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Biofuels Industry at Crossroads as Military Waits for Lower Prices (UPDATED) 


By Eric Beidel 

Military leaders like to say that their aircraft, ships and personnel can’t tell the difference between petroleum and biofuel.

But their budgets can.

Planes, ships and helicopters all have completed successful tests using alternative fuels. But the Defense Department has been paying per-gallon rates for biofuels that make volatile standard oil prices look like steals.

It’s the classic chicken and the egg conundrum.

Industry needs the military to buy big providing a demand signal that could help reduce prices, but a lot of things have to be sorted out in the young market before the Pentagon can afford to do that.

Proponents say that the biofuels industry is at a crucial juncture and needs the right mix of policy, action and financial support to cross the bridge to commercialization. But if any leg of that support goes weak, the military may have to wait even longer for green fuel to reach competitive prices.

To be sure, the costs have been coming down. The Navy is paying $12 million for 450,000 gallons of biofuel to power a carrier strike group off the coast of Hawaii this year. That $26.6-per-gallon purchase is nowhere near the $2.50 the service pays for each gallon of petroleum. (It has been stated that it would be about $16 per gallon if it were mixed with standard jet fuel.) But it can be considered a good deal when compared to what the Navy paid biofuels supplier Solazyme Inc. under a previous contract.

The service in 2009 spent $8.5 million for 20,000 gallons of algae-based fuel. That works out to $425 per gallon. In the fall of that year, the Defense Logistics Agency paid Montana’s Sustainable Oils $2.7 million for 40,000 gallons of fuel from the camelina plant. That’s about $67.50 per gallon.

The makers of biofuel have not moved to full-scale production. So the military is still paying research-and-development costs as part of the contracts.

During a recent discussion hosted by the Pew Charitable Trusts, former Republican senator from Virginia John Warner, a strong proponent of the Pentagon’s green energy efforts, put the question to two executives whose companies have been big players in the nascent biofuels industry.

“How much per gallon does the military pay you?” he asked.

It took the gentlemen — Vice President of Renewable Energy and Chemicals at Honeywell UOP Jim Rekoske and Solazyme President Harrison Dillon — about 15 minutes to sidestep the question.

It’s unfair to count the contracts currently being rewarded as per-gallon fuel purchases, Dillon said.

“All of our contracts with DoD are [research and development],” he said. “They involve research, purchase of new equipment and actual production of fuel . . . The cost has come down in each of these contracts and we are confident that at full commercial scale we can be competitive with petroleum.”

The nation has been getting fuel from petroleum for more than a century. The transition away from that will take time, said Rekoske, whose company last summer powered the first transatlantic flight to use a 50-50 blend of camelina and petroleum-based jet fuel.

“We are at the infancy of advanced biofuels,” he said. “We are still very early in that maturity curve and we need to make sure we understand that. We will get there. We will move down on the cost scale, but it’s going to take time and it takes further investment.”

The Defense Department plans to spend $300 million on alternative fuels over the next five years. The military spent about $17 billion on petroleum last year alone, Pew analysts said. It is clear to onlookers that the biofuels industry needs more help than the armed services can give it.

“Trying to spur the market to get a whole new energy source is a difficult thing to do on your own,” said Nancy Young, vice president of environmental affairs for Airlines for America, an industry trade organization.

The airline industry is another “early adopter” of biofuels and will be a gigantic consumer in the future. A mid-size airline uses as much jet fuel as the entire military, so it only makes sense that the industry would want to find a competitive alternative to petroleum, Young said. But the risk needs to be spread across the spectrum — from farmers and producers to the variety of end-users.

“You need to connect the whole supply chain,” she said.

There are a number of efforts to bring these groups together. The Department of Agriculture recently hosted a matchmaking event in Washington, D.C., to connect producers of energy feedstocks with biorefineries seeking to make fuels for commercial sale and consumption. Sarah Bittleman, senior advisor to the agriculture secretary, said that these key relationships will determine the country’s success in developing and deploying new aviation fuels. Those involved in feedstock and biofuels production must increase their understanding of supply chain issues, logistical challenges and potential pitfalls along the way, Bittleman said.

