Inside the US Navy’s new cost-competitive military biofuels program

$210 million towards public-private partnerships — that will result in $3.45 (or better) drop-in military biofuels that reduce foreign oil imports, create good-paying jobs, reduce carbon, and diversify the military’s energy supply. Those are the headlines out of DC.

But what are the details of the program – how does it work? The Digest speaks with principals.

On Friday, we reported that the Department of Defense has awarded $210 million under the Defense Production Act to Emerald Biofuels, Fulcrum BioEnergy and Red Rock Bio towards the construction of biorefineries that produce cost-competitive, drop-in military biofuels.

Exciting news. But what exactly does it mean for the sector, the companies, and the Navy? When will biorefineries be built, and where — how far along are they in their paths to completion?

To answer these questions, we went to the players themselves. In today’s Digest, we visit with Secretary of the Navy Ray Mabus, the Navy’s Director for Operational Energy Chris Tindal, Red Rock Bio CEO Terry Kulesa, and Fulcrum Bioenergy CEO Jim Macias to get the latest.

(We also spoke with Emerald Biofuels — who are eager to talk about their project on the record later in the year, when they’re ready to come out of stealth mode — although they wanted to make sure ton confirm that their project will be “somewhere along the Gulf Coast” at a site they’re not quite ready to disclose, and will utilize Honeywell Ecofining technology with a target capacity of 80 million gallons.)

Under the grants, the companies will build biorefineries to produce military spec fuel that is expected to cost the US military, on a weighted average, less than $3.50 per gallon — or cost competitive with petroleum-based fuels, with availability expected as soon as 2016, and have a 50 percent of greater reduction of emissions compared to conventional fuels.

Secretary of the Navy Ray Mabus

We asked the Secretary specifically about whether there might be a fourth biorefinery award sometime in the future, given that there is a little headroom between the $480 million each contributed by DOE, USDA and the Navy when this multi-department project got underway, and the $390 million which has been committed to feedstock or capacity-building to date.

“The original commitment was $160 million from the Navy, USDA and DOE” Mabus told the Digest. “The USDA money is in the CCC funds, for feedstock, and is there. We’ve made our full contribution of $160 million. DOE has funded $50 million of its share. It is doing it, incrementally. Right now, with this $210M commitment and the $20M we have provided in the first phase, there is nothing “left in the DPA account”. But there are more funds expected to be available and, yes, we might consider doing a fourth grant for an additional biorefinery.”

Chris Tindal, Director of Operational Energy, US Navy

We asked Chris Tindal about the Great Green Fleet and how these commitments to date on fuel purchases and caopacity would translate specifically into fuel on ships.

“We haven’t set aside a specific blending percentage for a given ship in the Great Green Fleet. Whether we are using 10 percent at the low end or 50 percent at the high end will depend on the ship’s operations. For example, we may be taking on fuel from a station where there is a 10 percent blend, and then refueling at a station with a 50 percent blend. And each ship, of course, is starting from 100% petroleum today.

“So there’s always going to be a degree of uncertainty, for example, exactly down to the percentage point how much biofuel is running in the USS Princeton. It might be 25 percent at one point, and more or less later. We won’t know and we won’t care, because we are not aiming for that degree of granularity.

“What we do know is that this is becoming just the way we go about our business — and the focus is going to be on the specifics of the operations, not the specifics of the fuels, knowing that in the aggregate we are meeting the goals that the Secretary has set for us.

Terry Kulesa, CEO, Red Rock Biofuels

We visited Friday by telephone with Red Rock Bio CEO Terry Kulesa, who gave us the highlights on some key milestones and pathways as his technology moves forward. Our notes:

Timing. We think 2016 Q2. Our biggest challenge is lead time on some of the big equipment, where we need 12-14 months out.

Finance. We’ll close most of the equity by the end of the year. We’re in due diligence now with 4 strong investors now. Basically, the debt side is bonds through Stern Brothers. So far we’ve been financing this ourselves to keep the dilution to a mimimum.

Technology and feedstock. Some of the technology and process is IR1 Group and proprietary, some through TRI. The feedstock is woody biomass. We have over 2 years of validation on the technology and the process.

Location. Lakeview, Oregon, three hours north of Reno, Nevada. We’re working with Collins Company, which has sawmill operations in that area.

Jim Macias, CEO, Fulcrum BioEnergy

We also visited Friday by telephone with Fulcrum CEO Jim Macias, who also gave us an update on details for the Fulcrum BioEnergy project.  Our notes:

Timing. 2015.

Location. 5 minutes outside (east) of Reno-Sparks, Nevada.

Finance. $175 million, all done. With the Navy, the contract is signed. These are grants, in matching funds. It comes in the form of reimbursement as we follow through with milestones. The financing with with Bank of America / Merrill Lynch (BAML)

Expansion. We’ll schedule the next plants near to airline operations. We’re indifferent as to where that is as long as it is a metropolitan area with enough feedstock. Potential targets we have looked at include Houston, San Francisco, LAX, Newark/NY. It all comes down to have a feasible cost of transporting biomass.

We don’t want to announce anything yet, until all the spade work is done, until we have a site secured and are ready to file for permits. It could be the middle of next year that we are ready to talk about next locations.

The impact of the first commercial project. Once you get the first done, the financing is not where the complications will come. The Valley of Death is literally to the first commercial project. If you have feedstock secured, and an offtake contract based on market prices…and especially if you can get a fixed price contract with a full wrap from your EPC, if you get that it’s a traditinoal project like any infrastructure.

Pricing. We’re very happy with market prices. If they are $3.45, great. But if market prices work out to be $3.00, we can remain cost competitive.

Selling to other buyers. The Navy understands the value of a commercial market for these fuels — a minor spec change and we are producing mil-spec fuels. We have demonstrated this already for aviation fuel as well as distillate for the fleet.

The Public-Private partnership. It’s just invaluable. Whether it is private equity or strategic investors like Cathay Pacific and Waste Management, they like to see the government at the table with skin in the game

Message to airlines. If you help us, we’ll prioritize production of your product.

Next steps. Now that financing secured, we’ll finalize contracts with suppliers. You generally get much better terms when you can show them that you have financing in place.