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Congress Kills a Biofuel Project

If we are to seriously encourage a move to biofuels, incentives are going to be required because the economics of biofuels just can’t compete with petroleum (regardless of what Vinod Khosla thinks). Eventually depletion will cause petroleum to become very expensive, and then the economics of certain biofuels (especially those with the best energy returns) are going to start looking a lot better. But if depletion occurs quickly, we are going to wish that we had provided encouragement for all sorts of alternatives. Of course not all alternatives are created equally, and there are often unintended consequences to deal with. But overall, Congress and now two administrations in a row have shown overwhelming support for incentivizing biofuel production. There is, however, one glaring exception.

I have posed the question before of whether it ever makes sense to offer subsidies to oil companies. I would argue that it does if you want oil companies to do something that economics would otherwise argue against. As an example, let’s say in the name of energy security that Congress thought it was a good idea for oil companies to invest in solar. The oil companies wouldn’t be interested if production costs are higher than the price they expect to get for the panels. The only way Congress would convince them that they should do this is by offering an incentive to do so. Oil companies are not going to otherwise make decisions that are counter to the bottom line (unless of course they are mandated to do it, and that’s another matter altogether).

Such is the case with renewable diesel. Broadly speaking, there are two different kinds of renewable diesel. Biodiesel is normally produced by reacting methanol with animal fats or vegetable oil. (See the process description at Wikipedia). The product is actually an alkyl ester. More simply put, the product contains oxygen, and is structurally different from petroleum diesel. The structural differences can cause some problems in cold weather, and this limits the amount of biodiesel that can be blended into petroleum diesel.

The second kind of diesel is green diesel, which is chemically equivalent to petroleum diesel. This product contains no oxygen, and can be blended in any proportion with petroleum diesel. It can be made via gasification from any biomass (see the Choren process) or by hydrocracking the same fats and oils that you use to produce biodiesel. Besides the structural differences in the product, biodiesel results in a glycerin by-product whereas green diesel results in a propane by-product. (All of this is explained in more detail in my Renewable Diesel Primer).

In 2007, ConocoPhillips (Full disclosure: This is my former employer) and Tyson Foods announced a partnership in which COP would hydrocrack waste animal fats and oils provided by Tyson to make green diesel. Costs of production were around $40/bbl higher than for producing conventional diesel, but COP was able to take advantage of the $1/gal tax credit that Congress had put in place for renewable diesel to bring the costs down to parity with petroleum. Whereas corn farmers love our ethanol policy, ranchers were happy with this announcement because it afforded them an opportunity to participate in the biofuels market. Tyson Foods was also happy to have another outlet for their oils, as this would take some of the sting out of higher corn prices which had cut into their bottom line.

The fact that an oil company would benefit from “their” tax credit sent the biofuel lobby into a tizzy. They asked why an oil company should be allowed a tax credit for doing this. My answer was the same one I have earlier: To get them to do something that wouldn’t otherwise make economic sense. We can have a different debate on the wisdom of the incentive itself (i.e., unintended consequences), but if the goal is to incentivize the production of biofuels, you shouldn’t selectively decide who gets the tax credit. The 1st generation biodiesel industry wanted special treatment (a $1/gallon subsidy advantage over anyone else who might like to compete against them) and they cranked up the lobbying machine.

Democrats were particularly outraged, with Lloyd Doggett of Texas suggesting that oil companies benefiting from this tax credit was a case of legislative abuse. (Especially ironic that he is going after a Texas company, mostly to the benefit of companies operating outside of Texas). They promised to correct this by making sure only targeted companies (i.e., anyone but oil companies) could take advantage of the credit. While ConocoPhillips explained that this project would simply not be profitable without the credit, the Senate called them on it and voted to kill the tax credit. The assumption is that they either thought oil companies would subsidize a money-loser from some of their more profitable divisions, or they simply didn’t want oil companies to produce biofuel. The first assumption is naive, and the second implies that this isn’t about energy security at all, but about favoring special interests.

Yesterday, COP followed through by announcing that they were indeed going to idle the project. This is certainly a victory for less efficient 1st generation biodiesel producers, and it should also be a warning to those who think 1st generation corn ethanol is going to naturally lead to 2nd generation cellulosic ethanol. Besides the technical challenges in getting cellulosic to work commercially, cellulosic producers are going to run up against those same vested interests who wish to see the status quo maintained, and who will lobby to prevent anyone from taking away their market share.

