Pie in the Sky

March 28, 2012 |

Companies like KiOR, ZeaChem, Virent take aim at a tasty aviation biofuels market with new recipes and game-changing economics

Seattle, as just about anyone can surmise from the soaring Space Needle and the sprawling Boeing complex south of downtown, has a pretty long tradition in aviation and transportation, and a progressive tradition based in a generally sunny outlook on technology and the future.

After all, Boeing begat United Airlines, and United CEO Eddie Carlson provided the inspiration for the Space Needle.  Fitting stuff for a state whose motto is the old Chinook word alki (meaning “eventually”).

An aviation biofuels hub

So, it’s not entirely surprising that the state and its largest city are focused on establishing itself as an aviation biofuels hub, and that one of the most persistent advocates for renewable energy in the US Congress, Jay Inslee, is running for governor in this election cycle on the Democratic ticket.

One of the other great products from the old Northwest, which had a leftist tradition so strong that Postmaster General James Farley quipped in 1936 that “There are forty-seven states in the Union, and the Soviet of Washington,” was a legion of Wobblies, members of the Industrial Workers of the World (IWW). The docks and logging camps were full of them.

Wobblies were widely considered to be dangerous radicals back in the 1910s. Many thought them heroic, but in the ultra-conservative, Seattle establishment family in which I was raised, you might as well have praised termite infestations as praise the IWW.

But the Wobblies sure could sing. One of their best-known satirical anthems, “Preacher and the Slave”, was written by Joe Hill, and had lyrics like:

Work and pray, live on hay
Chop some wood, ’twill do you good
There’ll be pie in the sky when you die

That’s where the phrase “pie in the sky” came from. Some times, when you hear critics of the feasibility of biofuels, you can’t help hearing that rollicking “pie in the sky” chorus in the back of your mind.

Times change

Of course, times change. In biofuels, we not only praise termites, we study them at great expense to unlock the secrets of extracting energy out of wood.

And it turns out that, in the end, there might be pie in the sky after all. Which is to say, a market for aviation biofuels that offers a locked-in, first-mover advantage to those who can make, ahem, affordable pie. And it turns out that chopping wood really can do you some good. Maybe those dang Wobblies had it right.

Let’s look at the numbers.

$3.32 per gallon, it’s the magic figure, and you can track it right here.

Meet this price, and you can own the world, or at least as much of the world as $100 billion buys. It’s the price of aviation fuel, and there are ready buyers, representing as much as 30 billion gallons of demand, for those biofuels producers who can sustainably produce biofuels at this price, and can reach scale.

If you can produce in-spec, sustainable, low-carbon, renewable jet fuel at $3.32 per gallon or less, it really doesn’t matter what happens with the US-based Renewable Fuel Standard, or road transportation mandates in the EU, Australia, Latin America or Asia. You can produce so much for the biofuels-hungry air transport sector and military, you might never get around to making road transportation fuel.

So, where are the gallons?

Well, there’s that scale problem, and there’s that price problem. Not enough pie, and for the moment, too pricey too. Let’s look deeper into the bake sale economics.

On the face of it, it is a problem of unlocking value in the non-food feedstocks. That not just because of food vs fuel concerns, or sustainability issues.  There’s going to be no pie in the sky made out of corn, or molasses, any time soon. Not even a decent veggie pie. The economics get ugly.

Let’s look at the alcohol to jet side. Corn, for example, costs $214 per ton (at $6 per bushel), and sugarcane costs in the $50 per ton range. The best yields we know of in the world of corn ethanol production are in the 106 gallon per ton range, and you need about two gallons of ethanol to make a gallon of jet fuel. So, starting at 53 gallons of jet fuel per ton of biomass, you are at $4.00 per gallon just on the feedstock. On the sugarcane side, using around 20 gallons per ton for ethanol and 10 gallons per ton of jet fuel, you are in the $5.00 per gallon range.

(Note to readers: friends at Gevo – who don’t themselves make ethanol from corn but are highly familiar with corn starch, point out that the above scenario does not make adequate allowance for the value of dried distillers grains, or DDGs, which would reduce the effective corn price per bushel from $6.00 to $4.58, which leaves you at a starting point of $3.08 per gallon on the feedstock).

On the first-generation feedstocks on the oil side, not much better. With palm oil trading at $1050 per tonne, and 328 gallons of jet fuel per metric ton, you can see the problem. You eat up $3.20 per gallon just getting the feedstock, no room for capex, opex, or loss of oil in processing to kerosene.

