R-Squared Energy Blog

Pure Energy

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.”

May 14, 2009 Posted by | biodiesel, ConocoPhillips, green diesel, Tyson Foods | 49 Comments

Games Politicians Play

In a bid to keep 1st generation biodiesel technology competitive with the more desirable 2nd generation variety, politicians have voted to keep a $1/gal tax credit for biodiesel made from food, but deny the credit for green diesel made from waste fats:

US Senate Bill Kills Tax Credit For Clean-Diesel Project

WASHINGTON -(Dow Jones)- A U.S. Senate vote Tuesday on tax legislation could be the death knell for a partnership between ConocoPhillips (COP) and Tyson Foods Inc. (TSN) that promised to generate as much as $175 million in tax credits annually through the production of cleaner-burning diesel fuel.

Soap makers and producers of biodiesel, a diesel additive made from vegetable oil, joined lobbying forces to help kill the $1 per gallon tax credit for the Tyson-ConocoPhillips venture.

The Senate legislation would renew for one year the $1 per gallon federal tax credit for biodiesel production, but would end it for the kind of renewable diesel made in the ConocoPhillips-Tyson deal. That partnership takes beef tallow, or fat, from Tyson’s food-processing operations and blends it with diesel fuel, using ConocoPhillips existing refinery facilities.

“Without the $1 per gallon credit, it is highly unlikely that this venture could continue,” said Jeff Webster, senior vice president and general manager of Tyson’s renewable-products division.

In addition, unlike other biofuels such as biodiesel or ethanol, the renewable diesel doesn’t use a food-based feedstock. Biofuels have drawn criticism for driving up food prices and contributing to a worldwide food shortage, though economists debate how much of an impact biofuel subsidies have had.

“This is a second-generation technology that uses animal fats instead of food. Why would you want to create an economic situation that shuts that down?” Webster said.

I spoke today during my ASPO presentation about politicians failing us by attempting to choose technology winners. In this case, they are selectively subsidizing one technology over another, and doing so for 1). Special interest reasons; 2). General animosity toward oil companies. I find it especially frustrating that Congress thinks it is a good idea to create disincentives for oil companies to produce alternative energy.

This is another reason I favor higher carbon taxes. You level the playing field for these alternative technologies to compete with each other, instead of trying to skew technology in a specific direction.

For additional background information, I have written several essays in the past on this deal:

The Biodiesel Lobby Cries Foul

Are Subsidies to Oil Companies Ever Justified?

Biodiesel’s Green Diesel Nightmare

Full Disclosure: I do own ConocoPhillips stock.

September 23, 2008 Posted by | biodiesel, ConocoPhillips, green diesel, Tyson Foods | 104 Comments

My Top 10 Energy Stories of 2007

First, thanks to all who contributed ideas. You may have an entirely different opinion on the most important energy stories. Feel free to share it. Many of these stories were contributed by various readers. Comments by readers are italicized. If you want to know who wrote what, you can see the entire comment thread here.

Here are my Top 10 Energy Stories of 2007

1. Oil price soars as media becomes Peak Oil aware

One reason I felt pretty safe in making the $1,000 bet on oil prices is that a move from $60 – the price in January – to $100 – the price at which I would lose the bet – would be unprecedented. Of course a worldwide peak in oil production will also be unprecedented, and I expect oil prices to soar when that happens. While I still don’t think we have quite peaked, what did happen is that Peak Oil awareness really hit the mainstream in 2007. I started noticing a great many stories on Peak Oil (and quite a few on Peak Lite), especially following the ASPO Conference in October. This was right in the middle of the sharp run-up in prices. So I believe that a major factor contributing to the fast run-up was the sudden realization by a critical mass of people that Peak Oil is on top of us. In that case, the value of oil will be much higher.

In addition to record oil prices, back in the spring we saw record-high gasoline prices as a result of sustained, record-low gasoline inventories. Conditions are currently favoring new record-high gasoline prices in 2008.

2. Criticism of biofuels mounts

The bloom comes off the biofuel rose. European studies showed oil-palm biodiesel was actually worse for the environment due to tropical rainforest destruction, and US corn ethanol plants lost money because of overbuilding. A general biofuel backlash took root due to higher food prices and other side effects.

While I was criticizing corn ethanol before criticizing corn ethanol was cool, in 2007 the media started asking critical questions about water usage, pollution from industrial corn farming, and the impact of ethanol mandates on food prices.

3. The Chevy Volt is announced

GM has dedicated a full product team and allocated a plant for mass production — the first time in history an electric car has achieved such status.

