A Tale of Two Energy Cities

Nebraska Governor Dave Heineman, speaking at the Novozymes facility opening in Blair

A major plant opening by Novozymes in Nebraska and a project announcement from ExxonMobil in Texas, highlight the opportunities and challenges for industrial biotechnology

It was, fittingly, one of those “chamber of commerce” sunny late spring days in Blair, Nebraska, when the VIP-laden cars and buses rolled in to a town just north of Omaha that, in recent years, has become a showcase for integrated biorefinery operations.

Like two towns in Iowa – Eddyville, and eventually in Fort Dodge – Cargill has been exploring economies of scale in what it calls its “over the fence” development model – not unlike the “industrial symbiosis” pursued by Novozymes and others in cities like Kalundborg, Denmark.

In Blair, Cargill’s corn-based, wet mill ethanol plant provides a base load corn grind, and the availability of starch, dextrose, steam, and wastewater treatment, for example, begins to provide the shared manufacturing infrastructure base that attracts other partners. More partners, more companies to share the economics and to utilize, for example, excess process heat and steam.

Accordingly, Cargill’s own Natureworks opened a plant in the extended Balir campus in 2002, with a nameplate capacity of 300 million pounds (140,000 metric tons) of Ingeo biopolymer. In 2003, NatureWorks built the world’s largest lactic acid manufacturing facility to feed its polymer plant. Evonik arrived as well, and is In producing the feed amino acid L-lysine, and has announced a two-phase expansion of the Blair, Nebraska, plant to an annual capacity of 280,000 metric tons, on track to be completed by this summer.

Novozymes arrives in Blair

What brought all the VIPs back to Blair for another plant opening was the arrival of a $200 million Novozymes facility, the largest and most advanced in the world built to date, exclusively for the production of enzymes for biofuels and, ultimately, supporting what the companies expects will be a massive expansion in demand for enzymes for advanced biofuels production.

The popular governor of Nebraska, Dave Heinemann, was on hand to tout the low unemployment and general prosperity in Nebraska, as well as hail the opening on a major new expansion to what could may rival the Cargill integrated complex at Eddyville.

“What makes a company great?” Heinemann asked the 200 people attending the opening of the Novozymes facility. “A great workforce. That’s why companies are coming here to Nebraska; that’s why we have the second lowest rate of unemployment. That’s why the best place for a business to begin is in Nebraska.”

Whoa, governor. Fair to point out that Nebraska was a fine state with great people, even back in the 1980s, in the midst of a farming crisis that was moving like a wrecking ball through a slew of Midwestern state economies. The midwestern states have generally responded with a stronger integration of high technology and agriculture: fostering closer links between academia and industry, and encouraging the construction of biorefining complexes that get more cost-effective with every partner like Novozymes that shows up to share the infrastructure load.

But prosperity has something to do with higher commodity prices, too – corn has tripled in price since the 1980s, and a surge in ethanol production has made states like Nebraska more energy independent than states, for example, in the US Northeast and Mid-Atlantic.

As the genial mayor of Blair, Jim Realph, noted in the Novozymes opening ceremonies, “Our bio refineries give back to the community, unlike [some industries] that just bleed the money out of you.”

And Governor Heinemann also happily noted, “How much better we are off than we were,” as he unveiled a special proclamation of thanks to Novozymes management.

Meanwhile, everything’s Big in Texas

But this week, the spotlight was not only shining on industrial biotechnology and the hard-working citizens of Blair. It was shining also on Baytown, Texas – where ExxonMobil has long run its own monster-sized version of industrial symbiosis. The largest oil refinery in the US is there, taking in 560,000 barrels per day at full capacity.

To translate that into the metrics usually used in bioenergy, that’s 8.6 billion gallons of production capacity, or about 60 percent of the size of all US ethanol production put together.

The refinery started down in Baytown in the 1920s, when Exxon was still known as Jersey Standard, and the plant’s intake was roughly 10,000 barrels per day, or around 153 million gallons per year.

Now, that sounds more like one of today’s biorefineries.

The news this week out of Baytown is that ExxonMobil will shortly unveil plans for a massive new ethylene production facility, designed to take advantage of a structural change in the relationship of oil and gas prices, with the new flow of shale gas from the US which has driven natural gas prices down as low as $2 per million BTUs.

On the BTUs, gas and oil should be, and traditionally have been, trading at levels where every $10 per barrel of oil should translate to $1 per million BTUs of natural gas. So, in times of $100 oil, there should be $10 gas, not $2 gas. That’s what’s changing the thinking at energy companies, who have determined that the structural shift in pricing is likely to persist for years, and that it offers a built-in advantage for natural gas-to-ethylene over processes, such as used in Asia, that make chemicals from oil-based naphtha.

