Renewable Diesel: Biodiesel' s Nightmare

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.

U.S. Biodiesel Consumption:

Source: National Biodiesel Board.

How big could the biodiesel business get? With U.S. 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 United States. There are many other potential feedstocks for biodiesel, but soy oil accounts for most of U.S. 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 (COP) announced a deal with Tyson Foods (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. It developed its 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 it refers to the process as a "proprietary thermal depolymerization production technology" and the fact that it is 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 its 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 the 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.

Comments

[vcsillag:]

I would be interested hearing from you about Bluefire Ethanol BFRE.OB
They use a feeding stock from garbage and it seems to me, that, that is the most economical.
Thanks
[e-mail]

2007 Aug 13 11:42 AM

[soarbird:]

Why does Tyson mention SYNM as their JV partner in Tysons 8-Aug-2007 Form 10-Q for TYSON FOODS INC, I Chevron also involved with SYNM?

In June 2007, the Company, along with Syntroleum Corporation, announced the formation of Dynamic Fuels LLC, a 50/50 joint venture, which will produce synthetic fuels targeting the renewable diesel, jet and military fuel markets. Tyson anticipates total initial capital spending of approximately $75 million for the construction of the initial facility, which is 50% of the estimated cost to construct the first facility. Construction is expected to begin in fiscal 2008 and continue through fiscal 2009, with production targeted for 2010. The Company continues to evaluate additional international and domestic growth opportunities.

2007 Aug 13 02:37 PM

[sicophiliac:]

I think as long as diesel is 3 + dollars a gallon, there will be room for both biodiesel and "renewable" diesel. If one is economical at 1 dollar a gallon vs 2 dollars a gallon they will still both demand the market rate give or take for the product. Am I right? Also its not like this renewable diesel is going to have a limitless feedstock, raising cattle or livestock and processing animal fats and meat is energy intensive. What is happening it seems is that they are like BFRE mentioned above, capturing energy that would typically have been waisted. Given that animal fat is a waste product (at least i think so) anyways.

2007 Aug 14 12:48 AM

[Tom Konrad:]

Both biodiesel and renewable diesel have essentially unlimited demand... the constraint is feedstock, and the question is, if they can use the same feedstocks, which process will prove to be the most economical way to do so. So far, renewable diesel is only being used for animal fats, but if the process can be made to work with vegetable oils as well, that is what biodiesel producers need ot worry about.

2007 Aug 15 04:31 PM

[alpha24seven:]

Whole lot of "whens and ifs" in there. As you mentioned that "details are sketchy", I'd like to see some real numbers regarding output and process. For example, how much water is needed?

Another thing, what would this do to already limited refining capacity? If you simply add another product to refine in the capacity constrained conventional refinery, then you aren't really getting anywhere because we don't have enough conventional refining capacity as it is. If you need to build a new refining facility to process "green diesel" and traditional diesel -- well good luck. NIMBY comes to mind and costs to build a new conventional refinery are far more than building a biodiesel refinery (my understanding)

We need more information before we can classify this as anything more than a "maybe".

2007 Aug 15 02:21 PM

[Tom Konrad:]

Limited refining capacity should not be a constraint here... fats and oils can simply replace higher priced crude oil in the existing refieries. But yes, this is one big maybe. When an idea is a certainty, there is no longer much potential to make money by using it as part of your investment strategy.

2007 Aug 15 04:34 PM