A reader asks a fundamental question worth investigating. The Digest looks at how it all shakes out, value-wise.
A question from the Digesterati: “Since biomass is ~40% oxygen and the principle of green chemistry is atom conservation, how will we achieve $3/gge biofuel as drop-in hydrocarbon without using all of the oxygen? Yield from biomass to octane is ~20% by mass. Isn’t the thermodynamics of the concept extremely flawed from the get go? Should we re-think the business case and make oxygenated bioproducts?”
It’s the oxygen problem the reader asks about, in a nutshell — and many wonder about it. Actually, it’s the “why bother?” problem? What do enterprises do about it?
Begin with the principle of conservation and frugality
As the reader notes, much of the original underlying biomass is not utilized when we make a hydrocarbon fuel, or any fuel. Take the case of corn, for example, and conversion into ethanol. We start with around 8.75 tons of biomass per acre, and we end up with around 1.6 tons of oxygenated fuel. So, the fuel yield is around 18%. If we process into a hydrocarbon fuel, the yield will be 10-12%.
What’s happened to the rest?
Around 2 tons of biomass needs to be returned to the field for field conservation. Another two tons is available for lignocellulosic conversion, or can also be returned to the field. Then, there’s around 1.6 tons converted to CO2 in fermentation, and 1.4 tons of protein which is sold as a livestock feed, and roughly 0.2 tons of oil which can be sold into the fuel, food or lubricant market.
So, value can captured from all the atoms — though some is valuable for soil conservation purposes rather than in the marketplace. Not all the value is realized as fuel.
In the same way, consider the barrel of oil and hydrocarbon fuel. In today’s market, a refiner is realizing roughly half of their revenues from fuel sales. It doesn’t mean that the oil refining business model is extremely flawed — it means that they make a portfolio of products.
How can we make cost-competitive fuel?
First of all, we start by thinking like a portfolio refiner. In the case of a company like Valero, they don’t sell all the products at the same price. For example, their overall revenues are around $80 per barrel these days but they get less than $65 (per barrel equivalent) from fuels, which represent 75% of their product portfolio by volume. It’s straightforward math to calculate that they generate around $125 (per barrel equivalent) from other products.
So, in this way, the other products “subsidize” the fuels. It’s normal business in oil refining and is likely to be normal business in biomass, over the long term.
Boeing thinks about sustainable fuels this way: “As the fuel customer, we’re the coach passenger, we are going to provide volume, but we’re not going to provide your top price. We know that you need to sell business and first class seats at a premium — those are the other products in your portfolio — in order to be able to provide a low price to us. That’s why we think it’s critical that you develop all your markets and why we think it’s essential for all of us to be interested in your opportunities at the front of the plane. We all benefit in the back of the plane from your success in selling the front of the plane, too.”
Think feedstock cost in MMBTUs
Heat value matters. That’s where we look beyond the presence of water and oxygen and look at the energy value of a material.
Natural gas: $2.90
Biomass: $5.00-$8.00, depending on feedstock (using a quoted price of $80/ton)
Crude oil: $8.80
Think realized cost in dollars
How much value does the refining process add? In this case, we don’t look at the ROI, just the uplift in value. Individual processes must compete provide the highest ROI for realizing these uplifts. (in the case of biomass, we used corn as an example of a sophisticated value chain, and took into account the added value of the CO2, the corn oil, fuel and protein, minus the cost of corn).
Biomass: $2.04 per bushel, or 53%
Crude oil: $39 per barrel, or 81%
In this case, we see that biomass has to work a little harder on capex and opex, compared to a crude oil refinery, because the basic uplift, at this time, is lower. That dynamic shifts dramatically when oil prices spike, of course, because they generally squeeze oil refining margins.
Are you really a fuel refiner when only 20% of your feedstock becomes fuel?
