ENERGY & RESOURCES Archives

17/09/2014by EOS Intelligence EOS Intelligence No Comments

Is Non-Oil Sector the New Champion of the Nigerian Economy?

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The 1970s’ oil discovery transformed Nigeria from a largely agro-economy to a more oil-dominated one. Over the last several decades, oil played a significant role in Nigeria’s positive growth story, and its emergence as one of the key economic hubs in Africa. Interestingly, however, the last few years have seen a revival of non-oil sectors, such as agriculture, once the key economic driver of the country. What does this ‘change’ mean for Nigeria and how does oil fit into the bigger picture?

Post Nigeria’s independence in 1960, the country’s economy was primarily agrarian, with mainstay products such as cocoa, rubber, palm oil and kernels, groundnut, and cotton; the agriculture sector accounted for 60% and 75% of the country’s GDP and total employment, respectively. During the 1970s, the Nigerian government undertook various measures to exploit the naturally available oil reserves, such as extending oil exploration rights to foreign companies in Niger Delta’s offshore and onshore areas, to tune the economy to one which is oil-centered (petroleum revenue share of the total federal revenue increased from 26% in 1970 to 70% in 1977). The oil-centered Nigerian economy reached its peak in 2008 when oil accounted for about 83% of the country’s total revenue. In recent years, the oil sector has been experiencing a decline with its share in total revenue falling to 75% in 2012, largely due to a stagnant crude-oil production at 2 million barrels per day (mbpd) (2.3 mbpd in 2012 and 2.2 mbpd in 2013). A steep fall has also been observed in crude-oil exports to the USA (Nigeria’s main oil export market), which contracted by 11 percentage points in a single year, falling from 16% of Nigeria’s total oil exports in 2012 to 5% in 2013.

Upon closer introspection of the reasons for the declining dominance of oil in Nigeria, various factors come to surface. One of the main reasons is the delay in the approval of the Petroleum Industry Bill (PIB), which aims to ensure the management of petroleum resources according to the principles of good governance, transparency, and sustainable development; this delay has been stalling further investments in the oil sector. Perpetual oil thefts, pipeline vandalism, weak investment in upstream activities, and insignificant discoveries of new oil reservoirs have also hampered the growth of this sector. As a result, oil giants have been selling off their stakes in various onshore as well as offshore blocks. For instance, Shell sold 45% of their interest in OML 40 onshore block to Elcrest Nigeria Limited (an independent oil and gas company) and Petrobras (a Brazilian multinational energy corporation) is planning to auction its 8% and 20% stakes in Agbami oil block and offshore Akpo project, respectively.

So, where does this leave the Nigerian economy?

Apart from the unsatisfactory performance of the oil sector, Nigeria’s economic environment faces risks from security challenges prevailing in the northeastern part of the country, conflicts related to resource control in the Niger Delta region, and high levels of corruption (case in point being the suspension of Nigeria’s central bank’s governor over misconduct and irregularities).

In the midst of all these challenges, the non-oil sector (described as a sector which is not directly or indirectly linked to oil and gas, and include sectors such as agriculture, telecommunication, tourism, healthcare, and financial services) is emerging as the new champion of the Nigerian economy.

This is mainly due to various policies adopted by the government in the light of the looming oil sector, along with the complementary effect of factors such as increase in private consumption and FDI.

In addition to government policies, FDI has played a key role in nurturing the non-oil sector. Nigeria has experienced a compounded annual growth of 20% in the number of Greenfield FDI projects from 2007 to 2013; 50% (total number of projects being 306) of these projects were service-oriented. The telecom sector particularly witnessed strong growth by attracting 24% of all FDI projects, while coal, oil, and natural gas received only 8% of foreign direct investment during 2007-2013.

Private consumption (forecast to reach US$231.2 billion in 2014) has also fuelled the growth of the Nigerian non-oil sector. The largest consumer market in Africa, Nigeria’s consumer spending (an indicator of private consumption) has increased from US$94.3 billion in 2007 to US$309.9 billion in 2013.

