Biodiesel’s Big Comeback and Bigger Prospects

Darling of the mid-2000s, still beloved by its many fans — biodiesel is increasingly a key to delivering advanced biofuels volumes now — and even more so between now and 2022.

Presentations by NBB CEO Joe Jobe and REG CEO Daniel Oh at ABLC 2013 explained the how and why.

In the excitement over cellulosic biofuels and drop-ins, it is easy to forget that the backbone of advanced biofuels in the US and around he world is biodiesel — and not the least of the many services that biodiesel has rendered is enabling the biofuels industry to make up for a shortfall in the production of cellulosic biofuels, by over-delivering on the targets for biomass-based diesel.

While the boom years of biodiesel capacity building are long over, the sector has been going through a renaissance in the past two years, which was plainly in evidence from the bullish outlooks presented at the Advanced Biofuels Leadership Conference by National Biodiesel Board CEO Joe Jobe, and Renewable Energy Group CEO Dan Oh.

Jobe presented on the first morning of ABLC, alongside the chiefs of the other four trade associations, and while the theme of stewardship and sustainability was a common one – touching on issues such as the protection of RFS2 and RIN fraud — the growth scenarios he presented were the most aggressive and the record of growth delivered in the past year was the most impressive.

Meeting RFS2 targets

He discussed the 5×15 initiative — converting 5 percent of the US diesel market to biodiesel by 2015, and said that the industry was well on the way to delivering on that goal.

The longer-term? The biodiesel industry is aiming for 10×22 — or 10 percent of the US diesel market, just north of 5 billion gallons, by the last year of the current Renewable Fuel Standard. That would deliver nearly 8 billion gallons towards the 2022 RFS obligation, because biodiesel gallons count for 1.5 ethanol-equivalent gallons because of their higher energy density.

Were US biobutanol production able to reach its current blend wall in the same period through conversion of the ethanol fleet — replacing 16 percent of the US gasoline market, or roughly 18 billion gallons of projected 2022 demand — that would total 23.4 billion ethanol-equivalent gallons, and between this total and biodiesel, the US would need just 4.6 billion gallons of ethanol-equivalent drop-in fuels to meet its 2022 obligation. Without requiring E15 ethanol blending or putting additional infrastructure requirements on auto manufacturers or the supply system.

That 4.6 billion gallons of ethanol-equivalent fuel would translate to 2,8 billion gallons of actual operating drop-in fuel capacity — and global capacity is over 21 billion gallons today. In short, RFS2 presents reachable targets — but biodiesel is key to accomplishing them.

With such a rosy picture of growth — it’s astonishing that in the entire debate on food vs. fuel there is hardly ever a word about biodiesel — and ranchers, poultry farmers and food manufacturers are never seen targeting biodiesel for the kind of all-out assault that is seen with corn ethanol.

Over to REG

The reason was plain from REG CEO Dan Oh’s presentation at ABLC – looking at how biodiesel is highly complimentary to the food and ranching industries — and supports a “food, then fuel” production system.

More on Renewable Energy Group

First, some background on REG for those less familiar. The company has increased sales from $132 million in 2009 to $1.015 billion last year, and EBITDA rose from a 2009 loss of $12M to last year’s $188M. The company has increased biodiesel sales to 188 million gallons last year, and now owns 227 million gallons of capacity — and has another 150 million in development or construction.

Encouraging both protein and carbohydrate production

In his ABLC presentation, Oh noted that biodiesel is the driver for meat and meal producers to realize higher income off their leftover fats and oils — in turn, encouraging farmers and ranchers to produce more, taking pressure of food prices by assuring them of a secondary market for the byproduct stream.

The protein boost

Soybeans are 80% meal and 20% oil — by provising a growing market for the oil, biodiesel producers help to support the expansion of meal production. This vital cattle feed is helping to hold down the lid on food prices despite China quadrupling its meat consumption in the past 30 years.

According to REG and a December 2010 study by Centrec Consulting, global soybean meal prices could increase by $36 per ton without the biodiesel market — and loss of the biodiesel sector would cost US livestock producers $4.6 billion over a five-year period. Hence the low levels of noise and outrage over biodiesel, compared to the hoo-hah over corn ethanol.

But the value does not stop at soybean oil and meal. There’s the animal fats, oils and greases market to consider – the residues captured and monetized by renderers like Darling. Overall, REG contents that the US biodiesel market consumed 1.29 billion pounds of animal fats in 2011 – providing another channel of monetary gain for the global farmer and rancher community, and lessening price pressures all along the food chain.

According to REG, biodiesel adds $16.79 in value per head of cattle, $2.89 for swine and $0.33 for poultry.

Then, there is the restaurant market. You might recall that restaurant owners have generally taken a dim view of the RFS because of the price pressures they contend that the energy policy causes on grain prices.

However, they are generally less outraged by the impact of biodiesel — which has almost single-handedly converted restaurant cooking oil from a $25 per store per week liability — and an odious component of landfill — to a $0.30 per pound or higher commodity that relieves environmental impact of restaurants and institutions while contributing to the bottom line.

The Bottom Line

Put all those benefits together, you not only get a good idea of why biodiesel’s popularity endures — and why, as so many cleantech IPOs have sunk more than 50 percent off their high values, REG continues to trade just a few percentage points off its IPO price of $10.00. As an investment proposition, we’ll know more shortly because REG reports its quarterly earnings next week (Wednesday, May 1).

But the positive impacts ripple far beyond the balance sheet.