Propel Fuels CEO Rob Elam: The Digest interview

Propel Fuels has been on a tear of late in expanding distribution of what we call “high renewable content fuels”. We spoke with CEO Rob Elam to see what’s driving the latest surge in renewable fuels.

Digest: What the price target to turn renewable fuels into consistent sellers?

RE: Our target is just under street diesel price and we’ve definitely held that spot consistently.”

Digest: How do you make that happen? Many companies say they struggle to be competitive on price in these days of low-cost oil.

RE: There are a few things at work here. First of all, with the California Air Resources Board, they are going to blendwall biodiesel because of concerns about NOx levels and other issues, and we understand that we’d be limited below B10 starting in 2017, until the 97% of vehicles get onboard NOx reduction technology.

Also, renewable diesel can run in any vehicle, and most of the light-duty vehicles here have a B5 limit in the warranty, so there is nervousness with the customer. And, the emissions profile is better in terms of reduced NOx vs biodiesel and diesel. Plus, we can use 5X the content of renewable fuel because we are blending at 98% instead of 20%.

What the customer wants is high performance at a good price. We use multiple channels at every physical site to inform and educate about renewable fuels. We have information on the product available on site, plus the customer can learn more on our website and or via our app, and we have a 800 customer service number operating 24/7. So, we engage at the pump, and with E85 we sell 3X what the average volume is across California.

Digest: Who is the customer?

RE: We know all that data, we have to be very data driven to succeed. I can’t disclose too many specifics, but for sure we are not talking about switching customers, we know that. We are bringing in new customers, and our local outlets get all that associated branding, awareness, convenience store sales, and of course other fuels they can sell to a customer’s additional car which might not be diesel or a flex-fuel vehicle.

Digest: What does it take to identify the right locations?

RE: We have sophisticated methodologies, some of which you can see from our diesel launch page. The first barrier – are the vehicle available. We know every registered FFV and diesel vehicle and we look for density patterns, and we overlay commuting and demographic patterns. We know where we want to be and we look for operating partners that have the right fit for Propel.

Digest: What could catalyze major growth?

 RE:There have been studies about E85 access, that different parties have been intentionally overpricing the product, especially when it seems that oil majors are dabbling in e85.

Digest: What policies work?

RE: “Our concern is the margin, and clearly RFS2 with RINs is a part of that. But here in California the Low Carbon Fuel Standard, which survived the litigation against it and will be readopted in June, gives us all in this market very specific carbon reduction milestones, and we have California’s carbon cap and trade system that just brought petroleum under the cap in January 2015, so the obligated parties are paying for their carbon obligation, and that gives us a 13 cents advantage on diesel side and 10-11 in gasoline because of the lower carbon intensity of our fuels. One thing that is great is the level of certainty around these programs is much better.”

“There certainly remain barriers. We experience interference, on a rep level, from the major brands. But we’ve been successful in our model and economics work for us. It’s still early days, but the more that we as a society set goals that incent the use of low carbon fuels, the more momentum they are going to get. Here in California, Governor Jerry brown just set out a goal of a further 40% carbon reduction by 2030 in an executive order. That’s a serious market opportunity. Though everyone sees that because of the scale of the opportunity, with Big Oil there will be regulatory fights.

Digest: What about other states?

RE: Where there is a Low Carbon Fuel Standard, yes, that’s a market to consider. But California is the third largest fuel market in the world. First, there’s the US as a whole, then there’s China, then there’s California. You’d go a long ways before you find opportunities that get as large as this. Oregon is a great state but it is way down there in terms of market size. Anyone big in this space will come from California, because it is highly unlikely that anyone starting out anywhere else is going to be able to do all that learning that is required on how to succeed in this market, and and then scale it. The cap and trade carbon trade was over $1 billion this year, and that was only California and we haven’t really gone deep into the carbon reduction yet. There are multiple billions of dollars here, and incumbents will have to make room for new companies.

Digest: What about declining fuels sales that could be expected in the future?

RE: Yes, there is a cap on the number of internal combustion engines that are ever going to be here in this state and there are increasing fuel efficiencies, but we think there is a really huge opportunity.

Digest: How does it work, financially?

RE: In our model, we build own and operate, and we deploy the capital, and it is typical project finance or construction finance. Our sites are performing really well. We have had 10 consecutive growth months in volumes, March was another record for us. And we have single-site dispensers doing 50,000 gallons of E85 in a month. That’s compared to less than 5,000 gallons, nationally.

Digest: Is that the California effect?

RE: The fact is, we outperform the California average significantly. It all comes down to how you introduce a low-carbon fuel. You need to price the product, and that means you have to have a strategy for procurement and supply and understand the economics, and forward purchasing, and hedging. You act like a large petroleum retailer would act. We know what we need to be under the competing fuel’s price to move renewable gallons.

Digest: What is that figure?

RE: That we’re not going to disclose, that’s our pricing strategy. But we have grown volume through the oil price downturn every month, and though a lot is driven by gasoline costs, you can succeed if you are not a spot purchaser and you have significant strategic policies in place.

Digest: What about renewable gasoline?

RE: Sure, our e85 market is limited to flex-fuel vehicles, and there are 1 million of them in California. If we could change that to 40 million, that would be a big opportunity. But our partner Pacific Ethanol is doing a great creating lower and lower carbon intensity for us on the E85 ethanol side.