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Biodiesel's Nightmare: Renewable Diesel

Until algae farms move from the research and demonstration stage, biodiesel usage is going to be tightly constrained by available feedstock.  The feedstocks for biodiesel are oils and fats, which naturally occur in quantity only in animals or the seeds of plants.  As such, the quantity of oil available is much smaller than the sugars, starches, and cellulose which occur not only in the seeds and fruits of plants, but also in the stems and leaves, and can be used to make ethanol.  Because sugarcane contains the best ethanol feedstock, sugar in the stem (not just the fruit) of the plant, Brazilian ethanol can compete effectively with gasoline without subsidies.

From Trash to Cash

Biodiesel can also compete with diesel on the basis of price, in large part because it is much simpler to convert oils and fats into biodiesel than it is to convert sugar into ethanol, and the oils commonly used for biodiesel today were essentially treated as low-value byproducts (e.g. soybean oil) or zero-value waste products (e.g used cooking oil) of food production.  When petro-diesel cost $1 a gallon, biodiesel was limited homebrew in the garages of a few hippie types, but now that it is around $3 a gallon, turning low value oils and fats into high value fuel can be big business.

US Biodiesel Consumption.  

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Source: National Biodiesel Board.

How big could the biodiesel business get?  With US production of soybeans at about 3 billion bushels, if the entire soybean crop were converted into biodiesel at 1.4 gallons per bushel, we would have about 4.2 billion gallons of biodiesel, or around 6.5% diesel fuel consumption in the US.   There are many other potential feedstocks for biodiesel, but soy oil accounts for most of US oil production, so we can safely say that domestic biodiesel production will not exceed 10% of domestic consumption without some new source of feedstock.  In fact, potential biodiesel supply is falling, since farmers are changing their crop rotation to include less soy and more corn for ethanol.  All told, the potential demand for biodiesel far exceeds the potential supply, which will be limited by the supply of potential feedstocks, instead.

Currently biodiesel supply is limited by production capacity, but in the long term, as more production facilities are built, supply will be limited by available feedstock.  At this point, commodity arbitrage will set the price of biodiesel close to its main substitute, petro-diesel, and the price of commodity oils will follow along for the ride, but low enough to allow biodiesel producers to earn a return on investment.

New Kid on the Block

The above analysis assumes that biodiesel production is the best way to take vegetable oils and fats, and make them into transport fuel.  This may not, in fact, be the case.  Last spring, ConocoPhillips (NYSE:COP) announced a deal with Tyson Foods (NYSE:TSN) to use fat from Tyson's rendering plants to make "renewable diesel" fuel in COP's refineries.  The key point here is that COP is making what they call "renewable diesel" not conventional biodiesel.  They developed their renewable diesel process using soy oil in Ireland, using their existing oil refinery there.  

I first heard of this process last October at an NREL presentation (they called it "Green diesel" and could not identify COP as the oil company they were dealing with,) but details remain sketchy.  The fact that they refer to the process as a "proprietary thermal depolymerization production technology" and the fact that they are using existing refinery infrastructure should cause alarm to biodiesel firms and investors.   

Why should this cause alarm?  Because COP claims its "renewable diesel" is chemically equivalent to conventional diesel.  If this is true, it's quite possible that it has a lower cloud point than biodiesel, and so could be used at a broader range of temperatures.  In addition, since COP is using conventional refining equipment, they may also be achieving higher energy yields.

According to NREL's Overview of Petroleum and Biodiesel Lifecycles, Biodiesel conversion requires 80 kJ of energy for every 1000 kJ of energy in the biodiesel, while petro-diesel requires only 64 kJ to produce an equivalent amount of fuel.  While the difference in energy costs is fairly minor, transportation fuel is a commodity business, and COP's ability to use the existing pipeline infrastructure into which their refinery is already integrated, as well as its ability to avoid the large capital expenditures required to build a biodiesel refinery from scratch are likely to give them a large cost advantage over biodiesel producers in this thin margin business.

With the exception of small biodiesel producers using local and distributed biodiesel feedstocks such as waste vegetable oil from restaurants, I expect that petroleum refineries will end up having an economic advantage making renewable diesel in comparison to conventional biodiesel producers.  This means that commodity oils and fats available in large enough quantities to interest refineries will be bid up in price to a point where less efficient biodiesel producers will be unable to operate profitably.

