As OPEC falls, what is the liberated market signaling to producers?

March 21, 2017 |

The biggest two pieces of news in renewable fuels in the past 12 months have been the collapse in RIN prices, and the complete offsetting of reduced Middle Eastern oil production with increases in US rig counts for fracking operations.

In other words, OPEC has collapsed in terms of its goal of setting a global oil price floor — and in renewables, there’s been an RINferno barbecue of carbon value.

The things we were taught to count on, cannot be counted on any more. As some of my favorite pit traders used to say: “there’s blood in the water. Let’s feast!” But where’s the opportunity, exactly?

The trading backgrounder

There’s a theory going around that biofuels are “government fuels” — and prices are set around a table in Washington, DC. But if you visit the big biodiesel and ethanol firms, you’ll see right away that the biggest, liveliest, noisiest room at corporate HQ represents the trading floor. This is a market of traders, and to thrive in the renewable fuels business at scale, mastering the world of spreads, hedges, offtakes and RINs is the calculus of survival.

The most fundamental economic in the oil & gas business has historically been the crack spread, which is the price difference between the value of crude oil and the underlying products after refined, or “cracked”. For example, Brent crude oil costs $51 a barrel right now, or $1.21 per gallon, while near-term RBOB gasoline prices at $1.58 per gallon, and the contract for ultra-low sulphur diesel is at $1.51.

Over in the world of biofuels, a similar measure is the crush spread — the differential between the underlying feedstock and the market price of the fuel. Right now price for soybean oil is 32.74 cents per pound, or around $2.62 per gallon, and the B100 biodiesel contract is $3.08 per gallon. Over on the ethanol side, corn is trading at $3.63 per bushel, which translates into $1.29 per gallon, while the ethanol contract in Chicago is trading at $1.53.

Caveats when looking at the crack and crush spreads: a primer

In the case of petroleum, the crack spread we’ve quoted doesn’t take into account the value of the chemical fraction, which pushes up the overall value of the barrel quite a bit. And, the soybean oil example doesn’t take into account the value of the glycerine by-product from biodiesel production. And the ethanol example doesn’t take into account the value of corn oil, CO2 or distillers grains. Or, the value of renewable fuel credits such as RINs. So, these are rough calculations relating the fuel fraction.

But they demonstrate right away some of the pressures on biofuels right now, at a time of low petroleum prices. On the ethanol side, there’s not much margin to work with for the biofuels producer. On the biodiesel side, the traditional US feedstock produces an expensive fuel.

Accordingly, ethanol producers have worked hard on diversifying the product set, notably adding corn oil in recent years, while biodiesel producers have sought out alternative feedstocks, especially tallows and other waste fats, oils and greases. Choice white grease in the Central US, for example, is trading at 21 cents per pound, or 20% less than soybean oil.

RIN price trajectories

(For those newer to the sector: RINS add value to renewable fuel. Obligated parties must present a certain number of RINs to the EPA each year. So, they have a choice between using fossil fuels and buying RIN in the marketplace, or buying a gallon of renewable fuel that comes with a RIN attached. For that reason, if RINs cost $1.00, an obligated party should be willing to pay up to $1.00 more for a renewable fuel, per gallon to avoid having to buy a RIN in the marketplace.)

RINs have been in free-fall since the arrival of the Trump Administration, with buyers disappearing on the theory that renewable fuel volumes will fall or the RFS will be scrapped or reformed under new management. The hit on corn ethanol RINs has been much more dramatic, they’ve tumbled by more than half since the Trump election. Diesel and advanced biofuels RINs have fallen 15-20%.

At the same time, California Low Carbon Fuel Standard credits have also been falling — though they are not impacted directly by the change in federal administration. LCFS credits were trading at $1.00 in late January and have tumbled to 81 cents now.

Here’s the price line-up:

D6 (corn ethanol) RINs are trading at 49 cents now, compared to 89 cents back in late January when {resident Trump was inaugurated.

D5 RIN (advanced biofuels) RINS are trading at 91 cents now, compared to $1.08 then.

D4 (biomass-based diesel) RINs are trading at $1.01 now, compared to $1.15 then.

So, where’s the opportunity right now?

It’s in cellulosic, cellulosic, cellulosic. The RIN is trading at $2.30 now, and with the LCFS credit at $0.81, that’s more than $3.00 in added value for cellulosic fuel. Add that to the $1.53 in ethanol value, and there’s $4.04 per gallon (after subtracting out $0.49 for the D6 conventional corn ethanol RIN)

That’s good news for producers like Edeniq and QCCP who have systems that can squeeze extra cellulosic gallons out of corn fiber.

And we might add: California, California, California. That’s where the top dollar can be realized, as credits stack up and LCFS values add a substantial bonus for diesel and cellulosic fuels that offer sharp reductions in carbon.

The entrepreneurial Enerkem

Small wonder that we reported this week that Enerkem is moving forward with the $200 million MSW-to-ethanol plant first announced last May with plans to site it outside St. Paul in Dakota County. Together with local recycling company SKB Environmental, a formal presentation was made in February to the local city council but the companies have yet to submit a proposal for permitting.

If all goes according to plan, the facility could be online as soon as 2020 using much of the county’s 400,000 tons of MSW per year.

Inver Grove plant would be first in U.S. to turn garbage into ethanol

At 70 gallons per ton, that would equate to something like 28 million gallons of fuel using the Enerkem process — we’re guessing that this project would be something like two Enerkem 10 million gallon modules, or 20 million gallons.

And, in the case of a MSW-to-fuels technology, consider the potential for tipping fees, which reached an average of $48.03 per ton a while back. The 285,000 tons to feed such a system would generate as much as $13.63M in tipping fees, and $81M in fuel value (combining credits and RINs).

What about biodiesel – where is the opportunity?

Right now, there’s nothing in the commodity market that’s cheap. Soybean oil is trading at the afore-mentioned 32.74 cents per pound, but tallow is not far behind at 28.50 cents, white grease isn’t much better at 27.50 cents, and yellow grease is running high at 23.91 cents. There’s not much reduced cost to work with, given that more advanced technology is required to use those feedstocks.

Which leaves brown grease. That’s rich in free fatty acids and it’s a bear to work with. Only a handful of plants have the technology — but that’s where the opportunity is. Consider the potential for grease acquired from wastewater treatment facility, and waste inedible fish oils.

What about natgas – isn’t that the wonder feedstock?

Well, let’s start with Holmgren’s Law, named for Jennifer Holmgren, the CEO of LanzaTech: “Never fall in love with a feedstock”.

It’s been a rollercoaster, crude-vs-gas, as this graphic shows below. A quick upward jolt around the 2010-2012 period as the floor fell out of natural gas prices, and a big correction in the past two years as oil prices also crashed.

natgas-vs-crude.png

The natgas-crude price ratio, down to 16 from a high of more than 60 in 2012.

It’s still pretty good. The EIA reports that the ratio between natgas and crude oil prices is 15.46, up from 6.4 back in the 1990s when the agency first started releasing data on this topic.

But the ratio is down 5 percent since last summer, and that was 25.6% down from one year before that. And, down

16.15, up from 6.4 back in the 1990s when the agency first started releasing data on this topic. Down from a peak of 63.04 in 2012. Meaning that you get one-quarter the revenue for the same project cost as five years ago, for a natgas GTL project, more or less.

More on prices.

The USDA has an excellent round up here.

PFL daily has a standout daily report, including RIN prices, and that’s here.

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