Energy Independence comes to Nebraska

The Digest embarks on an eight-state Midwest tour – listening to and sharing tales of energy independence – and reporting both the triumphs and the tensions.

Today, we look today at a bright economic revival in Nebraska since the state tipped itself from fuel imports to fuel exports.

Omaha, NE — You might not know it, but there was a reasonably interesting oil boom in western Nebraska a generation ago, and by 1960 the state was producing more than 25 million barrels of oil per year and had achieved liquid energy self-sufficiency. Out in the western Panhandle there was not only prosperity, but a boom in economic diversification.

Recently, with the boom in drilling operations in Wyoming and Colorado in the Niobrara shale – and some tentative exploration of the Kleinholz field – there have been renewed hopes for a return to the days of significant production.

But Nebraska’s above-ground oil field – its corn assets and ethanol fleet – have long restored energy independence to the Cornhusker state. It’s become a Little Saudi Arabia of the prairie, with the capacity to produce 20 percent more liquid energy than it consumes.

What’s the impact?

As the Digest noted in a report published last fall, states that produced enough fuel to meet their internal demand for gasoline maintained growth rates 2.5 times above the national average, and either completely avoided the 2007-09 recession or experienced a lighter version of it. These states maintained a GDP growth in 2007-08 at five times the rate of states that were less than 20 percent energy independent.

The knife-edge

It puts Nebraska in a precarious position, because the state is the largest ethanol producer west of the Missouri and has the second-largest capacity, by state, in the country. As the Nebraska Ethanol Board explains, “there are 24 active ethanol production plants in Nebraska, with a combined production capacity of over 2 billion gallons of ethanol each year—and requiring more than 700 million bushels of grain in the process. These ethanol plants represent more than $5 billion in capital investment in the state and provide direct employment for some 1,200 Nebraskans.”

In fact, one of the US’s most dynamic and fast-growing ethanol companies – Green Plains Renewable Energy – is Hq’d in Omaha — though some of its most interesting projects, such as its JV with BioProcessAlgae, are located on the east side of the Missouri.

That’s the good news, in terms of how Nebraskans look at ethanol demand and the associated rise in corn prices that increased demand has brought.

Now, here’s the flip side. Beef is big, even bigger than ethanol. According to the Nebraska Beef Council, “Its the state’s single largest industry and the engine that powers the state’s economy. The multiplied impact of the $6.5 billion in cattle sales each year is $12.1 billion. Nearly 5 million head are finished and marketed in Nebraska, a state with a population of 1.7 million residents.”

So, there are three head of cattle for every Nebraskan, and that means that the Renewable Fuel Standard is not universally popular here – creating competition for corn – and with severe drought affecting the United States, unhappiness has spilled over into an all-out war on the Renewable Fuel Standard – with the governors of poultry-focused states of Delaware, Maryland, Arkansas and North Carolina calling for a waiver of the RFS this year to balance out the impact of the loss of corn production.

Let markets adjust: Heineman

So far, popular Nebraska Governor Dave Heineman has stayed away from the waiver calls, though there were reports that he strongly considered a request , responding to calls for action from the beef cattle industry.

“I appreciate the concerns the livestock industry has, but no, we do not intend to ask for a waiver,” Heineman told reporters during a recent trade promotion swing. “At this stage, we need to let the market work and eventually we’ll get back to the proper balance.” Heinemann described Nebraska as “the most irrigated state in America and predicted that “we’re going to have a very significant corn and soybean crop.”

Market forces have indeed been at work, leading to the temporary shutdown of the 44 million gallon NEDAK Ethanol plant in Atkinson, and the 120 million gallon Valero ethanol plant in Albion, reducing maximum production by 8 percent in the state – diverting roughly 475 million bushels of corn back into the feed and export grain sectors (though depriving the feed markets of a significant tonnage of protein-rich distillers grains – as ethanol producers only use the starch fraction of field corn for fuel production).

Overall, the market is seeking a balance – the speed with which production and supply will return to equilibrium and the competing interests of cattle and ethanol rebalance themselves – well, these are questions that leave Governors like Dave Heineman on the knife’s edge. But as he noted in June at the opening of the Novozymes enzyme production facility in Blair, “How much better we are off than we were,” noting that Nebraska has the second lowest unemployment rate in the country.

The road to prosperity

The road to prosperity was first mapped out in the depth of the 1980s farm crisis. The midwestern states 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. Not only is Cargill located in Blair along the Novozymes plant, NatureWorks is there too.

