I believe that there is and will be a healthy market for biodiesel in the Pacific Northwest. It’s all about mastering the fundamentals, which includes tax incentives, segmenting market demand, understanding distribution infrastructure, and exploiting Big Oil’s built-in limitations. Oh, and of course, tapping in to the desire of consumers to replace foreign oil with domestic energy sources that help Americans and the planet. Americans seem to understand now that sending our manufacturing jobs overseas has not provided a long-term positive for our own economy and so the pendulum for wanting to keep jobs at home is swinging back. The power of that paradigm shift cannot be overstated.
"For the first time in a long time there are some financial incentives to attract manufacturing in the U.S.,"
Source: Roger Efird, president of Suntech America, a subsidiary of the world's largest solar power company, based in China.
And while developing a small footprint (sub 2MMgy) biodiesel processing plant may be counter to conventional wisdom, what follows are my arguments for why an opportunity is revealing itself now to create a long-term, sustainable business in biodiesel processing through plants that have annual production capacity of less than two million gallons.
In recent years, several new Federal laws designed to increase the production and consumption of domestic biofuels have been enacted. The Energy Policy Act of 2005 established the Renewable Fuel Standard, which mandated that transportation fuels sold in the United States contain a minimum volume of renewable fuels, the level of which increases yearly until 2022. In December 2007, the Energy Independence and Security Act of 2007 increased the mandatory levels of renewable fuel blending credits to a total of 36 billion gallons by 2022, including 16 million gallons of cellulosic biofuels. By comparison, in 2007, the United States consumed 6.8 billion gallons of ethanol and 491 million gallons of biodiesel.
Biodiesel consumption is predicted to increase to 1.2 billion gallons by 2030, or approximately only 1.5% of total diesel consumption. Consumption of renewable diesel, made from cellulosic materials, is expected to substantially exceed biodiesel consumption by 2030.
But this is only part of the story.
The big trend is this: Petroleum refining capacity in the United States has been declining since the late 1960s. Petroleum demand has been increasing. So, a massive gap between the decreasing supply of refined oil and the increasing demand has been created. Domestic supplies, then, have been made up by foreign imports of refined oil products. Americans love the oil, they’ve just lost their appetite for foreign oil. There are only two choices: add more refining capability, which we likely won’t do as no one wants a new refinery in their backyard, or build smaller refineries using domestic oil stocks. If we are going to build refining capacity, we might as well refine our own feedstocks rather than buy them from governments in the Middle East and South America.
Note: Any American who believes that our energy needs are being appropriately provided by the status quo – especially with regard to petroleum – is either naïve or purposely acting counter to our national interests. The fact is, petroleum is not the answer to our long-term energy needs. We must develop more local, closed-loop energy solutions that remove the myriad threats posed by our continued reliance on petroleum and its byproducts.
The arguments for and against biodiesel in particular and biofuels in general are many and complex. The arguments in favor of biodiesel are simple. Here are just a few…
1. BOTH CANADA AND THE UNITED STATES ARE INVESTING IN BIOFUEL INNOVATIONS AT PARADIGM-SHIFTING RATES. Paralleling efforts in the U.S. to expand the use of biodiesel, the Canadian Parliament last year passed a Renewable Fuel Standard (RFS) requiring biodiesel sold in Canada to contain an average of 2% renewable content, in the diesel supply. Four years ago, there was no significant market for biodiesel in North America, now both nations are aggressively trying to stimulate the growth of biodiesel production.
According to the National Biodiesel Board, there has been a nationwide explosion of biodiesel production in the past few years. The National Biodiesel Board, an industry trade group, estimates the 176 refineries that were functioning in 2008 produced 700 million gallons of biodiesel -- a 1,300 percent increase over 1999 production. That trend is expected to slow, but there will be continued growth, with at least 39 plants under construction and biofuel regulations either existing or proposed in nearly every state. But biodiesel's long-term future is clouded by, among other things, the availability of raw material for the alternative fuel.