The biobutanol option

Then, there’s the option of producing jet fuel as an upgrade from biobutanol. Gevo has such a project underway, and  alcohol-to-jet fuel is scheduled to be produced from isobutanol at Gevo’s hydrocarbon processing demonstration plant in Silsbee, Texas, in partnership with South Hampton Resources. The company plans to begin shipping product to the USAF in the first quarter of 2012.

A 100 million gallon ethanol plant will produce 76 million gallons of isobutanol, and to that is added a standard oil refining industry unit (well, custom-designed to fit an isobutanol plant, but standard in its process), which converts isobutanol, in a few steps, to a renewable jet fuel. As we observed last September, based on the guidance they are giving regarding their costs, Gevo are within “a buck or two today” of the current renewable jet fuel prices, and they believe that the RIN values will cover the difference by the time they are bringing certified jet fuels to market.

So, that pathway may prove to be a winner, and a significant one.

Which brings us to the cellulosic and advanced feedstocks. Which is to say, wood chip pie. A meal that perhaps only a termite or a biofuels enthusiast can love.

Looking at ZeaChem

On the alcohol-to-jet front, let’s take ZeaChem as an example. Their feedstock is wood chips, from poplar stands managed by Greenwood Resources, and they expect to have their first commercial facility in Boardman, Oregon in the next few years. There, you might be able to capture a $50 per ton feedstock and generate 135 gallons of ethanol per ton of biomass, or 67 gallons of jet fuel. Your starting point is $1.34 per gallon, for the feedstock. Leaving $1.98 per gallon for the operating costs, the capex, and the margin. There’s real opportunity there if the feedstock can be locked in, and when the technology proves out, at scale.

But we may not have to wait until mid-decade, when projects like ZeaChem are expected to reach commercial scale, or later in the 2010s when collaborations like Virdia and Virent have going are expected to reach world-class scale.

Over to KiOR

Right here, this year, there’s KiOR, whose stock has been recovering strongly this week, and is busy constructing in that other US-based forest heartland, the pine-rich Southeast.

First commercial plant is expected to be completed this year, some time in the second half. Now, he capex is high, at $15 per installed gallon for a 12 million gallon per year plant. At scale, it will be better, of course, though how much better we aren’t quite sure.

KiOR’s process can produce intermediates that can be upgraded at conventional petroleum refineries to renewable gasoline, renewable diesel, or renewable jet.

In their S-1 IPO registration documents, the KiOR team wrote:

“Our proprietary catalyst systems, reactor design and refining processes have achieved yields of renewable fuel products of approximately 67 gallons per bone dry ton of biomass, or BDT, in our demonstration unit that we believe would allow us to produce gasoline and diesel blendstocks today at a per-unit unsubsidized production cost below $1.80 per gallon, if produced in a standard commercial production facility with a feedstock processing capacity of 1,500 BDT per day. This unsubsidized production cost equates to less than $550 per metric ton, $0.50 per liter and $1.10 per gallon of ethanol equivalent.

“We have increased our overall process yield of biomass to renewable fuel from approximately 17 gallons per BDT to approximately 67 gallons per BDT. Our research and development efforts are focused on increasing this yield to approximately 92 gallons per BDT.

“This per-unit cost assumes a price of $72.30 per BDT for Southern Yellow Pine clean chip mill chips and anticipated operating expenses at the increased scale and excludes cost of financing and facility depreciation.”

Ok, what’s the bottom line here. $1.80 per gallon, excluding cost of financing, and for an intermediate blend stocks as opposed to a finished fuel. Can the capex, financing and final refining be completed for less than $1.52 per gallon? Well, it’s surely close if not already there, on the economics, and KiOR is expected to have scaled commercial facilities this year and full scale before the mid-decade.

The bottom line

Bring on the wood chip pie. Termites, you rock. (Though, alki, feedstocks like algae and jatropha are expected to extend the range of options for airline customers).

But here’s the best news. That’s with no subsidy, no mandate, no tariff, no tax credit – no hand-outs at all, though the states like Mississippi, Oregon and Washington have been offering a hand-up in the form of grants, R&D assistance, and anything else they can think of.

The more enlightened legislatures have taken the view, whatever it takes to get those facilities built, they ought to be built. Once built, they have to stand on their own.

But it just might come true that if you figure out a way to live on hay (or wood), there’ll be pie in the sky when you fly.

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