A main concern is the lack of facilities. The Energy Independence and Security Act of 2007 mandated that the country’s fuel supply include 36 billion gallons of biofuel by 2020. In 2010, the Agriculture Department reported that the United States still needed 527 new biorefineries at a cost of $168 billion to meet that mandate.

“We’re essentially renting factories,” Dillon said. “We have no large-scale purchasing on the feedstock, so we’re buying truckload by truckload of feedstock [and introducing it] into the process.”

Issues related to time and money are working against the establishment of biorefineries that can serve the military. The DLA currently only has authority to award contracts for up to five years to purchase fuel. But building a large-scale production facility to make biofuels is an expensive proposition that requires financing. And companies are finding it difficult to obtain large sources of up-front money for the construction and operation of new plants on the basis of short-term contracts.

Extending DLA’s contracting authority to 15 years would send a huge message to capital markets that these investments are less risky, Dillon said.

Strides are being made. Valero Energy Corp. is building a commercial facility on the Gulf Coast to produce 10,000 barrels a day of renewable diesel fuel using Honeywell’s technology. The facility will be up and running later this year, Rekoske said.

The fact that the largest independent refiner in the country is placing its bets on green energy says a lot, he said.

“They are a big business,” Rekoske said. “They don’t make decisions to do something if it’s not going to be cost competitive with the diesel fuel they supply today.”

Jet fuel is a subset of what is in diesel fuel, so Valero’s new facility sets a benchmark for what also could be done for military and commercial aircraft, he said.

“They’re kissing cousins with respect to the chemical properties,” Rekoske said. “If you can make diesel fuel, you can make jet fuel at those prices as well.”

Where the biofuels come from is another source of debate. There is concern that as the biofuels industry gains momentum, it may eat into feedstocks used by other industries.

“We are interested in making something which is indistinguishable chemically and physically from gasoline, diesel fuel and jet fuel,” Rekoske said. “We also focus on making sure we try to use sustainable feedstocks. Sustainability of feedstock is probably the industry’s major challenge — finding feedstocks which are not only sustainable but are available at a reasonable cost.”

Warner expressed concern about a tug-of-war between the biofuels and food industries. He wondered where farmers would find additional land to grow crops for alternative fuels.

“I represented an agriculture state and went to the farms,” he said. “It’s corn, it’s soy beans, it’s wheat, it’s alfalfa and so forth, and they rotate the crops. I don’t know where there’s any vacant land suddenly to expand.”

Young’s organization facilitated a pre-purchase agreement with AltAir Fuels LLC for 75 million gallons of jet fuel per year over the course of a decade. This project will involve the growing of camelina in the Pacific Northwest on land that is already being used for agricultural purposes. Camelina is a cover crop and can be used in rotation with wheat and other grains, and the same equipment can be used to farm the different crops, Young noted.

The Agriculture Department is performing outreach trying to persuade farmers to use camelina and has announced a pilot program to begin providing crop insurance for the plant. The department also has studied the feasibility of giving crop insurance to producers of other biofuel feedstocks such as corn stover, straw and woody biomass. There needs to be more initiatives to show farmers that these crops will be competitive with others that they grow, Young said. Those types of programs will help the industry climb over the commercial hump, she said.

But there also can be a clash of interests over feedstocks.

The key feedstock for the soap industry is animal fat, which just happens to be the key ingredient the new Valero facility will be using to produce its renewable diesel fuel.
“We’re seeing the case where our feedstock is going to biofuels,” said Mary Vihstadt, government affairs consultant for the Dial Corp., a soap manufacturer. She said that she understands that biofuels will take precedence until new feedstocks and technologies come on line.

“But what do we do in the meantime?” Vihstadt said. Animal fat “is dependent upon how much beef we consume in this country. It’s inelastic, so we will be competing with biofuels for a feedstock that we use to make soap.”

