In oil & gas and biofuels, we hear about crack spread and crush spread. But fuse spread is a critical factor in advanced, low-carbon fuels.
Here’s the what and why and who.
The most fundamental economic in the oil & gas business has historically been the crack spread, which is the price difference between the value of crude oil and the underlying products after refined, or “cracked”. For example, Brent crude oil costs $49 a barrel right now, or $1.17 per gallon, while front month RBOB gasoline prices at $1.42 per gallon, and the New York October contract for ULS diesel is at $1.54.
Over in the world of biofuels, a similar measure is the crush spread the differential between the underlying feedstock and the market price of the fuel. Right now the front month price for soybean oil is 25.51 cents per pound, or around $1.94 per gallon, and the September RME biodiesel contract in Rotterdam is $882 per ton, or $3.05 per gallon. Over on the ethanol side, corn is trading at $3.83 per bushel, which translates into $1.32 per gallon, while the October ethanol contract in Chicago is trading at $1.59.
About crush and crack spreads, in general
In the case of petroleum, the crack spread we’ve quoted doesn’t take into account the value of the chemical fraction, which pushes up the overall value of the barrel quite a bit. And, the soybean oil example doesn’t take into account the value of the glycerine by-product from biodiesel production. And the ethanol example doesn’t take into account the value of corn oil, CO2 or distillers grains. Or, the value of renewable fuel credits such as RINs. So, these are rough calculations relating the fuel fraction.
But they demonstrate right away some of the pressures on biofuels right now, at a time of low petroleum prices. On the ethanol side, there’s not much margin to work with for the biofuels producer. On the biodiesel side, the traditional US feedstock produces an expensive fuel.
Accordingly, ethanol producers have worked hard on diversifying the product set, notably adding corn oil in recent years, while biodiesel producers have sought out alternative feedstocks, especially tallows and other waste fats, oils and greases. Choice white grease in the Central US, for example, is trading at 21 cents per pound, or 20% less than soybean oil.
Over on the cellulosic ethanol front, the crush spread isn’t much better for agricultural residue. The most pessimistic assessment of feedstock cost right now is around $115 per ton for cellulosic biomass, or around $1.44 per gallon (at a yield of 80 gallons per ton). Should feedstock prices drop to around $80 per ton, delivered to the refinery gate well, that’s much better, at around $1.00 per gallon.
The good news if you have a technology that can work with municipal solid waste. MSW comes in at zero cost, right now. We don’t know how long that scenario will hold.
So, where’s the sustainable, affordable, reliable, available supply of feedstock for the industry moving forward?
There are two schools of thought.
School One. “oil prices are going up again soon enough” school, which generally subscribes to the belief that by the time cellulosic and other technologies can scale broadly around the world, oil prices will return to a $70-$80 per barrel price range, or around $1.67-$1.90 per gallon of crude, and that wholesale gasoline prices will rise to around $2.15 per gallon. Add in a 50-cent RIN for an advanced fuel, and a producer has something like $2.65 per gallon to work with, excluding the value of any co-products.
School Two. Oil prices could be low for some time, and investors don’t like rosy future scenarios based on high oil prices, anyway. So, it’s not a case of “waiting for business as usual”, but pursuing lower-cost feedstocks.
Which brings us to the fuse spread.
What’s that? The fuse spread is the difference between the underlying feedstocks fused together to make an organic molecule and ultimately produce a biofuel. Plants use carbon dioxide and water.
Water’s cheap, averaging 1.5 cents per gallon in the US.
So, it comes down to the cost of CO2, which is why the current haggling over the status of waste CO2 is of titanic importance to the planet.
If governments decree that, to mitigate climate change, waste CO2 must be geologically sequestered by regulated parties, CO2 must be obtained from the merchant market at something like $160 per ton, as we reported here.
If regulators allow carbon capture and use, costs could fall to a penny per pound of CO2.
So, here’s the underlying raw feedstock cost, per gallon of fuel, at theoretical yield:
|Merchant CO2||Waste CO2|
Generally, carbon monoxide and hydrogen combinations, such as LanzaTech uses, is expected to be available for free for some time. So they have the same “it’s free!” math as MSW.
The battle over carbon capture and use and the US Renewable Fuel Standard
A glance at the chart above and the math tells us why companies like Joule and Algenol, that have microorganisms that can produce fuels from CO2 and water, are working hard on carbon capture and use, as well as supporting efforts to expand ethanol acceptance.
The hydrocarbon route using merchant CO2 is a non-starter the feedstock is priced at more than the target fuel in today’s market, and even if oil prices improve as expected, these are complex technologies that need to build refineries, and there isn’t much help in the fuse spread. However, the match gets much better with waste CO2, where there’s some room for capex, opex and for a yield of say 85% of theoretical.
Over in the world of ethanol, it’s likely not to be workable with merchant CO2 unless then price drops into the $50 per ton range. But the math looks pretty good with waste CO2 and ethanol one of the reasons that these technologies suggest that they can be, long-term competitive even with low-cost petroleum.
The role for the regulator: dig up the carbon, then re-bury, or just leave petroleum in the ground in the first place
The decision facing regulators, then, is very simple. Do they want low-cost, low-carbon fuels that bypass competition with food and arable land or not? The policy path to affordable, at-scale fuels is relatively straightforward. A rising ethanol distribution combined with a policy on carbon capture and use and the fuse spread tells us there will be robust investor interest in deploying low-carbon fuels.
Given that there are hard limits on the geography and availability of free feedstocks such as MSW and carbon monoxide and given that there are practical limits on the availability of traditional biofuels feedstocks such as corn, soybeans and rapeseed, and supply chains to be worked out to tap cellulosic biomass the choice of the regulator is quite clear.
Either bury the CO2 and dig up petroleum to fuel the transportation economy, or use the CO2 that’s available and leave the petroleum in the ground. Either path sequesters the same amount of carbon. The latter path is quite a bit less costly and complex in the long