Are you really a baseball club when only 5% of your signed players reach the major leagues? Sure you are. That’s how you see yourself, and how the public sees your brand. Despite the fact that you have far more players at the rookie level in minor league farm clubs than you have on a major league roster. That’s a matter of how you position yourself in the marketplace, and may be subject to evolution over time.
How many business machines, for example, does IBM make these days? How many telegrams does American Telephone & Telegraph actually process, nowadays? How much of Coca-Cola’s revenue is derived from sales of Coca-Cola?
If you want to be perceived as a fuel-maker, by all means, append “biofuels” to your identity.
How can a biomass refiner hope to make $3 hydrocarbon fuel?
First of all, in these times, we better be thinking $2.40 fuel. If you’re selling half your finished product at $4.00 (per gallon equivalent — and in this case, think chemicals), then you ought to be able to realize something like $2.40 for the fuels and record or something like $200 and $240 per ton of underlying biomass, for your troubles. If you acquired delivered biomass at less than $80 per ton, you may be on the way to a good financial result, especially with a carbon price (see below).
The more expensive the biomass, you will be making more higher-value products to hit your maximum ROI if your process can produce them at the required purity. But those markets get saturated far more quickly, and you can lose margin in marketing because niche markets are more likely to require selling partners. SO, there are practical limits on how much high-value products can offset a high process cost or expensive biomass.
What about carbon prices?
Former DOE Biomass Program Manager Paul Bryan says “without a carbon price, biomass can’t hope to compete with hydrocarbons from the oil refinery on cost so long as hydrocarbons can use the sky as a free sewer.” Note “cost”. Often, biomass can compete based on market price — but that advantage, as we have seen, can go away.
Now, investors usually zero out assumed carbon prices because they don’t trust them — and that’s problematic. However, the
The problem of skyfill, vs landfill
Want to dump a ton of waste product at the landfill? Think something like $50 per ton, wholesale. At the retail level, you might pay as much as $40 per 200 pound load.
But skyfill is free, currently. You can generally vent anything you want in unlimited quantities without financial penalty unless the gas poses direct threats to health. That’s changing…slowly. In the long-term, society needs a $50/ton skyfill price for the same reason it needs a $50/ton landfill price. It helps pay for remediation and handling of residues, offers a market incentive for efficiency plays that reduce waste, and provides a boost to technologies that can convert waste into useful products, like fuels or chemicals.
As it goes for Mother Earth, so it should be for Father Sky — if for no other reason than fairness and also to remove incentives to combust waste into gases that can be vented for free, instead of landfilled at substantial cost, and thereby exacerbating climate change.
What’s a $50/ton incentive worth? It’s a nice boost. A gallon of gasoline emits 19.6 pounds of CO2, so think along the lines of a $0.49 credit per gallon for 100% carbon reduction, long-term. So, a 50% reduction in greenhouse gas emissions might be worth something like 25 cents per gallon. That’s not taking into account refinery CO2 emissions, to keep things simple, which add between 1-2 pounds of CO2 per gallon of fuel produced.
The bottom line
$3 hydrocarbon fuel, or even $2.40? Depending on the product portfolio, the feedstock cost and the carbon price, there are plenty of scenarios where low-cost, low-carbon fuels make economic sense.
Why make fuels instead of other products when the yields are 20%? Well, that’s like asking why you should invest in anything at all, since investment advisors tell you to put less than 20% into any given investment. Portfolio theory is nature’s way of spreading risk. Portfolios are all around us.
Essentially, the human race is a genomic group of risk-spreaders, not risk-takers. It’s a strength, not a weakness. But putting no more than 20% in a single bet doesn’t mean hiding the rest under the mattress, or venting wastes into the sky.
It’s likely that all relatively new inventions will have residues in the near-term, after a monster application is discovered and before the applications are developed for the residues. Once, we hunted whales mostly for the oil, and buffaloes for the tongue. The opportunity is in the landfill and the skyfill — but it helps if we put a price on dumping waste, that brings around investment into residue applications faster.