I will repeat what someone wrote to me when Congress first announced their intentions to deny the credit: “It ain’t about the fuel… it’s about a piece of the pie.”

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May 14, 2009 - Posted by | biodiesel, ConocoPhillips, green diesel, Tyson Foods

49 Comments

  1. Tyson is free to make a deal with a non-oil company. Of course they won’t have the diesel distribution network that an oil company has.

    Comment by robert | May 14, 2009

  2. Tyson is free to make a deal with a non-oil company. Of course they won’t have the diesel distribution network that an oil company has.

    Comment by robert | May 14, 2009

  3. Tyson is free to make a deal with a non-oil company. Of course they won’t have the diesel distribution network that an oil company has.

    Comment by robert | May 14, 2009

  4. Interesting point.

    An Oil Company should be able to qualify for the same subsidy. I’m sure that there are a number of oil companies who are finding less opportunities to get good oil projects due to technically harder to get oil, depleting existing stocks and working with countries just aren’t worth the risk.
    If they can diversify and it makes $ sense I’m sure they want to .

    The question is that will Biofuels become competitive against 60-70 dollar oil as projects scale and technology matures.

    Hopefully we are subsidizing plans where that will eventually happen.

    Perhaps some $ should be spent on carbon fiber research, engine and pump efficenty work, and improved efficentcy.

    I think there would be a benefit to help utilities share in their own energy savings rather that being cost plus with no $ incentives to improve.

    I also imagine there are a number of offshore drilling projects that would not of got started without subsidies. ( conjecture)

    Comment by takchess | May 14, 2009

  5. Interesting point.

    An Oil Company should be able to qualify for the same subsidy. I’m sure that there are a number of oil companies who are finding less opportunities to get good oil projects due to technically harder to get oil, depleting existing stocks and working with countries just aren’t worth the risk.
    If they can diversify and it makes $ sense I’m sure they want to .

    The question is that will Biofuels become competitive against 60-70 dollar oil as projects scale and technology matures.

    Hopefully we are subsidizing plans where that will eventually happen.

    Perhaps some $ should be spent on carbon fiber research, engine and pump efficenty work, and improved efficentcy.

    I think there would be a benefit to help utilities share in their own energy savings rather that being cost plus with no $ incentives to improve.

    I also imagine there are a number of offshore drilling projects that would not of got started without subsidies. ( conjecture)

    Comment by takchess | May 14, 2009

  6. Interesting point. An Oil Company should be able to qualify for the same subsidy. I’m sure that there are a number of oil companies who are finding less opportunities to get good oil projects due to technically harder to get oil, depleting existing stocks and working with countries just aren’t worth the risk.If they can diversify and it makes $ sense I’m sure they want to . The question is that will Biofuels become competitive against 60-70 dollar oil as projects scale and technology matures. Hopefully we are subsidizing plans where that will eventually happen. Perhaps some $ should be spent on carbon fiber research, engine and pump efficenty work, and improved efficentcy. I think there would be a benefit to help utilities share in their own energy savings rather that being cost plus with no $ incentives to improve. I also imagine there are a number of offshore drilling projects that would not of got started without subsidies. ( conjecture)

    Comment by takchess | May 14, 2009

  7. “I also imagine there are a number of offshore drilling projects that would not of got started without subsidies.”

    I almost used that as my example, but was afraid someone would misinterpret and think I was arguing for subsidies for offshore drilling. So I went with the solar example.

    RR

    Comment by Robert Rapier | May 14, 2009

  8. “I also imagine there are a number of offshore drilling projects that would not of got started without subsidies.”I almost used that as my example, but was afraid someone would misinterpret and think I was arguing for subsidies for offshore drilling. So I went with the solar example.RR

    Comment by Robert Rapier | May 14, 2009

  9. Also here was a company who I felt had a interesting and substainable model but might of done better if run by an Oil/Gas Company.