Years after GM killed the electric car, they are bringing it back in the form of the Chevy Volt. I have long advocated the need for the electrification of transportation as one of the key elements in any Peak Oil mitigation plan. Therefore, I am very pleased to see GM making another effort at electric cars.

4. Nanosolar begins to deliver

Cost-effective solar power would be a very big silver BB in a Peak Oil mitigation plan. Nanosolar has the potential to deliver a game-changing thin-film photovoltaic technology. If you don’t know much about Nanosolar, check out this interview with their CEO: 10 Questions for Nanosolar CEO Martin Roscheisen

However, the potential for cost effective solar power also highlights the desperate need to tackle and solve the problem of energy storage for intermittent sources of energy like wind and solar power. Hopefully we will see some breakthroughs there in 2007.

5. LS9 starts up

For years I have dreamed of a microbe that eats garbage and excretes hydrocarbons. The beauty of such a system would be that the hydrocarbons would just phase out of solution, thus ensuring a low-energy purification step. If you think about it, the concept is not that far-fetched. The human body produces fats and fatty acids that are not too far-removed from the hydrocarbons that make up gasoline or diesel. There is no reason, in principle, that a microbe couldn’t be designed to do just that.

The difficulty lies in understanding the metabolic pathways well enough to modify them to produce the target molecule without severely compromising or killing the microbe. This is exactly what LS9 – the “Renewable Petroleum Company”, is attempting to do. And they have certainly assembled a team that just may pull it off.

6. Range Fuels breaks ground

In November Range Fuels – formerly Vinod Khosla’s Kergy venture – announced the groundbreaking of the first commercial “cellulosic” ethanol plant in the U.S. While I dispute the terminology (as I explained in this essay, it is actually a gasification process, which is not specific to cellulose), the process does have a chance to be a success in the long-run. Short-term, I believe they will remain highly dependent on generous subsidies because the capital costs for gasification processes are so high. But on down the road I think gasification makes a lot more sense than most fermentation processes.

One thing that I would have done differently would have been to produce diesel instead of ethanol. Once syngas is produced in a gasification step, there are many different products that can be made. It is not particularly efficient to produce ethanol in this process, but this is the kind of thing you end up with when the government is picking technology winners.

I do think Range Fuels has a high likelihood of becoming a significant technology. What little information is available certainly sounds promising, including the result from EBMUD that the Klepper gasifier was the most efficient.

7. First application for US nuclear plant in 30 years

NRG announces first application for US nuclear plant in 30 years:

NRG South Texas Nuclear

They propose to use GE’s Advanced Boiling Water Reactor technology.

My personal belief is that we are going to need nuclear power to continue making a significant contribution toward our electricity needs. This will be especially true if electric transport takes hold. Therefore, I think it is a very big story that 2007 saw the first application for a new U.S. nuclear plant in 30 years.

8. Carbon capture & sequestration moves forward

The FutureGen alliance announces the site for its demonstration plant on Tuesday, Dec. 18:

FutureGen Announcement

For those not familiar with it, FutureGen is a clean coal demonstration plant that will include carbon capture and sequestration. There are 4 finalist sites. Two in Illinois and two in Texas. The purpose of the project is to demonstrate commercial scale CCS technology.

FutureGen selected Mattoon, IL for their site.

FutureGen runs a combined cycle instead of the single cycle of existing coal plants. Combined cycle plants can achieve 50-60% thermal efficiency vs. the 33% typical of single cycle, so it’s quite possible FutureGen will deliver more kWh/ton of coal than existing plants.

9. Progress on next generation biofuels

The biofuel spotlight turned to the future. Dozens of startups focused on cellulosic ethanol, gasification and other next-gen processes competed for headlines with “green diesel”, butanol and other biofuel initiatives from the oil majors.

Most of the oil majors have taken a pass on the ethanol craze, but they are looking at other biofuels. 2007 saw announcements from BP that they would team with D1 Oils to produce biodiesel from jatropha; from ConocoPhillips that they would team with Tyson Foods to produce “green diesel” from waste animal fats; and that BP and Dupont would team up to produce bio-butanol. (I wrote a reality check on bio-butanol here).

10. US Navy funds Bussard Fusion

I think you have to include the US Navy funding Bussard Fusion in there:

http://www.defensenews.com/story.php?F=3139619&C=navwar

Bussard died a couple months ago. I had really given up on fusion, but his work actually appears to have a reasonable change to work. Hopefully with more funding his team will be able to make it work.

