Biofuels Industry: Minus Incentives
22nd Annual EPAC Conference
June 24-26, 2012
Billings, MT
John M. Urbanchuk
Technical Director - Environmental Economics
Cardno ENTRIX
John.Urbanchuk@cardno.com
Who we are
 Cardno ENTRIX is a professional environmental consulting
company specializing in water resources management,
environmental risk management, natural resource economics,
natural resources management, and facility permitting &
compliance.
 Our staff of more than 1,600 includes biologists, chemists,
geologists, oceanographers, toxicologists, meteorologists,
economists, and environmental, chemical, and civil engineers.
 Headquartered in Houston, we have more than 40 offices in
the U.S., Canada, Ecuador, Colombia and Peru.
Why Biofuels?
Crude oil prices remain high.
Source: EIA
4
Gasoline and ethanol prices are diverging. As a result
price margins continue to favor blending ethanol.
Source: Nebraska Ethanol Board. Updated 6/19/12
The biofuel policy landscape is changing. We will see if
the industry can stand on its own two feet.
RFS2 Mandate
% Chg YOY
 Biofuel critics got their wish. The
principal Federal tax incentive and
secondary tariff expired 12/31/11.
 The RFS2 mandate remains in place
but is under attack.
 Recent EPA approval of E15 is
favorable.
 Money for flex fuel infrastructure will
remain elusive.
 Expect increased investment in
Brazil and more exports to the U.S.
after the Brazilian sugar crop
recovers.
40
35
30
25
20
15
10
5
0
Corn
Cellulose
Biodiesel
Other Adv Biofuels
Fundamentals for global petroleum growth favor
biofuels. Will support expansion of export market.
BRIC Characteristics
Brazil
Russia
India
China
Cur Pop (Mil)
201
139
1,157
1,330
2000 Pop (Mil)
223
132
1,326
1,384
GDP Per Cap
$9,217
$14,907
$2,966
$6,237
Vehicle Stock
(Mil)
28
38
20
51
Per 1,000
192
319
25
48
New Vehicle
Sales (5-yr)
15%
3%
16%
25%
Biggest challenge facing ethanol industry will be
demand! Approval for higher blends (than E15)will be
necessary to meet RFS2 mandates.
Source: EIA 2012 Annual Energy Outlook
Biofuel feedstock prices continue to be a challenge. High
sugar prices have made Brazilian ethanol unprofitable and
oilseed prices are challenging biodiesel.
Source: IMF Primary Commodities Database. Updated April 2012
Industry profitability has declined sharply reflecting loss
of VEETC and large supplies.
Ag Marketing Resource Center Iowa State Univ. May 2012; USDA/AMS
Production is outpacing domestic use. Exports are a
bright area but stocks continue to build.
U.S. Ethanol Supply & Utilization
(Million Gallons)
Production
Imports
Domestic
Use
1995
1,358
168
1,501
34
92
2000
1,622
165
1,749
54
136
2005
3,904
212
4,072
62
234
2010
13,289
16
12,865
397
753
2011
13,948
132
12,874
1,193
767
Year
11
Exports
Ending
Stocks
Not all is bleak. Two factors working in favor of ethanol
profitability are strong co-product and low natural gas
prices.
Ag Marketing Resource Center Iowa State Univ. May 2012; USDA/AMS
Profitability will remain a challenge. Expect profitability
to remain under pressure until RIN values increase as
inventories are drawn down.
$1.75
$1.50
$1.25
$1.00
$0.75
$0.50
$0.25
$0.00
$2.75
$2.50
$2.25
$2.00
$1.75
$1.50
Returns over Var Cost
J.M. Urbanchuk projection Jan 2012
Ethanol, FOB Nebraska
$/Gal
$/Gal
Ethanol Profitability
How will we produce the 21 billion gallons of non-corn
starch biofuels needed to meet RFS2 targets by 2022?
 Biofuels policy is uncertain; budget pressures are likely to
continue trumping energy needs.
 RFS2 is under attack in the courts and Congress
 VEETC and biodiesel tax credit are gone and will not
return.
 Cellulosic tax credit expires on 12/31/2012.
 Feedstock diversity will provide both challenges and
opportunities.
Another major challenge will be the required rate of
expansion and availability of construction infrastructure
 Producing 15 billion gallons of corn starch ethanol is no
problem.
– Currently 212 refineries have nameplate capacity of 14.8 billion
gallons with an average capacity of 70 MGY.
 Capacity is in place to produce more than1 billion gallons of
biomass biodiesel.
 Assuming a 50 MGY capacity, as many as 400 new plants will
be needed to be built by 2022 to meet RFS2 target at a capital
cost of nearly $90 billion!
More challenges ...
 Commercially successful conversion technology is uncertain
and will require consistent R&D investments. Options include:
 Biochemical (enzyme fermentation)
 Chemical (acid hydrolysis)
 Thermochemical gassification or pyrolysis
 Algae
 Capital availability and financing are uncertain. Money is
available but lending standards have tightened significantly.
 Permitting and sustainability will be issues for new
biorefineries
In conclusion …
 Biofuels production will expand both in the U.S. and globally
but significant challenges remain.
 Threats to RFS2
 Feedstock and technology choices
 Financing and capital availability
 Permitting and sustainability
 Rate of expansion and availability of resources
 Biofuels are a shining star within a declining U.S.
manufacturing sector and will continue to provide significant
economic, environmental, and energy security benefits.
Questions?