Taming the Ethanol Zoo: a Biofuels Digest essay
The Time Has Come
Is ethanol a stereotypical “flash in the pan”, a fad; a momentary hysteria? Or, has its time finally come?
It was called “The Clean Energy Scam” in Time Magazine, April 7, 2008. But, put the article in perspective as merely a snapshot of the birth trauma of a vast and burgeoning industry.
Another spin: If only about five percent of the capital invested in petroleum during the last seventy-five years had been spent on biofuels, we might have $1.00 motor fuel right now. It would all be carbon-neutral or carbon-favorable, and there would still be food to go around; all because of dramatic impacts of technology transfers into the mainstream production paradigm.
Certainly, the time has come because many experts agree that global oil production is peaking now, while fuel demands continue to grow as China and India develop their economies.
Efforts to extract petroleum are now “heroic”. That is the only word to describe them, e.g. into the “ultra deep” waters offshore where water depths range from 5,000 to 10,000 feet. At that depth, explorers are willing to drill five miles more; below the ocean floor. Exploratory wells cost about $100 million. It costs about $6 billion to develop a field; to yield a measly 156 billion barrels of petroleum. That’s before pumping, transportation, processing, refining …
“Proof” that ethanol’s time has come: The Wall Street Journal said Warren Buffet’s Berkshire Hathaway bought 60 percent of Marmon Holdings on December 26, 2007. Buffet paid $4.5 billion for a manufacturing unit that includes Union Tank Car. Note that Union Tank Car was part of the original break-up of Standard Oil by the government in 1911.
As usual, Buffet sees things many people don’t; e.g. that a booming ethanol industry is going to demand hoards and legions of high-capacity tank cars, since rail transit of this volume is cost-preferable to truck shipment. [Note: fuel pipelines are already overstressed – capacity-wise – and aren’t compatible with ethanol, as it easily combines with water.]
This is Buffet’s way of acknowledging the ethanol boom, and cashing in on it!
So, why didn’t Berkshire Hathaway simply buy into one (or more) of the primary biofuel participants? As Warren said of Marmon , it’s “the kind of fundamental businesses” [sic] he likes. You can conclude ethanol is not “fundamental” because it is highly fragmented, immature, and shot-through with a lot of technical wizards and nouveau industrie “cowboys”. They may have minimal background in precision operation of effective, stable and mature business units.
In other words, basic ethanol is going to be a zoo.
The winners in the coming “ethanol wars”:
• Strategically positioned – from the start – to focus on cash
• Operated with a sense of urgency to become mature, effective business units
• Managed with precision, to include…
• Defined operating objectives
• Performance management
• Effective metrics – KPIs
• Real-time operations attention
• Optimal profitability
• Able to absorb and assimilate other marginal operations and turn them around, i.e. “If money makes the world go around; absorption supplies the grease.”
The Beginning
Operators are advertising for Plant & General Managers with “experience in operating biofuels/ ethanol plants”. As this is a somewhat infant discipline, they are likely to get a disproportionate cadre of personnel with “experience in operating biofuels/ ethanol plants poorly”.
A recent posting for a General Manager (GM) position included this part of the position description:
“Oversee all business operations, plant operations, purchasing operations, marketing operations, personnel operations, and any and all other items relating to plant operations and profitability.”
This is probably okay, as far as it goes. But the posting goes on to describe that the GM is responsible for…
? Reporting of financial information
? Public Relations [PR]
? Human Resources [HR] policy adminstration
? Performance Administration
? Scheduling
? Training
? Personnel Management
? Legal and Regulatory compliance; ATF, OSHA, EPA…
? Complete Supply Chain responsibility
? Ensure that all … product costs are maximized [sic].
? Report to management & board
? Support corporate initiatives and policies
The incumbent is expected to provide all of this with a compliment of 40 individuals. He/she is expected to be degreed, experienced, willing to take on a 24/7 operation and be on-call, relocate to East Podunk, and work for about $80 – 90K a year. This is for a 56 million gallon per year (Mgy) plant.
Certainly, there must be some corporate matrix-type people to assist the GM in things like regulatory compliance, PR and accounting, but after the first two or three GMs come out of rehab, the corporation is going to wonder what it can do to turn around and pull out several of these business units.
Strategic Cash Focus
The new corporations and plants are Strategic Business Units (SBUs), and they must be strategically positioned – from the start – to focus on cash.
Ethanol operators are considering their facilities to be technological models of a sort, intended to demonstrate a commitment to environment. Even the biggest plants are pilot facilities in a budding industry; becoming test beds for production of biofuels. Investors are looking for ground floor opportunities to generate explosive returns on their money. Some SBUs are extensions of existing successful agribusinesses or energy firms; parent corporations are hedging their bets on promising technology to carry them through the 21st century.