The cumulative effect of all these factors has proven exceptionally positive for the non-oil sector. This is evident from the increase in percentage share of the sector in the Nigerian GDP. Agriculture remains the largest contributor, among both oil and non-oil sectors, with a share of 22% in GDP, in 2013. Other non-oil sectors such as manufacturing (GDP share increased from 4% in 2010 to 6.8% in 2013), construction (GDP share increased from 1% in 2010 to 3.1% in 2013), wholesale and retail trade (GDP share increased from 13% in 2010 to 17% in 2013), transport and communication (GDP share increased from 3% in 2010 to 12.2% in 2013) have also strengthened their position in Nigeria’s growth story.

Moreover, non-oil sector’s contribution to government revenue has improved from US$154.3 million in 2000 to US$3,018.2 million in 2011, which is a significant increase. A growth has also been observed in non-oil exports, which have increased from 1.28% in 2000 to 3.59% in 2010, in terms of percentage contribution towards total exports.

The Nigerian non-oil sector has also been attracting a number of investments in recent years, for instance:

July 2014: Procter & Gamble, a multinational consumer goods company, announced the construction of a new manufacturing plant worth US$250 million, in Nigeria’s Ogun state. The manufacturing plant is expected to employ 750 Nigerians and offer opportunities to 300 SMEs
February 2013: Indorama, a global chemical producer, launched a Greenfield urea fertilizer project worth US$1.2 billion, in Nigeria’s Port Harcourt. The project claims to support Nigerian and West African requirements for affordable fertilizers

Apart from giving credit to an increase in private consumption, investments in the non-oil sector must also be attributed to the measures undertaken by the Nigerian government. To showcase the attractiveness of the Nigerian economy, the government undertook a GDP rebasing exercise (GDP calculations are now performed on 2010 year’s figures instead of 1990’s). The exercise led to a better coverage of the informal sector, addition of new industries, and increase in the contribution factor of sectors such as service, manufacturing, and construction.

According to the National Bureau of Statistics, Nigeria’s GDP is valued at US$498.9 billion as compared with US$263.7 billion, prior to rebasing, in 2013. In spite of several criticisms around the authenticity of figures, rebasing of the GDP gave a strong competitive edge to Nigeria, among other emerging and developing economies, by showcasing a high GDP to allure investments. Additionally, implementation of the government’s Industrial Revolution Plan is expected to continue driving the country’s manufacturing sector. Since regular and ample power supply is a critical issue in Nigeria, the plan has implemented reforms in the power sector which aims to facilitate a continuous power supply, thereby, supporting the manufacturing sector by reducing power generation related costs and encouraging further investments.

Final Words

While the oil sector did well to provide Nigeria with a strong foundation and help build basic infrastructure to support a long-term growth potential, the rekindling of the non-oil sector is likely to strengthen Nigeria’s growth story and help it attract much needed foreign investments to create a balanced economy.

The approval of the PIB, post 2015 elections, might improve the oil sector performance, which should go hand-in-hand with non-oil sector development, making Nigeria an attractive market for global investors. It will be important that the Nigerian government undertake continuous reforms in both sectors to ensure the emergence of a strong economy, able to compete with the more established emerging markets of the world.

03/09/2014by EOS Intelligence EOS Intelligence No Comments

Mexico Energy Reforms – Pleases Energy Companies, Displeases Nationals

In H2 2013, we published an article on Mexican President Enrique Peña Nieto’s proposed energy reforms. Eight months after constitutional amendments were introduced to actualize these reforms, the President has taken a historic step and signed the energy reform bills passed by the Congress into law. While analysts seem happy with the new package of laws, the key question pertaining is that, has the government done enough to satisfy the key stakeholders, the oil companies, PEMEX, and the Mexican public.

Mexican President Nieto has set a blistering pace for reform of the nation’s oil, gas and electricity sectors, with final Congressional approvals being in place in less than a year of the initial proposal. The secondary legislation signed into law by the President on 11th August 2014 has opened up the oil and gas sector to private investment for the first time in 75 years. The Mexican government estimates that the new framework will result in an investment of US$50 billion by 2018 in oil exploration, production and refining activities.

