The story of Red Rock Biofuels and the bond market breakthroughs

In the world of drop-in military biofuels, two major updates appeared this week.

In Oregon, Red Rock Biofuels got good news on Monday when the governor approved $245 million in bonds that will allow the company’s planned aviation biofuel plant thanks to overwhelming support by state level legislators and business groups. The facility set for Lake County intends to use 175,000 tons of forestry waste as feedstock via a Fischer-Tropsch process and then later hydro-processing to produce up to 16 million gallons of aviation biofuel annually – approximately 7.2 MMgal jet fuel, 7.2 MMgal diesel fuel, and 3.6 MMgal naphtha.

Sources tell The Digest that the bond sale is now in diligence and targeting a closing in early April — so nothing is fully baked yet.

RRB has eight-year offtake agreements for 100% of the jet fuel with Southwest Airlines and FedEx. Diesel and naphtha output will be sold through the either future offtake agreements with major refiners or on the spot market.

Meanwhile from Washington DC came news by mid-week that a proposed $55 million award for another drop-in military fuels project, one of four originally envisioned under a program of the Defense Production Act (DPA) Title III office — has been cancelled without further explanation. The timing on the cancellation is mystifying, since the original application due date was back in mid-May 2017 (then extended to early June). Whether the cancellation reflects project proposal quality or a change of heart at DoD on priorities remains to be seen. Selected awardees were required to share at least 50% of the total project cost.

Government bonds again.

We’ve seen the structure now a number of times. Government-backed bonds appear to be the hot financing approach for those refineries that most closely resemble state infrastructure projects.

The problem? Too many first commercials that are struggling to get financed because of unguaranteed debt. Even government loan guarantee programs — designed to accelerate the adoption of new technologies by shifting risk to the public sector — don’t guarantee 100% of the debt. As Faegre Baker Daniels partner John Kirkwood told The Digest, “it doesn’t fit anywhere but in the institutional debt markets.”

The Oregon project costs

The $245 million bond amount reported is somewhat mystifying. That’s because the project always featured to this point what Red Rock described as “balanced project funding and robust equity returns” with a $200+ million project cost that would be covered by a $70M DPA Title III grant and “130M+ private funds”.

Fulcrum BioEnergy

Recently, Fulcrum BioEnergy raised $150 million in bond financing for its Sierra BioFuels project, which will convert  up to 175,000 tons of municipal solid waste per year into more than 10 million gallons of low-carbon synthetic crude oil, beginning in early 2020.

We profiled how they got it done here in I Don’t Like Losses, Sport: The invention of bioeconomy risk insurance and Fulcrum BioEnergy’s leap to scale.

Prairie Catalytic

On November 29, 2017, Prairie Catalytic, a subsidiary of Greenyug, closed on the sale of project bonds to finance its first commercial production facility to develop a 50,000 metric tons per year urethane grade ethyl acetate production facility that is located adjacent to the Archer-Daniels-Midland Company ethanol production facility in the City of Columbus, Platte County, Nebraska. It had been a long time coming. At one stage, there were hopes to commence construction a year ago and start production bin early 2018.

The financing was provided by means of an institutional placement of limited-recourse project bonds, partially secured by a loan guarantee issued by the United States Department of Agriculture under its Business & Industry Guaranteed Loan Program, which provided both construction and permanent financing for the project.  This first commercial scale biochemical production facility is the second financed by Stern Brothers using a B&I loan guarantee coupled with institutionally-placed project bonds.  The Project Finance Group at Faegre Baker Daniels served as counsel for Stern Brothers and Heartland Bank and was headed up by John Kirkwood, a partner in FBD’s Indianapolis offices. Kilpatrick Townsend represented the bond buyers. (Note to readers: Stern Brothers and Faegre Baker Daniels are also leads on the Red Rock Biofuels project).

The complete Prairie Catalytic backstory is here, in Of Esters and Investors: The story of Prairie Catalytic’s leap to scale.

And we profiled the technology here, in Bolting chemicals onto ethanol plants: The Digest’s 2016 8-Slide Guide to Greenyug

More about Red Rock

We most recently profiled the technology here: Jet and diesel from the sticks: The Digest’s 2017 Multi-Slide Guide to Red Rock Biofuels

The DPA project rationale

Here’s what the Navy had to say about its advanced military biofuels program (this was in the original Funding Opportunity Announce, before they, ahem, cancelled.)

A robust advanced drop-in biofuels market is an essential element of our national energy security and requires unrestricted, uninterrupted access to affordable energy sources to power our economy and our military. Traditional fossil-fuel based petroleum is derived from crude oil that has increasingly challenging market and supply constraints. Chief among these is limited, unevenly distributed, and concentrated global sources of supply. America’s growing dependence on foreign sources of crude oil undermines foreign policy objectives and comes at an ever increasing impact to the Nation’s trade imbalance. In recent years, the cost of imported oil has exceeded $300 billion per year. Advanced biomass-derived transportation fuels that use a domestic, renewable feedstock provide a secure alternative that reduces the risks associated with petroleum dependence. 

Enhanced reliability of fuel supplies through diversification to advanced drop-in biofuels is also essential to sustain the U.S. military’s mission capabilities, which are at risk due to potential disruptions of crude oil supplies. Accordingly, the Department of the Navy has adopted a goal of, by 2020, replacing one-half of conventional petroleum-based fuel use with domestically sustainable fuel alternatives. Only a handful of production facilities for renewable jet fuel and diesel will operate in the foreseeable future. Current processes for producing advanced drop-in biofuels are expensive, and the resulting high cost of the end product continues to limit demand. Military and civilian end users of fuel have clear strategic incentives to adopt renewable drop-in fuels, but adoption is only possible when those fuels become cost-competitive. 

Given the current economic environment, significant start-up risks, and competitive barriers posed by the firmly established crude oil markets, industry will not assume all of the uncertainty and risk associated with providing a commercially viable production capability for advanced drop-in biofuels. Therefore, it is necessary the federal government cooperates with industry to create a strong demand signal and to make targeted investments to achieve the necessary production capacity required for a robust domestic advanced drop-in biofuels industry. Without these efforts, adequate production capability would not otherwise be established in a timely manner. The principal objective of this initiative is to incentivize the construction of a domestic commercial- scale advanced drop-in biofuel refinery with the capability to produce ready drop-in replacement advanced biofuels meeting military specifications in support of the Navy’s strategic 2020 goals and the Nation’s overall energy security needs. 

The Bottom Line

Red Rock becomes the third to get a greenlight through government-backed bonds to help push an advanced technology through to commercial scale.  Some of the reasons this approach is working we tipped quite a long time ago, back in 2010, in The Name is Bond: New concepts in bond financing may break biofuels finance logjam, here.

And that article dated back in some ways to our multi-part series Benjamins for Biofuels, in which we speculated that “the answer to the financing freeze would be most likely found in  the bond market.”

It’s been a long time coming, but three projects in the space of two months represents something of a wave trend, so we’ll be on the lookout for more.