ALTERNATIVE ENERGY, PART 1

Energy bill provides kick–start to biofuels
Washington has created new mandates and financial incentives that promote alternative energy, including the conversion of agricultural products to ethanol and next–generation biofuels. Don Warlick examines the alternative energy market and its drivers.

EDITOR’S NOTE: Renewable energy has been heralded by some as the answer to our dependence on hydrocarbons for transportation fuels and power generation. In this first article in a two–part series, noted researcher and consultant Don Warlick of Warlick International scrutinizes biofuels. Next month, he takes on wind power and solar energy.

There are three principal alternative energy business sectors in today’s energy picture: biofuels, wind power, and solar energy. Each is growing at a fast pace, and together they may well be a $60 billion market for products and services at the present time. This article provides an overview of these three huge sectors with emphasis on the US but also addressing global markets (see Table 1).

There are a number of global drivers that are pushing alternative energy, the least of which are reduction in greenhouse gases, cleaner fuels, renewable nature of the resources, energy replacement, etc. Then there are government mandates and incentives to help various alternative energy sectors. Importantly though, there have been significant efforts in technology and manufacturing that have reduced the cost of the end product as shown in Table 2.

This month’s article covers the first of the three principal alternative energy sectors – biofuels. Next month’s continuation will address the other two – wind power and solar energy.

Biofuels

The biofuels sector, largely ethanol, and then some biodiesel, is on the verge of yet another leap upward in size, thanks to the US Congress. A new energy bill signed by President Bush in December 2007 set the scene for one of the most ambitious programs in American business history – it will greatly enhance, via mandate, the growing biofuels industry in the United States, which is basically a business to convert agricultural products and various plant materials into transportation fuels.

The beginnings of the ethanol industry started with the Energy Bill of 2005 that supported an infant industry but provided a basis for a ramped–up construction program to build ethanol plants across the Midwest. In January 2005 there were 81 ethanol plants. Today there are 134 with another 77 either planned or under construction.

There’s more: As a consequence of the new energy legislation of 2007, ethanol produced from corn will probably reach 15 billion gallons by 2015, up from less than 6 billion gallons in 2007. This is a huge increase, especially considering that 20% of the US corn crop is already going into ethanol.

As an add–on, the new legislation mandates that next–generation biofuels (beyond ethanol) should reach 9 billion gallons in 2017 and 21 billion gallons in 2022. This mandated market is a truly spectacular undertaking.

The technology of biofuels and, more specifically, ethanol is straightforward. Ethanol is produced in a fermentation process. It utilizes corn grain and a process to remove the sugar in wet and dry mills via crushing, soaking, and chemical treatment. The sugar is fermented and the resulting product is distilled and purified. Result: anhydrous ethanol. It is now available as a high–octane transportation fuel and additive.

Regarding application and use, ethanol is not used as a motor fuel. Instead, a percentage is combined with unleaded gasoline in two common blends, E10 with 10% ethanol and 90% unleaded, while E85 contains 85% ethanol and 15% unleaded gasoline and is an alternative fuel available to flexible fuel vehicles. Today about 45% of US gasoline will contain some ethanol, mostly E10.

Ethanol is a mandated additive, an oxygenate, as a replacement for the earlier MTBE, an oxygenate that was removed from the refining process due to environmental problems. Ethanol and biodiesel have lower energy contents than either gasoline or diesel fuel.

Conventional gasoline has about 125,000 BTU per gallon. The two most common forms of blended fuels containing ethanol, E10 and E85, have energy content of 84,300 BTUs and 94,900 BTUs per gallon, respectively. The objective to blend oxygenates into gasolines has been accomplished, but at a price – fewer miles per gallon due to lower BTU content.

Biodiesel is somewhat similar to diesel fuel, utilized in the same applications. It can be blended with petroleum diesel in almost any fraction for use in compression–ignition engines given the system is compatible. Common biodiesel blends are 2%, 5%, and 20% (B2, B5, and B20).

In the US, the predominant feedstock for biodiesel is soybean oil. In Europe, it will be sunflower oil and rapeseed; and in Asia, it is typically palm oil. There are other feedstocks that include animal fats, restaurant waste, vegetable oils, etc.

Ethanol is not new. Driven by high gasoline prices in the late 1970s, so–called “gasohol” (10% ethanol) appeared in several US markets, primarily in the farm belt stretching from Indiana to Idaho and from Kansas to the Canadian border.