The determination with which the President has pursued energy reform is highlighted by the move to pre-pone the ‘Round Zero’ process by a month, which entailed the granting of exploration and production rights to PEMEX. PEMEX has been awarded rights to 83% of the country’s proven and probable oil reserves and 21% of the nation’s prospective resources. The next round of bidding, Round One, will involve private companies, foreign companies, and PEMEX bidding on equal terms for the remaining 79% of prospective reserves. This tender process will be overseen by the National Hydrocarbon Commission (CNH), and is expected to take place between May and September of 2015.

The reforms are considered ‘fairly pro-market’ as private players will be allowed to pursue joint ventures on their own accord or with PEMEX. More importantly, addressing earlier concerns regarding share in resources, foreign and private companies will be allowed to book reserves, even though oil and gas resources will remain under state ownership until they are produced. This has resulted in keen interest from leading global energy companies, few of whom have given official statements stating their intent to bid. The new law also opens up the electricity generation market, while the state retains monopoly in transmission and distribution. The government looks to set up an electricity wholesale market under the reforms.

In addition to introducing private investment into every segment of Mexico’s hydrocarbon sector, the regulation encompasses the strengthening and autonomy of regulatory bodies, CNH and Energy Regulatory Commission (CRE) as well as setting up of new independent bodies for supervising environmental protection as well as controlling and operating the natural gas and electricity network. This it to ensure smooth and transparent implementation of the reforms.

From the point of view of the energy companies, the reforms could have not come at a better time, with several of their current operation zones (of the likes of Iraq, Libya, Nigeria, and Russia), facing violence and above-the-ground problems. In comparison, the situation in the Mexican territory seems much less risky. However, there exists a slight amount of political risk for international companies.

President Nieto has bagged several wins in his first two years, including banking, education, telecommunication, and energy reforms. Unlike the case of the three former reforms, the public has not supported their President in his latest endeavor. According to a poll published in Mexican newspaper, Reforma, 40% of Mexicans believed that the changes under the energy reforms would be bad for the country. Should President Pena Nieto’s PRI party lose elections in 2018, an incoming government may be likely to roll back such reforms that displeased the Mexicans. Nonetheless this risk, most energy companies are likely to welcome the reforms with open arms.

Overall, Mexico’s energy reforms are expected to be transformational for both the country as well as the global energy industry. While they are running well within the timelines in terms of policy formation, time will determine the success, or lack thereof, of the reforms, especially with regards to implementation.

09/06/2014by EOS Intelligence EOS Intelligence No Comments

Japan’s Quest for Renewable Energy

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Japan, for many years the symbol of safe use of nuclear energy, started to revise its focus on atomic power following the 2011 tsunami and Fukushima plant meltdowns. After the accident, atomic plants were shut down, and in 2012, the government declared its commitment to the diversification of energy sources, working towards making the country renewable energy-powered.

Yet this wishful thinking was soon confronted with the reality of slow growth of renewable energy generation. In April 2014, a new energy plan re-designated coal as an important long-term electricity source, with similar importance given back to nuclear power. While Japan is unlikely to abandon fossil fuels and nuclear power in any foreseeable future, the shifting focus and public reluctance to atomic power gave start to a more dynamic development of renewable power generation technologies.

Several projects across solar, hydro, biomass, and to a lesser extent geothermal, had already been developed prior to Fukushima accident, but it is now the time for Japan to embrace its renewable energy potential at a larger scale.

Read our report – Japan’s Quest for Renewable Energy

27/01/2014by EOS Intelligence EOS Intelligence No Comments

Mongolia – Mining in China’s Backyard

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Mongolia, uninteresting and perhaps almost forgotten to the rest of the world until just recently, has turned out to become of the world’s largest untapped mining centers. The country houses minerals worth over US$ 1 trillion, thanks to which it has the potential to become one of the most prosperous economies in the East. We take a closer look at Mongolia’s potential, its background, most relevant advantages, and challenges that continue to put a brake on the country’s development. Read Our Detailed Report.

