Drop-in fuel producers would like long-term, stable fuel sale and feedstock purchase contracts.
Why not put those needs together?
According to a Defense Department report, the US Navy will need 336 million gallons of renewable fuel by 2018 to meet its Green Fleet goals. Let’s take that as a starting point.
The same report concluded that “the projected supply of drop-in renewable fuels will not be sufficient to meet anticipated DoD demand for renewable jet fuel products. Also, price premiums for drop-in renewable fuels…may be considerable.” Elsewhere, the report suggests that the price premium may range from $1.43 to $5.24 per gallon.
To accelerate production and ensure that costs are in line, affordable feedstocks — which can represent up to 80 percent of finished fuel costs — are essential.
A National Biomass Lend-Lease project could achieve that goal. What is it, exactly?
NBL in focus
The NBL is a dedicated portion of federal lands — made available for no-cost (lend) leasing to bioenergy producers or their supply-chain partners who, in turn, commit to supplying affordable, drop-in, low-carbon, domestically-produced fuel to the DoD while observing strict sustainability guidelines.
In 1940, Roosevelt explained the original Lend-Lease program in this way:
“Well, let me give you an illustration: Suppose my neighbor’s home catches fire, and I have a length of garden hose 400 or 500 feet away. If he can take my garden hose and connect it up with his hydrant, I may help him to put out his fire.
“Now, what do I do? I don’t say to him before that operation, “Neighbor, my garden hose cost me $15; you have to pay me $15 for it.” What is the transaction that goes on? I don’t want $15–I want my garden hose back after the fire is over.
“All right. If it goes through the fire all right, intact, without any damage to it, he gives it back to me and thanks me very much for the use of it.
But suppose it gets smashed up–holes in it–during the fire; we don’t have to have too much formality about it, but I say to him, “I was glad to lend you that hose; I see I can’t use it any more, it’s all smashed up.”
He says, “How many feet of it were there?” I tell him, “There were 150 feet of it.” He says, “All right, I will replace it.” Now, if I get a nice garden hose back, I am in pretty good shape.
Is there a precedent in oil & gas for a national biomass feedstock reserve?
By 1910, the U.S. Navy was rapidly converting from coal to oil-burning ships. Concern arose for an assured supply of oil in the event of war or a national emergency.
The Pickett Act of 1910 authorized the President to withdraw large areas of potential oil-bearing lands in California and Wyoming as sources of fuel for the Navy. President Taft wrote to Congress in 1910: “As not only the largest owner of oil lands, but as a prospective large consumer of oil by reason of the increasing use of fuel oil by the Navy, the Federal Government is directly concerned both in encouraging rational development and at the same time insuring the longest possible life to the oil supply.”
Within the next fifteen years, the properties that make up the Naval Petroleum and Oil Shale Reserves (NPOSR) were brought under the NPOSR umbrella. This included the Naval Petroleum Reserves 1, 2, and 3 plus the Naval Oil Shale Reserves 1, 2, and 3. The Naval Petroleum Reserve Number 4, on the north slope of Alaska, was added in 1923.
How much land does the NBL require?
The US has 635 million acres of federal lands — for this purpose, about an 75×75 mile section would be required, or roughly one-half of one percent of federal land. That’s about 4 million acres. Presumably, forested land would be used.
How big was the Naval Petroleum Reserve?
Well, there were four. In all, they comprised roughly 35,718 square miles — or about six times the land proposed for the National Biomass Lend-Lease project. Point is, it’s all been done before. For many of the same energy-security reasons. But now, we have the added motivation of putting a stop to the debilitating increase in crazy weather.
Keep in mind, the Naval Petroleum Reserve was in no way guaranteeing or financing the refining capacity – they were ensuring that a sufficient source of affordable feedstock would be available to refiners,
The bioenergy producer(s) would have a 15-year feedstock harvest right and a 15-year fuel obligation. The land would be used according to strict sustainability standards, and restored to original condition at the end of the contract. The net goal – no long-term disturbance of either nature, or US carbon storage.
How is Biomass lend-lease different from leasing federal lands for oil & gas?
Well, it is different – primarily, with renewables you have a cyclical energy sources, there’s no depletion of energy reserves — no associated, permanent release of carbon. At the end, you get the forest back that you leased.
Not to say that there are not good reasons to open up federal lands for oil & gas leasing. There are. The US would like to be long energy, not short energy. But a National Biomass Lend-Lease project is better.
How much could an NBL save on renewable fuel production?
Let’s look, for example, at KiOR. In a 2011 IPO filing, KiOR’s management wrote:
“Our proprietary catalyst systems, reactor design and refining processes have achieved yields of renewable fuel products of approximately 67 gallons per bone dry ton of biomass, or BDT, in our demonstration unit that we believe would allow us to produce gasoline and diesel blendstocks today at a per-unit unsubsidized production cost below $1.80 per gallon.
“We have increased our overall process yield of biomass to renewable fuel from approximately 17 gallons per BDT to approximately 67 gallons per BDT. Our research and development efforts are focused on increasing this yield to approximately 92 gallons per BDT.
“This per-unit cost assumes a price of $72.30 per [bone dry ton] for Southern Yellow Pine clean chip mill chips and anticipated operating expenses at the increased scale and excludes cost of financing and facility depreciation.
The cost of fuel to the military?
Right now, the spot price for jet fuel is $3.18 per gallon. That’s $133 per barrel – or about $20 per barrel more than an underlying barrel of Brent crude. The military pays considerably less, as a contracted major buyer. In 2012, the DoD price was roughly $100 per barrel. Oil prices are rising again – probably a strike price somewhere in the middle could be a starting point, around $115 per barrel.
What problem does this solve? Why can’t renewable fuel producers simply produce fuels at scale, at affordable costs, on their own?
A primary challenge in building drop-in fuels capacity is cost of capital. Currently, you pay lower interest rates on a Visa card than renewable fuel producers receive for building energy security, US jobs and lowering emissions through renewable fuels.
Now, project finance rates can be quite low — but they generally require no technology risk, no feedstock risk, and no market price risk. The National Biomass Reserve ensures a long-term feedstock supply at fixed rates, and a long-term fuel contract.
Who gets what?
The military gets affordable, low-carbon, domestically-produced fuel. Bioenergy producers get a feasible path to commercial scale. The public gets more renewable fuel in the overall energy supply, without the trade-off of using land that could be used for, say, food production. Sustainability advocates get a land use that is based on good stewardship principles, reduces global carbon, and returns the land undisturbed later on.
Would the financiers go for it – would it really work?
If you offered a lend-lease arrangement — 15 year (very low) feedstock cost, 15 year fuel contract — and the numbers worked out something like the KiOR example so that you really can meet your debt and equity requirements via selling $115 per barrel jet fuel to the military? Yes, we believe that project financiers would go for it, if they were given an appropriate “technology guarantee” or wrap issued by the constructors or the project’s insurers.
More background on the story from the Digest
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