Biodiesel 2011: the real opportunity

An interview with James Garton, president of Mission Biofuels USA subsidiary. We look at the jatropha 1.0 catastrophe, actual biodiesel capacity in the US, palm biodiesel, the RFS, and more.

“We see real opportunity in 2011-13 to make money in biodiesel,” Mission NewEnergy’s James Garton told the Digest when we caught up recently.

The company, which recently listed on NASDAQ following a successful US IPO, has been better known for years in Australia, where the company is headquartered, and in Southeast Asia and India, where it has the bulk of its operations in palm and jatropha biodiesel. The company broke into the US market with a stunning and innovative offtake contract for palm and jatropha-based biodiesel, with up to a billion gallons in total over a number of years.

The contract has not become operational, for the time being, while the industry awaits a ruling on the GHG reduction numbers on palm biodiesel. Below 50 percent, the fuel will not qualify under the Renewable Fuel Standard as an advanced biofuel, and concerns over indirect land use change and palm-based deforestation in Indonesia have observers worried that generic palm will not make the cut.

BD: What about palm oil, and the timing of a separate sustainable palm oil pathway?

JG: There’s been a long running debate on certifications at the EPA. Either EPA will flunk palm or open the pathway.  Our palm biodiesel has been recognized in the EU as sustainable – we got a mid range 50s to high 50s in EU.  Because of the way we do it, we are confident that EPA will recognize our palm biodiesel either generically, or as a separate pathway for sustainable palm. We understand the EPA has a desire to close the book on generic palm, somewhere inside of the next month. We would think that upon closing that – yes, then yes, if no, then fast track we hope to fast track our sustainable palm as a pathway, and by summer or maybe 3Q get approval on gPalm — Green Palm.we are comfortable with that because.

BD: And the sustainable palm discussion, will it come to an end, or even a satisfactory end?

JG: The palm deforestation discussion will go on. There are ways to do palm that are sustainability friendly. But palm has to be a part of the mix, the quantities are there.

BD: How did your Valero deal work – there were some elegant elements to it.

JG: Basically there were 3 buckets. There is the energy value of what you are selling – the BTUS. There’s the compliance value – the RIN plus any subsidy that applies. Then there’s the handling or aggravation factor, recognizing that its easier to buy a dry RIN than a wet barrel.

Our deal is designed to take into account the ULSD, the cost of production, everything an obligated party would look at. So that it is indifferent whether you buy the RIN or barrel.

It’s a winning deal for both us and Valero. We will sell them a low-cost biodiesel now, and be paid on a crude palm basis now. The agreement bridges the duration when we had palm, versus our own captive jatropha feedstock. It’s the first time, maybe the only agreement that has a RIN based component. Right now the contract is enforceable but not operational, because we are not yet supplying palm biodiesel to them pending the EPA ruling. But Valero continues to be very important to us.

BD: What’s your take on the Jatropha 1.0 catastophe?

JG: Well there was a lot of financing and building up of jatropha, despite failures in contract farming. Basically you had unknown yields, unknown agronomy, and poor quality genetics. The idea for a lot of companies, the sort of D1 approach, was to put capital into buying a tract of land, planting and hoping.

BD: What’s different with the new contract farming?

JG: We opted for contract farming in the near-term. It’s not D1- here’s a bag of feed and we hope you get somewhere. We have an active approach, we do GPS mapping, and are actively dealing with our contractors to optimize their yields. But for some time, we have to expect that yields are going to be low.

BD: You’re making some initial deliveries.

JG: We have seen the first small quantities, 500 tons or so of material. It’s very encouraging, especially how the cost for us to move and extract was in line with our expectations, and the pricing was good.

BD: Which market will you serve: power or fuel?

JG: In the end, the market potential has to be based on the highest and best use. In our case, the last four batches of jatropha were sold for power and CHP, not biodiesel. On the fuel side, the industry is not sure which molecule it wants, and there’s a heavy degree of reluctance at companies like valero and chevron to deal with the pain and logistics, though less so in EU. It strikes us that the opportunity in jatropha may well be in biojet, where we partner up or supply feedstock to a UOP.

BD: Just selling the crude jatropha oil?

JG: Mission is an integrated player, with feedstock and refining capacity, but we have to ask ourselves: Where is the value going? In jatropha, the value is going to the feedstock. If we are selling CJO out of India than margins better than refined in malaysia, even though our refining capability is important, in jatropha we may see higher and better uses outside of our refining.

BD: Your goals with jatropha?

JG: 150,000 barrels next year – a pittance, really. But we hope to see an improvement in the agronomy, and we hope another player comes up with the genetics, so that we can turn back to the contract farming, while understanding where to plant, the fundamental agronomy.

BD: Back to the US Renewable Fuel Standard for a moment, how important is it for you?

JG: It was THE game -changing event, the RFS. Unfortunately its impact was masked with the dollar tax credit and the carnage of 2008-09, and inability to crystallize what we were going to do around the RFS. But if indeed RFS has shifted away from a mechanism to subsidize the agricultural sector, and has become a genuine component of the energy platform, it must be maintained.

BD: How do see the RFS mandates for advanced biofuels being met?

JG: From our point of view, the only feedstock that can make a difference in the next five years is palm. Aside from that, there is maybe 600 Mgy of available feedstock with soy that’s available, and all the available tallows.

BD: How much real production capacity is there in the US?

JG: There’s 2.2BG of installed capacity. But if we look at it closely, the vast bulk of that it sub 50Mgy capacity that was built with a debt component. The ability to turn on and generate working capital has to be in serious question at this point. They have asset value problems, zero margin problems, long term contract problems.

To produce a ton you have to come up with $1500 to sell something like $1550 in biodiesel, so an operator might need as much as $60M every 30 days – you need the capital lines. Meanwhile, the banks got stuck with the deals, the bulk of those participants with stars in their eyes, who thought you could get into biodiesel based on good old fashioned leverage. Well, in our view, the small refineries can’t operate. Only two sectors can: the integrated players like ADM Cargill, and Bunge. Plus, maybe the likes of the REGs with their stronger balance sheet, and some small guys with microeconomics because of local mandates, subsidies, or low-cost feedstock in small quantities. Overall, we see 500-600 Mgy of operating capacity.

BD: What do you hear from the players on the sidelines?

JG: We get approached daily for tolling arrangements, bankers with assets that are far underwater, and now sitting idle at least 7-8 months. It would take something like a $3 RIN, to make a $7 gallon, to get o the point where some people can turn on some capacity there.