Competing With Sub $50 Oil: A Strategy for the Biofuels Industry

May 26, 2016 |

2d28fb1By Irshad Ahmed, Consultant with Lee Enterprises Consulting and Member of MITSBAA Entrepreneurs Group, Massachusetts Institute of Technology

Special to The Digest

If bioenergy represents a sustainable energy future for the planet, then why must it compete with oil prices to be deemed a feasible energy alternative for the society?

The answer is simple: It is because the value of bioenergy is indexed on to the cheapest source of fossil energy available on this planet. The generalization of all energy sources on the basis of just the BTUs and the notion that “all energy created is equal” is at the heart of our dilemma. However, until such time that we internalize the true life-cycle costs of extracting and using fossil fuels, and distinguishing fossil-BTUs from bio-BUTs, we will continue to struggle to find a balance between cheap energy verses sustainable energy. In the meantime, we can create a stable business and economic platform for bioenergy industry by following a few simple rules that are anchored on four basic principles to enhance your business/plant’s value-chain:

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  1. Diversify your product-line by upgrading or adding new co-products (or services) that can add new revenue stream(s);
  2. Design strategies to hedge the market risks that your primary products currently face in the marketplace;
  3. Evaluate your plant, production process or services operations and identify the efficiency bottlenecks, and improve overall efficiency;
  4. Latest technology upgrades based on recent advances in your operating field is essential to staying competitive in both low- and high-oil price environments.

The Human Element

In my 25 years’ experience in the global biofuels industry, I have never stepped into a biofuels or bioenergy plant that I could not find significant process and operating inefficiencies in. In most cases, the operations were run without a standard operating protocol (SOP) and heavily relied on teams’ years of experience. While experience is good, doing things the same way for years does not mean doing things the best way. Furthermore, loss of key employees can further deteriorate the plant efficiencies. So, develop a SOP on paper and improve it with employees’ feedback on a regular basis.

The human factor is important, however, latest technological advances that are competing for the limited market space can be devastating no matter where the oil prices are. Remember, you are not just competing against cheaper energy price, you are also competing against cheapest manufacturer of the product that your plant produces. Keeping your production line in-sink with the latest developments in the industry is the only way to achieve sustainable growth and competitiveness.

A periodic evaluation of both operating and technological inefficiencies with respect to your greatest competitor must be done. In most cases, you will find that any improvement costs will more than off-set by the increased revenue and profit margin gains through yield improvements and efficiency gains.

Value-Chain Enhancement

There are two ways you can enhance the value generated from your plant. First, by extracting more value from your existing operations through co-products upgrade, and second, by integrating new technologies and/or products that can complement your existing product-line.

While your business plan is anchored on your main product (or service) that you produce, you will be surprised the value that is being left untapped in co-products and by-products. For example, in biodiesel production plants, an obvious value co-product is glycerin. Most biodiesel producers never try and extract the full potential of glycerin value and give it away for pennies a pound or worst at zero value extraction. With latest advances in bioprocessing, the crude glycerin can be converted to high-value industrial products, such as biopolymers (PHB, PHA and acrylates), poly unsaturated fatty acids, n-butanol, 1,3-propanediol, propanoic acid, citric acid, etc., just to name a few.

Hence, look at your process and you may find one or two side low-value co-product streams or waste streams that can be enhanced to add value. You will be surprised how much revenues additions can come from a well thought out plant upgrade effort.

The second important approach to improve the value produced from you plant is to look at other complementary products that you can produced under an integrated production-line with your existing process lines. Expanding the overall product portfolio is not only good for your bottom line but it is also essential to staying competitive in a dynamic market place.

Managing Market Risks

In today’s highly volatile fossil energy pricing environment, just being an efficient bioenergy producer is not enough. The ability to manage the futures risks with a well thought out hedging strategy is key to survival.

The basic hedging strategy for a manufacturing plant is taking purchase positions on a commodity that the production operation depends upon on a forward rolling basis. Locking in the prices for certain percentage of your purchasing needs for the next quarter of the operation will provide a cushion against wide price fluctuations. Since the value of most biofuels are indexed on fossil fuel counterparts, a hedging strategy that takes a direct position into the indexed commodity for a portion of your plant throughput can shield the plant from volatile market gyrations.

Hedging is not a cost-saving strategy but by implementing a well thought out hedge against most volatile components of your manufacturing components can help you manage input costs better. “The Right Way to Hedge,” a recent article by McKinsey & Company outlines the merits and pitfalls of hedging strategies very well.

Renewable Fuels Standard (RFS-2), RINs Program and Other Factors

No other public policy driven program has helped the biofuels industry more than the initiatives under RFS-2. The establishment of RINs program is acting as a dampening force against the market volatility and wide energy price fluctuations. RINs program has stabilized the operating and profit margins on biofuels to some extent, which enabled some of the biofuels plant operators to stay in operation under harsh market conditions when oil hit under $30 a bbl.

I believe more help for the biofuels industry is underway. A more robust public policy plan is in the making that will incorporate the objectives set under the global climate change initiatives from COP21 Paris Climate Conference of 195 nations. The Paris agreement sets out a global action plan to put the world on track to avoid dangerous climate change by limiting global warming to well below 2°C. One of the primary solution is a more aggressive expansion of the role of biofuels to achieve the COP21 goals. The agreement is due to enter into force in 2020.

Decoupling from Fossil Index

While it is not immediately obvious as to how to decouple from the fossil energy indexed pricing model that values biofuels in today’s markets, an attempt can be made to reduce its impact on the financial health of the biofuels producing companies through product portfolio diversification, sound hedging strategies, technology upgrade and efficiency improvements.

In conclusion, a good stewardship of your current operations and products will enable a biofuels plant to successfully compete with not only low oil prices but will position it on a strong footing to remain competitive with your toughest competitors.

A value chain approach to managing the business life-cycle can make a big difference in surviving sub $50 oil environment. In my opinion, the long-term future of the biofuels industry is strong independent of these short-term energy price fluctuations. The fundamental forces that are in motion today is shaping the biofuels industry of the future to be a primary energy provider to the transportation and industrial sectors of the global community.

 

About the Author

Irshad Ahmed has an MBA from the Sloan School of Management at the Massachusetts Institute of Technology and graduate degrees in engineering from MIT, Cornell University, University of New Hampshire and IITC, India. He has advanced management certifications in Agribusiness from Harvard Business School. He has served as an adjunct at Lehigh University and is on the Board of Advisors of the Speed School of Engineering at the Univ. of Louisville. Irshad is a recognized expert in the renewable energy with over 20 years of experience and currently handles many aspects of Project Finance & Development for Lee Enterprises Consulting, the world’ largest biomass and biofuels consulting group. He is the inventor of E-Diesel and cellulosic ethanol biorefinery technology platforms and fuel additives. He holds 31 patents, has written four books and over 100 publications, and manages over $200 million in ethanol, biodiesel and waste-to-energy projects. He has raised over $500 million in equity and project financing for renewable energy projects. He has served in lead corporate management capacities at the US EPA, Booz Allen & Hamilton, as the President of National Biodiesel Foundation. Irshad is the CEO of Pure Energy Corporation and an associate at the MITSBAA Entrepreneurs Group, Sloan School of Management at the Massachusetts Institute of Technology. More about Lee Enterprises Consulting here.

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Category: Thought Leadership

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