    E3 Biofuels is about to fire up the most energy-efficient corn ethanol facility in the country: a $75 million state-of the-art biorefinery and feedlot capable of producing 25 million gallons of ethanol a year. What’s more, it will run on methane gas produced from cow manure. The super-efficient operation capitalizes on a closed loop of resources available here on the prairie – cattle (fed on corn), manure (from the cows), and corn (fed into the ethanol distiller). The output: a potential gusher of renewable, energy-efficient transportation fuel.

    Now it is in chapter 11 and a big part is that they suffered multiple explosions. I wonder if that would of happened if this was run by a company with Oil/Gas Process Experience.

    Comment by takchess | May 14, 2009

  10. Also here was a company who I felt had a interesting and substainable model but might of done better if run by an Oil/Gas Company.

    E3 Biofuels is about to fire up the most energy-efficient corn ethanol facility in the country: a $75 million state-of the-art biorefinery and feedlot capable of producing 25 million gallons of ethanol a year. What’s more, it will run on methane gas produced from cow manure. The super-efficient operation capitalizes on a closed loop of resources available here on the prairie – cattle (fed on corn), manure (from the cows), and corn (fed into the ethanol distiller). The output: a potential gusher of renewable, energy-efficient transportation fuel.

    Now it is in chapter 11 and a big part is that they suffered multiple explosions. I wonder if that would of happened if this was run by a company with Oil/Gas Process Experience.

    Comment by takchess | May 14, 2009

  11. Also here was a company who I felt had a interesting and substainable model but might of done better if run by an Oil/Gas Company. E3 Biofuels is about to fire up the most energy-efficient corn ethanol facility in the country: a $75 million state-of the-art biorefinery and feedlot capable of producing 25 million gallons of ethanol a year. What’s more, it will run on methane gas produced from cow manure. The super-efficient operation capitalizes on a closed loop of resources available here on the prairie – cattle (fed on corn), manure (from the cows), and corn (fed into the ethanol distiller). The output: a potential gusher of renewable, energy-efficient transportation fuel.Now it is in chapter 11 and a big part is that they suffered multiple explosions. I wonder if that would of happened if this was run by a company with Oil/Gas Process Experience.

    Comment by takchess | May 14, 2009

  12. Other than subsidized, I don’t see much of a future for biofuels. PHEVs, BEVs, and natural gas can all survive in the market. Thrive, if oil can ever stay above $80.
    Why biofuels?
    That is getting to be a good question.

    Comment by Anonymous | May 14, 2009

  13. Other than subsidized, I don’t see much of a future for biofuels. PHEVs, BEVs, and natural gas can all survive in the market. Thrive, if oil can ever stay above $80. Why biofuels? That is getting to be a good question.

    Comment by Anonymous | May 14, 2009

  14. takchess,
    E3 is going to fire up that plant again? I read that they fired it up in 2007 and then shut it down and filed for bankruptcy in 2007. It looks like they haven’t updated their website since. I can’t find any news from them in the past year. Where did you hear/read that they’re firing up a plant soon?

    Comment by Clee | May 14, 2009

  15. takchess,
    E3 is going to fire up that plant again? I read that they fired it up in 2007 and then shut it down and filed for bankruptcy in 2007. It looks like they haven’t updated their website since. I can’t find any news from them in the past year. Where did you hear/read that they’re firing up a plant soon?

    Comment by Clee | May 14, 2009

  16. takchess,E3 is going to fire up that plant again? I read that they fired it up in 2007 and then shut it down and filed for bankruptcy in 2007. It looks like they haven’t updated their website since. I can’t find any news from them in the past year. Where did you hear/read that they’re firing up a plant soon?

    Comment by Clee | May 14, 2009

  17. Under my net metering agreement, I swap fifty cent kilowatthours to the utility and they give me five cent kwhs in exchange. But they paid a third of the cost of the project to be in this position. So it’s win- win for everybody. The people getting a subsidy are the folks running their air conditioner on 50 cent kWhs and paying 15 cents for them.

    Today Washington is dropping money out of helicopters as part of the economic recovery plan. Back then I got two grand from the feds which is 5% of the cost. I got nothing from the taxpayers of California since my rebate came from a municipal utility.

    It costs $8/watt for solar capacity and $8/watt for nuclear capacity. The problem with pointing out the nuke produces power at 2am is those kwhs are worth little to nothing. They’re likely to be dumped into a load resistor to get rid of them.

