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Sinopec ushers in new era for China’s sustainable aviation fuel industry

11 July 2022 Max Tingyao Lin

Sinopec Group has kickstarted China's sustainable aviation fuel (SAF) industry following a successful test run at a large-scale biojet plant operated by subsidiary Zhenhai Refining & Chemical, the country's first.

Aviation, which accounts for 2-3% of global GHG emissions, has been widely seen as a hard-to-decarbonize sector, and airlines see large expansion of SAF supply as essential to reach industry-wide carbon neutrality by 2050.

On its website, the Chinese state-owned energy major announced the plant with a processing capacity of 100,000 metric tons (mt) per year managed to produce on-spec biojet from used cooking oil on 28 June.

Biojet is the most common type of SAF and needs to be blended with crude oil-based jet fuel before final consumption under the current commercial and technological environments.

Zhenhai Refining completed the construction of the plant at its facility in the eastern province of Zhejiang, in August 2020, and Sinopec has been preparing for industrial-scale production since, according to the company.

In May, Zhenhai Refining's SAF production means received certification from the Roundtable on Sustainable Biomaterials, an industry body whose recognition is often sought by SAF producers in international markets.

Sinopec has supplied biojet to domestic airlines on a pilot basis in recent years. Whether the Zhenhai plant lifts production depends on feedstock availability and production economics, analysts said.

The facility is designed to use waste cooking oil and fat to produce SAF, but S&P Global Commodity Insights earlier reported their supply is not stable and that Sinopec could source palm acid oil as an alternative feedstock.

That said, production margins are healthy on paper—S&P Global's Platts estimates SAF prices at about $2,336/mt for delivery into China as of 8 July, versus $2,136/mt for used cooking oil.

Other players are also eyeing the lucrative space. Earlier this year, Chinese non-state Oriental Energy tentatively agreed to develop a 1 million mt/year plant in Maoming, Guangdong in southern China with US engineering firm Honeywell.

If the project materializes, the facility will consist of two 500,000 mt/year units, of which the first will begin production next year. It can also convert used cooking oil and fat into SAF.

China's SAF production could potentially grow from zero last year to under 400,000 mt by 2030, based on S&P Global's ENR estimates from known projects that take into consideration production uncertainty.

Still, this forecast suggests China will be a disproportionately small player in the SAF industry, given that it has one of the world's largest air travel markets. Global SAF supply could rise from 59,000 mt in 2020 to over 370,000 mt this year, before a further hike to about 8 million mt in 2030, according to ENR estimates.

While vowing to develop low-carbon fuels as part of its decarbonization efforts, the Chinese government has yet to introduce policy incentives for SAF producers.

"Financial incentivizes will be needed given the large capital and technological investment needed to establish commercial-scale SAF refineries," said Loren Puette, biofuels analyst at Platts Analytics.

"These incentives could be production subsidies, price guarantees to name a few," he told Net-Zero Business Daily.

Waiting for demand signals

In January, the Civil Aviation Administration of China under the Ministry of Transport set carbon and energy intensity targets for Chinese airlines during the 2021-2025 period.

Based on its plan, China's aviation sector aims to cut fuel consumption per mt-km to 0.293 kg in 2025 from 0.295 kg in 2020, and CO2 emissions per mt/km to 0.886 kg from 0.928 kg.

The government agency also established a target for SAF consumption of 50,000 mt at the aggregate level in the five years, and 20,000 mt on a single-year basis in 2025.

Amid high SAF costs and no legal requirements, Chinese airlines have generally shown little appetite in fetching long-term procurement deals for the fuel. This is in contrast to their peers in Japan, Europe, and the US.

"With current spot prices of SAF being three times of conventional jet fuel … the question of how the cost is going to be passed through to the consumer arises," said Ji Yang Lum, ENR principal research analyst at S&P Global, referring to the Chinese firms.

However, Chinese airlines are set to face more pressure to decarbonize their operations later this decade.

Launched in July 2021, China's national emissions trading scheme is expected to extend to domestic flights by the end of 2025.

Under the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) by the International Civil Aviation Organization, the UN's aviation agency, all international flights will face mandatory emissions caps from 2027. Airlines will need to shift to low-carbon fuels or purchase carbon offsets for their compliance.

If the fuel option is taken, China's annual SAF demand could reach 10-12 million mt on average between 2027 and 2035, according to Hua Chuang Securities' estimates.

"It's possible that Chinese airlines will need to shoulder the responsibility of cutting emissions from international flights once CORSIA's mandatory phase kicks in," the China-based securities house said in a note. "From a technical perspective, SAF will be the most effective decarbonization means for Chinese airlines."

Changing trade dynamics

To achieve net-zero emissions, the Air Transport Action Group—a trade body whose members include airlines, airports, and aircraft makers—estimated SAF consumption will likely need to increase from 50,000 mt in 2020 to 330-445 million mt in 2050.

Analysts expect Europe to be the demand driver in the near term. France, Norway, and Sweden have imposed 1% SAF blending mandates on their jet fuels sales.

Pending approval from member states, the EU will introduce a 2% blending mandate from 2025, with the use of crop-based SAF banned for sustainability issues. This effectively means EU fuel suppliers will need to source more waste-based SAF as synthetic fuels are not yet commercially available.

The task could become complicated as some waste-based SAF production capacity—like the Sinopec plant—comes onstream in China, the world's largest producer and exporter of used cooking oil.

In 2021, China exported 1.14 million mt of used cooking oil to other countries and was the top supplier to Europe's biofuel industry, according to Platts Analytics.

"Any diversion [of used cooking oil] towards its domestic renewable diesel and SAF industry would likely push up international SAF prices given the decline in feedstock availability," Puette said.

The other side of the coin is China could also begin supplying SAF to international markets, with forecast slow growth in domestic demand for the near term.

"It's likely some Chinese SAF will be exported to European markets given their biofuels mandates, while a portion will also be consumed domestically, likely in the major aviation hubs of Shanghai and Hong Kong," Puette said.

Posted 11 July 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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