Operators need to understand that each SBU must be primarily intended as a cash generator. If not, then all the excitement in the paragraph above will evaporate and ethanol plants will take on the visage of “noble experiments”, kind of like prohibition or communism.
An operation must generate cash shortly after startup. The plants are all justified on a “Business Administration 101” model. The model says you purchase feedstock at a given cost, process it into ethanol with a particular application of labor, other materials and burden, and sell the product at some handsome price. If the original business model was based on $2.50 per bushel corn and $4.00 per gallon ethanol, there is likely a problem at this writing. Management must be able to strenuously attack each metric in the conversion process, screw it down, and squeeze cash out the other end to maintain working capital and begin to offset depreciation. This is the “managed with precision” cited in the opening of this paper. More about this, later.
Mature, Effective Business Units
What does that mean? Mature, in this context, simply means completed in development and operating on a routine basis. Effective is producing the desired result – fuel ethanol – in an acceptable cost/price mode.
The idea is to affect the achievement of Maturity and Effectiveness at the earliest opportunity; at both the corporate and plant level. This is a state that should be planned and managed-to. Too many operations are “waiting for things to gel” or accept “normal start-up expenses” as de rigueur. As part of precision management, definitions and time lines need to be established, and the status toward achievement of objectives – as measured by effective KPIs [Key Performance Indicators or Key Process Indicators: critical performance measures; often non-financial quantities.] – is part of the overall mission.
The SBUs must be operated with a sense of urgency to get past any start-up trauma. Employee orientation phases should be planned and orchestrated. Individuals, staffs and cultures should be reasonably, intentionally urged along their distinct learning curves.
Managed with Precision
While not an all-inclusive set of points, precision management includes a few key bullets:
o Defined Operating Objectives
o Performance Management
o Effective Metrics – KPIs
o Real-time Operations Attention
o Optimal Profitability
Defined Operating Objectives
For these purposes, “goals” are un-quantified statements of desire, e.g. “Let’s start a big ethanol plant and make a lot of money.” Sadly, many operations are guided by statements not unlike this quotation.
Objectives are quantified by dimensioned KPIs and timeframes, e.g. “Complete Phase II construction by June 17, 2008 at a cost not to exceed $26 million.” or “Increase gross margin by $.021 per gallon in IQ2009.”
Objectives need to be established for the entire array of KPIs on a daily, weekly, monthly, quarterly and annual basis. They should correlate with other business realities, like due dates for debt payments and the expiration of tax incentives.
Major objectives need to be broken down into components, e.g. Phase II construction will contain various steps to completion, like site work, footers-piers, foundations, setting of structural steel; all with defined costs, timeframes and other metrics.
Performance Management
Management’s mission is to meet or exceed those specified values for each KPI by strategic and proactive measures. After something dire has happened is an inopportune time to address a problem.
Uptime is the name of the game. Preventive, periodic and emergency maintenance will be the maker or breaker of these plants. It’s advised that Archer Daniels Midland uses Maximo® and similar systems in its maintenance function(s), so they have an edge on the marginal outfits that wait for things to break. Five percent downtime may be perilously close to a margin or pretax rate. A company with 92 percent equipment availability is disadvantaged against the guys who maintain it in the higher nineties on a routine basis.
Configuration control should be essential. The success of the nuclear power program in France is partially attributed to all of their plants being – essentially – alike. An ethanol plant designed with a hundred different electric motor configurations (frame, horsepower, voltage…) is more difficult to keep going than the plant with only a handful of types. The same can be said of pumps, pyrometers, etc. The inventory of protective spare items, and the ability to change them out quickly, is part of the mature-and-effective scenario. The advantage becomes even more pronounced when leveraged over a family of plants.
Collateral with uptime are considerations in the Health, Safety and Environmental arena. One fire, one occupational death; one catastrophic environmental event can shatter an SBU – literally – in an instant.
Effective metrics – KPIs
During an interview with an officer of a major player in corn ethanol, a consultant mentioned that one of the company’s technical experts said fermentation time was running from 30 to 40 hours. When the consultant said that statement raised the proverbial red flag, the officer had no idea why.
Metrics experts generally agree that many of the most effective KPIs have been in use for over a hundred years; mainly the usual lines on Profit and Loss statements and Balance Sheets. In later years, “non-financial” metrics arose to provide information value to operations managers, without sloshing through a lot of accounting miasma like cost allocation, depreciation, accrual formulae, etc.
Although no litany of metrics can satisfy the needs of all SBUs, Units per Hour/ (Day) is a fairly straight- forward KPI. A few other examples are..
? Gallons Produced per Hour / Day / Week / Year
? Process Energy Efficiency [Btus Output / Btus Input]
? Key Inputs e.g. water, yeast, fuel, steam, chemicals…
? Byproduct Production: lbs or gallons
? Downtime & Uptime statistics
? Inventory Turns
? Inventory by Stage of Production
? Production per Hour of Labor Applied
? Mandatory statistics per ATF, OSHA, EPA and other agencies.