    Comment by robert | May 14, 2009

  18. Under my net metering agreement, I swap fifty cent kilowatthours to the utility and they give me five cent kwhs in exchange. But they paid a third of the cost of the project to be in this position. So it’s win- win for everybody. The people getting a subsidy are the folks running their air conditioner on 50 cent kWhs and paying 15 cents for them.Today Washington is dropping money out of helicopters as part of the economic recovery plan. Back then I got two grand from the feds which is 5% of the cost. I got nothing from the taxpayers of California since my rebate came from a municipal utility.It costs $8/watt for solar capacity and $8/watt for nuclear capacity. The problem with pointing out the nuke produces power at 2am is those kwhs are worth little to nothing. They’re likely to be dumped into a load resistor to get rid of them.

    Comment by robert | May 14, 2009

  19. @ takechess

    [i]E3 Biofuels is about to fire up the most energy-efficient corn ethanol facility in the country:[/i]

    This will be a repeat for long time readers but for new readers …

    E3 was a client of my neighbor, who is a ruminant technician at UNL who provided some details I haven’t seen in print yet.

    One of the details is that the company who sold the boiler that blew up was a very small outfit. It was a ‘turnip’ and there was no blood to be squeezed out of the company to recoop damages.

    So this is probably a good case study that lends credence to your sentiment ‘might of done better if run by an Oil/Gas Company’

    RBM

    Comment by Anonymous | May 14, 2009

  20. @ takechess

    [i]E3 Biofuels is about to fire up the most energy-efficient corn ethanol facility in the country:[/i]

    This will be a repeat for long time readers but for new readers …

    E3 was a client of my neighbor, who is a ruminant technician at UNL who provided some details I haven’t seen in print yet.

    One of the details is that the company who sold the boiler that blew up was a very small outfit. It was a ‘turnip’ and there was no blood to be squeezed out of the company to recoop damages.

    So this is probably a good case study that lends credence to your sentiment ‘might of done better if run by an Oil/Gas Company’

    RBM

    Comment by Anonymous | May 14, 2009

  21. @ takechess[i]E3 Biofuels is about to fire up the most energy-efficient corn ethanol facility in the country:[/i]This will be a repeat for long time readers but for new readers …E3 was a client of my neighbor, who is a ruminant technician at UNL who provided some details I haven’t seen in print yet. One of the details is that the company who sold the boiler that blew up was a very small outfit. It was a ‘turnip’ and there was no blood to be squeezed out of the company to recoop damages.So this is probably a good case study that lends credence to your sentiment ‘might of done better if run by an Oil/Gas Company’RBM

    Comment by Anonymous | May 14, 2009

  22. Vested interests strike again! I am beginning to think that vested interests, and their lobbyists are the biggest threat to America. This powerful resistance to change is changing the fabric of the nation. And not for the better.

    Bland idiotic prostitutians are, of course, the manure that fetilizes these evil weeds.

    Comment by Optimist | May 14, 2009

  23. Vested interests strike again! I am beginning to think that vested interests, and their lobbyists are the biggest threat to America. This powerful resistance to change is changing the fabric of the nation. And not for the better.Bland idiotic prostitutians are, of course, the manure that fetilizes these evil weeds.

    Comment by Optimist | May 14, 2009

  24. Sorry, the note on E3 was from a year or so ago. I only included it for the discription of what I thought was a substainable model. I don’t know of any plans to reopen.

    Comment by takchess | May 15, 2009

  25. Sorry, the note on E3 was from a year or so ago. I only included it for the discription of what I thought was a substainable model. I don’t know of any plans to reopen.

    Comment by takchess | May 15, 2009

  26. Sorry, the note on E3 was from a year or so ago. I only included it for the discription of what I thought was a substainable model. I don’t know of any plans to reopen.

    Comment by takchess | May 15, 2009

  27. The E3 system struck me as overly complex, something RR has commented on before as adding to cost of production.

    I still think the simple improvement to E3 is to scrap the ethanol plant, feed the corn to the cows, and use the biogas to generate electricity. As is done on many farms.