It doesn’t have to be a competition, Dillon said.

Solazyme makes oil from sugar and even partners with Unilever to make soap without using a drop of animal fat, he said.

Solazyme turns plant biomass into oil. Plant material, which is essentially made of sugar, is put into fermentation tanks. Then the company infuses its algae into the tank, and in about two days, that algae has converted all of the sugar into oil.

“This is the first time in the history of oil we can actually design what the oil looks like,” Dillon said. “We are talking about a new technology that can turn one thing into another . . . You can take wood chips or the grass clippings from the golf course that get landfilled or the stover left over after you’ve harvested the corn, you can take old newspapers. All of that you can take and you can feed it to microbes and our process turns that sugar directly into oils ideal for making a bar of soap or box of detergents.”

Collaboration will be key moving forward. The departments of Agriculture, Energy and the Navy last year announced that they would invest up to $510 million over three years — with financial help from the private sector — to produce biofuels for both military and commercial transportation. The Agriculture Department will focus on feedstocks, the Energy

Department will take the lead on technology and the Navy will provide the market by buying the fuels. Officials hope the effort leads to the establishment of commercial-scale biorefineries in different regions of the country that produce jet and naval drop-in biofuels from a variety of feedstocks and processes.

“It is without a doubt proven that these drop-in fuels work,” Warner said. “But having sat up there in the puzzle palace for 30 years, I know that they’re going to tolerate only so long these prices for the biofuels.”

Bloomberg New Energy Finance analysts say that some aviation biofuels, including that made from camelina, could be competitive with regular jet fuel come 2018. Until then, the government will have to use subsidies and follow through on mandates requiring their use to speed up the pace of adoption, analysts said.

Companies are inching closer to being able to offer the military the quantities of green fuel it needs to make a dent in petroleum consumption. And the price of alternative fuels will continue to drop as some of the technology involved in creating them matures, Dillon said.

“What did the military pay for the first set of night-vision goggles? And what do they pay today?” he said. “I’m sure it’s a lot less. That’s how technology development works.”

UPDATE: The House Armed Services Committee on May 9 voted to ban the Defense Department from buying alternative fuels that cost more than traditional fossil fuels. The committee also voted to exempt the department from legislation that prohibits the purchasing of alternative fuels with higher carbon emissions than fossil fuels. See story here.
Reader Comments

Re: Biofuels Industry at Crossroads as Military Waits for Lower Prices (UPDATED)

It seems to me (as an algae tech insider) that there definitely do need to be a few grand jury investigations leading directly to arrests, perp walks, trials etc. but not for whom one might think.

Let's examine the problem. In the algae industry we've all taken up the task to design systems satisfying as many of the criteria as one's ability will allow. The sealed, continuously harvested algae cultivation and conversion (Biorefining) process systems to warrant their being seen as analogous to planting a drilling rig, transport & storage facilities, tanker ships & offshore platforms, as well as an entire refinery and blending/distribution complex and find another way to incorporate the functions of all of those Billions of dollars of government subsidized infrastructure that has evolved over the past century and replace it all on a patch of dirt on a per acre basis virtually anywhere on Earth between the arctic circles.

To whom has the task of finding a way of making the technology financially viable using essentially a dirty swimming pool? Primarily, it is Phycologists (algae "Doctors") upon whom this task waits. The wrong people are working the problem as Phycologists don't know how to build machines,

It seems to me that if a company wants a machine that does X, that unless that company had the foresight to have invested even modestly in R&D over time

Let's keep in mind that petroleum is extracted energy and uses a completely different financial model from most other businesses. What is needed is a purpose designed financial model for the biofuel industry. One that is separate, accurate and different from that being applied to us at Scipio Biofuels Inc. during our capital raising odyssey. What we already have the economically viable technology for is NOT a donut shop, or a shoe store, or a petroleum company so it necessarily follows that those financial models simply do not apply.

