Energy & Resources

A growth story

Why Chen Yilong is betting on trees

A growth story

Energy grows on trees

Hubei businessman Chen Yilong has struck oil in China’s forests – and it’s not underground. He’s planning to invest more than $1.5 billion to get energy the old-fashioned way: from trees. The only thing preventing him from becoming an oil baron is the price – fossil fuels are still much cheaper – but he’s confident that will change.

Chen plans to harvest the seeds of oil-rich trees to make biodiesel, and also to burn their branches for electricity. His company, Wuhan Kaidi Investment Holdings, has already agreed to develop more than 1.6 million acres of forestland in 266 cities and counties across 12 provinces, according to the 21CN Business Herald.

Chen’s brainwave came a few years ago. “At that time, the oil price was not as crazy as it is now,” remembers Huang Runquan, vice president of Wuhan Kaidi Sun Biomass Energy Investment, “But Chen believed energy shortages would become increasingly serious and that the oil price would rise sharply in the next few years.”

Crude oil prices have risen roughly 80% since Chen’s company began working on the project in 2005 – ringing alarm bells in Beijing.

China – the world’s second biggest consumer of oil – imported more than half of its oil last year, according to a China Business News report. That’s an uncomfortable statistic for the country’s leaders, who depend on cheap energy to fuel GDP growth.

“Domestic production is already at its peak,” energy expert Lin Boqiang recently told the China Daily, “although domestic companies have accelerated their overseas expansion, the resources they [have acquired] are still limited.”

As its economy continues to grow, China is becoming more vulnerable to oil prices. When Premier Wen Jiabao signalled that China’s economic stimulus would continue in his speech to the country’s legislature last week, crude oil prices jumped to nearly $81 dollars a barrel.

But that’s still not high enough for Chen’s gamble to pay off. China’s benchmark diesel price is currently Rmb7,160 a tonne, but it costs nearly double that to get refined biodiesel from Chen’s trees (Rmb14,500).

The bulk of the biomass forests are in Hubei province, where Kaidi agreed to spend $440 million developing nearly one million acres – split between Chinese tallow and tung trees.

The biggest costs facing the company are the oil refineries used to process the seeds, as well as the biomass power plants. Kaidi’s nine operating power plants are being injected into its Shenzhen-listed subsidiary Wuhan Kaidi Electric Power at a cost of $265 million, and another 93 are planned.

Until Kaidi’s biodiesel becomes economical, the tung oil can be sold as a wood finish, and tallow oil as a substitute for vegetable oil. And if the biomass power plants are built using Kaidi’s “fluidized bed combustion” technology, they can also burn coal.

Although biodiesel is a renewable energy source, it may not be terribly green. Cutting down natural ‘low-yielding’ forests and replacing them with commercial single-species forests can cause serious harm to biodiversity and soil quality (see WiC41). And according to Kaidi’s website, forests are also being planted in wetlands, a critical part of lake ecosystems.

But getting biodiesel from trees has advantages too. It does not need to take over arable land needed for growing food (see WiC40). Food security is a prime concern for Chinese leaders, a factor that led to criticism of ethanol fuel technology after worldwide food prices spiked in 2008.

In the push for greater energy independence, China’s leadership is starting to embrace biofuel. The government set a target of blending 2 million tonnes of biodiesel into domestic fuel as a part of getting 15% of China’s energy needs from renewable sources by 2020.

In fact, government support is likely to be critical to the project’s success, at least until oil prices more than double from current levels. The Ministry of Finance is expected to offer a subsidy of roughly $1,200 per acre of biomass forest, and more is expected as the state develops the sector.

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