Seeking Delta: Biofuels, algae, natgas, CO2 and the finding of true value

What’s it all about? Finding the delta between the cost of feedstock, the price of fuel added to the D value (the RIN number). That’s the secret, says Aemetis CEO Eric McAfee.

How’s that work again?

“What you really are in the business of,” Aemetis CEO Eric McAfee reflects, “is capturing the arbitrage between the commodity price of your most expensive feedstock — and the price of your finished molecule plus the D value. That’s the RIN value in the Renewable Fuel Standard. There’s the D3 RIN, for cellulosic, the D4 RIN for biodiesel, the D5 RIN for an advanced biofuel and the D6 RIN for corn ethanol. The D value.”

“These days, when you are talking to someone about finance, you’ll find that there’s a lot of interest in the D value. For example, hedge funds really like D4 RINs, since D4 RINs apply to D5 and D6 mandates, as well. In another instance, if you can move from a D6 to a D5 RIN — that is, upgrade a corn ethanol plant to something like the biogas+milo+CHP pathway we have at our Keyes plant — there’s long-term improvement in value with D5 RINs. In addition to the fact that at the moment you get the underlying sugars for 10 percent less with milo than with corn.”

“It’s important to look at that feedstock value — not only in terms of the underlying crop that you are using — but in terms of all your inputs. There’s a technology out there — highly promising, well-regarded — that uses virtually free water, CO2 and completely free sunlight to make fuel molecules. We looked closely at it in terms of partnership because, in our case as a corn ethanol plant, we produce 400 million pounds of very pure CO2 at our plant, and with our own wells, we have access to the water required.

“But here’s what we found. From our estimation, the bacteria in the case of this particular technology we looked at, are subjected to so much heat, in terms of the sunlight and their own metabolism, that you need to use $30 million of natural gas, at full scale, to keep the bacteria cool enough so that they maintain optimal production rates.

“In my view, this doesn’t make them a CO2, water and sunlight technology – where you are comparing the value of CO2 and water to the value of fuel molecules. It makes them a natural gas technology, where you have to compare the value of producing a fuel molecule to the value of simply compressing the natural gas and marketing that as a fuel.”

This, of course, is the Natural Law of Alternative Commodity Markets — NLACM — from the inventor of the term itself.

We’ve used NLACM to illustrate, in the past, the difficulty of making jet fuel from ethanol. Not that there’s anything at all wrong with the technology — it can be done. Not that there is really any insurmountable problem with producing jet fuel, via ethanol, at commercially viable rates. It isn’t happening yet — as there are no plants large enough yet to achieve the required economies of scale — but all observers agree that the engineering and the science looks positive.

The problem is that is takes roughly 2 molecules of ethanol to produce a molecule of jet fuel — minimally — and the economics of the conversion don’t make a lot of sense. To produce a $3 gallon of jet fuel (which includes one valuable RIN worth roughly 1.7 ethanol RINs), you start with two ethanol gallons and two ethanol RINs. In the case of corn ethanol – at the moment, you are starting, then, with something like $4.50 in ethanol and $2.00 in RIN value. It makes more sense to sell the molecules for $6.50 into the physical ethanol market, than to realize around $4.00 in the jet fuel market.

That’s NLACM, in a nutshell. It applies not only to biomass, but to all the underlying feedstocks — power, natural gas, CO2, and so on — that go into making a biofuel.

Where has all this led Aemetis? Keep in mind, that’s a company that’s all about identifying valuable commodity arbitrage opportunities — and then securing the rights to technologies that can realize the transformation that captures the arb.

For example, there’s an arb between the value of stearine waste and the diesel market in India. Made more valuable recently by a cut-back from the Indian government in the amount of subsidies they pour into bringing down the price of diesel. In this case, Aemetis acquired a technology that produces biodiesel from stearine waste — and has a 50 Mgy plant now in India to produce it at scale.

Similar tale in the US. The company spotted an arb between the value of Argentine milo and biogas — and the value of ethanol fuel molecules and advanced biofuel (D5) RINs. With that, they acquired an idled 60 Mgy corn ethanol plant (the old Cilion facility, originally backed by Vinod Khosla and Sir Richard Branson, among others), in Keyes, California. The plant has now been switched over to the new technology and feedstocks, the EPA has approved the pathway, and the company now has the D5 RINs registered and flowing, plus it is in the process of expanding to 75 million gallons capacity.

