A fuel value over $7.00 per gallon, and everyone’s chasing it: The birth of USA Bioenergy and the surge in renewable diesel

In California, we are now seeing project flow projecting a sustainable $7.63 price for renewable diesel in the California market, where the Low Carbon Fuel Standard stacks on top of the RIN values from the federal Renewable Fuel Standard.

That’s market value, not subsidy. Though some die-hards might still insist that renewable fuels should only be sold based on energy value, not on market value, as in for example the markets which Californians freely established for themselves with the Low Carbon Fuel Standard, and in which any fuel producer can avoid carbon taxes and no one is guaranteed a subsidy. Yes, Californians have different standards for fuels than other states. But then again, some people drink bottled water at $6 a gallon and some drink tap water for pennies. Up to you — that’s how markets work.

With the change in how Californians have designed their transport markets, for some time, we have been tipping that a boom in renewable diesel is on.

The limitation that everyone is talking about is feedstock. At some stage, there’s not going to be a drop of tallow or other waste oils anywhere near the state of California; the economics are certainly there to begin to compete for veggie feedstocks such as soybean oils, but most of the newer projects have been wary of utilizing anything at scale that looks like it will be in long-term competition with food markets — problems with price swings and the optics of food-vs-fuel are usually cited.

For that reason, one of the top execs at one of the major players (that is, the “north of 300 million gallons per year” club predicted that the industry will begin to tilt towards wood-based feedstocks, especially residues. In some cases for finished fuels, in others as a source for a biocrude that can be refined by the bigger players.

That’s good news for the likes of Red Rock Biofuels, which has established such a technology though jet fuel is what their primary offtakers are requiring. EnerSysNet has been on stage at ABLC presenting just such a technology, too — though with a strikingly modular, small-scale, low capex approach. It’s early days for EnerSysNet — we expect that 2019 will be a pivotal year fro them in advancing towards commercialization.

Perhaps the most intriguing company we’ve seen of late is USA Bioenergy, which has racked up agreements providing access to over 2 million tons annually of renewable and sustainable feedstocks in Oregon, Arkansas, and Arizona. Upon completion of its project plan, the company aims to produce an estimated 4,000 barrels daily of premium renewable fuels (approximately 60 million gal/yr),and they have the option of nearly tripling their production in Arkansas, which would bring total production volumes in the area of 140 million gallons annually with our current feedstock suppliers. 

It’s ambitious.  it takes 78 semi truckloads a day, ten hours a day, running six days a week to feed a 750 ton gasifier.

Let’s look at the company in some more detail.

Who is USA BioEnergy?

USA BioEnergy is a renewable fuels technology development and integration group based in Scottsdale, Arizona —  integrating real estate development, renewable energy technologies and capital structure. Specifically, the company develops sustainable energy projects in the fields of biomass to fuel, municipal solid waste to fuel, biomass to electricity and anaerobic digestion to biogas. 

The technology approach

The projects will use biomass gasification to convert the biomass into a hydrogen and CO-rich synthesis gas. The syngas is processed via Fischer Tropsch catalytic conversion to produce a light synthetic crude oil. This light crude is then upgraded using conventional equipment from well-known process technology providers in the oil and gas sector.

Offtakers

It’s early days, but the company is actively looking for renewable fuel purchasers who are willing to enter into a 12 to 15-year fuel purchase agreements. These agreements must have a floor price to cover operating costs and debt service as required by funding sources. Airlines or large truck stops companies are the primary target. They can purchase all of the renewable jet fuel or diesel fuel from our first three biorefineries. USA BioEnergy is currently looking for a standing order of 100 million gallons of renewable fuel.

The project progress

The development process has now reached the point where a front-end engineering and design study (“FEED”) must now be conducted to move forward.

The California market

Transportation fuel is one of the top three energy use sectors in the United States, accounting for a third of the 20 million barrels of crude oil consumed daily.  Californians consume more than 50 million combined gallons of gasoline and diesel each day, or 1.2 million barrels per day. California’s Low Carbon Fuel Standard (LCFS) and the Cap-and-Trade Program are two policies, working in concert to cut the use of high-carbon fuels for transportation and also create affordable low-carbon alternatives and the infrastructure needed to support their use.  These policies, in turn, are spurring investors, entrepreneurs, scientists, and engineers to develop innovative low-carbon transportation technologies and strategies as we have done. California has dramatically affected the direction of the nation’s transportation sector as it continues to lead with landmark legislation to decrease petroleum use 50% by 2030, and greenhouse gas emissions 30% by 2020. Presently in 2018, cellulosic and advanced biofuels production in the U.S. has been well below the EPA’s required annual mandates.