Yes, Dr. Bussard’s work will be carried on. First step is to construct WB-7 and replicate the results achieved with WB-6. Hopefully by the end of April 2008. If that works, then on to WB-8, and then an actual power generating plant.

The rest of the list (in no particular order), many of which could have easily been in the Top 10 list:

11. King Coal is still king

If we look for the stories that did not attract attention, surely one of the big ones has to be the continued surprising vitality of the international coal industry. King Coal has officially been dead for a long time. Who would have predicted that, 10 years after Kyoto, coal would once more be where it’s at, supplying more Btus to the world than ever before?

12. US Coal Plant cancellations, headlined by TXU cancelling 8 of 11 planned plants.

CO2, the primary driver behind the other half of our top 10 stories, has long played in Europe but will only achieve global influence by spreading through the US into the developing world. 2007’s coal plant cancellations marked the tipping point.

13. Al Gore wins Nobel Prize for work on Global Warming

Gore’s tireless efforts to educate the world on Global Warming was recognized with this year’s Nobel Peace Prize. Tiny Carthage, Tennessee now claims two Nobel Laureates. (Cordell Hull is the other).

14. Shell releases details of their shale oil process

Probably the most important energy announcement was Shell’s release of info on their proprietary in-situ process for generating oil from oil shale. Could open a whole new branch of the oil industry, put a cap on the price of oil from conventional fields, and thereby inject some realism into windy dreams. But it turns out that Shell has been working towards this for about a quarter of a century. “Incremental advances” indeed!

15. Resource nationalization grows

While the seizure of the assets of international oil companies by Hugo Chavez got the most press, many other countries are moving to nationalize their oil resources. Many other countries, and even states like Alaska, are also passing laws to increase their tax revenues from the extraction of oil. The U.S. needs to sit up and take notice, because this will further constrain supplies. We can’t continue to count on a steady supply of oil from countries who don’t like us, yet we lack the political will to reduce our dependence on these countries.

16. New efficiency record for silicon PV – 42.8 percent from sunlight at standard terrestrial conditions

http://www.physorg.com/news104501218.html

The highly efficient VHESC solar cell uses a novel lateral optical concentrating system that splits solar light into three different energy bins of high, medium and low, and directs them onto cells of various light sensitive materials to cover the solar spectrum. The system delivers variable concentrations to the different solar cell elements. The concentrator is stationary with a wide acceptance angle optical system that captures large amounts of light and eliminates the need for complicated tracking devices.

In a way I find the Nanosolar story more compelling since they are actually in commercial production now. Still, the prospect of high efficiency PV without using exotic and/or toxic materials gives me hope.

17. Manpower shortages in the energy sector

Big Oil’s Talent Hunt

From the article:

ConocoPhillips (COP) has grand plans. With demand for oil soaring, the company announced on Dec. 7 that it will boost its exploration and production budget by 8%, to $11 billion, a war chest intended to fund massive projects from Canada to China to the Caspian Sea.

But there’s a potential obstacle to the company’s vision: not enough people to get the work done. Half of Conoco’s employees are eligible for retirement within five years. Unless older workers can be replaced, Conoco’s expansion could be costlier and slower than planned. In an interview with BusinessWeek, CEO James J. Mulva said that the lack of talent is one of the most dangerous threats to his company’s long-term health. “People are a big concern,” he said.

This is not just a big oil story. Lack of workers is hitting all sectors of the energy industry. It seems that college students would rather be lawyers or investment bankers than scientists and engineers.

18. Texas surpassed California in wind energy

This signals a shift in wind from high-cost, subsidized eco-darling to cost-effective energy source. As the low-cost provider, wind now thrives in low bureaucracy states such as former oil-king Texas. Meanwhile high-regulation states such as California lag behind.

19. Potential PV improvement

Potential improvement on PV front

Transparent electrodes created from atom-thick carbon sheets could make solar cells and LCDs without depleting precious mineral resources, say researchers in Germany.

Solar cells, LCDs, and some other devices, must have transparent electrodes in parts of their designs to let light in or out. These electrodes are usually made from indium tin oxide (ITO) but experts calculate that there is only 10 years’ worth of indium left on the planet, with LCD panels consuming the majority of existing stocks.

“There is not enough indium on earth for the future development of devices using it,” says Linjie Zhi of the Max Planck Institute for Polymer Research in Mainz, Germany. “It is also not very stable, so you have to be careful during the fabrication process.”

