It Takes Two to Tango

June 28, 2011 |

How and why could three announcements from Gevo, Toray, Redfield and the EPA point the way forward for US ethanol, advanced biofuels, and renewable chemicals?

In recent weeks, Gevo, Toray, Redfield Energy and the EPA made three seemingly unrelated announcements regarding biofuels mandates, isobutanol, and a product you probably never heard of called paraxylene, or PX.

But put the three together, and you may have a roadmap for extracting the US ethanol industry, and the biofuels movement, from its present uncertainties and difficulties.

Not through policy action, but through market action, and the application of some gold old-fashioned know-how.

The news background

Let’s quickly review the three announcements.

In the first, Gevo entered into a JV with Redfield Energy to retrofit Redfield’s existing ethanol plant into an isobutanol plant with an expected production capacity of approximately 38 million gallons per year (the original ethanol plant had a nameplate capacity of 50 Mgy). The retrofit is expected to commence by year end 2011, and Gevo expects to begin commercial production of isobutanol at the facility in the fourth quarter of 2012.

In the second, the EPA proposed to deny the petition of API and NPRA to change the methodology for projecting the cellulosic standard. EPA uses achievable production volumes based on survey of the industry. API and NPRA wanted actual volume commercially produced or the more conservative projection from DOE’s Energy Information Administration.

In the third, Gevo announced that it has successfully produced a renewable version  of polyethylene terephthalate (PET), in partnership with Toray Industries. Gevo employed prototypes of commercial operations from the petrochemical and refining industries to make paraxylene (PX) from isobutanol. Toray employed its existing technology and new technology jointly developed with Gevo and used Gevo’s para-xylene and (commercially available) renewable mono ethylene glycol (MEG) to produce renewable PET.

(PET? That’s the polyester used to make plastic bottles, plus polyester fiber – a 50 million ton market per year, globally.)

Now, how do we put all three of these news items together?

The EPA ruling, deconstructed

The key is looking at the EPA ruling. How do you rate the “Achieveable production volumes” of advanced biofuels for public transportation coming from what will be the upgraded Redfield plant? As 38 million gallons of isobutanol, which is a perfectly fine fuel blendstock? Or as some corresponding mixture of, say, isobutanol and paraxylene.

That can make for an interesting situation for an oil refiner facing an obligation under the Renewable Fuel Standard. The EPA has shown that it is perfectly willing to waive down the RFS mandates where there is no production capacity available to meet the original targets developed by Congress in 2007. But it has been less than willing, for example in the bio-based diesel or advanced biofuels portions of the mandate to waive down the mandate if the market price for fuel is too low for producers to make money.

This is one of the reasons that the National Biodiesel Board is all jumped up over the biodiesel mandate for 2011 and 2012 – because it will allow for stranded capacity to come back online – capacity that idled because of market conditions, or because the fuel price.

Overcapacity – the biofuels business-case killer

Overcapacity – that has been the financial bear that has sat on the biofuels industry for too long.

Why is overcapacity been the problem that it is? Because producers have made one fuel for one set of buyers – what is known as a captive market, and that’s one reason that ethanol is just about the only item blended into gasoline that costs less than RBOB gasoline at the refinery gate. Usually, additives cost more, and justify themselves through enhanced performance – for example, detergents.

For ethanol producers, the concept of an integrated biorefinery has been to produce distillers grains, CO2 and ethanol in fixed proportions. There’s been no alternative to ethanol, and you can’t simply turn up the CO2 production when the ethanol price goes down. It’s a multi-product environment, the old ethanol plant, but something different than what, say, Gevo or other advanced biofuels companies offer.

Consequently, there’s not much competition for the fuel – except when there is undercapacity.

That’s why the oil industry’s proposal – to perfectly match the mandate to production – was a real problem. Given that refiners can, under global trade rules, import foreign cellulosic biofuels to meet the mandate – matching mandates to domestic production would ensure a perpetual state of US cellulosic biofuels overcapacity. Dampening prices, margins, and killing the economic rationale for the fuels.

Moving to a market-based system of competition

So, let’s look at the alternative world that we see in the Gevo announcements.

In the case of a Gevo-retrofitted plant, the biorefiner can produce biobutanol plus co-products, or paraxylene and the same co-products – to give one example.

Turns out, in renewable fuels as well as elsewhere, it takes two (products) to tango.

Pricing moves around in these volatile markets, but as a rule of thumb, paraxylene prices at around a 25 percent premium to ethanol (after taking into account the lower yields of isobutanol, per ton of feedstock). PET sells for roughly a 125 percent premium.

But think about that fuel mandate? Now, the EPA will have to make a decision on how to score the production capacity at Redfield. If they score the fuel capacity at zero simply because Redfield can produce paraxylene, that would be a farce. So, how will they score the achieveable production capacity – well, why wouldn’t they score it at 38 million gallons?

So, now the industry has some interesting options. Producers can produce fuels, or chemicals. Blenders are obligated to blend fuels, or buy credits. Now we start to see the potential for undercapacity. That will move price, and may inspire blenders to build or buy some capacity of their own, simply to avoid competing with, say, Toray, for isobutanol.

Looking at the blend wall

But let’s go a step farther.

How does that 38 million gallons in capacity relate to, say, the dreaded E10 “blend wall”, or the limit of around 13 billion gallons of ethanol that can be blended in the US, in the form of E10 ethanol.? The blend wall has the industry talking about swapping ethanol tax credits for investments in market access, such as blender pumps that can dispense higher-blend fuels.

Well, that’s interesting also, isn’t it? Biobutanol blends, today, at 12 percent under a common waiver, and Dupont even secured a waiver some time ago for a 16 percent blending waiver.

You see, switching to biobutanol pushes back the blend wall – without having to certify E15 ethanol blends, or pay for blender pumps as an end-around.

All, in all, you have some mighty interesting options as an ethanol producer, when the options in the fuel market and the chemicals market are put together in a powerful integrated biorefining business case. Companies such as Cobalt Technologies, Butamax, Green Biologics, and Butyl Fuels are chasing the biobutanol market. For very good reasons, it turns out – though Cobalt’s a-chemicals and Butamax’s all-fuels value propositions work differently.

Keep an eye on biobutanol, for sure, and on the EPA as it continues to work through its thinking on how it will apply the volumetric Renewable Fuel Standard to the capacity options of integrated biorefiners.

For sure, if they go the right way, the EPA may have found a real market-making mechanism that may send obligated blenders back to their boards with a new perspective on the payback associated with investing in renewable fuels.

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