Routes to the summit: 3 keys to first commercial advanced biofuels, and beyond

3 Routes to the Summit

In biorefinery financing, we have seen three trends emerge for successful projects.

1. The successful ones are generally integrated with others — so that resources such as infrastructure (e.g. rail, power, water), and biomass or residue aggregation are in place to the extent possible. Even existing refining units that can be utilized in a bolt-on strategy.

Think of this as simplifying the inputs and outputs — feedstocks into the plant and distribution of product out of the plant — so that as much financing as possible goes to the core technology, which often can be as little as 10 percent of the overall cost and footprint of an integrated biorefinery.

For this reason, we see wood biomass, sugarcane bagasse, corn stover and wheat straw projects getting the most traction, now. It’s been easier to use existing residues (bagasse), existing aggregation resources (wood) or at least an existing network of growers and delivery mechanisms (corn stover and wheat straw).

New feedstocks such as carinata, jatropha, sorghum and algae are incredibly exciting and getting closer every day — but it is tough to finance a first commercial plant when there is agricultural risk.

2. The successful projects typically involve a shared financial burden. There have been some notable go-it-alones — DuPont and Abengoa come to mind, and they have really “put their back into it” on advanced biofuels in terms of getting a first commercial project going.

But there’s the Beta Renewables group – Novozymes, Chemtex, and Texas Pacific Group. Poet and DSM have teamed up. Shell and Cosan are in their Raizen JV and have Iogen in the mix.Fibria is tied up with Ensyn, Versalis with Genomatica. Darling and Valero have tied up in Diamond Gren Diesel, as have Tyson and Syntroleum Solazyme and Bunge have their sugar-to-oils JV. GranBio and American Process are tied in together now. Renmatix has JDAs with both UPM and Waste Management — and WM is also backing Enerkem and Fulcrum BioEnergy. British Airways has tied up with Solena. BP and DuPont tied up in Butamax.

The trend usually involves a company with access to feedstock — or at least a key cost element like enzymes — teamed up with a processor. In some cases — such as BP, BA and Eni’s Versalis unit, the tie-in is between a downstream marketer and a processing technology developer.

3. The successful projects have, so far, been the ones that are most cost-advantaged in terms of product cost — and cost advantaged within the universe of opportunity available to a given investor.

Carbon anxiety only goes so far, it turns out — it can attract players into the market in terms of inspiring them to investigate a sector. But those players will definitely measure the cost of buying mandatory renewables credits against the returns from a project, as Chevron’s many partners found out.

Enthusiasm and genuine interest will only find its way into project financing if the returns are there — measured against the other returns available to that company in other opportunities it has.

That means, generally, targeting companies not that have strong balance sheets — only — but companies that have low returns from other project opportunities. It means nothing that a biofuels venture can make a 10 percent IRR if this is measured against 18 percent available to that company in terms of its existing upstream opportunities in oil & gas.

Companies that are primarily refiners have smaller option sets than those deeply involved in upstream oil & gas exploration. Pulp & paper industries have fewer options, and challenged ones. Feedstock providers — such as companies that own large tonnages of palm residues or bagasse — see attractive upside economics in biofuels. As do owners of large caches of low-purity CO2, such as flue gas — if their other generation projects have low potential returns.

In short — it is not all about ROI. It is about comparative ROI.

In today’s Digest, we explore the geographies that work, a 6 point quiz, and the players that are in the financing game — and how they work, and what works for them – all via the page links below.