20. Study analyzes off shore wind in US Northeast

http://www.physorg.com/news89650495.html

The wind resource off the Mid-Atlantic coast could supply the energy needs of nine states from Massachusetts to North Carolina, plus the District of Columbia–with enough left over to support a 50 percent increase in future energy demand–according to a study by researchers at the University of Delaware and Stanford University.

The study marks the first empirical analysis in the United States of a large-scale region’s potential offshore wind-energy supply using a model that links geophysics with wind-electric technology–and that defines where wind turbines at sea may be located in relation to water depth, geology and “exclusion zones” for bird flyways, shipping lanes and other uses.

21. A123Systems mass produces next generation lithium batteries

Shipping in DeWalt’s 2007 line of 36V cordless power tools, these new cells mark the 5th wave of rechargeable batteries (lead-acid, NiCad, NiMH, Li-ion and now advanced lithium). Advanced lithium chemistries from A123 and dozens of other vendors offer the possibility of cost-effective plug-in hybrids as well as applications in the electrical grid.

22. Electricity shortages, particularly in the developing world

Some appear to be related to climate change — droughts that require major hydro cutbacks. Some are clearly due to oil prices/supplies — poor countries that burn heavy diesel in their power plants and can’t afford it at the new world prices. Some are due to bad bets on fuel sources — natural gas generators put in, and the gas supply declining sooner than planned.

23. Solar thermal heats up

For decades the SEGS parabolic trough plant in California’s Mojave desert stood alone as the only large-scale CSP plant on earth, but 2007 saw a rebirth of this technology with the inauguration of the 64MW Nevada Solar One plant and construction of plants in Spain, Australia and elsewhere. California utilities have ordered up to 1750 MW of capacity from dish-Stirling purveyor Stirling Energy Systems and startups such as Ausra are pushing the price/performance barrier with linear Fresnel architectures.

24. First Solar market value hits $20 billion

As the first mass producer of non-silicon thin film PV, FSLR cashed in big-time in 2007. Their $1.40/W manufacturing cost is a huge competitive advantage, yielding fat profits and an eye-popping 200% growth rate. True to their name, First Solar got out of the gate first, but other non-Si players are still in the race. Companies using CIGS, including the much-hyped but yet-to-deliver Nanosolar, promise to break the $1/W barrier.

25. Cooper Pairs in insulators

http://www.aip.org/pnu/2007/split/849-1.html

One of the AIP’s top stories of the year, this discovery may well help us reach a better understanding of superconductivity and insulators both. Superconductivity is of course a holy grail in energy research, and while this discovery doesn’t directly lead to a room temp superconductor, it does add to the fundamental knowledge of material in the solid state.

26. Medvedev slated to take over from Putin

http://en.rian.ru/russia/20071217/92858987.html

Essentially Putin’s Russia will continue, and that has direct implication for all the fossil fuel industry in Asia, regarding everything from global warming to export control to defense postures. Putin’s Russia, one of an energy oligarchy, will continue to express those policies likely for a good portion of the 21st century.

27. Conditions in Iraq improve enough to get the oil industry back online

http://www.rigzone.com/news/article.asp?a_id=54099

Opening the possibility that Iraq just might return to a functioning member of OPEC has direct implications on the availability of oil for import around the world.

28. USAF test flight of transport aircraft C-17 using CTL synthetic fuel

http://www.enn.com/pollution/article/24117

This heralds the onset of CTL and likely portrays our (US) future over the next couple of decades.

29. And now, for my wildcat speculation of the most important news item:

Namibia: Expert Confident About Oil Reserves

Southwest Africa will turn out to be a major oil exporting region over the next couple of decades, slowing the decrease in available net exports of oil.

30. The response of the global economy to the large increase in oil prices

Most people would have probably assumed that $90 oil would have caused mayhem in the global economy a year or two ago. Yet the effect has been relatively muted. I think this says a lot about how effectively individuals, businesses (and hats off to alternative energy firms), and governments have responded to increasing oil prices over the long term. Oil now has a much smaller (I believe around 50%) impact per GDP than it did in the 1970’s in most of the big western economies, including the US.

31. Tesla troubles

A not-positive but nevertheless noteworthy story is Tesla Motors recent troubles with putting the final touches on its long-awaited car, particularly with the transmission failure and the management shuffling.

And I love this suggestion for 2008. What a great idea this would be:

My favorite energy story for 2008 would be — Congress recognizes they cannot pick winners, and instead sets up a multi-billion dollar X-Prize competition for the first three alternate energy sources to supply reliable commercial-scale power at costs competitive with fossils.

So those were the energy stories that I, or various readers thought were significant in 2007. Were there other significant stories that we missed?