09/10/2013by EOS Intelligence EOS Intelligence No Comments

Mexico’s Energy Reforms – The Balancing Act

Mexico’s president Enrique Peña Nieto seems to be a man on a mission. Since his term started in July 2012, he has worked towards weeding out the inefficiencies and monopolies plaguing several sectors in Mexico and has received much appreciation for that. But this time, has he gone too far? With Pemex being Mexico’s much-guarded jewel, the attempt to bring in private investment seems much more ambitious than the previously introduced overhaul in the labor laws and telecom sectors.

President Enrique Peña Nieto took a bold step in June 2013 by reforming the country’s quasi-monopolistic telecom sector, voicing his seriousness about bringing real changes to Mexico’s economy by tackling inefficiencies and welcoming foreign investment. While the results of the telecom reforms remain yet to be seen, he has moved to an even more ambitious project – to allow foreign investors to enter Mexico’s energy sector, which has been closed to private participation since 1938.

Pemex, which is the world’s 10th largest oil producer, has been a government monopoly for over 75 years. The country’s oil output has been falling since 2004, as a result of its inability to explore unconventional (deeper) sources driven by lack of investment and outdated technology. It is expected that if further exploration is not undertaken, Mexico will become a net energy importer.

To combat this, the president sent a bill to congress that aims to end the state’s 75-year old monopoly over the energy sector. According to the proposed bill, private oil exploration companies would gain access to the Mexican oil reserves under profit-sharing contracts for upstream oil and gas development (exploration and production).The bill also cover reforms regarding the restructuring of Pemex to make it more transparent and accountable.

The bill also encompasses reforms in the electricity market, wherein it looks to allow private participation in electricity generation, while maintaining transmission and distribution under state control. While few amendments to partially allow private participation in the electricity sector have been introduced in the past, they have left much to be desired. The current amendments only allow private companies to generate or import electricity for self-supply or to undertake cogeneration. In addition, Independent Power Producers that produce less than 30 MW of electricity and exclusively sell to the state-owned Comision Federal de Electricidad (CFE) or export to other countries are allowed to generate electricity under the existing amendments. As against the state-owned CFE choosing the players from which it would like to purchase electricity, these reforms would boost competitiveness in the sector by establishing an independent system wherein power generator participation would be decided based on lowest generation costs.

These reforms are expected to boost investments in the oil sector by about US$10 billion per annum. Further, an influx of investments is expected to help Pemex offset its current US$60 billion debt. In addition, they are also expected to bring down electricity prices in the country (which are 25% higher than that in the USA), boost employment, and strengthen the participation of renewable energy in the energy mix primarily underpinned by private participation in electricity generation.

While these reforms spell out immense benefits for Mexico’s economy, their implementation and outcome are a different story altogether. The Mexican population that applauded and supported the government through the education and telecom reforms, is now much less convinced regarding this arm of reforms. Mexicans have for long considered Pemex to be symbol of their national independence and the oil found beneath Mexico’s soil and water, a part of their national heritage. Moreover, March 18th – the day when president Lazaro Cardenas nationalized the country’s oil industry in 1938 is celebrated proudly as a national holiday. Unlike the case of the previous successful reforms, the government faces much opposition from the leftist groups. However, with full support for the reforms from Peña Nieto’s Partido Revolucionario Institucional (PRI) and the Partido Acción Nacional (PAN) parties, which control more than two-third seats in congress, there are strong chances of this proposed law becoming a reality.

The bill also falls short from the point of view of leading global oil exploration companies. While the reforms give foreign companies access to extract and exploit oil, share risks and profits, they would not be able to have a share in the resources. This makes the Mexican agreements far less lucrative for large oil players when compared with proposals offered by neighboring oil-producing countries, such as Brazil and Columbia, which allow the producers to own a certain amount of oil in their books. Thus, although leading oil companies, including Shell, Chevron, BP, and Exxon Mobil have welcomed the wave of reforms in Mexico, their participation will largely depend on the nature and attractiveness of the final profit-sharing agreements.

