MARCH 2011 |www.opp.org.uk WORDS | Daniel Kiernan


BUSINESS What is green oil?


Many IFAs and agents looking to broaden their offering of investment products are considering Green Oil. It’s a new industry and a new product that offers high returns for investors and high commissions for agents. It is an intriguing proposition.


I


t is easy to say think about green oil projects as an alternative investment product … but who would know what I meant? What is Green Oil exactly? Very simply, “Green Oil” is the oil derived by crushing the seeds of crops such as Jatropha, Oil Palm, Millettia and Silver Leaf trees.


As these crops grow they absorb carbon from the atmosphere and the oil can then be used as an alternative to conventional energy sources – so you are replacing an energy source that emits carbon with one that absorbs it, therefore reducing the amount of carbon in the atmosphere and helping combat climate change.


The trees can be harvested annually and have a productive life of up to 75 years. Green Oil is actually not a new source of energy and has been used on a small, local scale for hundreds of years. However, large commercial plantations are increasingly viable and there are three key drivers supporting demand for renewable energy: 1: Global demand for energy is increasing. The International Energy


Agency (IAE), predicts that world demand for oil will increase from 2,000 million tons of oil equivalent (mtoe) to 16,800 mtoe in 2030. About 93% of this increase in demand is expected to come from China and India as they industrialize and as their populations grow richer and consume more energy. 2: Conventional fuel is becoming


scarcer. Nearly all of the easily extracted, readily available oil has already been obtained and we are increasingly reliant upon harder to extract sources such as deep water drilling and tar sands. The BP Deep- Water Horizon disaster in the Gulf of Mexico last year demonstrates how diffi cult and expensive it can be to extract this kind of oil.


3: Governments are increasingly setting targets for the use of renewable sources of energy to reduce the amount of carbon we are emitting into the atmosphere and combat climate change: Many Green Oil businesses are


currently looking to raise the funds to establish their plantations. As a new and relatively untested proposition, raising funds from banks can be


both diffi cult and expensive - so the industry is turning to IFAs and agents to raise money from the retail market. The investments are usually structured as a parcel of plantation that is leased to the investor.


The lease is for a fi ve, ten, fi fteen or twenty year period and the investor should receive an annual income from the revenues and their capital back at the end of the term. And because it’s such a young industry there are many


“Funding from banks can be diffi cult so the industry is turning to IFAs and agents to raise money”


different business models out there, none of which have had the chance to build signifi cant track records of success yet.


Consequently the returns on offer to the investor and the commissions on offer to agents can vary wildly. Some products forecast annual returns of 90% + and agent commissions as high as 12%, while others are much more conservative.


In this kind of environment it’s important to carry out very thorough due diligence. • Location. Green Oil crops grow best


in tropical conditions; so many plantations are located in South East Asian countries such as Thailand, Cambodia & Sri Lanka. These locations offer good growing conditions and low costs, but also present risks in the shape of poor infrastructure, undeveloped markets, natural disasters and political instability. • Fixed or variable returns.


Pull the trigger | And shoot for revenue growth from the green oil sector instead


Variable returns hold out the prospect of higher returns, but fi xed returns offer investors a higher degree of certainty and security. • Insurance. It should be standard practice to insure the crop against


known diseases and common disasters. • Crop Choice. All of the major


Green Oil crops have been well researched. Jatropha is probably the best established and most well- known. Millettia is commonly regarded as the most resilient and highest yielding. It’s also worth establishing what other complimentary products can be produced from the crop and if there is a market for these as they can be a good additional source of revenue. • Currency Exposure. Is your client exposed to the currency of the investment location? This can be both a good and a bad thing of course, but it is another element of uncertainty that must be considered carefully. • Operator. The operator who will


manage the plantation, cultivate the trees and harvest the oil is a key part of the proposition. Ensure they are an experienced operator with a strong track record. • SIPP Accepted. As ever, the best products have been SIPP accepted or approved by a specialist such as the SIPP Investment Platform sippinvestmentplatform.co.uk • End Markets. Verify that there is an established and defi ned end market for the Green Oil. Key Conclusions • Green Oil projects are genuinely “green” investments • There are many Green Oil projects on the market offering a range of commissions and forecast returns • With such a young industry, it’s important to undertake thorough due diligence or work through trusted product providers • The right projects offer a great


mix of fi xed returns, defi ned exit and environmentally friendly investing. Daniel Kiernan is the chief investment analyst at Alterntive Outlook.


ALTERNATIVES | 39


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