Gevo’s Delta sustainable aviation fuels deal — Holy SAF, Batman, it really worth a billion bucks? 

Delta enters offtake agreement with Gevo for 10 million gallons per year of sustainable aviation fuel, creates long-term carbon solution. What does it mean?

In Colorado and Georgia, Delta signed a take-or-pay deal to purchase 10 million gallons per year of advanced renewable biofuels from Gevo. Sustainable aviation fuels provide significant environmental benefits because the lifecycle carbon footprint can be up to 75 percent less than conventional jet fuel.

The sustainable aviation fuel is expected to be produced upon completion of an expansion to Gevo’s existing advanced biofuel production facility in Luverne, Minn. and is expected to be available for use by Delta between 2022-2023.

The hard data

A copy of the fuel sales agreement between Delta and Gevo has been filed with the U.S. Securities and Exchange Commission on Form 8-K.

Details worth noting in the deal

A couple of provisions in the Delta / Gevo agreement stand out, and we’ve excerpted from the SEC filing available at the link above.

The Company intends to supply the SAF under this Agreement upon completion of an expansion to its advanced biofuel production facility in Luverne, Minnesota, such that the expanded facility is capable of producing, refining and delivering up to 12 MGPY of hydrocarbons.

Delta may terminate the Agreement (i) if the Commencement Date has not occurred by March 1, 2023 or (ii) if the Company has not obtained certification under the Carbon Offsetting and Reduction Scheme for International Aviation (“CORSIA”) by the later of the Commencement Date or the date that CORSIA goes into effect, subject to a six-month cure period.

The Parties shall share [**], the economic value of any and all Emissions Credits associated with the Fuel purchased by Buyer under this Agreement, subject, however, to allocating such revenues in accordance with this Article 6. Unless otherwise agreed by the Parties, Seller shall use commercially reasonable efforts to monetize all Emissions Credits within five (5) Business Days of the day on which such Emissions Credits are generated at a price that is no less than the OPIS price for the day on which such Emissions Credits are monetized for: CALIF. LOW CARBON FUEL STANDARD, Carbon Credit ($/MT); current year D4 BIODIESEL RIN CREDITS; or ADVANCED BIOFUEL RIN CREDITS, as applicable.

The Digest’s Take

Let’s look at 3 key factors and 3 unknowns

1. Deal structure.

Known: This is Delta’s first big foray into large-scale offset deals, and the airlines have not successfully transitioned from a structure that affords them millions of gallons of low-carbon fuels towards a structure that will give them tens of millions of gallons.

This is described by Gevo CEO Pat Gruber as a “bankable deal” — meaning one that can justify the financial commitment by investors and lenders to expand Gevo’s facility at Luverne, Minnesota to produce these hydrocarbons. Gevo had previously landed around 5 million gallons in offtake contracts, and here’s another 10 million per year. So we have a base load of about 15 million gallons per year, so far. We understand there’s more to come, and that ultimately Gevo could see, according to sources, as much as 50 million gallons in demand per year for its sustainable aviation fuels based on the demand uncovered to date. 

Unknown: More demand is likely to emerge, and not all demand so far uncovered will realize in the form of take-or-pay closed deals, so we’ll have to wait a little longer to understand Gevo’s near-term planned capacity.

2. Deal size.

Known: Our understanding is that, owing to the carbon credits available to Delta and Gevo in this partnership, that there’s going to be a good, profitable price for Gevo at the factory gate, yet an affordable price for Delta at the other end after carbon credits are realized.

Unknown: If Gevo were to realize $3.00 per gallon for its aviation biofuels at scale, and it could be more than that (or less), but $3.50 per gallon for energy value before carbon is a target many have spoken about — that would give this deal a value of $52.5 million per year, or $1 billion over the 20 year life of a hydrocarbon plant, should a deal like this continue for that long. Specific yet to be fully understood.

3. The ATJ pathway just went huge.

Known: This technology creates hydrocarbons from sugars, as opposed to fats. In some ways, hearkens back to something Jonathan Wolfson observed in the glory days of algae biofuels — nature is better at making low-cost sugars than making low-cost fats, and a long-term pathway to sustainable aviation fuels at affordable scale has to take this into account. Byogy, Gevo and lately LanzaJet have been the leaders here. Vertimass has been developing a one-step system straight from biomass to hydrocarbon fuel. Most of the capacity to date has been made by hydrotreating fats, oils or greases to make a hydrocarbon — and there appear to be headwinds in terms of finding enough affordable feedstock to even scratch the surface of the vast demand for sustainable aviation fuels.

Unknown: We now have a structure in hand to do deals in the tens of millions of gallons per year. But we don’t yet know how airlines and producers will structure deals worth hundreds of millions of gallons per year. That is the Next Big Thing

The Gevo technology

Powered by inedible, industrial corn products, or no. 2 corn, Gevo’s patented process separates the sugar from the proteins in the corn product. The sugars are then used to make the jet fuel, while the proteins are fed to livestock. After capturing and converting the livestock manure into biogas digesters that can displace fossil-based natural gas, the solids produced are used as fertilizer for the fields, thereby creating a continuous, renewable manufacturing cycle.

The Delta backstory

Delta’s agreement with Gevo complements the airline’s recent $2 million investment in Northwest Advanced Bio-fuels, LLC for the feasibility study of a facility to produce sustainable aviation fuel and other biofuel products in Washington State. The airline’s investment in sustainable fuel is only one example of Delta’s work to positively impact the environment, maintain its commitment to carbon neutral growth and reduce emissions 50 percent by 2050.

That Riedy guy again

BTW, write down this number. 2025085823. It sounds like an deal size but it’s actually Mark Riedy’s phone number, a partner with Kilpatrick Townsend & Stockton, and an eminence grise whose team served as counsel on both the Northwest Advanced Biofuels and Gevo deals. Seeketh thee deal flow, kemosabe? You might well start therewith.

Reaction from the stakeholders

“Long term investments such as our agreement with Gevo are critical to Delta’s goal to lower our carbon footprint while planning for a more sustainable future,” stated Graeme Burnett, Senior Vice President – Fuel Management at Delta Air Lines. “Fuel is an airline’s biggest area of impact and therefore presents our greatest opportunity to drive solutions that care for the planet.”

“We have such great potential in our business system to break paradigms as to what is possible. We are working to create a business system that works hand-in-hand with agriculture to improve sustainability and lower the carbon emissions of jet fuel while producing protein for food chain use,” said Patrick R. Gruber, Gevo’s Chief Executive Officer. “Not only does our system produce enormous quantities of protein, we are working to get off the grid by installing wind power for electricity and manure digesters to produce biogas. We want our Luverne Facility to embody the ‘circular economy’.”