Later in the 1990 amendments to the Clean Air Act of 1977, Congress required lower emissions from reformulated gasoline, or RFG that would contain an oxygenate. The oxygenate that dominated both fuel blends was MTBE (methyl tertiary butyl ether) because it was relatively straightforward to produce in existing refineries and most importantly, could be transported with no problems in the existing pipeline system, whether by itself or already blended in finished gasoline.

By the late 1990s, MTBE had been detected in trace amounts in well water used for drinking, and the states of California, New York, and Connecticut banned its use, with ethanol as the designated replacement. MTBE, even at very low levels, imparted a bad taste to water and removal was expensive. These events plus concerns about possible heath effects caused several other states to ban it. Thus began the real growth of ethanol.

The economics of ethanol (and biodiesel as well) are largely driven by governmental requirements. This is truly a mandated market growing up right before our eyes.

There a number of drivers supporting the use of biofuels around the world. Those that are more specific to the US include the fact that ethanol is renewable, ethanol usage (and that of biodiesel) promotes energy security, partial elimination of greenhouse gases, relatively good ROI, creation of rural jobs, and enhancement of local economies across the Midwest and other agricultural centers.

But the principal drivers for US ethanol use come from the government, summarized briefly:

• Federal Renewable Fuel Standard (RFS) – per the new Energy Bill signed in December, 2007 refiners, blenders, and importers are directed to use increasing amounts of biofuels each year forward through 2022, essentially “setting” a market for ethanol
• Oxygenated Fuel Mandates – the Clean Air Act requires the use of fuel additives that increased oxygen content. As a result the earlier use of MTBE was eliminated, now replaced with ethanol
• EPA Clean Diesel Rules – starting in 2006 the EPA required those who refine gasoline and diesel fuels to reduce nitrogen oxide emissions by removing almost 100% of sulfur content, which in effect reduced the lubricity of diesel fuel. Accordingly, there is more use of biodiesel produced from soybeans (it contains no sulfur and has lubricating qualities)
• Federal Blenders Tax Credit – blenders of ethanol receive 51¢ per gallon. Biodiesel blenders receive $1 per gallon of produced biodiesel made from virgin oil and 50¢ per gallon of biodiesel made from waste grease
• Small Producer Tax Credit – small producers of ethanol and agri–biodiesel receive 10¢ per gallon tax reduction on the first 15 million gallons and they produce each tax year
• Tariff Protection – there’s an existing tariff on imports of ethanol (principally aimed at Brazil) that amounts to 54¢ per gallon
• Government Fleet Purchases – the 1998 Energy Conservation and Recovery Act will allow fleet managers in federal and state positions to meet federal alternative fuel vehicles acquisition requirements by utilizing biodiesel blends of 20% or higher
• Renewable Energy/Energy Efficiency Loan & Grant Programs – in the spring of 2007 the Department of Agriculture made $177 million available in loan guarantees and $11 million in grants supporting investments in renewable energy and efficiency improvements by ag sector producers and small businesses

The market for ethanol and biodiesel worldwide is quite large, having grown quickly in the last six years. First, the US market, which recently passed that of Brazil in size, is shown in Figure 1, supplied by Raymond James.

There is growing global use of biofuels, pioneered in Brazil, now being utilized at increasing rates in Europe and Asia. Global ethanol sales (biodiesel is included, perhaps 5–7% of the total) is estimated to range from $21 billion to $28 billion at the present time.

With regard to ethanol producers in the US, almost all are Midwestern plants close to corn production. Mentioned earlier, there are now 134 operating ethanol plants plus another 77 that are either planned or under construction. Keep in mind that the recent softness in ethanol pricing has imposed some plant operating restrictions, closures, and delayed construction.