All of this may happen remarkably quickly as well.  ConocoPhillips and Tyson say that their deal could ramp up to 175 million gallons by 2009, or about 10% of United States 2006 biodiesel production.  How soon will refineries be competing directly with biodiesel producers for soy and other vegetable oils?

While we can only speculate about the relative economics of renewable diesel and biodiesel, having a new competitor cannot be good for the biodiesel industry.  Biodiesel producers might be sustained by federal biodiesel tax credits, but depending on government subsidies is not a sustainable business model, especially when you are competing with an industry with a long track record of successful lobbying.

The likely winners I see are the suppliers of feedstock.  When the deal was announced, a Tyson spokesman said he expected the deal to increase annual earnings by between $.04 and $.16 per share.

DISCLOSURE: Tom Konrad  and/or his clients do not have positions in any of the companies mentioned here.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

 



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Comments

I always find this blog very informative and insightful. I always get new areas to research. I am still trying to find the best way to benefit as an individual investor.

There is so much inaccuracy in the article it is difficult to know were to start. All I can assume is that you must have gotten a great Christmas present from Conoco-Phillips. The problem with this type of slanted article it pretends to be fact and contributes to the very real problems we face everyday as producers. This type of misinformation winds up in someone's due-diligence file and is almost impossible to correct.
By sighting NREL you hope to give credence to this type of propaganda (spin) article. pyrolization technology has been out there since WW2 and will never be cost effective due to energy balance. Working with the oils from algae has so many drawbacks and expenses to make a usable product , viscosity to smell, is almost impossible except on lab bench. Esters from algae are very unstable and oxidize even faster than fatty acid esters.
If you want to run a article that slams BioDiesel and offers hope of miraculous technologies from big oil then don't pretend to be an informational article, call an advertisement and advertisement.
Regards
Tim Lee

Tim,
I actually have an investment in a stock that might be hurt by the trend that I point out (MWAV), but none in any of the companies oil refiners. However, owning a biodiesel stock (as well as being a biodiesel user, and member of a biodiesel coop), I am, if anything, prejudiced in favor of biodiesel producers rather than oil refiners.  But just because I have an emotional attachment to one does not mean that I can ignore a threat from another.  In fact, since my ownership of MWAV means that I'll make more money if the biodiesel industry does well, and lose money if it does poorly, I need to be especially vigilant about threats to the industry.  That vigilance lead to the thinking behind this article.

Dealing with your points:

1) I cite NREL as my source because that is where I first learned about this.  Much of what I know about renewable energy has come through them, and that is the reason I cite them.  I am happy if this also lends an air of credibility to my work.

2) If COP's "thermal depolymerization production technology" has as bad an energy balance as the pyrolyzation technology you equate it with, then biodiesel producers have nothing to worry about.  I believe these are different technologies, and that COP's technology is likely to prove to have a better energy balance, but that is yet to be seen.

3) The ease or difficulty of working with algae based oil has nothing to do with the strength of my argument; it applies no matter what the source of the oil is.

4) I applaud Conoco-Phillips for the small steps they have taken in the direction of renewable energy, as well as for their recent membership in the US Climate Action Partnership. However, they are still an oil company, which means that I'm very unlikely to ever own the stock, or recommend that my readers buy it.  I will, however, continue to watch what they do very carefully, because it will have a great effect on what happens to anyone involved in biofuels.

Tom,

I think the thing to take from this is that due to the lack of knowledge of the "thermal depolymerization production technology", some of these things you discuss have that much uncertainty about them - until more is known it probably is not being overly concerned.

I agree with all the points on all the technologies mentioned. But some of the arguements laid out on pyrolytic technologies and prokaryotic-derived-oil are like comparing apples and pears.

I find that without more info - the title of C-P's technologies gives nothing away of what the actual chemistry involved is. Without that dicussing the energy balance is impossible.


Finally your last well made point - on suppliers of oils is one I have made to an Exec of a supplier in the food industry here in the UK. The suppliers of raw oils - it's win win. But it's also about them potentially dictating the development of sustainable supply chains... with two large industries - chemical/petrochemical-food/agriculture getting into bed together.

Finally, I am aware of a large number of technologies (chemical and engineering) in development by various organisations that will help the "little guy" be competitive. You should probably focus your interests on the companies whom can get together to be more competitive..... if you catch my drift.

For you venture capitalists (Tom) it's about you knowing the technology portfolios and encouraging smaller SME's to get in with larger organisations like C-P and the petro-chemical industry where it is technologically/economically appropriate and advantagious.