Therefore, while these reforms look at altering history, it remains extremely premature to predict their outcome. These reforms run the risk of offering ‘too much’ from the eyes of the Mexican public or ‘too little’ from the point of view of resource-hungry energy companies and can only be a success if they manage to find the perfect balance between both the stakeholders. Thus, the key question that remains is not regarding the approval of reforms, but if these reforms will actually manage to stir foreign investment into the Mexican oil sector.

06/08/2013by EOS Intelligence EOS Intelligence No Comments

South Africa: Clearing the Air with Renewable Energy

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South African ailing energy sector seems to have found a new lease of life in clean energy. In 2012, South Africa witnessed investment of $5.5 billion in new renewable energy projects, leaving behind some well-known usual suspects such as Brazil, France, and Spain. With the local government looking at renewable energy as a long-term answer to the country’s energy problems, we evaluate the scope for private sector involvement in developing South Africa’s energy infrastructure.

In March 2013, Eskom, the national electricity provider in South Africa, warned about the possibility of power outages during the coming winter season. As soon as the news spread, millions of South Africans were left reflecting on the energy crisis of 2008, which brought the mining and industry sectors, and thereby, the economy, to a halt.

Increasing winter demand and planned electricity network maintenance are putting pressure on the power system. In May this year, long before the peak winter season, South African power system capacity exceeded demand by just 0.17% (let’s just point out that the recommended reserve margin for a power system is 10-15%). With consumption expected to increase further during winter (June and July), Eskom will be forced to look at extreme measures to prevent scenarios similar to those of 2008. Some of such measures include power buy-backs from large consumers, and triggering of ‘interruption clauses’ included in contracts, through which Eskom can cut supply to consumers in case of tight supply situations, in return for discounts.

While these measures could help deal with the short-term spike in demand this year, the South African government is looking for alternatives to achieve long term sustainability of the country’s energy sector. Investment in clean energy (particularly renewable technologies such as wind and solar) is one of the possible solutions contributing to solving the country’s energy supply problem. While achieving energy sustainability, clean energy investments will also help South Africa adhere to its commitment to achieve a 42% cut in carbon emissions between 2011 and 2025, by reducing dependence on coal for power generation. Furthermore, renewable energy projects can come online on a shorter horizon compared with coal and nuclear power plants.

Let’s focus on clean energy

According to a 2013 report published by Bloomberg New Energy Finance, South Africa stood 9th in the world with US$5.5 billion worth of new clean energy investments in 2012 (a whopping 20,563% growth over 2011). Majority of this investment (US$4.3 billion) has gone into developing solar photovoltaic (PV) technology based power plants, with the remaining being spread across wind, concentrated solar plants, landfill, biomass and biogas, and hydro-projects.

The onset of clean energy investment projects in South Africa is correlated with the introduction of the Integrated Resource Plan (IRP) in 2010, as well as Department of Energy’s Renewable Energy Independent Power Producers Procurement (REIPPP) program in 2011. As a part of the 2010 IRP, South African government outlined its plans to increase electricity generation capacity by additional 18,500 MW by 2030. About 42% of this additional capacity is envisaged to be generated through renewable energy technologies.

Introduction of REIPPP program in 2011 facilitated private sector’s involvement in electricity generation. Through this program, the government plans to procure 3,725 MW of renewable energy from independent power producers by 2016. A significant focus has been laid on procuring power generated through onshore wind and solar PV technologies. The REIPPP program sets up a bidding system through which independent power producers can bid for power generation allocations. Electricity thus generated is purchased by Eskom on a 20-year Power Purchase Agreements (PPAs). The tariff for purchasing electricity is decided through a bidding process. Some independent producers cashed on the first mover advantage, and received tariffs as high as R2.6/KWh ($0.26/KWh) during the first phase of bidding in 2011 (more than Eskom’s electricity price). With increasing competition, these tariffs have fallen in the successive bidding rounds to as low as R0.89/KWh ($0.09/KWh).

Private sector holds the key

One possible mode of involvement is continued private sector participation in the REIPPP program, selling the generated electricity to Eskom at rates agreed in the PPAs. However, several independent power producers (IPPs) have raised concern about the attractiveness of such a system, where only a single buyer (Eskom) is present in the market.

