Gevo’s historic $900 million offtake deal with Trafigura Group

August 20, 2020 |

In Colorado, Gevo entered into a long term, take or pay Renewable Hydrocarbons Purchase and Sale Agreement with Trafigura Group, the largest contract in Gevo’s history. Trafigura is one of the world’s leading independent commodity trading companies with over $171B and over $54B in revenue and assets, respectively. Under this contract Trafigura is expected to take delivery of 25 million gallons per year of renewable hydrocarbons, the majority of which is expected to be low-carbon premium gasoline with a smaller portion of the volume for sustainable aviation fuel starting in 2023.

What’s the bigger picture?

The deal adds to substantive offtake deals struck with Delta, Total and SAS in the past year and with AvFuel in 2018. The Delta deal was particularly material in terms of changing the way in which sustainable aviation fuels agreements are structures, and more on that here.

Gevo is selling out the inventory from its planned advanced isooctane and sustainable aviation fuels plant, as a part of the financing agreement. That’s why the agreement is subject to certain conditions, including Gevo acquiring a production facility to produce the renewable hydrocarbon products contemplated by the Agreement and closing a financing transaction for sufficient funds to acquire and retrofit the production facility.

Making educated estimates of production capacity: the known and surmised

Known. We do know that Gevo had $600M in offtake contracts on the books in May, and this is the only one announced since then, so we can peg the Trafigura deal at an estimated $900 million value.

Surmised. We estimated that Gevo had sold 5 million gallons of capacity leading up to the Delta deal, and Delta added 10 million, and the Trafigura deal adds 25 million. So, 40 million, so far.

Known. Now, Gevo noted in May that they had $1.5 billion in potential future offtake contracts. At the same deal structure as Trafigura, that’s another 16 million gallons per year at $600 million.

Surmised. So, we’re looking at perhaps 56 million gallons in all.

Known. Yes, Gevo is expanding. As they have noted to investors, they are in the hunt for “two US ethanol facility acquisition and retrofits (of ~30mmgpy each), with “four US expansion sites identified and counterparties engaged, and with two described as “high priority targets”.

Surmised. Now, 30 million gallons ethanol plants, if Luverne is a guide, set the stage for 21 million gallon isooctane plants, which suggests a production network size of around 55 million gallons (21+21+13 for Luverne). That’s an educated estimate, could be more.

The Selling Price

We have the Trafigura deal size and the gallons per year, but not the term, so we can’t precisely pin down the price. But here’s the spread of possibilities

5 year term – $7.20 per gallon. Not plausible.

10 year term – $3.60 per gallon. Plausible.

12 year term – $3.00 per gallon. Low side of plausible.

15 year term – 2.40 per gallon. Sounds low.

Our experience in covering the sector points us towards the 10-12 year range and the $3.00-$3.60 price range in today’s market. Deal structures often have variable pricing to protect all parties, with a peg to carbon prices and fuel prices.

The Gevo backstory

Having produced SAF and other hydrocarbons for nearly a decade, Gevo has a unique business system as it integrates sustainable agriculture and biorefining to produce SAF and low-carbon premium gasoline. For every gallon of low-carbon premium gasoline or SAF produced, Gevo produces about ten pounds of protein for the food chain, delivering substantially all of the nutritional value of corn to the food chain. The farmers who supply Gevo on average are capturing carbon, building up their soil with regenerative agriculture techniques.

Gevo began to use ISCC+ and Roundtable on Sustainable Biomaterials (RSB) certified corn for its Luverne, Minnesota facility while displacing fossil-derived power and heat with wind turbines and the upcoming implementation of biogas from dairy manure generated nearby. The execution of this circularity is unique and Gevo’s SAF is expected to have greenhouse gas profile reduction of 70% compared to the fossil-based jet fuel alternative.  Eventually, it may be possible through soil carbon sequestration to completely decarbonize jet fuel through the use of Gevo’s SAF.

More on the Delta deal here.

More on the SAS deal here.

More on the Total deal here.

The Trafigura backstory

This commitment will support Trafigura’s efforts to develop the market for low-carbon fuels including low-carbon premium gasoline. The Agreement will also enable Trafigura to supply SAF to both US and international customers whose interest is growing in low-carbon jet fuel.

If you’re not familiar with the company — it’s a giant international commodities trader with a big book of business in fuels, more on the company here.

Reaction from the stakeholders

“This is our largest single contract to date, and with it, brings Gevo to over $1.5B of revenue in long term contracts when added to the other contracts we have in place.   As drop-in fuels, Gevo’s renewable, very high-octane gasoline and SAF are a perfect fit with Trafigura’s existing fuels business and will allow them to integrate these low-carbon options seamlessly into their supply chains. We expect that our low-carbon fuels will enable certain of Trafigura’s customers to substantially lower their carbon footprint,” said Patrick Gruber, Chief Executive Officer of Gevo.

“Today’s agreement is a natural fit between our companies that will help drive the expansion of our renewable fuels product offering. We look forward to continuing to make a positive impact on the transition towards a low carbon economy,” said Robert Kreider, Head of the Strategic Management and Development Group, North America for Trafigura.

The Bottom Line

We suspect that there’s one more big chunk of offtake to go before Gevo zips up the order book and begins plant construction and retrofitting. But this one is almost certainly the largest the company will have in its current configuration plan. And it’s certainly the largest deal we’ve ever seen for SAF and isooctane.

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