Controversy Brews Over Blender's Credit

Refined from low-cost animal fats through thermal depolymerization, renewable diesel is said to possess superior fuel properties and logistical advantages over methyl esters. Large-scale production of renewable diesel will soon be run by Big Oil, its profitability ensured at least for now by a credit originally intended for biodiesel. These issues have producers lobbying hard to keep the blender's credit in the methyl ester realm.
By Ron Kotrba | June 21, 2007
National Biodiesel Board (NBB) CEO Joe Jobe has been working overtime aggressively pursuing the recapture of his members' former exclusivity to the $1-per-gallon blender's tax credit that the Internal Revenue Service (IRS) handed to major oil companies in early April. The IRS interpreted ambiguous language in a 2005 energy bill provision extending the previous year's biodiesel tax credit to include thermal depolymerization of animal fats-the more technical term for the production of renewable diesel. In mid-April, a major oil company and a giant food processor announced a subsidized marriage made in misinterpretations. In other words, non-methyl ester green diesel is here. "Renewable diesel is on every continent except Antarctica and North America," says Jeff Webster, the general manager of Tyson Renewable Energy, a division of Tyson Foods Inc. "Now, we're bringing it to North America."

Webster is referring to Tyson Foods' partnership with ConocoPhillips, which will materialize in taxpayer-subsidized production of renewable diesel-175 MMgy of it for starters. Ground zero is the oil company's Borger petroleum refinery in Texas, where a $100 million capital investment is underway to outfit the crude processing complex with enough storage, handling and hydro-heating capacity to convert animal fat byproducts from Tyson Foods into renewable diesel, according to ConocoPhillips spokesman Bill Graham.

On May 3, Jobe testified before the small business committee in the U.S. House of Representatives. "Do you take limited government resources and invest them in new energy technologies built from the ground up, where Americans have leveraged their family livelihood into equity?" he asked committee members. "Or do you take those dollars and give them to large, mature, highly profitable oil companies that will use them for their conventional petroleum processes?"

Graham says ConocoPhillips is the first major U.S. oil company to support the development of mandatory climate change programs. "The company is actively looking at ways to lower our carbon footprint," he tells Biodiesel Magazine. "One way to do this is to modify select refineries to process renewables."

But are these climate change initiatives truly philanthropic; and would ConocoPhillips' desire to reduce carbon impacts through green diesel production wither if the $1 credit disappeared? "It certainly changes the economics of it," Graham says. "We need the tax credit to make it competitive. Even with the credit the economics are marginal."

According to Webster, at $2 a gallon for Tyson's poultry, hog or beef fat, it would cost $84 to buy a 42-gallon barrel of feedstock without the $1-per-gallon credit, compared with $65 to purchase a barrel of crude oil. "Then there are the conversion costs, which range from 35 cents to 50 cents a gallon," Webster says. "Then transportation costs are about 25 cents per gallon, and capital investment depreciation is 6 to 13 cents a gallon."

The Process and Fuel Properties
In the United States, soybean oil is the most common feedstock for biodiesel production. Concerns of some well-intentioned biodiesel advocates have surfaced over petroleum companies buying up shrinking stocks of virgin vegetable oils-causing sharp rises in virgin oil prices-and then dumping it straight into their refining process. But vegetable oil is more expensive than animal fat byproducts like turkey offal, and animal fats and simply work better than soybean oil when thermally depolymerizing triglycerides.

In the ConocoPhillips-Tyson renewable endeavor, the production process of green diesel begins at Tyson Foods, where animal fats from industrial-scale poultry and pork slicing and dicing for food markets gives way to fat byproducts from chicken, turkey and pork carcasses in typical rendering fashion. Just as adjustments must occur at the petroleum refinery to accommodate the alternative fat stocks, Tyson Foods is also required to refine its byproduct stream further before handing it off to ConocoPhillips. "On our end, as far as animal fats go, it's different than preparations for soaps or other end uses," Webster tells Biodiesel Magazine. He says the primary reason for the additional treatment of the fats is to remove the alkaline-metal elements resident in the animal fat byproduct chemistries. If not removed, these elements would adversely react with the catalyst during refining. Additional capital costs covered by Tyson go toward increasing quality assurance and lab equipment. Webster says he couldn't reveal exactly how much Tyson was spending to make the necessary upgrades.

"Animal agricultural producers have the preferred feedstock for this renewable diesel," Webster says. This is because the molecular structures of animal fats have fewer double bonds than most vegetable oils. The process of thermal depolymerization breaks down complex polymers into simple monomers under high temperatures-monomers are the smallest repeating unit in a polymer-followed by hydrogen saturation and catalyzed reconstruction into combinations, such as C16H34 or diesel fuel.

"What they are doing is breaking down the triglyceride into its parts, removing the oxygen, and saturating the double bonds with hydrogen," Webster says. Because soy oil has more double bonds, it would require more hydrogen. This all occurs in a hydro-heater under elevated temperatures, with hydrogen and a catalyst. The animal fats become a chemical replica of C16H34 diesel minus sulfur, which is negligible in ultra-low sulfur diesel.