IPPs feel that lack of certainty about feed-in-tariff structures and a single buyer model are likely to deter large scale investments from the private sector. In 2012, the South African Independent Power Producers Association put forward a proposal to set up an independent grid to challenge Eskom’s dominance of the transmission (grid) network.

In March 2013, the South African government passed the Independent System and Market Operator (ISMO) Bill, which will create an independent entity by 2014, to manage procurement of energy from Eskom’s power generation business and independent power producers. Establishing an independently operated power grid would encourage competition in the power generation sector while keeping a lid on prices.

Another possible form of investments could be in the shape of independent (off-grid) solar/wind power projects by large enterprises (particularly in mining sector) to meet part of their internal demand. Industries could reap several benefits from these independent projects. Benefits of a solar power project could include:

Several large energy consumers are required to operate diesel generators to meet the surplus demand from their operations. Even though the current cost of producing solar energy is higher than what is procured from Eskom, the cost is lower than that of electricity produced through diesel generators. In the short-term, solar energy projects could replace generators, as an additional input source of energy
The national energy regulator (NERSA) recently approved an annual 8% hike in electricity tariffs charged by Eskom till 2018. With price of solar PV panels expected to decline further, the cost of solar energy production could even be lower than Eskom’s prices 5-6 years down the line
Furthermore, solar power plants have an effective life of 25-30 years, greater than the typical 20 year PPAs offered by Eskom. Independent projects enable more efficient utilization of electricity generation capacity over a longer horizon, compared with the REIPPP program

Foreign investors also to step in

With the removal of subsidies on renewable power in several European countries, South Africa becomes an ideal investment location for both foreign renewable energy developers and infrastructure financing organizations.

Participation of foreign firms in the REIPPP program has increased in subsequent bidding phases. Working as a part of a consortia, several foreign developers, such as Abengoa (Spain), Gestamp Wind (Spain), SolarReserve (USA), and Chint Solar (China), have already won bids for setting up power projects, working in partnership with local developers and BBBEE partners.

International financial institutions, such as European Investment Bank and IFC (member of the World Bank Group) have also invested in several renewable energy projects being undertaken by international developers in South Africa. In 2012, European Investment Bank agreed to provide €50million ($64.9 million) for the Khi Solar One Project being undertaken by Abengoa.

So is the energy sector out of the woods?

With a power crunch looming, the mining and industry sector companies are left searching for options to keep their operations running, or risk large-scale shut-downs during the winter season. With the declining cost of setting up and generating renewable power, investment in renewable energy projects could be a sensible option to achieve sustainability of power supply, over both short and long-term.

Setting up of an independent transmission company will go a long way in reducing Eskom’s dominance over the electricity networks, urging more private sector participation in the REIPPP program. But, is this enough? Will there be further deregulation/liberalization of the renewable power generation sector to additionally boost competition in the market? The fate of private sector investments hinges on government’s willingness to risk its control over probably the most important utility system.

04/06/2013by EOS Intelligence EOS Intelligence No Comments

An Eco-Friendly Product Or Just A Mere Marketing Gimmick? Bio-plastics Are Gaining Momentum.

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The term ‘bio-plastics’ appears fascinating as it seems to revolutionize what plastics have always stood for. Being derived from plants and having the ‘bio-‘ prefix in their name, these plastics are considered to offset the main underlying negatives of conventional plastics, thus seem like ideal products. However, there is more to bio-plastics than meets the eye, as they carry their own fair share of baggage.

We are surrounded by plastics all the time and everywhere – may it be at home, at work, or in transit. The use and abuse of products containing plastics has increased exponentially over the past few decades, fuelled by low oil prices and limited awareness about their ill-effects on the environment. But the tide is turning now, with bio-plastics entering the stage.