The project in Baytown is huge. 1.5 million tons of ethylene – that’s roughly 400 million gallons, by volume, to give a comparison to the ag biotech projects up in Nebraska.

The off taker for the ethylene? Exxon itself, which is planning two new 650,000 ton polyethylene projects in Mont Belvieu, a few miles northeast of the Baytown complex.

It’s part of a resurgence of US chemical manufacturing, off the heels of falling natural gas prices. Dow, Shell and LyondellBasell are three other companies that are increasing their US production capacity.

Ultimately in Mont Belvieu, they make the precursors for the kind of plastics and fibers that, for example, NatureWorks and its Ingeo biopolymer line compete with.

But, for now, not really competing on price.

Competing with China

One thing both projects expect to do, surprisingly, is compete effectively with China.

Novozymes, for example, originally expected to build this project in China but, after closely examining the customer base and, briefly, flirting with Uruguay, decided to construct the facility in the US. The operating cost, noted Novozymes Executive VP Peder Nielsen, will be lower in Blair than in China, although Nielsen candidly conceded that the capital investment for a US project is still double that, for a comparable facility in China. He noted that the advantages of being close to the customer base were winning factors for the company, and also noted the complexity of the technologies utilized in ethanol production were far more complex than those used, for example in the pharma business.

The Advanced Manufacturing tax credit

Speaking in Blair, DOE policy analyst Jason Walsh noted that the project was a “clear illustration that the clean energy economy is real, and is all around us.” He added that the project showed the value of the Obama Administration’s Advanced Manufacturing Tax Credit, which enabled projects like Novozymes to choose the US as a base.

Walsh noted that the Novozymes project showed how smart federal investment can leverage large private investment, and that enzyme costs for ethanol production, through innovative series of public-private partnerships between the government and companies like Novozymes, for R&D and manufacturing, had dropped by a factor of 30.

“We face a stark choice: Export from Nebraska, or import from China” Walsh said.

Baytown and Blair

But Walsh might have added, “export from Nebraska, or import from Texas.” The cleatech tax credits are not driving the thinking down in Baytown, for sure – though the breakthroughs in natural gas prices are driven by breakthroughs in high technology, for sure, few are going to mistake shale gas extraction technologies for cleantech.

But, given the scale of expansion in Texas, compared to the scale of expansion in Nebraska, the question is going to be asked – why should projects that help Nebraska receive so much support, when even larger projects can be built down in Texas, without the need for federal supports?

It’s a question that will bedevil industrial biotech as it competes with the onset of low-cost natural gas. For years, industry leaders have relied on the long-term view that the price of carbohydrates will rise more slowly than the price of oil – and that thinking has driven both people and dollars into industrial biotech, seeing that a tipping point is likely to come.

At which time, the theory goes, bio-based companies like Gevo or Solazyme, that had built a business in delivering complex, high-value molecules at lower cost than its fossil-based competitors – could scale up and deliver transformative price advantage in fuel production.

Shale operations challenge that thinking, and rightly so. But also it is important to note that no one really knows how much shale gas is really going to come online. Thoughtful observers have made the point that actual production from projected gas reserves may be a small fraction of what was thought to be there.

But bio-based economy, likely, needs to be based on something stronger than the fact that it might be a hedge if hopes for long-term low natural gas prices turn out to be somewhat exaggerated.

The Federal-State challenge

Advocates of the clean tech economy and ag-based economy that, for example, the projects at Blair exemplify, may well note that Nebraska has a lot more at stake than the US, in terms of developing economies of scale for bio-based industry.

For the growth of US domestic manufacturing and the development of energy security – there is always a sense at the federal level of spreading the dollars around, supporting all regions, but that must be tempered by economic realities – not a lot of federal support for the automotive industry goes to Wyoming, for example – it generally flows to places like Michigan, Ohio, the southeast or California where the lowest cost of manufacturing generally can be found. So, too, with energy production.

But Nebraska knows no such constraints – neither do any of the prairie states, really – or the Midwestern Governors Association. It really isn’t tough to make the argument to a prairie state governor about the importance of building up the industrial sector around biomass assets, and around industrial and ag biotech. That’s in their DNA.

In their case, an export from Nebraska is worth one heck of a lot more than an import from Texas. Not just because of the direct job creation, but because energy is in everything, and states that have more energy independence retain more of their GDP, and have stronger opportunities for net capital inflow.

Net capital inflow. There’s hardly a better-known driver for innovation and growth than that. Making the development of more aggressive state policies, even as they face tough budget challenges, a high priority for the bio-based states who seek to compete against gas, and Texas.