Tear Down These Walls

Three Walls — product wall, blend wall, distribution wall — some built by the enemy as a form of siege warfare, some built by industry itself.

What’s happens if you tear down these walls — and seek the sweeter life of energy freedom?

The Digest looks at a new column, a new white paper and a big piece of news from REG.

For some time we’ve been reporting in the Digest about three walls.

There’s the blend wall imposed by competitors seeking to limit choice in fuel.

Then there’s the product wall imposed by the industry in itself — instead of building strong, diversified companies with multiple feedstocks and multiple products — it’s one feedstock, one product, baby. A strategy which invariably runs into trouble when, in the rollercoaster of commodity prices, the feedstock and products costs get upside down. Generally followed by a plea for help for the industry to Washington.

Then there’s the distribution wall. After the product is made, it’s handed off to the petroleum industry to distribute. And the friends who brought you the Obamacare rollout put in charge of making sure that everything runs smoothly.

That’s the walled garden. Then there’s diversity and open access.

In power, there’s diversification — there’s nuclear, coal, natural gas, hydro, solar, wind, and biomass — accordingly, the prices are relatively stable compared to other energy sectors. But in fuels, there’s little diversity — and what you hear about all the time is pain at the pump, combined with “I won’t pay more” for a competing molecule. Even if there was stability to be gained through diversity.

The Product Wall

But times are changing. We see it in a column today in the Digest on multi-product strategies, from Alkol’s Al Costa, “Seeing Beyond Ethanol”

“It is imperative we understand we are not in the ETHANOL business, but in the FERMENTATION business. We need to move to a model which closely resembles the oil industry. There, there is a refinery which produces in a single “distillation column” a myriad of products. Gasoline, diesel, asphalt, jet A, methane…you name it . In our model however, the same column produces just ONE product: ethanol . Doesn’t that sound like a big waste of machinery? Couldn’t we ALSO grow other microorganisms such as maybe Deinove’s Deinococcus? Or maybe that genetically modified Saccharomyces by Amyris which also produces Farnesene?  Well, you’d say, “We also produce DDGS, CO2, oil in some cases, etc. ” But we need to go for the high end molecules.”

The complete column is here.

The Blend Wall

We see it in a new paper from PK Verlegar LLC and The Brattle Group, with an assist from Butamax, on “How Markets Can Knock Down Walls” – addressing E85 and the blend wall, and fuel choice for flex-fuel vehicle owners.

As the authors observe:

“Most motorists don’t realize that they are the beneficiaries of a significant policy experiment that began several years ago during the Bush Administration. The policy that helped make 10% ethanol the market norm—the Renewable Fuel Standard (RFS)—has helped moderate overall fuel prices and will continue to do so if given a chance to evolve in a way that preserves its basic structure.

“The RFS requires a certain percentage of ethanol be blended into motor fuel, and creates a credit pricing system to rationalize that process. The price of  credits—called Renewable Identification Numbers or RINs—spiked last year, causing much consternation in oil markets and in some policy circles in Washington. Nevertheless, even that episode showed that higher RIN prices stimulated a substantial jump in sales of E85 ethanol gasoline blends. Cheered on by some segments of the oil industry, however, the Obama Administration proposed a retreat from the ethanol percentage requirements for 2014, apparently spooked by the prospect that high RIN prices might be blamed for high gasoline prices or some unspecified distortions in the market.

“This concern regarding the effects of RIN prices on motorists is misguided and clearly refuted by market evidence. Our examination of the interplay between the RFS policy and transportation fuel markets shows that:

“Ethanol use lowers crude oil prices. RIN prices work as intended. The RIN price impact on retail gasoline (E10) prices is small and transient. The increased demand levels for E85 enabled by RIN prices creates the market incentive to invest in additional E85 infrastructure. Thus, the blend wall can be overcome by letting the RFS policy work as intended through RIN price levels sufficient to attract additional investment, encourage innovative pathways and expand choices for vehicle fuels.”

You can download this transformative report in its entirety, here. It’s a must-read.

The Distribution Wall

And we see it in news from Iowa that Renewable Energy Group has launched a new division that will sell petroleum-based heating oil and diesel fuel, and enable the company to offer more biofuel blends. Going with its diversification into renewable diesel with the acquisition of Dynamic Fuels, and the entry into renewable chemicals and other markets with the acquisition of LS9.

REG Energy Services, LLC will sell heating oil and ultra-low sulfur diesel at seven terminals throughout the northeastern U.S. as well as BioHeat blended heating fuel at an existing REG terminal location.

“REG Energy Services complements our advanced biofuel business as we optimize and grow our fully integrated biodiesel business across North America,” said REG President and CEO, Daniel J. Oh. “It allows us to offer more products to our customers, including more biofuel blends, while also expanding our customer base.”

The new company will be regionally headquartered in Portsmouth, New Hampshire and led by Barry Knox, a long-time downstream petroleum distribution specialist. Before joining REG, Knox served the last 14 years as Chief Operating Officer at Total Energy Solutions, LLC.

REG Energy Services is now marketing heating oil and ULSD at Citgo terminals in Albany, NY (Citgo/Glenmont), South Portland, ME, and Braintree, MA; at Motiva terminals in Providence, RI, New Haven, CT and Newark, NJ, as well as the Sun Logistics terminal in Newark. BioHeat blended heating fuel in blends up to B20 is also available from REG’s location at the Clifton, NJ Dutch Hill terminal.

“REG Energy Services expands our fuel portfolio in the New England market where we can now offer heating oil, ULSD, and biodiesel fuel blends in addition to REG-9000 biodiesel. This will further enhance REG’s ability to meet customer needs for biodiesel blended fuel,” said Gary Haer, REG Vice President, Sales and Marketing.