Still in their nascent stage of commercialization, bio-plastics are portrayed as able to revolutionize the plastics industry over the next couple of decades. Playing on the key drawbacks posed by traditional plastics, such as limited supply and rising prices of feedstock as well as environmental concerns, the currently insignificant bio-plastic share of about 1% of overall demand for plastics is expected to soar to about 25% over the next 15-20 years. Advanced technical properties, potential for cost reduction (owing to easily available feedstock), biodegradability options, and higher consumer acceptance, are some of the key factors that usher the market to higher growth rate, especially in products such as PET bottles and disposable cutlery used by foodservice industry. While the market stands to grow at about 20% a year, there are also several factors that conspire to withhold the potential of the market.

First and foremost, bio-plastics cannot replace conventional plastics in all applications, and at this stage of development and commercialization are also known to generally offer poorer quality. While they are suitable for disposable products, they cannot yet replace traditional plastics where stability of material properties and durability over time is necessary, therefore, discouraging traditional plastics’ substitution on a mass scale.

At the bio-plastics production end, large land requirement for bio-feedstock (corn, sugarcane, etc.), which leads to conversion of forests into agricultural lands and increases the use of fertilizers and pesticides, may just negate the ecological benefits of bio-plastics to a certain extent.

At the consumption side, the key challenge is the lack of dedicated end-of-life facilities for bio-plastics. There is limited infrastructure for industrial composting and incineration worldwide, which largely limits the benefits reaped from the biodegradable property of these plastics. Moreover, bio-plastics are not uniform and vary greatly, thereby require different end-of-life infrastructure (including segregation, disposal, composting, and incineration). This makes it a much more complicated and expensive process. The recyclability of bio-based plastics is also limited and relatively more expensive. Furthermore, the mixing of conventional plastics and bio-plastics in the recycling stream results in poorer quality of the resultant recycled plastic.

Lastly, the traditional plastics market is much more developed. Bio-plastics on the other hand, are still in the pilot production stage and generally lack economies of scale, thereby costing much more than synthetic plastics. Instead of substituting incumbent plastics, the bio-based plastics market currently caters to a niche audience, which is highly environmentally-conscious and is willing to pay a premium for such products.

Follow the Leaders

Despite the mixed opinions on bio-plastics, several small- and large-scale bio-plastic adoption programs are increasingly undertaken by leading consumer goods producers. It can be expected that these programs and investments will eventually lead to economies of scale for bio-plastics, but as of now it seems that these players have been jumping into the bio-plastics arena mainly for marketing and PR-building purposes, as the group environmentally-conscious consumers expands globally. Here are some examples of investments and innovations by leaders in bio-plastics adoption-

Coca-Cola	In 2009, it launched PlantBottle, made of 30% bio-plastics and 70% oil-based plastics The company aims at using the PlantBottle technology for all its bottles globally by 2020, in place of the current distribution network of 20 nations Coca-Cola claims it is also looking into innovation in feedstock for bio-plastics, moving from food crops to waste and agricultural residues It has also entered into agreements with three technology firms, Avatium, Gevo, and Virent, to develop and bring 100% bio-plastics bottle technology to commercial scale
PepsiCo	Pepsi developed the world’s first 100% bio-based PET bottle in 2012 and has been working towards its commercialization ever since
Coca-Cola, Ford Motors, H.J Heinz, Nike, and Procter & Gamble	In 2012, the companies formed a strategic working group called Plant PET Technology Collaborative (PTC), focused on the development and use of 100% bio-based PET materials in their products
Panasonic Corporation Eco Solutions Company	In 2012, the company used bio-based resins to manufacture a range of kitchen countertops and bathroom ceilings for its premium product lines
Gucci	Also in 2012, Gucci launched a range of women and men’s shoes called ‘Sustainable Soles’ made from biodegradable bio-plastics In the same year, it also released an eyewear line wherein it manufactures sunglasses made from bio-plastics
Toyota	For the past few years, the company has been using bio-plastics (PET and PLA) in the manufacturing of several automobile parts (vehicle liners, interior surfaces, upholstery material on doors, luggage area trims, etc.) It aims to have 20% of all plastic components in its automobiles to be made of bio-plastics by 2015

Notwithstanding the many benefits of using bio-plastics, they are not the perfect eco-friendly products the world would want them to be – at least at the current level of development and commercialization. While the benefits reaped from them at this point are marginal, companies are marketing these new plastics as the revolutionary heroes that will save our environment. However, with a strong momentum towards innovation to improve product quality, huge investments by leading players, drive towards commercialization, and a host of government initiatives, it seems too early to judge the industry as of yet.