Now, the afore-mentioned 400 million pounds of CO2 comes into play. Ethanol-based CO2 is very pure — almost none of the impurities you find, for example, in flue gas that have to scrubbed out. Then there’s the low-cost water that the Keyes plant has, in the form of its wells. Then there’s all that sunlight in the San Joaquin Valley — which powers the growth of Sunmaid Raisins, California Blue Diamond almonds, Odwalla juices and a host of other tasty molecules.

“But here’s where you really have to look at the enterprise and ask yourself what business you really want to be in,” says McAfee. “If you choose some of the technologies out there based on algae, well, you’re in the real estate business. I mean, think about it. In the corn ethanol business, you get around 500 gallons per acre, if you are doing everything right. That means that to produce 100 million gallons per year, you have to, effectively, rent 200,000 acres of land from corn producers to acquire your feedstock. If the producers are already out there, and you can effectively compete for their corn because you can cover all their costs and provide them with a higher profit than competing users — well, good. But you’re competing with the food chain — on some level — for feedstock, even if there is enough for all.

“In the case of algae, no one’s growing it at anywhere near the scale you are going to need. Granted, you might get 3000 gallons per acre, because the productivity is great. But you are still in the business of needing 33,000 acres. Maybe you’ll need to pay $10,000 per acre – that’s $330 million just for the land. Maybe you’ll get it for a lot less — good luck in finding all the right elements just where you need them, at very low land costs, for a whole lot of plants.

“But, at the end of the day, you are in a real estate arbitrage. Your biggest cost is land, and that’s the business you are in.”

“For sure, there are really valuable companies like Solazyme that are using algae, and have already shown that they can achieve positive cash flow with products like lotions. That company is worth a lot of money, just on the markets they are already cash-positive in, foods and cosmetics. But the company, using dark fermentation, is really an arbitrage between the value of sugar and the value of the oils they produce. In our case, we are looking for something based in CO2, because that’s what we look to upgrade the value of.”

“Now, there’s cyanobacteria. These technologies can deliver fantastic rates of biological growth. But I’ve mentioned the heat problem that they currently have. It would put me in the natural gas business to keep them cool and productive.

“When we look at the arbitrage — it comes down to the cost of land, compared to the cost of capex for reactor systems. We believe that reactors will come down in cost over time, and land will continue to go up. So, we know where we want to start. For example, if you can produce a million gallons at 3000 gallons per acre and you pay $10,000 for the acre, it’s $32 million for the land. If you can achieve 30,000 gallons per acre with a reactor system, that’s $3.2 million. That gives you a lot of money for capex — if you can develop the right system.

“We need a room temperature system, and a reactor where we can make more out of the light that we receive, and bring down the acreage to manageable levels. Reactors can produce — well, we’ve seen test data on some systems with productivity near 153,000 gallons per acre — let’s see how that works out at scale before we get excited about test data. But there’s no question that reactor systems can give you productivity rates that help bypass the land problem.

“We think we’ve found the technology, out of China, that gives us the right productivity, at standard temperatures and pressures, moves around the light with great efficiency and is based more in low-cost plastics than high cost glass. It’s most similar, compared to technologies out there, to what Algae.Tec has — though we think this technology has better solar capture, and we have a cleaner stream of CO2 to work with.

“That’s definitely something not to underestimate — flue gas compared to ethanol gas. It’s not that flue gas is not workable — and believe me, we’ve had substantial interest in China from coal-fired power producers, and I can only imagine what companies like LanzaTech have, with their technology, out there. But working with flue gas, pretty much what you hear is that they want to hand off the flue stack to you, and it’s your problem. So you’re in the business of producing cleaned-up gases as feedstock for your feedstock. It takes you a long way from your core business.

“We think that withour technologies we can produce 60 million gallons at Keyes, in advanced ethanol — and the cyanobacteria technology will produce an additional 16 million gallons of advanced ethanol. It takes about 660 reactors per million gallons, but they are small and low cost. We think it is a here and now opportunity to add value to the CO2 – which has virtually no value today but will help us to realize more than $48 million in added revenue, considering the fuel and the RIN value.”

“Meanwhile, we will convert our corn oil and milo grain oil and algal oil, using the ARA technology, to 100 barrels per day of jet fuel. It’s a small start, but we’ll supply that to Virgin and other aviation customers.”

“In the end, you just focus on the arbs, and let the feedstock opportunities and the available technology lead you to the right markets. You ask, what is the value of the molecule, what RIN are you producing, what is the cost of the feedstock? Then, find technology.”