Looking back at the list, many (most?) of the stories were not anticipated at the beginning of the year. So, who knows what 2008 will bring. Any thoughts?

December 22, 2007 Posted by | Al Gore, Chevy Volt, ConocoPhillips, ethanol, food prices, LS9, nuclear energy, oil prices, Peak Oil, range fuels, reader submission, solar efficiency, solar power, Tyson Foods | 12 Comments

Help Brainstorm the Top Energy Stories of 2007

While Platts has done a great job listing all of the major oil company stories of 2007, I am working on a Top 10 list for energy in general. I am about to be offline for a few days, so I thought this would be a good opportunity to gather input on the top energy stories of the year. My short (non-oil company) list of potential candidates would be Nanosolar, the Chevy Volt announcement, the LS9 start-up, the Range Fuels groundbreaking, the BP/D1 jatropha announcement, and the COP/Tyson green diesel announcement. Those are some that spring to my mind.

What else? I am struggling to remember any major developments in wind, tidal, or geothermal power. What about coal? Nuclear? Feel free to debate the list as well. I will check in later on next week and start crafting a post around the list.

December 15, 2007 Posted by | Chevy Volt, ConocoPhillips, LS9, Nanosolar, range fuels, Tyson Foods | 116 Comments

Biodiesel’s Green Diesel Nightmare

I have been saying this for months, and others are starting to realize the same thing:

Renewable Diesel: Biodiesel’ s Nightmare

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.

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.

I have said it before, and I reiterate: Biodiesel’s days are numbered.

Disclosure: I do own ConocoPhillips stock. As does Warren Buffet. 🙂 And Jim Cramer. Must not forget about Mad Jim Cramer.

August 13, 2007 Posted by | biodiesel, ConocoPhillips, green diesel, Tyson Foods | 40 Comments

Biodiesel’s Green Diesel Nightmare

I have been saying this for months, and others are starting to realize the same thing:

Renewable Diesel: Biodiesel’ s Nightmare

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.

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.

I have said it before, and I reiterate: Biodiesel’s days are numbered.

Disclosure: I do own ConocoPhillips stock. As does Warren Buffet. 🙂 And Jim Cramer. Must not forget about Mad Jim Cramer.

August 13, 2007 Posted by | biodiesel, ConocoPhillips, green diesel, Tyson Foods | Comments Off on Biodiesel’s Green Diesel Nightmare

Biodiesel’s Green Diesel Nightmare

I have been saying this for months, and others are starting to realize the same thing:

Renewable Diesel: Biodiesel’ s Nightmare

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.

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.

I have said it before, and I reiterate: Biodiesel’s days are numbered.

Disclosure: I do own ConocoPhillips stock. As does Warren Buffet. 🙂 And Jim Cramer. Must not forget about Mad Jim Cramer.

August 13, 2007 Posted by | biodiesel, ConocoPhillips, green diesel, Tyson Foods | Comments Off on Biodiesel’s Green Diesel Nightmare

Biodiesel’s Green Diesel Nightmare

I have been saying this for months, and others are starting to realize the same thing:

Renewable Diesel: Biodiesel’ s Nightmare

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.

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.

I have said it before, and I reiterate: Biodiesel’s days are numbered.

Disclosure: I do own ConocoPhillips stock. As does Warren Buffet. 🙂 And Jim Cramer. Must not forget about Mad Jim Cramer.

August 13, 2007 Posted by | biodiesel, ConocoPhillips, green diesel, Tyson Foods | Comments Off on Biodiesel’s Green Diesel Nightmare

Biodiesel’s Green Diesel Nightmare

I have been saying this for months, and others are starting to realize the same thing:

Renewable Diesel: Biodiesel’ s Nightmare

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.

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.

I have said it before, and I reiterate: Biodiesel’s days are numbered.

Disclosure: I do own ConocoPhillips stock. As does Warren Buffet. 🙂 And Jim Cramer. Must not forget about Mad Jim Cramer.

August 13, 2007 Posted by | biodiesel, ConocoPhillips, green diesel, Tyson Foods | Comments Off on Biodiesel’s Green Diesel Nightmare

Are Subsidies to Oil Companies Ever Justified?

Should We Ever Subsidize an Oil Company?

“Of course not!” might be the immediate reaction of most people. But doesn’t it depend on the objectives you are trying to achieve or the behaviors you wish to influence? Are there no cases in which it would be warranted? What if the end result was a reduction in our fossil fuel consumption?