08/04/2013by EOS Intelligence EOS Intelligence No Comments

Venezuela – Evolution After the Revolution?!

It has been a month since Hugo Chavez passed away, losing a two-year long battle against cancer. With snap elections on 14 April, both Venezuelans and the rest of the world eagerly await the outcome – an outcome that might drive Venezuela deeper into a state of socialism or towards the path of market-oriented economic development.

Whatever the result of the election, perhaps the most pertinent question is how Chavez’s demise has impacted the future of Venezuela’s oil economy? What good has the largest proven oil reserves in the world (297.57 billion barrels) brought Venezuela in terms of inclusive human and economic development?

Let us retrace our steps to 1998. The global oil industry was in a big mess, with prices at an all time low of (less than $10 per barrel), driven by oversupply of oil by OPEC member countries, which were unwilling to comply with production and export quotas. Things, however, took a turn for the better when in February 1999 Hugo Chavez came into power in Venezuela. Now at the helm of affairs of one of the world’s largest oil producing nations, it became important for Mr. Chavez to revive the oil sector, which was to become the driving force behind his socialist policies. In his own charismatic manner, Hugo Chavez convinced the OPEC members to lower production, thus driving-up oil prices (to a price of $25-28 per barrel).

Further, driven by his ambition to bring about a socialist revolution in Venezuela, a new Hydrocarbons law was passed in 2001, to bring all oil production and distribution activities in Venezuela under the purview of the government. The law proposed a minimum 51% state ownership of PDVSA, the national oil company, and an increase in royalties paid by foreign corporations from 16.6% to 30%.

Under Chavez, Venezuela also shifted its focus from the US, to forge closer alliance with Russia, China, Nicaragua, Cuba and Iran by signing preferential oil deals. These deals, however, put additional economic pressure on PDVSA, and in turn the Venezuelan economy, with 43% of the company’s crude and oil products sales not being paid directly in cash, resulting in shelving of some of the company’s investment plans.

Oil-sector reforms were carried out under a veil of socialist change and reform. While the pro-socialist policies of Hugo Chavez remain popular among the Venezuelan masses, they have resulted in a lack of talent and investment, causing the Venezuelan oil industry to decline. According to Morgan Stanley reports, Venezuela’s oil production declined by 25% during the Chavez era (1998-2013).

While the socialist regime under Chavez is said to have brought about a sense of income equality amongst Venezuelans, the cost of this equality has left the country in an economically dilapidated state. Huge deficits and high inflation have lead to significant devaluation of its currency (30% to the US Dollar in February 2013).

The state of the economy hinges purely on the outcome of the elections, with Nicolas Maduro, the acting president and the hand-picked successor of Chavez, and Henrique Capriles, the governor of Miranda State, vying to be the next president.

Nicolas Maduro, who served as a foreign minister under Chavez for six years, is a right-wing activist. A loyalist to Chavez, Maduro pledges to follow Chavez’s policies. Given his closeness to Chavez, Maduro also enjoys the support of military.

On the other hand, Henrique Capriles, who came closest to beating Chavez in the last elections in 2012 (bagging 44% votes), vows to adopt pro-business policies, which include de-politicization of the oil sector and opening-up Venezuela to foreign investments. Capriles does recognize that actions taken during the Chavez era cannot be undone over a short period of time.

Driven by the emotions linked with Chavez’s death, initial polls widely tip Maduro to win the upcoming elections. But given the economic condition of Venezuela, would this be a right choice? Even if Capriles wins, will the government be stable enough to guide Venezuela to development? Will the Venezuelan oil sector open for global trade? One can only speculate.

Irrespective of who comes to power, one thing will stay unchanged. The oil sector will remain critically important in either continuing to aid the path towards a fully-socialist state or changing the course to a more market-oriented economy.

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