    Comment by Optimist | May 15, 2009

  28. The E3 system struck me as overly complex, something RR has commented on before as adding to cost of production.

    I still think the simple improvement to E3 is to scrap the ethanol plant, feed the corn to the cows, and use the biogas to generate electricity. As is done on many farms.

    Comment by Optimist | May 15, 2009

  29. The E3 system struck me as overly complex, something RR has commented on before as adding to cost of production.I still think the simple improvement to E3 is to scrap the ethanol plant, feed the corn to the cows, and use the biogas to generate electricity. As is done on many farms.

    Comment by Optimist | May 15, 2009

  30. This is similar to the bias that Obama and Congress have towards anything in the O&G industry. They seem to want to move forward with clean coal, but seem to want to restrict domestic O&G wherever possible. That makes absolutely no sense. Are clean coal BTUs better or cleaner than petroleum? GHG emissions from natural gas have been shown by DoE and EPA and others to be way better than ethanol, and way cleaner than clean coal – what's not to like about that?? If Obama wants science-based policy, he needs to get off his Anything But Oil jag.

    Comment by Anonymous | May 15, 2009

  31. This is similar to the bias that Obama and Congress have towards anything in the O&G industry. They seem to want to move forward with clean coal, but seem to want to restrict domestic O&G wherever possible. That makes absolutely no sense. Are clean coal BTUs better or cleaner than petroleum? GHG emissions from natural gas have been shown by DoE and EPA and others to be way better than ethanol, and way cleaner than clean coal – what's not to like about that?? If Obama wants science-based policy, he needs to get off his Anything But Oil jag.

    Comment by Anonymous | May 15, 2009

  32. This is similar to the bias that Obama and Congress have towards anything in the O&G industry. They seem to want to move forward with clean coal, but seem to want to restrict domestic O&G wherever possible. That makes absolutely no sense. Are clean coal BTUs better or cleaner than petroleum? GHG emissions from natural gas have been shown by DoE and EPA and others to be way better than ethanol, and way cleaner than clean coal – what's not to like about that?? If Obama wants science-based policy, he needs to get off his Anything But Oil jag.

    Comment by Anonymous | May 15, 2009

  33. Blaming Obama? Congress passed the law under Bush

    Comment by Anonymous | May 15, 2009

  34. Blaming Obama? Congress passed the law under Bush

    Comment by Anonymous | May 15, 2009

  35. Blaming Obama? Congress passed the law under Bush

    Comment by Anonymous | May 15, 2009

  36. Another solar failure:

    http://www.detnews.com/article/20090515/METRO/905150392/1448/LIFESTYLE14/Troy-s-celebrated-solar-house-left-in-dark

    “They’re likely to be dumped into a load resistor to get rid of them.”

    That is a new one, what is a load resistor in the contest of dumping?

    Power plants only produce electricity on demand. Here are some links to demand curves from California, France, Midwest (PJM provides bidding numbers), and mid Atlantic.

    http://www.caiso.com/outlook/SystemStatus.html
    http://www.rte-france.com/htm/an/accueil/courbe.jsp
    http://www.midwestiso.org/page/Real+Time+Info+(EOR)
    http://www.pjm.com/

    Here is the best solar plant in the US:
    http://www.tep.com/Green/GreenWatts/SolarHistorical.php?p=1242280800

    and not so good:

    http://www.google.com/corporate/solarpanels/home

    By observation over many years, solar does not make electricity when customers need it, even in California

    Comment by Kit P | May 15, 2009

  37. Another solar failure:http://www.detnews.com/article/20090515/METRO/905150392/1448/LIFESTYLE14/Troy-s-celebrated-solar-house-left-in-dark “They’re likely to be dumped into a load resistor to get rid of them.”That is a new one, what is a load resistor in the contest of dumping?Power plants only produce electricity on demand. Here are some links to demand curves from California, France, Midwest (PJM provides bidding numbers), and mid Atlantic.http://www.caiso.com/outlook/SystemStatus.html http://www.rte-france.com/htm/an/accueil/courbe.jsp http://www.midwestiso.org/page/Real+Time+Info+(EOR) http://www.pjm.com/ Here is the best solar plant in the US:http://www.tep.com/Green/GreenWatts/SolarHistorical.php?p=1242280800 and not so good:http://www.google.com/corporate/solarpanels/home By observation over many years, solar does not make electricity when customers need it, even in California

    Comment by Kit P | May 15, 2009

  38. People are basically sheep and politicans know how to take advantagve of that. Oil companies are the bad guys and passing bills like this allow senators and congressmen to stand on a platform and shake their fist at someone.