Because renewable diesel is virtually indistinguishable from diesel fuel no adjustments need to be made at the terminals to accommodate it; no heated trucks, tanks or lines are necessary; the fuel is hydroscopic, so it will not attract moisture; it's extremely stable; and it's carbon-neutral because fats are a renewable resource, Webster says. Another advantage renewable diesel has over biodiesel is its ability to move straight into pipeline kinetics.

Preemptive Strikes
Rep. Lloyd Doggett, D-Texas, introduced legislation to reverse the IRS's interpretive ruling that allows oil companies to collect the $1-per-gallon credit. "Green energy initiatives must not be converted into public boondoggles," Doggett said during a May press conference hosted by Jobe and the NBB, the purpose of which was to promote and rally support for the Responsible Renewable Energy Tax Credit of 2007. He added that allowing multinational oil companies to receive such a large subsidy overexpands and exploits the credit, and therefore is perverse.

Doggett sketched out the means and a timeline for moving the legislation, which was referred to the House Committee on Ways and Means. "I think the most likely vehicle [for the bill] is the energy independence legislation we hope to mark up in the Ways and Means Committee probably about mid-June," he said. "It was announced that we would probably take action, not only in the tax code, but generally on energy independence legislation by July 4 of this year. That's ambitious, but I'm hopeful we'll see action as a part of that bill, though there remains the possibility as standalone legislation for any reason unrelated to our bill, should this legislation be delayed." Those wishing to see the Responsible Renewable Energy Tax Credit of 2007 become law should contact their congressional representatives.

Jobe has made it clear many times that he's not opposed to renewable diesel-he just doesn't believe it should be eligible for the same tax credit his NBB constituents rightfully receive. In his testimony to the House Small Business Committee, Jobe said there is already a 50-cent-per-gallon credit ConocoPhillips and others could cash in on, an alternative fuel tax credit passed in the 2005 transportation bill.

Can't We All Just Get Along?
Larry Sullivan, chief technology officer with Kreido Biofuels, a publicly traded biodiesel company with spinning-tube-in-tube (STT) technology, says of the 140 refineries in the United States, 15 oil and gas companies own 80 percent. "Valero [Energy Corp.], Chevron [Corp.], Motiva [Enterprises LLC], the top 10 are very divergent in their approach to this," he tells Biodiesel Magazine. "Some major oil companies have methyl ester investments, but keep in mind, the tax credits are given at the point of blending."

While the IRS is getting a bad rap for its pivotal role in this situation, the IRS didn't rule as much as it took advice from the U.S. DOE, and the U.S. EPA should have had more involvement in that direction, Sullivan says.

The diesel market is a "big church with a lot of pews," says Sullivan, and there's room for many different technologies and alternative diesel fuels-dimethyl ether (DME), biodiesel, and renewable diesel, to name a few. "The middle distillate market is 70 billion gallons in the United States today, and it'll be close to 100 billion gallons in 10 years." He says methyl ester production capacity can reach a billion gallons easily. In fact, DME, biodiesel and renewable diesel could all reach 1 billion gallons in annual volume and not even represent 5 percent of the 70 billion gallon market.

ConocoPhillips is not alone in its interest in capitalizing on the availability of the $1-per-gallon credit. "I know of six companies like ConocoPhillips, all wanting to bring renewable diesel to market," Webster says.

In response to Doggett's legislation to correct this malady of misinterpretations that gives the already heavily subsidized oil companies even more taxpayer money, Graham says legislative efforts to pick technological winners and losers this early in the game would discourage the development of the renewable fuels industry. "In the long run, a level playing field will allow the market to determine the suite of biofuel technologies required to meet long-term policy goals," he says. "We do not believe [NBB's] protectionist actions are in the best interest of the United States."

Essentially, oil companies like ConocoPhillips that are moving forward with renewable diesel production want to have their cake and eat it too, Jobe said. "Advocates have claimed their product would have environmental emissions and carbon benefits, but they haven't proven any of them, or demonstrated them to the EPA as is required by the 1990 amendments to the Clean Air Act." He says future renewable diesel producers have managed to bypass the fuel registration process through this ruling because they've argued to the IRS that their product is clinically indistinguishable from diesel fuel and therefore falls under the registration for diesel. "Well, they can't argue on the one hand that it is clinically indistinguishable from diesel fuel in order to avoid having to go through the EPA certification process, and on the other hand claim that they have emissions and environmental benefits over diesel fuel in order to justify the generous subsidy," he said. "There is very little [emissions] data available, and even less third-party data available because they have essentially side-stepped the process whereby they would have to demonstrate that data." Although ConocoPhillips has yet to receive the EPA's OK, Graham says it will get all the necessary approvals before the product is manufactured or sold in the United States.

Ron Kotrba is a Biodiesel Magazine staff writer. Reach him at rkotrba@bbibiofuels.com or (701) 746-8385.

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