I think most people would like to see us move away from fossil fuels. But fossil fuels are money-makers for the oil companies, and the cheapest option (strictly in terms of dollars at the pump) for consumers. So how do we wean off of fossil fuels?

Reducing Fossil Fuel Usage

There are really two options. By far the most efficient would be to raise taxes on fossil fuels. I am an American, but have lived in Europe before, and I am back here now. In my opinion Europeans have been far wiser about their policies on fossil fuels than we have been in the U.S. They made them expensive. Does that mean everyone then lives in poverty because they can’t afford gasoline? Far from it. People have adapted. They are attracted to fuel efficient vehicles. They live in smaller houses, closer to their jobs. They embrace mass transit. These are all behaviors that the U.S. has discouraged by keeping fossil fuel taxes low. So, we are energy gluttons, and we maintain this gluttonous habit by ensuring that both major political parties think twice before raising our gas taxes.

Higher fossil fuel taxes would help level the playing field for alternative fuels. Not only does this avoid the potential mistake of trying to forecast and subsidize particular technology winners, but it also discourages alternatives that have high fossil fuel inputs. This is important, because we are now subsidizing some “alternative” options that are essentially 90% recycled fossil fuel. Taxing fossil fuels would strongly penalize those alternatives with high fossil fuel inputs.

However, I think it is unlikely that our political leaders have the will to tackle the tax option. So then we are left with the alternative of subsidizing alternative energy and hoping that one or more sustainable options are developed as a result. We have tried this experiment with corn ethanol for 30 years now. It has been heavily subsidized since the late 1970’s, and today it is still not a viable option without mandates or subsidies. (I know that there are those who truly believe that grain ethanol could survive without the subsidies. I think what we would see is that the industry would collapse like a row of dominoes, which is why the subsidy remains in place).

Renewable Diesel

One option that I have always felt had serious potential as a sustainable option is renewable diesel. Not only is the EROEI of the biodiesel production process superior to that of grain ethanol, but a diesel engine is also much more efficient than a spark-ignition engine (which is where our ethanol supply ends up). And like ethanol, we also subsidize renewable diesel. And there aren’t all that many objections to subsidizing biodiesel; that is until an oil company wants to make it.

Biodiesel, which is strictly defined as alkyl esters made from the transesterification of vegetable oils or animal fats, receives a $1/gallon production subsidy. Biodiesel is produced by reacting the vegetable oil or animal fat with (typically) methanol (which is usually produced from fossil fuels) and a strong caustic. The products are biodiesel and a glycerol by-product that can be difficult to dispose of (it is often simply incinerated). There is also a wastewater discharge, containing “free fatty acids that have a high biochemical oxygen demand, or BOD, that can remove oxygen from water bodies and harm aquatic life.” None of the by-products, however, are classified as hazardous waste.

There are two other forms of renewable, or “green diesel” that aren’t strictly defined as biodiesel. One is obtained via a gasification and subsequent Fischer-Tropsch reaction of biomass. Choren, for instance, uses this process to make their SunDiesel product. The other form involves thermal processes in which animal fats or vegetable oils are heated and sometimes reacted with hydrogen to transform the oils into a diesel product. Such processes for making diesel have been referred to as second-generation biofuel technology. And these second-generation technologies have one big advantage over the first-generation technologies: They can be blended up to 100% with conventional diesel in any weather. The cold weather limitations of alkyl ester biodiesel are well-known.

There was some uncertainty about whether new green diesel technologies met the definition of biodiesel and therefore qualified for the subsidy. So Missouri Representative Roy Blunt, to help a company in his district – Changing World Technologies (CWT) – inserted a provision to make sure that so-called thermal depolymerization processes also received the subsidy. In addition, he helped CWT secure a $5 million grant. While this is money that in hindsight was probably thrown down a black hole because of grossly exaggerated claims on the part of CWT (See my essay TDP: The Next Big Thing), it did set a precedent for expanding the biodiesel subsidy to include processes other than strict alkyl ester biodiesel. In general, I would think that funding second-generation technologies is as important as funding first-generation technologies.

