Archive for the ‘Biorefinery’ Category

White Elephant in the RAND Report

Tuesday, February 1st, 2011

What the RAND report IMHO characterizes is a repeat of somewhat known issues (with algea), the development of a hypotheses based upon longstanding hopes (FT), and the skirting of the white elephant in the room (money).

Let’s focus on the elephant:

Profitability, in view of complex financial markets, rules the project feasibility and hence the production of commodities (!). Which ever way you will get to a new process to produce sometype of energy will cost you CapEx at the tune of $/EUR 2.8 and more per Watt installed capacity. In addition you have to procure your feedstock, which can be at a cost of zero (wind, sun, waste) or at up to 90% and more of revenues (cane, sugar, corn, camelina, palm, etc.). Between the CapEx and the ops cost the process has to be feasible and the operations need to be financable. Eventually, that requires cheap (debt) capital in large amounts (billions would be good) as well as reliability/predictability of the input/output spread (no commodity speculation would be helpful).

Sadly none of these basic financial limits and mechanics have been touched upon in the RAND report, but the financial workings are crucial to making any of the technologies work at relevant scale. To use RAND’s numbers, even a FT GTL plant clocks in at $/EUR 2.8 to 3.8 per gallon CapEx and the gas input needs to be procured at around $4.5 per MMBTU in the US. Also the cited Pearl/Qatar facility at a $5bn price tag will need to be somehow financed, which is where a huge balance sheet (i.e. that of Shell) helps, and also provides a barrier of entry (The last time I checked my bank’s credit officer would not give me $5bn to do same).

And this is where the issue lies: lack of project finance capital, i.e. debt capital at LIBOR plus few percent for 8 and 9 digit amounts for “risky” projects. It’s absence and the resulting lack of financial feasibility, rather than any of the other more technical points challenges the transition of technology from scaling to deployment.

On the other side these very same large financing amounts also make commodity production a non-VC business, the equity premium (usually linked to some IP) just is not available in a margin business, the WACC would get completely out of whack using VC ideas on returns (3X, 5X, 7X, whatever …) in these projects. It is the huge equity investments made by VCs in plants, that tilted the balance and drove past projects to a capital loss.

That algea has a few fundamental problems of physics to overcome is long known (see the work of J Benemann and M Cooney). On the other side, the number of CTL/GTL facilities built since WWII, i.e. in the last 60+ years is really limited as well and only feasible when done at huge scale, as in SASOL, Qatar etc. This is actually pointed out in the report and hence they conclude that it will be 20yrs+ when BTL is to be expected large-scale. Sadly, oil might run short before then.

Woolsey’s hypothesis to turn “Oil into Salt” is the most compelling rational, and indeed if Oil would not be a priced resource, we would not have wars to begin with and the logistics challenges to continue. That is why distributed global renewable fuel production, and abundant fuels should be a core military goal.

Fat vs. Fuel

Friday, January 7th, 2011

A common argument thrown against the expansion of conventional biofuel production from agricultural resources is the indirect land use charge, which is a more eloquent argument along the line of the food vs. fuel accusation, which in itself should rather be a fat vs. fuel debate. The interesting aspect of both hypothesis is that they typically come out of environmentally concerned corners of the political spectrum, the side where one would expect a demand for softer chemistry and industrial processes using an integrated approach to meet the demands of the society. Put into the bigger context, both challenges to the use of conventional biofuels are misleading if not hypocritical.

Currently a mere 4% of corn ends up as actual food on US tables, another 16% is exported, and 39% may end up, after extraction of carbs and their conversion to ethanol, in US gas tanks. The vast majority of 70% of corn, as well as the remainder of the corn-ethanol conversion ends up in the stomachs of animals, which are raised for meat production at a conversion rate of 7:1. Essentially they provide another 10% of calories as protein to the American diet and 25% of greenhouse gases from the digestion of said corn and its conversion to methane. Hence, given our current diet, we use the vast majority of our land to produce the same energy as the other 4% which go straight to food.

On the other side, net of exports, we consume per capita shy of 4000 cal. per day, which is nicely twice as much as the USDA, also in charge of promoting US agricultural products, recommends for a healthy diet. Consequently, the US is enjoying an obesity epidemic at a rate of more than 60% of the population that is overweight, and more than a third clinically obese, and a quarter that is pre-diabetic. Overweight leads to obesity, which in return provides us with diabetes, cardiovascular diseases, and an ever-increasing healthcare bill, which at 17.9% of GDP is going to bankrupt the US medical system in this decade.

In sum, we are using 80+% of land to overfed the average consumer by twice its necessary consumption and bankrupting the government on the way by asking it to care for the effects of fattening our bodies.

Along that line the indirect land use change (iLUC) argument (i.e. using land to produce feedstock for biofuels takes it away from food production and hence “somewhere” “new” land needs to be cultivated and that increase GHG output) becomes paradoxical when applied to a growing, eating population. How indeed should we be charging the overeating, obese members of our society for the increase in GHG output by way of their nutritional intake. Even more so, how should we account for emerging economies finally growing enough food for their people by ploughing and cultivating uncultivated lands, so that they too can enjoy a better and healthy life style, and there we are talking about billions of people not just the mere 300 million in the US. And yes, the birth rates in emerging economies lead to forecasts of 9 billion people in the next decade. Shall those countries – applying the iLUC thinking here -  be taxed for the increasing need of agricultural land or should they continue to go underfed and malnourished?

The opportunity here is to recraft the agricultural policy to provide healthy food by modern standards at healthy levels of 2000 cal. per capita and day, and using the surplus production lands to produce a domestic renewable fuel in distributed integrated biorefineries, which at the same time revitalize rural economies and diversify the feedstocks grown. The agro-food conglomerates such as the meat packers and food multi-nationals may seem as losers in this change, but they have something to offer that is critical in making the change and investments: balance sheets to support the investments in bioindustrial production, expertise in processes, logistics expertise and market penetration reaching each and everyone. Even a Walmart and Whole Foods can and should play in the change from a mere food driven agro industry to an agriculturally driven bioeconomy. The biggest loosers though should be the healthier population and the empty treatment rooms of sickness care providers.