S&P examines opportunities for advanced biofuels

Paula Dittrick
OGJ Senior Staff Writer

HOUSTON, Nov. 19 -- Major oil companies and midstream companies face some changes in how they do business if biofuels production expands at the rate required by the US renewable fuel standards (RFS), a credit rating agency reports.

“The potential for advanced biofuels remains robust as long as the government-mandated demand remains in place,” Standard & Poor’s Rating Services analyst Mark Habib said in an October research note.

Currently, RFS-mandated volumes are almost 10% of US liquid fuel demand. The RFS requires increasing production of grain-based biofuels and advanced biofuels at a pace that could more than triple current biofuel production by 2022, he said.

“More than half will come from second-generation biofuels, primarily cellulosic biofuel which the EPA defines as an advanced alternative having at least a 60% greenhouse gas reduction compared with petroleum,” Habib said.

He expects “a combination of second-generation biofuels will most likely be required,” to meet RFS mandates, and any reduction or potential phaseout of the RFS could hinder the biofuels industry’s growth.

Although S&P hasn’t publicly rated any advanced biofuel producers, the rating agency is monitoring various emerging technologies.

“While the case for the viability of biofuels may not have been as compelling when crude oil prices bottomed out at $40/bbl, the emerging US economic recovery and the attendant strengthening in commodity prices are a reminder that biofuels will continue to have proponents,” Habib said.

Advanced biofuels research
Major oil companies and refiners are researching advanced biofuels more actively than they are participating in corn ethanol production, he noted.

Advanced biofuels appear to be a better fit for oil companies than corn ethanol because advanced biofuel technology involves complex chemistry and engineering, for which oil companies have expertise, Habib said.

For instance, ExxonMobil Corp., BP PLC, and Valero Energy are involved with various partners looking into ways to convert algae into fuel. BP, Chevron, Royal Dutch Shell PLC, and Valero Energy are working on cellulosic ethanol

Advanced biofuel producers will face credit issues already familiar to corn ethanol producers, Habib said. These include logistical and infrastructure constraints, hedging risk, construction risk, particularly for nonstandard plant designs, and uncertainty over long-term government support.

“Midstream energy companies—which may come to partner with or service the advanced fuel industry—may both benefit from a potentially growing industry and risk exposure to a still highly-speculative rated segment,” Habib said.

Blending issues
“Some advanced biofuel technologies can produce fuels with a variety of chemical and physical properties that can sidestep blend wall limitations and allow them to use existing infrastructure,” Habib said.

Existing ethanol’s water absorption properties and traditional biodiesel’s poor cold-flow properties prevent them from using most existing refinery products infrastructure, particularly pipelines, he said.

“In addition, the potential production slate for advanced biofuels includes a variety of product specifications and performance levels that could target more specific types of end users than corn ethanol,” he added.

Currently, blenders can use up to 10% ethanol in conventional motor gasoline, but the ethanol industry is working to convince the US Environmental Protection Agency to increase the blending limit to 15% or higher.

“This would allow for greater discretionary blending, which could raise demand and support higher prices,” Habib said.

Biofuels have the potential to change traditional refined fuel prices, refinery-throughout requirements, and distribution networks, he said.

“Terminal and rack facilities may need additional tanks and mixing systems to allow for blending new biofuels if, like ethanol, advanced biofuel specifications don’t allow for prior mixing,” Habib said.

New pipeline specifications probably will need to be developed given the diverse properties of the advanced biofuels product slate, he said.

“Existing pipelines may be able to accommodate some advanced biofuels, but retrofits or looping may be required to handle the properties of new biofuels that reach appreciable shipment volumes,” he said.

Pipeline flows might need to change. For example, algal cellulosic biofuel production probably would come from the Gulf Coast, southern California, northern Mexico, and Florida.

“With the exception of the Gulf Coast, extensive refined products pipeline networks currently don’t serve these regions and could require significant capital expansion,” Habib said. “Some finished-product pipelines may also see lower volumes from existing regions if advanced biofuel production in other locations displaces a portion of current refinery capacity.”

Contact Paula Dittrick at paulad@ogjonline.com.

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