The First-Generation Recipients Scream Foul

On April 16th, 2007 ConocoPhillips and Tyson Foods announced a collaborative effort to produce green diesel via one of the second-generation technologies. But the National Biodiesel Board, a lobby for the first-generation biodiesel producers, cried foul and issued an incredibly hypocritical news release, which I have dissected:

The Biodiesel Lobby Cries Foul

Their argument was that it was not fair to give an oil company – already making billions in profits – incentives for producing biofuels. They also complained that the White House was directly lobbied on this matter. This issue is discussed at:

ConocoPhillips, Tyson Lobbied White House on Tax Rule

The persistent theme of the article is that the credit was expanded on behalf of ConocoPhillips and Tyson Foods. But it appears to me that a clarification was requested before millions of dollars had been invested in this process. From the EPA’s Regulation of Fuels and Fuel Additives: Renewable Fuel Standard Requirements for 2006 , issued December 30, 2005 we find the following definition of biodiesel:

Biodiesel means a diesel fuel substitute produced from nonpetroleum renewable resources that meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency under section 211 of the Clean Air Act. It includes biodiesel derived from animal wastes (including poultry fats and poultry wastes) and other waste materials, or biodiesel derived from municipal solid waste and sludges and oils derived from wastewater and the treatment of wastewater.

That definition is certainly not process-specific, but I can understand the desire to get clarification on the rules before the project was announced. The sticking point could be that someone could argue that “biodiesel” has traditionally been the term for the ester product. But the key phrase to me looks like “diesel fuel substitute produced from nonpetroleum renewable resources.” After all, what are we actually trying to achieve with these subsidies? Isn’t the point to encourage movement away from fossil fuels and toward biofuels? Shall we start picking technology winners by funding one renewable “diesel fuel substitute” while denying funding to another?

But some didn’t see it that way at all. What they saw was that an oil company was going to get the same subsidy that biodiesel producers received, and they are quite happy to cut off their nose to spite their face:

Democrats Target Tax Break for ConocoPhillips, Tyson

April 20 (Bloomberg) — Democrats in Congress plan to reverse an Internal Revenue Service ruling that allowed ConocoPhillips and Tyson Foods Inc. to benefit from a tax break for producing alternative energy.

If adopted, the legislation would threaten a joint venture announced this week by ConocoPhillips and Tyson to produce diesel fuel from animal fat. Lawmakers said that the tax credit was intended to benefit new technologies using animal carcasses and other food waste and that the companies pressured Bush administration officials to redefine it.

I almost hate to point out that this is new technology. This particular process came along much later than both traditional biodiesel manufacture and the CWT process that didn’t actually work as advertised yet still got $5 million.

As Jim Mulva pointed out, the project is not profitable without the tax credit and would not go forward otherwise:

ConocoPhillips spokesman Bill Graham said today that remarks by company Chief Executive Officer Jim Mulva earlier in the week sum up the company’s position on the tax cuts. Mulva said that ConocoPhillips and Tyson wouldn’t proceed with the venture if they didn’t qualify for the tax credit, worth $1 per gallon of renewable diesel produced.

“It’s not profitable without the $1 tax credit,” Mulva said April 16 at a news conference in Houston. “It’s very important and significant in going forward at this point in time.”

A Tyson spokesman also weighed in:

Gary Mickelson, a Tyson spokesman, said today that the company hadn’t seen any legislation.

“Denying the tax credit will only serve to limit the expansion and availability of alternative fuels and also damage the ability of livestock farmers and ranchers to participate in the renewable energy business,” Mickelson said in an e-mail, citing support for the IRS ruling by the National Cattlemen’s Beef Association, National Pork Producers Council, National Chicken Council and Texas Cattle Feeders Association.

The article also pointed out the it wasn’t only the biodiesel lobby that was unhappy:

It also angered the American Soybean Association, which fears refiners may begin shipping in less-expensive foreign palm oil to replace U.S. soy oil at the government’s expense.

This is a ridiculous argument, because nothing is stopping conventional biodiesel producers from doing that right now. Of course this sort of protectionism is nothing new in the renewable energy field, as we do the same thing with corn ethanol. We subsidize it, and then penalize much more sustainable Brazilian ethanol with a $0.54/gallon tariff. Except in this case, we are going to discourage the development of an alternative within the U.S. because it will benefit a U.S. oil company.

An article in the Houston Chronicle discussed the economics in a bit more detail:

Jeff Webster, general manager of Tyson’s Renewable Energy Division, noted that the cost of using animal fat as a feedstock is about $2 a gallon, or about $84 a barrel.

That compares with crude oil futures running above $63 a barrel on the New York Mercantile Exchange.

The $1-per-gallon tax credit, however, would bring the feedstock cost for animal fat down to about $1 a gallon, or $42 a barrel.

“In general, the feedstock cost is the big driver of your overall costs, as much as 75 percent of your cost structure,” Webster said.

Asked about the effort to change the interpretation, ConocoPhillips spokesman Bill Graham noted: “With any repeal, you’re changing the economics for the manufacturing of the renewable diesel.