The capitalist principle of: Self interest ... will ensure that the little guys SMEs will continue - although probably in different forms, depending on if they take their chances to co-operate when they arrise.

The fact that the oil industry is thinking smaller - is almost like them and biodiesel industry converging on the middle ground.

That's where you should be looking Tom....

All good points, Mark... I really don't have anything to add. I'm much more bullish about small biodiesel producers than large ones, because I think they will be better able to negotiate with small suppliers of oil than the big oil refiners. Transportation costs are also going to be a bigg issue, and this will faover small producers in local markets with a local supply of waste oil.

I agree with the sentiments of the majority of the comments here. You cannot start out with a premonition, and then use uncertainties to justify your inclination. The predisposition is lacking substantial proof, and is lacking specific logic using nebulously defined criteria for validation of the idea that ‘biodiesel is not THE answer’. However, no one is claiming that biodiesel is THE (only) answer. So, refuting a non-argument is pointless, unless one seeks merely to rationalize that biodiesel is “bad”, or you should not invest in biodiesel.

I argue that Biodiesel is necessary as an alternate fuel. Alternate fuels are necessary to sustain the current growth trends in economies on a global scale. So, inevitably we will burn whatever fuel is available and cheapest.

The question is not will biodiesel win out over petrodiesel, or should one NOT invest in biodiesel technology. The question is:
“What will happen to the global economy if it does not become decentralized and self-sufficient in a local manner as quickly as possible?”.

As global petroleum production decreases its output as reserves run dry, instability in fuel supplies must be countered with local sustainable practices of fuel production in order to make more constant the supply of fuels, particularly for purposes of transportation, IF one seeks to sustain quality of life (your American status quo). Doing anything other than that will make things more difficult in the future.

Dear Dr. Konrad,
After reading your informative article, and I would like to get your feedback regarding to some issues of biodiesel in Malaysia context. 

1. What might be the newest biofuel technologies that can be introduced and implemented in Malaysia? 

TK:    Since Malaysia is tropical, it should be suitable to a wide variety of biofuels.  The question to ask is not what technologies are most appropriate, but what feedstocks you can grow cheaply and in quantity with as little as possible degradation.  Another thing to look at is what local industries you have that produce a lot of organic waste which might be made into ethanol or biodiesel.
2. What are the 3 hot issues that concern the biofuel/biodiesel market these days in terms of the technical aspect of it?

    The biggest issue wit biofuels today is: Are they sustainable?  If you have to chop down a rainforest to plant a biofuel crop, it will take centuries to replace the carbon that is released into the air with the destruction of the rainforest.  This is another reason to look at organic waste from existing industry; when you used waste as your feedstock, you get teh double benefit of disposing of the waste and the use of the biofuel.


3. Are there recent developments or changes in the market/profession/legislation? What are they and when? what are the impact and implications?

    Again, sustainability is the big issue.  The European Union is considering removing their biofuel subsidies because of rainforest destruction based on biofuels.  Sustainable biofuels will likely gain an edge over ones that involve environmental destruction as consumers become more aware of the difference.


4. Who are the experts in the technical aspect of biofuel technologies who are actively researching and enhancing biodiesel technologies? 

    There are more groups than I can count doing biofuel research.   When you know what feedstock you plan to turn into a biofuel, you should then search for researchers who are looking into turning that feedstock into fuel.  That said, some of the leading companies are Abengoa, Dow Chemical, Shell, Dupont, Conoco-Phillips (as mentioned in the article) and Syntroleum, but there are many I don't know about or have not mentioned here.

G.W. - I find one big misconception with your theory. With the introduction of the Fischer-Tropsch process into the equation, companies are now using the heat produced from the FT process to boil water, which creates steam, which turns a turbine, which creates electricity. So for you to say that pyrolization will never be cost effective due to energy balance is anything but accurate. Not only will the energy to operate this system be essentially free, it can produce electricity for others as well. And not only algae is used as a feedstock in this process, actually algae is a very uncommon feedstock. Municipal waste such as trash, old tires, scrap wood, and basically anything carbon based can be used as a feedstock, this will reduce the use of the extremely expensive oils from soy and corn, plus this method will not have the Food vs. Fuel freaks that think they know all about harvesting crops, breathing down your neck about this, and what about the cost to transport bio-diesel...I could go on for hours about the cons for bio-diesel, although it is better than petro diesel, Renewable diesel take the pot hands down. Maybe you should investigate the other topics a little more before you go bashing someone elses posts.

Best Regards,
Tyler Stein

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