Substituting petrol

SMARTSHARE

The Iraq conflict has led to a steady rise in crude prices and the prospect of conflict with Iran has triggered a big spike. Crude prices have jumped 25 per cent in the last two months.

Even if Iran-Iraq cools off, it's difficult to envisage long-term scenarios where prices reduce dramatically. Demand from growth economies like India and China is up. "Peak Oil" theorists are projecting near-future scenarios where global oil supply peaks and demand continues to grow.

For energy-deficit India, high crude prices cause a Catch-22 policy conundrum. If the government allows retail prices to rise, inflation spirals and chokes growth. On the other hand, price controls ruin PSU refiners and add another burden to GoI finances.

One effect of high crude prices is enhanced interest in petro-substitutes. Fuel cells are the most tempting in terms of promising zero pollution. But hydrogen-production technology will take 15-30 years to be market-ready. Adoption would also disrupt the delivery chain. Hydrogen cannot be stored, transported or delivered using current facilities.

Hybrid vehicles that switch between electricity and conventional fuels are already popular though expensive compared to normal vehicles. But electricity itself has to be generated "" often by burning gas, naptha, other petro-derivatives, or coal. The issue of expensive fuel doesn't disappear though wider hybrid adoption may ease the supply-demand equation.

Biofuels could be a practical solution. Variations on ethanol, jatropha-based diesels and even plain cooking oil mixed with petroproducts can easily be used in modified internal combustion engines. These are renewables. Flexi-fuel engines that run biofuels and diesel/petrol or mixes of biofuels and petrol are already big sellers in many markets.

There are technological barriers. Jatropha is hygroscopic, ethanol is expensive and energy-intensive to produce. But solutions are in sight and importantly, storage, transportation and delivery would not have to be re-engineered to adopt biofuels.

Brazil has been using ethanol for decades and reckons to save around $50 billion per annum in terms of petro-imports. India, like Brazil, has large cane acreages making it easier to produce ethanol. Experiments with alcohol from agricultural waste, grasses and grains are also yielding promising results.

According to a widely circulated presentation by Vinod Khosla, ethanol as an alternative to petrol would be breakeven in the US if crude remains at around $35 per barrel. He also points out that "E85" (a blend of 85 per cent ethanol) is far less polluting than petrol.

Last month, Khosla's venture capital outfit, KPCB set off an explosive surge in the shareprice of a mid-sized Pune company called Praj Industries by buying a 10 per cent equity stake at around Rs 127 per share through a complicated deal structured at a discount to the then-prevailing price (Rs 157).

Praj calls itself a "global Indian company that offers innovative solutions to add value in alcohol and brewery technology and related wastewater treatment systems".

Translation: it's a technology leader in ethanol production, which specialises in project design and implementation as well as R&D.

In the first nine months of 2005-06, Praj's turnover hit Rs 172 crore (Rs 163 crore in the corresponding period of 2004-05). In August 2005, it issued a 1:1 bonus and also split the Rs 10 face-value share to FV Rs 2. A good Q4 may push EPS to Rs 2.5. The stock's richly priced at 80 PE. Khosla and co. are presumably betting on explosive long-term growth.