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The Renewable Fuel Marketers’ Guide to Planet Houston

| September 2, 2013

ZodIf you don’t reach the right profitability thresholds, you too might well be forced to “Kneel Before Zod!”.

But, er, what’s right? We go through the data.

If you are of a certain age, you my well remember that in Superman II, the evil General Zod arrives from Krypton and, after overhearing a pair of astronauts talking with NASA Mission Control, exclaims as he surveys his new domain, “so this is Planet Houston”.

When it comes to energy investment these days, the US has been looking more and more like the Planet Houston of late: a lot more attention to fossil fuels of late; a revived focus on the kind of laissez-faire, “don’t tread on me” energy economics that are popular in the Lone Star State — and a general feeling that government spending ought to be restricted to funding accelerated depreciation on oil & gas exploration.

Or, perhaps, spending would be OK for the Johnson Space Center, especially if it took the form of a project to transport the bioenergy business to, say, Krypton.

Now, to give Houston its due — why shouldn’t energy investments provide a comparable return on investment? Which raises the question: at what prices will bioenergy projects provide the kind of returns that would make a hard-bitten citizen of Planet Houston say a kind word or two about “choice at the fuel pump”?

Our starting point? News this week, after troubles in Syria amped up the fear-factors, that West Texas Intermediate Light Crude has shot up to $107 per barrel; Brent Crude is trading at $114 per barrel. The prospect of long-term oil prices above $100 per barrel is looking more and more of a sure thing— and the International Energy Agency this year project in the World Energy Outlook that, by 2035, “oil prices reach $125/barrel in real terms (over $215/barrel in nominal terms).”

In the IEA’s view, shale gas and tight oil will not reduce prices — rather, they will help ward off more intense price increases — as global demand jumps to around 100 million barrels per day by 2035.

Using the IEA’s forecasts — let’s go through the economics, by the numbers.

In this case, we’ll build a chart of six different types of biofuels  — three alcohol fuels, plus biodiesel and two drop-in fuels. We’ll base one chart on today ($3 gasoline), and adjusted that for 2035 ($3.75 gasoline, in 2013 dollars). We’ve adjusted for energy value — so that this represents comparable BTUs.

Now, we look at three scenarios.

First – the $3.00 per gallon threshold. Above that, we don’t see that anyone one is going to be very interested in distributing or using biofuels, except as mandated to do so.

Second – the $2.73 per gallon (the 10 percent return) threshold, where the economics  =begin to work well for selected investors interested in capacity-building.

Third – the $2.56 per gallon mark (17 percent return). ABove this point — there’ll be broad excitement about investment and even some interest in building infrastructure (e.g. blender pumps, pipeline) to get the fuels out. Why 17 percent? That’s the average return on capital for Chevron — a relatively convenient tipping point where dollars for biofuels are cost-justified, regardless of the future of the Renewable Fuel Standard.

Distribute “as is” Build capacity Build infrastructure
Multiplier  $3.00  $2.73  $2.56
Butanol 1.16  $2.59  $2.35  $2.21
Methanol 2  $1.50  $1.37  $1.28
Ethanol 1.5  $2.00  $1.82  $1.71
Rgasoline 1  $3.00  $2.73 NA
Rdiesel 0.9  $3.33  $3.03  NA
Biodiesel 1  $3.00  $2.73  $2.56
Distribute “as is” Build capacity Build infrastructure
Multiplier  $3.75  $3.41  $3.20
Butanol 1.16  $3.23  $2.94  $2.76
Methanol 2  $1.88  $1.71  $1.60
Ethanol 1.5  $2.50  $2.28  $2.13
Rgasoline 1  $3.75  $3.41 NA
Rdiesel 0.9  $4.17  $3.79  NA
Biodiesel 1  $3.75  $3.41  $3.20

What does all this mean?

If you hear about a $4.25 per gallon biofuels business case, consider that the venture may share a fate with the planet Krypton. At the very least, you’ll be wading through an awful lot of discussion of mandates, subsidies — and possibly, a long dissertation on the market for nutraceuticals or chemicals.

Support for any of the above will be thin in Planet Houston — and it’ll be a stern test of Planet Iowa’s political muscle.

The $3 per gallon mark — well, it greatly depends on the molecule, doesn’t it? Looks dire for ethanol, not bad for diesel. Of course, at those levels the fuel can be sold at parity with incumbent fossil fuels — but won’t provide much ROI for the investor. So think creatively when approaching the capital markets — a strategic investor or a co-located project may be the only way to go.

Then, there’s the 10 percent threshold. It won’t bring in the oilcos, and you can just about forget any widespread enthusiasm for infrastructure improvements. But in that $1.71-$3.79 threshold (in the long term), or more like $1.37-$3.03 today, there’ll be substantial interest among well-funded feedstock developers, for example.

Now, at 17 percent returns, the ROI is bigger than for the average fossil-fuel project, seen in the eyes of the people who built all that fuel infrastructure — pumps, trucks, pipelines, terminals and so on. Alcohol fuels and biodiesel have limits on distribution in the existing infrastructure. North of 17 percent, you might find that you start to see the fossil fuel industries, as a whole, start to get pretty excited about the opportunities with biofuels. To the extent that they might be investing in marketing them, and explaining them, rather than opposing, blocking and demonizing them.

The Bottom Line

Alcohol fuels may well require 17 percent and higher returns — to generate the type of enthusiasm that overcomes market access barriers.  Drop-in fuels may require a lot less — perhaps in the 10 percent rage.

That means feedstocks, for sure, in the sub-$70 per ton range for cellulosic biomass. In relatively dense quantities that can support large-scale biorefineries that can achieve economies of scale.

So, that’s the Planet Houston outlook — which is to say, the market for fuels. In tomorrow’s Digest, we’ll look at the case for Planet Iowa — that is to say, whether the feedstocks will be available.

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