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Introduction

I teach a graduate class on biorenewables and students frequently ask me how the so-called "Shale Gas Revolution" will affect U.S. biorenewables in general and biofuels in particular. A common assumption is that biofuels will be negatively affected by this development, and I expect this view to become even more prevalent in light of Patriot Coal's Chapter 11 bankruptcy filing, which has been attributed in part to coal's inability to compete with cheap natural gas. After all, if inexpensive coal can't compete economically with shale gas as an energy source, then how can we expect our relatively undeveloped biomass reserves to fare any better? Furthermore, if biofuel producers fare best when the price of another fossil fuel, petroleum, is high, then won't they suffer when the price of natural gas is low?

While these are valid points, they ultimately fail to account for the crucial fact that many advanced biofuel pathways (i.e., those utilizing a feedstock other than corn) employ natural gas either directly as is or indirectly as a hydrogen source. The economic feasibility of these pathways should therefore increase as the price of natural gas falls due to reduced operating costs. This article quantifies the increase in the biofuel industry's economic feasibility resulting from the advent of inexpensive shale gas.

Biofuels and Natural Gas

Ethanol, which has historically been the focus of U.S. biofuel industry, is an imperfect transportation fuel due to its relatively high oxygen content. This causes ethanol to damage engines and fuel equipment unless it is blended with large amounts of gasoline prior to use ("gasohol"). It is also responsible for ethanol's low energy value relative to gasoline. Interest in the production of biobased hydrocarbons has increased greatly in recent years as a result of these deficiencies, as these can be refined to produce biobased gasoline (or "drop-in biofuels" due to their ability to utilize unmodified fuel infrastructures, unlike ethanol). Biomass contains up to 50% oxygen by weight (with the remainder comprised of carbon and hydrogen) and this must be removed during the production of biobased gasoline. While multiple deoxygenation routes exist, one of the more attractive options is to react the oxygen in biomass with hydrogen via a process known as hydrodeoxygenation, or hydroprocessing. Hydroprocessing allows the oxygen in biomass to be removed as water, leaving behind the carbon and hydrogen biomass components -- i.e., the building blocks of hydrocarbons. Steam reforming of natural gas accounts for 95% of U.S. hydrogen production [1] and this analysis therefore assumes that the hydrogen consumed during hydroprocessing is derived from natural gas.

A number of commercial-scale biofuel companies are expected to employ natural gas as an inexpensive source of hydrogen. KiOR (KIOR) produces an oxygenated bio-oil via the catalytic pyrolysis of biomass, which is deoxygenated and depolymerized (i.e., split into smaller molecules) into a gasoline blendstock via reaction with hydrogen. Honeywell International (HON) subsidiary UOP has developed a hydroprocessing route that is being used to produce both biobased gasoline and biobased diesel fuel (not to be confused with biodiesel). Ensyn-UOP joint venture Envergent will use UOP's technology to build 15 fast pyrolysis in Malaysia that will produce a bio-oil capable of being hydroprocessed into gasoline and diesel fuel. Rentech (RTK) uses natural gas and biomass and Sundrop Fuels uses biomass and natural gas-derived hydrogen as feedstocks in gasifiers for the production of a syngas that is then converted to biobased gasoline. Finally, the following U.S. producers all react hydrogen with lipids to produce diesel and jet fuels via lipids hydroprocessing:

  • Altair Fuels
  • Diamond Green Diesel [a JV between Valero (VLO) and Darling Intl. (DAR)]
  • Dynamic Fuels [a JV between Syntroleum (SYNM) and Tyson Foods (TSN)]

All of the above projects are notable in that they have commercial-scale biorefineries either in operation or under construction. Use of natural gas will therefore be widespread within the advanced biofuels sector in the near future.

Quantifying the Impact of Shale Gas on Biofuels

When addressing the question of how much of an impact falling natural gas prices will have on biofuel economic feasibility, it is useful to see how shale gas production has affected natural gas prices. The Energy Information Administration's Annual Energy Outlook provides natural gas price projections from before and after the advent of widespread shale gas production. The following figure shows the difference between the EIA's 2010 and 2012 AEOs:

Source: Annual Energy Outlook 2010; Annual Energy Outlook 2012

Increased shale gas production has caused natural gas projected prices to decline significantly, especially between 2012 and 2022.

I frequently use techno-economic process models of biofuel pathways to tease out information on pathway economic feasibility. While published models are not available for all of the pathways employed by the biofuel projects listed above, they are available for fast pyrolysis and hydroprocessing, which is similar but not identical to the catalytic pyrolysis and hydroprocessing pathway employed by KiOR. For this analysis I look at the production of both biofuels [2] and commodity chemicals [3] via fast pyrolysis and hydroprocessing. While biofuel production is the nominal focus of this analysis, it is helpful to also look at the production of commodity chemicals (i.e., petrochemicals derived from biomass rather than petroleum) due to the recent trend of biofuels producers switching to chemicals production and its greater profit margins [3]. Modified Excel versions of both models are employed to calculate the 20-year internal rate of return for 2000 metric ton per day biorefineries employing each pathway under the AEO 2010 and AEO 2012 natural gas price scenarios. A higher IRR represents greater economic feasibility.

The results of this analysis show that lower natural prices resulting from increased shale gas production will have a significant positive impact on the fast pyrolysis pathway's economic feasibility:

20-year IRRs for biofuels and chemicals production under two NG price scenarios
Biofuels IRR (%)Chemicals IRR (%)
AEO 20104.39.9
AEO 20128.813.2

A similar result can be assumed for the lipids hydroprocessing pathway due to the operational similarities between bio-oil hydroprocessing and lipids hydroprocessing. It is more difficult to quantify the impact on economic feasibility for the aforementioned gasification companies due to their use of natural gas and hydrogen as feedstocks rather than hydroprocessing inputs, although it is most likely positive due to their use of either natural gas or hydrogen as inputs.

Conclusion

A number of advanced biofuel projects in the U.S. employ natural gas either directly as is or indirectly as a hydrogen source. These projects will benefit from the long-term fall in natural gas prices resulting from increased shale gas production. As a result, public biofuel companies and other public companies engaged in biofuel projects such as Darling Intl., Honeywell, KiOR, Rentech, Syntroelum, Rentech, Tyson Foods, and Valero are expected to indirectly benefit from increased shale gas production. While the shale gas revolution is not alone sufficient to make these biofuel projects economically viable, their economic feasibility is greater than it was before the widespread production of shale gas. Investors (as opposed to traders) in these companies should keep an eye on shale gas production and projected natural gas prices as a result.

References

[1] Spivey, J. and Egbebi, A. 2007. Heterogeneous catalytic synthesis of ethanol from biomass derived syngas, Chemical Society Reviews (36): 1514-1528.

[2] Wright, M., Daugaard, D., Satrio, J., and Brown, R. 2010. Techno-economic analysis of biomass fast pyrolysis to transportation fuels, Fuel (89): S2-S10.

[3] Brown, T., Zhang, Y., Hu, G., and Brown, R. 2012. Techno-economic analysis of biobased chemicals production via integrated catalytic processing, Biofuels, Bioproducts and Biorefineries (6): 73-87.

Disclosure: I am long KIOR.

Source: Advanced Biofuels And The Shale Gas Revolution