The reasons why governments in Canada and the U.S. and Canada are doing this are simple. In biodiesel, everyone wins. The farmers. The entrepreneurs. The consumers. And, most importantly, the politicians who want to keep their jobs. There is simply no real political or economic downside. It could be argued (and it is by many) that the current price of petro-diesel, which is higher by several cents than gasoline, means that biodiesel is going to be unattractive to consumers for a good while longer. But, that is only a small part of the picture. It ignores the fact that the vast majority of petro-diesel is consumed by businesses like truck fleets, river and ocean shipping, Over the long-term, biodiesel production will provide a wide variety of economic and environmental benefits that cannot be ignored.
2. THE ECONOMIC RECOVERY IS ABOUT ONE THING: JOB CREATION. Renewable fuels provide a major source of economic opportunity. New green jobs are already being created. Expanded production will equal increased industrial and commercial development. Perhaps most excitingly, renewable fuels will spark economic expansion for farm families and the forestry sector - which will provide the feedstocks for new fuels that we harvest, rather than extract. Re-creating jobs in the forestry and agriculatural sectors in the Pacific Northwest is politically attractive.
The Portland Development Commission (PDC) commissioned a study two years ago to evaluate crops that have the highest potential as a biodiesel feedstock and where they may be grown in Oregon. The PDC did this, in part, to demonstrate to the majority of the state – which is rural – that it could be a partner in providing win-win economic solutions for not just city dwellers, but rural as well. The report examined the viability of a Portland-based biodiesel refinery with a capacity of one half million gallons annually as a starting point. Canola was the feedstock focal point because of its hardiness as a seed oil crop in many parts of Oregon.
3. THERE IS A LOT OF MONEY BEING PUT INTO THE “GREEN ECONOMY.” The U.S. plans to spend $50-$100 billion in economic stimulus funds for extended renewable energy tax credits, building efficiency retrofits, subway and light rail projects, and environmental restoration programs. Many of these programs intersect with the business of biodiesel. In particular, the U.S. Department of Energy is providing loan guarantees up to 80% of the project costs. States are also providing incentives. A list of some of those incentives is attached.
4. OUR BIGGEST LONG-TERM COMPETITOR, BIG OIL, IS ALSO LIKELY OUR MOST SIGNIFICANT LONG-TERM PARTNER PROVIDING A CLEAR POSSIBLE EXIT OPPORTUNITY. Large petroleum processors like ExxonMobil, Marathon Oil and ConcocoPhillips have a right to be concerned about the proliferation of biofuels processing in the United States. It’s only my opinion, but It could be argued that a conspiracy is being led by Big Oil to kill the budding biofuels industry by, among other things, stifling production of petroleum in the near-term. They are also trying to drive up prices for their own products, but if it harms the nascent biofuels market that can’t be bad for them either.
Big Oil’s greatest threat is our greatest asset and that is this. Big Oil has a finite amount of refining capacity for at least the next ten years. No new refineries have been developed in the United States since 1976 and it can take a decade or more to build a new one. In early 2009, many larger refineries cut capital investments by billions of dollars, so capacity will not be able to come online quickly once the economy inevitably turns around.
Even in the worst-case scenario where the economy does not start growing again for another five years, petroleum refinery capacity will not be much different from what it is now. This means that prices for petroleum will inevitably rise which leads to more dependence on foreign stocks ultimately. That is not a sustainable model for the United States in the long-run.
5. SMALL BIOFUEL REFINERIES THAT ARE CLOSE TO THEIR FEEDSTOCKS SIMPLY MAKE SENSE. In a late November 2008 report, widely cited by media around the world, Merrill Lynch analysts shared a belief that energy markets today are mostly centralized, thus decentralized energy generation is evolving toward a horizontal, distributed industry. That’s a fancy way of saying that “small is beautiful.” In Oregon, small biodiesel refineries can create local markets for farmers. They can create local jobs, which is attractive to local governments. They also reduce the costs of fuel eventually because one of the biggest costs for petroleum is in transportation.