A quick summary of the top five ethanol producers, which will account for about 60% of 2008 production:

• POET Energy – was the US leader with capacity of 1.5 billion gallons per year (BGPY), current and planned/under construction; based in Sioux Falls SD, opening another ethanol production facility in Ohio in January 2008
• VeraSun/US BioEnergy – now the #2 US producer of ethanol by virtue of their just–announced merger. These two companies together account for almost 1.6 BGPY of ethanol. VeraSun is based in Brookings, SD and US Bioenergy offices are in Inver Grove Heights, Minn.
• Archer Daniels Midland – this ag sector giant is a global leader in agricultural processing of corn, wheat, soybeans, and cocoa. ADM could well be #1 in the ethanol business in 2008 with current plant additions by the end of 2008. Their new total should be ~ 1.6 4 billion BGPY.
• Aventine Renewable Energy Inc. – will have 226 BGPY in ethanol production sometime in 2008; based in Pekin, Ill.
• Hawkeye Renewables – based in Iowa Falls, Iowa, this company will be #5 in the US in 2008 with 210 BGPY

It’s notable that a number of international oil companies have invested directly or indirectly in the biofuels sector. A few examples:

• BP made a $400 million investment with Associated British Foods and DuPont to build a bioethanol plant in the UK.
• ConocoPhillips currently produces biodiesel from soybean oil at a refinery in Ireland and has planned a similar operation in its Borger, Texas Refinery. They also announced plans in conjunction with Tyson Foods for the processing of animal fats into biofuels.
• ExxonMobil gave $100 million to Stanford University to support 27 projects related to solar, carbon dioxide storage and capture, biomass, etc.
• Shell holds an investment in cellulosic ethanol company Iogen and Choren Industries in Germany.

Looking ahead, biofuels growth will do nothing but increase worldwide. That is certainly the case in the US, as it is a mandate–driven business for both ethanol and biodiesel (and later cellulosic–based fuels). In the foreseeable future, it’s almost a certainty that all segments will gain speed. There appears to be little to no capacity limitation worldwide, and there certainly is no lack of investment capital to support this fast–expanding sector.

About the author

Don Warlick [[email protected]] is president of Warlick International, a market and business consultancy established in 1977 that specializes in the global energy business. Previously, Warlick served in marketing and corporate development roles with Getty Oil Co., PepsiCo Inc., and The Williams Companies. He has BS and MS degrees in engineering from The University of Tulsa.

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Syntroleum and Tyson Foods launch renewable fuels venture

Tulsa–based Syntroleum, a synthetic fuels technology company, wants to be a leader in renewable energy. As such, the company has teamed up with Tyson Foods to form Dynamic Fuels LLC, which will produce synthetic fuels targeting the renewable diesel, jet, and military fuel markets.

The 50/50 venture plans to construct and operate multiple stand–alone commercial facilities capable of producing ultra–clean, high–quality, next–generation renewable synthetic fuels using Syntroleum’s patented refining process, which it calls “Biofining.”

Tyson, headquartered in Springdale, Ark., is the world’s largest producer and marketer of chicken, beef, and pork. The company produces large by–product volumes of various grades of animal fats, greases, and vegetable oils that can be utilized as renewable feedstock in the new venture. The company will pre–process the feedstock mix and optimize it for refining into high–quality fuels.

The first facility will produce about 75 million gallons of synthetic fuel annually. Construction of this initial facility is scheduled to start in 2008 with production targeted for 2010. The estimated cost of the project is $150 million, which Tyson and Syntroleum will share equally.

Annual operating profits, which are expected to begin in 2010 for Dynamic Fuels, are forecast to be between $35 million and $60 million.

Dynamic Fuels will leverage Syntroleum’s proprietary work done in producing synthetic fuel and developing synthetic fuel standards for the US Air Force and the Department of Defense. The fuel produced by this venture will offer the same benefits of synthetic fuels derived from coal of natural gas, while providing substantial advantages over petroleum–based fuels, said Jack Holmes, Syntroleum’s CEO.

These benefits include higher cetane levels, which are a measure of combustion quality; significantly lower nitrogen oxides (NOX), and near–zero sulfur, Holmes said. In addition, the synthetic fuel provides superior thermal stability, making it effective for advanced military applications.

The fuel will offer higher energy content, better cold–flow properties enabling it to function effectively in cold weather, and reduced carbon dioxide emissions. The unblended fuel can be used in existing diesel engines with no engine modifications required and also can be upgraded into ultra–clean, high–quality jet fuel.

The fuels are expected to be completely compatible with existing pipelines, storage facilities, and other conventional fuel infrastructures, says Syntroleum. Also, the synthetic fuel produced by Dynamic Fuels can be blended with petroleum–based diesel and/or conventional biodiesel to help those fuels achieve superior environmental and performance characteristics.

Syntroleum also plans an expansion into full biomass–to–liquid fuel production, which could potentially incorporate cellulosic biomass, animal waste, and other organic materials.