In the last 4 years of watching the USFG "assisting" in biofuels commercialization I have seen only one single dynamic repeat
itself over and over and over again which leads to the only conclusion that logically fits the situation 100% and it is ugly.

The USFG has gone out of its way to grant capital or guarantee the loans of biofuel or green energy companies with TECHNOLOGY THAT EITHER CAN NOT WORK, OR WILL NOT WORK WILLFULLY AND ON PURPOSE.

I can say this with absolute certainty because I have done everything but light firecrackers on the white house lawn to get the government's attention in seeking the under $500k (that's all) we need not to begin designing a system, or work on some esoteric area needing improvement.

We ONLY need 3rd party certification of the productivity of our already known to be financially viable for biofuels, algae cultivation and harvesting system. Our system has been in development and prototyping for almost 10 years at our own expense and is virtually ready to go.

The only problem is that President Obama is committing high treason during his repeated attempts to eviscerate the US Dollar as the world reserve currency at which he has succeeded, in part by his personal turning of a blind eye to us, because we lack the capital to purchase his willingness to influence opposite to the direction he desires for America, DOWN!

Viable biofuels technology is everywhere if you aren't looking to fail on purpose as President Obama has repeatedly demonstrated to be necessarily true.


Matt Snyder on 05/18/2012 at 18:26

Re: Biofuels Industry at Crossroads as Military Waits for Lower Prices


Solydra story is opening a huge can of worms at the DOE GRANT AND LOAN GURANTEE LOAN PROGRAM. Its not just about the Solar loan guarantee program. Look at all the millions in fees collected by the DOE GRANT AND LOAN GUARANTEE PROGRAM with algae projects less than 20% completed. An audit needs to be done on all DOE Biomass Program Grants to algae researchers.

The US taxpayer has spent over $2.5 billion dollars over the last 50 years on algae research. To date, nothing has been commercialized by any algae researcher.

The REAL question is: Does the DOE BIOMASS PROGRAM really want the US off of foreign oil or do they want to continue funding more grants for algae research to keep algae researchers employed at universities for another 50 years?

In business, you are not given 50 years to research anything. The problem is in the Congressional Mandate that says the DOE can only use taxpayer monies on algae research, NOT algae production in the US. So far, algae research has not got the US off of foreign oil for the last 50 years!

A Concerned Taxpayer
ARPA-E halts algae project, citing missed milestones
Jim Lane | February 16, 2012
Share"In Washington, the DOE has halted a research project at Iowa State University funded by ARPA-E to develop biofuel feedstock from an aquatic micro-organism for failing to reach research milestones. About 56% of the $4.4 million grant was used. Politicians against increasing APRA-E funding as proposed by President Obama’s new budget are using it and other halted ARPA-E projects as examples to reject the program."

anonymous on 05/15/2012 at 09:41

Re: Biofuels Industry at Crossroads as Military Waits for Lower Prices

Sustained biofuel production in the US will come from multiple feedstocks and take some years to achieve a significant impact on overall fuel usage. The potential exists, requires strategic commitment, and in the case of annual plant based feedstocks, the ability to complement current agrronomic practices not replace them. The leadership role taken by the military in biofuels is critical in the creation of the industry.

Scott Johnson on 05/14/2012 at 16:53

Re: Biofuels Industry at Crossroads as Military Waits for Lower Prices

All at-scale biofuel production significant enough to offset our oil imports - are dependent upon NPK fertilizers as our food crops. Over the past 10 years the US fertilizer imports have grown significantly - particularly for phosphates from Morocco. All this extremely ignorant rhetoric about biofuels bringing energy independence is just so much self-interest generated manure - while we go from depending on oil from the Middle East - to importing phosphates from Morocco and Western Sahara where 60-85% of remaining available phosphate deposits are. Where did intelligent leadership go in this country? Not to DC that's for sure. Is there anyone in the military or political leadership not corrupted by big money interests?

Durwood Dugger on 05/14/2012 at 16:14

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