    Comment by laur | May 15, 2009

  39. People are basically sheep and politicans know how to take advantagve of that. Oil companies are the bad guys and passing bills like this allow senators and congressmen to stand on a platform and shake their fist at someone.

    Comment by laur | May 15, 2009

  40. http://www.google.com/corporate/solarpanels/home

    Comment by robert | May 15, 2009

  41. http://www.google.com/corporate/solarpanels/home

    Comment by robert | May 15, 2009

  42. Solar isn’t dispatchable power but neither is nuclear. Solar panel produce power between 6am and 6pm. Peak demand is around 3pm where panels produce peak power at 12pm. It isn’t an exact match but it is close. I have two solutions to make the power match even better. One is to cool our houses in the morning which only helps if they have thermal mass. The second one is to build an HVDC line from Arizona to the eastern timezone.

    Comment by robert | May 15, 2009

  43. Solar isn’t dispatchable power but neither is nuclear. Solar panel produce power between 6am and 6pm. Peak demand is around 3pm where panels produce peak power at 12pm. It isn’t an exact match but it is close. I have two solutions to make the power match even better. One is to cool our houses in the morning which only helps if they have thermal mass. The second one is to build an HVDC line from Arizona to the eastern timezone.

    Comment by robert | May 15, 2009

  44. “The second one is to build an HVDC line from Arizona to the eastern timezone.”

    Robert is missing the obvious fact that power flow is into California from coal and nuclear. Robert apparently ignores winter. That is when the earth tilts away from the sun in the northern hemisphere. It gets cold at night.

    Comment by Kit P | May 15, 2009

  45. “The second one is to build an HVDC line from Arizona to the eastern timezone.”

    Robert is missing the obvious fact that power flow is into California from coal and nuclear. Robert apparently ignores winter. That is when the earth tilts away from the sun in the northern hemisphere. It gets cold at night.

    Comment by Kit P | May 15, 2009

  46. “The second one is to build an HVDC line from Arizona to the eastern timezone.”Robert is missing the obvious fact that power flow is into California from coal and nuclear. Robert apparently ignores winter. That is when the earth tilts away from the sun in the northern hemisphere. It gets cold at night.

    Comment by Kit P | May 15, 2009

  47. According to Nellis Air Force Base performance monitoring of their single axis tracking photovoltaic array,
    http://mypowerlight.com/Commercial/Kiosk.aspx?id=1dd14d57-7840-4b2d-af0a-0fe0fdd5c872
    46.41 GWh of energy was produced since system installation a year and a half ago in Nov 2007 on a system with 14.02 MW peak rating.
    Capacity factor is 46410 MWH / (14.02 MW x 24 h/day x 365 day/year x 1.5 year) = 25% capacity factor, which would seem to beat Springerville’s fixed array’s capacity factor.

    Comment by Clee | May 16, 2009

  48. According to Nellis Air Force Base performance monitoring of their single axis tracking photovoltaic array,http://mypowerlight.com/Commercial/Kiosk.aspx?id=1dd14d57-7840-4b2d-af0a-0fe0fdd5c87246.41 GWh of energy was produced since system installation a year and a half ago in Nov 2007 on a system with 14.02 MW peak rating. Capacity factor is 46410 MWH / (14.02 MW x 24 h/day x 365 day/year x 1.5 year) = 25% capacity factor, which would seem to beat Springerville’s fixed array’s capacity factor.

    Comment by Clee | May 16, 2009

  49. Perhaps one needs to examine this issue further by looking at the impact of these tax subsidies on traditional users of these feedstocks. There is not enough animal fat/yellow grease in the marketplace to supply traditional users of these materials, i.e. the oleochemical and pet food industries, and new users, like the subsidized biofuels industry. For once, Congress looked at the impact of a biofuels tax credit on other industries and rightly sought to address the unlevel playing field by eliminating the tax credit for coprocessing. Allowing this tax credit to continue would have decimated the oleochemical industry.

    Comment by Anonymous | May 27, 2009


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