Mitigating the risks

The company is using commercially proven technologies with production and lifecycle guarantee on our catalysts and engineering guarantees from its EPC. Additionally, they are pursuing an insurance wrap that covers the project end to end. The insurance will be in place for the life of the debt service and provides certain production guarantees. We are utilizing top-rated EPC contractors that provide construction and process guarantees to assure investors the plants will be built on time, on budget, and maximize nameplate production volumes.

The sites

The project has entered into a Letter of Intent with terms of a transaction to fund, build, purchase & leaseback, and operate one or more plants to produce about 19,400,000+ gallons per year of renewable diesel and/or jet fuel on sites controlled by USA BioEnergy in Yell County, Arkansas, and in Maricopa County, Arizona, and Lane County, Oregon.

It looks like the Arizona project may be the first one, and would be located on approximately 96+ acres in the city of Buckeye in Maricopa County, Arizona, is zoned for heavy industrial with all required utility service and rail access. 

The project scope

The purchase & leaseback will provide funding for:

• Cost of land, construction & equipment
• Construction interest
• Rent reserves
• Technology insurance, and
• Working capital, etc.

The primary lease term will be for 30 years. Multiple ten-year renewal terms are available

Conditions for closing include:

• Site owned or optioned with all approval from proposed use
• Executed lease and purchase & sale agreement
• Executed bondable GMP construction contract
• Demonstrated redundant sources of intake materials
• Long-terms offtake agreement with financially strong entity or entities
• Production and technology guarantees from third-party operator and equipment manufacturers
• Rent guarantee and/or technology insurance from entities with investment grade credit rating
• Normal real estate conditions Closing will take place upon commissioning and acceptance of the plant from the EPC by USABE

About that fuel value

According to those familiar with the project details, the assumed fuel price is $7.63 per gallon at completion of the project. That’s striking. The breakdown is as follows:

$2.80 energy value
$2.72 federal RIN value
$2.11 California LCFS value

The anticipated CI of fuel produced by the project “should have a CI of ~10 gCO2e/MJ and receive a LCFS value of >$2.00/gal.,” according to project principals. 

The knowns and unknowns

Couple of knowns and unknowns to focus on.

First, the known high capex cost associated with F/T technologies at this scale. That’s a risk factor if the project fundamental don’t work out in terms of cash flow — less of an issue here because of the stability of the California carbon markets, and we understand that the project has 100% of the financing in place subject to 3rd party validations, completion of designs and a technology insurance wrap.

Second, the unknown nature of the offtakers and the specific of the technology partners. EFT, Velocys and Johnson Matthey have been offering F/T back-end systems, and TRI, Sierra Energy and InEnTec have been in the running for high-profile technologies of late. We’ve seen some turbulence in the project line-ups. Fulcrum recently switched back-end providers from EFT to Johnson Matthey and we see that Red Rock has added EFT as a licensor. There’s been less turbulence on the gasifier side.

Another unknown, the identity of the offtakers. For diesel, the big trucking firms are always on the radar and of course the major oil refiners with their large obligations under RFS to blend renewable fuels. In some ways, truck stops have the upper hand, if they can handle the supply volumes, because they are not themselves obligated parties under the US Renewable Fuel Standard, meaning they can buy the fuel, and detach and sell the RINs in the open market. For that reason, fuel retailing firms are the untapped resource that can push renewable fuels to new heights.

Stability of the US carbon credit market is a known unknown. In the US, we have seen D6 ethanol RIN prices swing from highs of nearly a dollar to a low in recent weeks of under 2 cents. The diesel side is way more stable, but it illustrates the importance of having a clear vision on forward carbon prices and risk mitigation.

The hunt for dollars

Though project finance appears to be conceptually in place, the company has the same needs as almost anyone else at this stage to satisfy the usual lender conditions. Site under control,, permits in place, long-term and credit worthy offtakers, operator agreements, a construction contract, technology and engineering guarantees, and the various insurance wraps. So, the company is on the hunt for funding for this stage of approvals.

More about the company

The financials, the project partners and principals are usually just an NDA away, and the company and its contact details are available here.