In Colorado, Gevo (GEVO) has entered into a heads of agreement with Lufthansa to supply Gevo’s alcohol-to-jet fuel from its first commercial hydrocarbon facility, intended to be built in Luverne, MN. The terms of the agreement contemplate Lufthansa purchasing up to 8 million gallons per year of ATJ from Gevo, or up to 40 million gallons over the 5 year life of the off-take agreement.
Gevo utilized the enthusiasm generated in financial markets yesterday to raise $15.6M in cash and to convert $11M in debt to equity.
What the deal means in the short term
Here’s what it means in a practical sense. Expect Gevo to wind down ethanol production and convert the entire Luverne facility over to isobutanol, now that demand is ramping up. There will be a hydrocarbon upgrading technology added, which will give Gevo the option to produce up to 10 million gallons of hydrocarbon fuel from 13 million gallons of isobutanol.
That’s a mix of isooctene and kerosene – that mix can be dialed in to an 80/20 ratio either way, depending on market conditions. The kerosene will be blended by a third party to Lufthansa’s preferred blend. Could be a low percentage, could be high, that’s Lufthansa’s call.
About the agreement
The heads of agreement establishes a selling price that is expected to allow for an appropriate level of return on the capital required to build-out Gevo’s first commercial scale hydrocarbons facility. The heads of agreement is non-binding and is subject to completion of a binding off-take agreement and other definitive documentation between Gevo and Lufthansa, expected to be completed in the next few months.
Then comes the engineering, the financing, the construction. Stand by for 24 months. Mark fall 2018 on your calendar.
And so, Gulliver escapes from the land of the Lilliputians, formerly tied down by the Butamax litigation and the slow-to-emerge though shiningly profitable world of marine fuels. Into the big time of delivering solar fuels to hungry airlines.
Can Gevo go Big?
“We want to get to big scale,” Gevo CEO Pat Gruber told The Digest. “50 million 100 million gallons, where you really start to get economies of scale. We’re sitting here with 75,000 gallons in Silsbee, so how do we get to there from here. We’re going to do this in an intermediate step. We’re going to build out Luverne for isobutanol, we have good traction with Musket and the rest, and there’s a good value proposition based on really high performance. It’s high energy, high octane, lower carbon, lower cost. The pricing and margins are good. But it’s truly a niche not a commodity market, so it will take time to develop that niche.
“So, we have this opportunity to divert more into jet and isooctane, at the same time as Lufthansa wants to see alternatives develop.
“That’s their strategic interest. What they want is to self-regulate on carbon emissions, and avoid a patchwork of regulations everywhere they take off, land or fly over. The cost of compliance would be too great. But what none of us know is exactly what the cost of compliance will be, or the cost of oil, or the cost of alternative fuels in that long-term. So, everyone is moving cautiously although steadily.
“Meanwhile, it’s attractive to the investor community, too. They see the massive market, and they see the obvious need and the airlines actively developing. They understand there’s no electric plane any time soon, so there’s aren’t that many options, and this is one of the last sectors to be addressed in terms of lowering carbon emissions. Investors also see that some of the alternatives are more expensive, or are more expensive to scale.
The background news you can use
The agreement follows the completion of the first commercial flights using Gevo’s renewable alcohol by Alaska Airlines. The airlines used a 20 percent blend. Gevo said at the time that it “believes that its renewable ATJ has the potential to offer the most optimized operating cost, capital cost, feedstock availability, scalability, and translation across geographies.”
Gevo’s alcohol to jet synthetic paraffinic kerosene process turns its bio-based isobutanol into jet fuel that meets the requirements of the recently revised ASTM D7566 (Standard Specification for Aviation Turbine Fuel Containing Synthesized Hydrocarbons) for up to a 30 percent fuel blend.
In March, we reported that ASTM International Committee D02 on Petroleum Products, Liquid Fuels, and Lubricants and Subcommittee D02.J on Aviation Fuel passed a concurrent ballot approving the revision of ASTM D7566 (Standard Specification for Aviation Turbine Fuel Containing Synthesized Hydrocarbons) to include alcohol to jet synthetic paraffinic kerosene derived from renewable isobutanol. That’s now done, done and done.
So, now there are 4 approved alternative fuel specs. F/T fuels, which no one is making. Farnesene, up to a 10% blend, which TOTAL-Amyris makes but is expensive at the moment based on sugar and jet fuel prices. There’s HEFA, which is in wide use but also has waste oil / jet fuel price issues at the moment that have limited the production. Now, there’s the isobutanol-to-jet fuel pathway, which essentially is all Gevo’s right now.
Why would anyone make jet fuel from alcohol, anyway?
So, here’s the critique of jet fuels made from alcohol. Aside from the technical hurdles, why would anyone convert $3.50 corn into $1.20 aviation fuel when the yields are something like 1.3 gallons of hydrocarbon fuel per bushel? Isn’t that $1.56 worth of fuel from $3.50 in feedstock?
Well, yes and no.
First, Gevo is producing its own distillers grains, worth roughly $1.15 per bushel in normal market conditions. And, we believe the fuel will qualify for the biomass-based diesel tax credit of $1.01 per gallon, relying on this from afdc.energy.gov.
Biomass-based diesel is defined as a renewable transportation fuel, transportation fuel additive, heating oil, or jet fuel, such as biodiesel or non-ester renewable diesel, and achieves a 50% GHG emissions reduction.
And there’s roughly $1.00 in RIN value.
So, putting that together, you have $4.72 in value from that $3.50 corn. That’s before considering the fact that the Lufthansa deal is “expected to allow for an appropriate level of return on the capital required to build-out Gevo’s first commercial scale hydrocarbons facility.”
So that’s why you can make money making jet fuels from alcohols.
A Big Deal?
Yes, big. Monster.
Why? Combination of two factors. One, it’s Lufthansa stepping up, big time, despite the low-price oil environment. Second, it’s a multi-year offtake deal with a credit worthy partner. The kind that can get a plant built, as Gevo continues to foster an escape from near-certain death that wouldn’t be out of place in outtakes from Deliverance.
In February, we reported that low fuel prices aren’t deterring Lufthansa from continuing to develop aviation biofuels, some it describes as a long-term strategy and not one that is swayed but a tough year or two. The company began looking for fuel alternatives in 2011 and has launched a number of trial flights and commercial flights with different blends of aviation biofuel with fossil jet fuel.
The relationship between Lufthansa and Gevo dates to spring 2014, as we reported here.
Back in 2012, the airlines said that believed that A1 jet fuel will remain the main aviation fuel for the next 20 years but expected renewable jet fuel to replace up to 5% of the market by 2019. With the European economic climate no longer interesting for investors, the airline believes that agricultural investmentsfor feedstock for aviation biofuel, for exampleis an area not yet fully exploited.