? Feedstock Analysis: Moisture, density, starch…
? Output product analysis: Btus, water, trace elements, denaturant amount…
? Process parameters: pH, water content, temperature, specific gravity, constituents’ analysis…
Real-time Operations Attention
These metrics come into play in different stages; for different purposes. A Daily-Weekly Operating Report (DWOR), as the name implies, details to management what happened in the 24 hours just ended, and predicts the overall performance for the week. However, since the best time to lock the barn door is before the horse escapes; critical KPIs should be monitored by hour, by shift; or in real time, as is feasible.
Hopefully, a serious plant will use high-grade process control hardware and software which allows process monitoring, from a pulpit or control room, via various graphic displays on an array of monitors.
Not only does the control system allow technicians to control movement and flow of product through the various processes, but also allows notification of equipment failures for immediate remedial response by maintenance personnel.
Process anomalies are a different concern. Precision management means constantly tuning the process; to achieve rates equal to the Best Demonstrated Performance (BDP) per various metrics. Physical chemistry dictates that if you control all the input parameters, then the outputs are predestined. Thus, temperature, pressure, pH and other KPIs can (and should) be observed continuously. Required adjustments insure the desired output.
Comparison of Planned KPI levels versus those actually achieved point the way to permanent remediation strategies. This is part of an overall Kaizen [A Continuous Improvement Process installed as part of the culture of a business unit.] installation, which ultimately makes the BDPs more favorable, lowers the plant’s break-even point, and ultimately achieves an optimally effective SBU.
Optimal Profitability
Most turnaround consultants think of profitability coming in two “flavors”. The first flavor: to achieve business viability with the revenue currently available.
A turnaround of an ethanol facility cannot depend on “work-loading” or “ratio delay” analysis to chop headcount/labor expense because the plants run lean and hungry from the start. Staffing for 24/7 operations – depending on plant capacity – can be as small as 17 individuals. A serious plant may employ 45 persons.
The solutions are a lot more challenging and esoteric. While employing many of the precepts outlined above, additional operations research on individual engagements will provide specific strategies and tactics to make the SBUs viable, or determine – once and for all – that they should be liquidated.
The second “flavor” of profitability is to reinvest a portion of earnings to expand margins. That can be done internally, via various strategies and tactics to reduce cost and increase throughput. Expansion of margins via volume increases and marketing strategies is another way. Somewhere in this continuum is where operations and marketing meet in the middle: cost control allows margin expansion, so marketers can price more effectively and still maintain profitability.
The Winners
“If money makes the world go around; absorption supplies the grease.” That simply means that economies of scale and asset utilization are major corporate KPIs that predicate success. That thought leads to the consideration that bigger is generally better, in any productive enterprise.
Perhaps it’s time to provide a little taxonomy to ethanol facilities. In 2022, one estimate puts US gasoline consumption at 156 billion gallons. Now, it’s arbitrary, but the table below might be of value:
Capacity Category
<5 Laboratory
5-10 Pilot Plant
11-65 Ethanol hobbyists
66-125 Serious Mom & Pop plant
126-300 Commercial Operator
>300 Industrial Scale Producer
Of course, plant location exercises optimize freight-in versus freight-out. Projected volume of feedstock within the reasonable environs of a proposed plant also bears on plant size.
When a successful operator seizes the opportunity to absorb a marginal SBU fallen on hard times, they have the opportunity to assimilate the distressed SBU, install their own [flourishing] management practices, and utilize favorable absorption to achieve both flavors of profitability; being an Industrial Scale Producer (ISP).
It’s also going to be the ISPs who will be most ably poised for the “cellulosic shift”. Most industry analysts agree that corn is an interim feedstock for ethanol. Ultimately, other cellulosic materials – those not competing for land and capital with food industries – will become the feedstock for ISPs. Corn silage, wood chips, miscanthus, switchgrass, beets, cane, waste paper, lawn cuttings and cyan algae have all been suggested as ultimate feedstock. Many ISPs won’t shift at all, as they are founded on cellulosic feedstock.
It will only take a couple of technology transfers to really affect this. Some future ISPs are rolling the dice on thermal cracking of cellulose into 5- and 6-carbon sugars. Meanwhile, a biologically-engineered cane-type grass that doesn’t currently exist could be the real final feedstock. This would be something which grows like crazy in northern climates, is nitrogen fixing or nitrogen-neutral to the soil, and synthesizes glucose and fructose directly in its tissue; in the field.
John D. Cochran, BSIE MBA, is a practicing Operations Strategy and Process Consultant, living in the Midwest “ethanol belt”. He has a specialization in industrial operations involving energy management. Reach him at En7erprise@aol.com.
Taming the Ethanol Zoo. © 2008, John D. Cochran, All Rights Reserved
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