Recent yield trials in the Willamette Valley have shown that available winter canola varieties can produce in excess of 4,000 lbs. of seed per acre. Other production regions under consideration are the Columbia Basin (dryland and irrigated), Central Oregon near Madras, and Northeast Oregon in the LaGrande area. Even though yields may be lower (2,000 to 3,000 lbs. per acre) outside the Willamette Valley, canola may serve as a valuable rotation crop in these areas.
In spite of recent media reports suggesting that biodiesel crops may be restricted from expanding in Oregon, growing demand is likely to ensure that just the opposite will occur. We can be a part of ensuring that Oregon continues to expand production limits which are due for reconsideration by Oregon Department of Agriculture crop regulators in September. There is a more technical reason, though, why Oregon is likely to expand canola crop expansion. Using canola in a crop rotation with grass seed and wheat benefits Oregon growers.
Canola plants have strong taproots that penetrate compacted soil layers that fibrous roots of grass seed and cereal crops cannot. Growing canola can significantly improve soil tilth and increase water infiltration rates in compacted soils, reducing tillage costs and improving performance of following crops. Including canola in the crop rotation will also help growers control grass weeds, which are becoming greater problems in both grass seed and wheat production. This is particularly important in the Willamette Valley where grass weeds have become a major problem in grass seed production fields, and growers have few non-grass crop rotation options.
6. ANOTHER SUPPORTING COROLLARY TO THE “SMALL IS BEAUTIFUL” SCENARIO INVOLVES THE DISTRIBUTED GROWTH OF SEED CRUSHING OPERATIONS. The use of small, decentralized mechanical oilseed crushers that extract vegetable oil without the use of solvents is a growing phenomenon. This concept has been used very successfully in Europe and Asia for local production of cooking oil, biodiesel, and oilseed meal for animal feed for decades. This technology allows extraction of oil on-farm or by small local enterprises, virtually eliminating transportation costs. Filtered, virgin oil is sold for edible or industrial use, and the meal is usually consumed by animals on-farm or sold to local dairies.
Advantages of On-Farm Oilseed Processing Facilities:
Low capital cost ($100,000 – $250,000)
No waste products
Minimal siting issues – on-farm or industrial sites will work
Small footprint and low power usage
Low raw material transportation and storage costs
Create rural jobs and value-added opportunity
There are, of course, some disadvantages to on-farm oilseed processing. These include, low throughput, possible quality control issues (no on-site lab) and high residual oil content ( 8-12%) remaining in the meal. But, mobile oilseed crushing units are already being considered as a potential solution to the problem. These mobile crushers would likely be able to quickly increase their capacity from about 200 gallons of oil per day to as much as 400 or more, thus making them economically-viable. Indeed, there may be another profitable business in this sector focused on bringing the crusher to the farm, rather than the seeds to the crusher.
7. OREGON’S BIGGEST INDUSTRY IS AGRICULTURAL PRODUCTS. WHY? BECAUSE WE HAVE A LOT OF LAND. According to state agricultural resources, Oregon can suitably grow as many as 300,000 acres of canola in the next few years on an annual basis. This represents a 100X increase in production from the current 3,000 acres. Our calculations show that for every 1MMgy of production, you’d need about 30,000 acres of canola in rotation. That can likely be cut by a significant amount if yields can be properly managed. As we do have such a large agricultural product base, we have a significant volume of relevant infrastructure for moving agricultural products to markets. These include strong networks of roads and rail transport, as well as the infrastructure that supports river movement of products along the Columbia – the fifth largest river in the world.
END NOTES
http://earthtrends.wri.org/text/energy-resources/variable-817.html
http://www.biodiesel.org/news/taxincentive/