“If it is repealed and maintained for other forms of alternative energy, then what you’re doing is picking and choosing between alternative energies. And we don’t think that’s sound public policy.”

Objections

Most objections that I have seen are generally along the lines of “Why on earth would I want my tax dollars going to a company making billions of dollars a year? They don’t need any subsidies.

Of course that is correct. They don’t need subsidies to continue business as usual. In fact, all that would happen if you removed the so-called indirect subsidies is that we would pay more for gasoline. There would be some demand destruction as a result, so perhaps there would be some impact to the oil companies, but for the most part it would be business as usual.

And there’s the rub. If you want to take that position: “They don’t need my tax money“, then don’t expect them to do things that you think they should do. As someone else wrote to me “It is in their best interest to move into biofuels.” But you see, as far as they are concerned it is not. What is being asked here is for them to enter into a guaranteed money-losing commercial venture. That is a lot different than just funding R&D research, which is being done regardless.

You saw the API conference call transcript. The oil industry, rightly or wrongly, believes that their business will be oil for quite some time. So that leaves two possibilities.

First, what if they are wrong? Well, if they are wrong and they are discouraged from moving into next-generation fuels, then you and I will suffer. It will be peak with no parachute. We will have wasted quite an opportunity to nudge them in the direction of diversifying the fuel supply.

So, what if they are right and there is plenty of oil and gas? Well, they will continue to make oil and gas, consumers will continue to buy it, oil companies will continue to profit, and greenhouse gas emissions will continue to rise. And they will not change their behavior because the status quo is making money, and the shareholders are happy.

So the way I see it, we need to encourage a move away from fossil fuels even if we have to give oil companies the same incentives that we give everyone else. Who will be hurt if we don’t is you and me.

Conclusions

This case is very frustrating to me. It highlights the problems that we are going to have in encouraging oil companies to move toward alternative energy. What is the purpose of these subsidies? Isn’t it to make the alternatives competitive with fossil fuels? So then why should we expect oil companies to expand R&D on alternative fuels if they are going to sell these fuels at a loss? Remember, the current biodiesel producers aren’t losing their $1/gallon tax credit. Farmer Marty Ross, mentioned in The Biodiesel Lobby Cries Foul, is still going to receive his $5.5 million a year in subsidies. Furthermore, he qualifies for various grants and low-interest loans to give him an additional benefit. But biodiesel producers want both a subsidy and a monopoly, and their position endangers us all by discouraging the development of next-generation alternatives.

Oil companies are still answerable to their shareholders. They can’t be expected to invest big dollars into product development if they believe they are going to sell the product at a loss. These credits should be open to anyone willing to make the necessary investments. Would you rather see the money flow to the Middle East? Do you want the next generation of fuels to be coal-based, or derived from shale oil? Because this is what will happen if we make it more difficult for oil companies to become involved in alternative fuels. Ask yourself the following questions:

1. Will technologies like this reduce our dependence on foreign oil? Yes.
2. Will this encourage a renewable diesel technology that does not commercially exist? Yes
3. Will this help diversify our fuel supply? Yes.
4. Does this produce a fuel with superior performance characteristics? Yes

That would seem like a slam-dunk. Yet there is one more question to answer, and because of that answer some are willing to forego quite an opportunity to nudge oil companies in a sustainable direction:

5. Will an oil company benefit, just as any other company could benefit? Yes.

I have personally lobbied my company to become more involved in alternative energy, and this attempt to rescind the credit is very upsetting to me. I have skin in the game here, and I want to encourage my company to move into alternative fuels. But rescinding the credit will be a disincentive because I know what the economics look like for these biofuels.

Disclaimer

Of course I do work for “an” oil company. I can’t say which one, although it is relatively easy to figure out with Google. I tell you this because I don’t want there to be any misunderstandings. However, I can’t come right out and name my company, because I am not sanctioned to speak for them. Their position and my position don’t always mesh, so it is important to keep my personal opinions separate from official company statements.

I was conflicted about whether to write this essay, because I don’t want it to look like I am putting my self-interests ahead of good energy policy. And I wouldn’t even touch this one, but I think this is a very important, precedent-setting issue that has major implications on the direction of our energy policy. I asked and received feedback from TOD editors and contributors, and the feedback that I did receive suggested that I should go ahead and post it.

April 23, 2007 Posted by | biodiesel, biofuels, ConocoPhillips, green diesel, oil companies, subsidies, Tyson Foods | 57 Comments