAME (soy methyl ester- SME; palm methyl ester-PME; etc.) have different specification and require dedicated storage. These types of FAME can be blended together to achieve the specification (a.o. cloud point) required by the buyer. Since demanded batches of FAME are relatively small, storage providers need to have multiple small tanks available for biodiesel storage and blending. More information on the technical issues related to biofuel storage, handling and transportation can be found in appendix E.

Produced biofuel (pure biodiesel-B100 and ethanol-E100) is transported to the areas where it is demanded, by ship to overseas locations or inland by barge or train. The biofuel that is destined for the area around the production plant is transported by truck to the terminals (or refineries) where it is blended with fossil fuels. Only small volumes of European biofuel are exported. The largest part of the biofuel produced and imported in Europe is transported by barge, or sometimes by train to inland terminals or depots where it is blended with fossil fuels.

Biodiesel can be blended op to 7% with conventional diesel (B7) and ethanol up to 5% with gasoline (E5). These blends are the ‘protection blends’ at which original equipment manufacturers (OEM’s – car producers) guarantee the warranties of the vehicles that use the fuel (see section 4.2). Higher blends of ethanol (up to E10) are becoming available, up to this point only at a few locations for certain types of cars. At the moment, E5 represents 95% of the EU market. The blending of biofuel with conventional fuels is preferably done ‘as late as possible’ in the chain. To assure the specifications of the blend (biofuel attracts water, see appendix E), blending usually takes place at the last terminal before retail. The process steps between European production and/or import and retail are shown in a simplified manner in figure 3.7 below.

Trends and Challenges in Biofuel Trading, Blending & Distribution

This node is by many interviewees seen as the most ‘fuzzy part’ of the biofuel supply chain. Where the upstream nodes more or less ‘logically’ sequence each other, the part of the chain after biofuel production is

Port Integration in the Biofuel Supply Chain