Rising commodity prices have resulted as new markets have opened, and the emphasis on high technology has helped states like Nebraska diversify their economies. Though based on a platform of agriculture – the economic good times here have touched retail, banking, and services.

Boom in enzymes and cellulosic production

Even in industrial biotechnology, the benefits are beginning to move well beyond a stimulation of demand for corn and soybeans. The Novozymes project is a case in point. Sited alongside a massive Cargill facility – and now newly expansion to what could may rival the Cargill integrated complex at Eddyville, Iowa – and as the genial mayor of Blair, Jim Realph, noted at the Novozymes opening ceremonies, “Our bio refineries give back to the community, unlike [some industries] that just bleed the money out of you.”

Examples abound. Last fall, the JournalStar.com reported that York County may be either on a short list or at the top of a list for a second Abengoa Bioenergy cellulosic ethanol plant, using cornstalk, as well as other plant residues for feedstock. York County Development Corporation executive director, Cassie Seagren said that the figure being mentioned for the plant as $500 million.

Around the same time, BioSyn announced plans to build a $100 million biodiesel production facility in Bellevue that will produce 6,500 barrels of fuel per day originally from animal fats and vegetable oils. The project does not yet have EPA approval or all of its investors in place.

Meanwhile, last summer, NatureWorks reported a major capital investment project for its Blair facility, adding production of new grades of high-performance Ingeo biopolymers as well as a new generation of lactide intermediates. Samples of the new polymers and lactide intermediates will be available this year with commercial sales commencing by 2013.

In a signature investment reported this past March, Laurel BioComposite plans to break ground on its $17 million commercial scale bio-resin facility this spring, scaling up from the small batches it has been producing from DDGS and sending off to potential customers for testing. The new facility will produce 48 million pounds of bio-resin pellets annually.

Putting their own money to work

What made the Laurel investment special? Instead of the money coming from outside the state – meaning that cash flows from the project would be exported back to outside investors (leaving the state itself to benefit only in terms of jobs and overall economic activity, funding for the Laurel investment came from local investors and area farmers. They see the potential of bio-resin as a value-added product from DDGS.

Creative financing is on the rise here, at the county level as well. Last year, South Sioux City officials gave the green light to the issue of $25 million in municipal bonds to support a 60 million gallon biodiesel plant proposed by Nature’s BioReserves, which will use beef tallow from the Beef Products Inc rendering plant. The $100 million project is expected to provide between 30 and 40 jobs, and the plant is expected to open this after a construction start last summer.

The bottom line: 6 keys to prosperity

In our special Digest report last year, we identified six factors key to the economic revival, and recession resistance, or rural economies in the six states visited in our survey.

1. Investment retention. Communities that reduced the outflow of dollars for energy costs – either through the development of fossil fuels production, or bioenergy and wind, kept their petrodollars home, where they were reinvested in the community to foster local growth.

2. Diversification. Communities that diversified from agriculture into biotechnology, life sciences and bioenergy reduced the drain of talent and the break-up of families.

3. Good neighbors make good economies. The targeting of technologies, and the construction of industrial parks and shared resources – turned the attraction of one key company or technology into several allied technologies. They valued the skilled workers, community support, existing infrastructure, tax breaks, and opportunities to share cost with neighbors as new infrastructure needs emerged.

4. Targeted economic revival funding. Projects like the Iowa Power Fund have had a strong impact in attracting companies like POET, DuPont, and Danisco in their site evaluation process.

5. Connections. The launch of technology centers of excellence to foster pilot projects and cross-training of personnel. Centers like Iowa’s BECON – which combine the incubation of technologies with the infrastructure and resources needed for bench- and pilot-scale testing and development, have had a powerful “magnet” effect in drawing talent and projects away from traditional technology development centers in Silicon Valley and the East Coast. The flow of early-stage investor dollars, research funding, and the appearance of new high-tech workers, further diversified small communities and stiffened resistance to the economic downturn.

Further, states that connected its top university research programs and its development opportunities with key clusters, provide a key competitive advantage for communities and states that would ultimately resist recession.

6. Give-back to the community – communities that gave strong, grew strong. Wed found that strong community spirit, and the presence of strong community values, was a striking feature of successful communities that were growing through the recessionary period. Especially we noted that cohesive communities, bound by shared values, were more committed and successful in attracting new business.

What’s Your Story?

The Digest is on the road the next two weeks – on an eight-state swing through the Midwest, looking at economic revival, drought, food vs fuel, and new technologies in Nebraska, Iowa, the Dakotas, Minnesota, Montana, Wyoming and Colorado. Have a story of economic revival (or pain) to share? Contact us here. We’d love to share your tale.