“In our space, on a myopic level, we are so used to getting battered around, we’ll get through this too—but on a broader level the dynamics in which we operate will be substantially different,” said Gene Gebolys, founder and CEO of World Energy, one of the largest biodiesel producers in North America. 

In late March, during the midst of the coronavirus pandemic, Biodiesel Magazine spoke with Gebolys about how the global crisis is impacting his business, the biodiesel market, renewable fuels in general, the broader energy complex, and climate change.

Despite plummeting crude oil prices stemming from a price war between Saudi Arabia and Russia in early March just as the U.S. began feeling the effects of the coronavirus pandemic—triggering staggering losses in the stock market—shelter-in-place orders across the world’s largest economies have slashed gasoline demand in half.

“The diesel side of the equation hasn’t been destroyed as much as the gas side,” Gebolys said. With lower gasoline prices and demand, ethanol prices have sunk to new lows, obliterating margins and forcing some U.S. ethanol plants to shut down.

Unfortunately, this phenomenon comes in the wake of one of the worst years for ethanol demand destruction in the U.S. as the EPA—the agency in charge of administering the nation’s Renewable Fuel Standard—granted a record number of small refinery exemptions (SREs) under the program, including 31 on a single day last August.

“Ultimately, the ethanol industry is going to go through some of what we in the biodiesel industry have gone through,” Gebolys said. “They’ve been limping along with excess capacity, which now must be rationalized. These companies are taking a beating, so the likelihood rationalization will occur in the ethanol industry is pretty high.”

While gasoline and ethanol demand has fallen sharply in a matter of weeks, the diesel-powered supply chain rolls on. “Stuff still needs to get consumed, whether that’s heads of lettuce or toilet paper,” Gebolys said. “But when people don’t go to work, or to Disney World, or anywhere—it’s just stunning what’s happening in the world gasoline markets.”

Biodiesel producers won’t get out of this crisis unscathed by any means. For one, under the RFS program, the obligated parties’ (oil companies’) renewable volume obligations (RVOs) are percentages based on projected gasoline demand and production. When actual production and demand fall short, so will the volume of ethanol and biodiesel that are required to be blended in the motor fuel pool.

“Demand for compliance credits will be off proportional to the demand for fuel,” Gebolys said.

Secondly, what have historically been lower-cost, lower-quality feedstocks such as used cooking oil (UCO) and distillers corn oil (DCO) are rising in value due to waste feedstock demand for low carbon intensity biodiesel and renewable diesel in carbon markets such as California and elsewhere on the West Coast. More recently, with restaurants—and ethanol plants—shutting or slowing down due to the coronavirus pandemic, less UCO and DCO are being produced.

“These used to be low-value feedstocks, but now they’re high-value LCFS feedstock and they’ve been holding up better than soy oil for some time,” Gebolys said. “They’re really holding firm. They don’t only go into fuel. Oleochemical demand is holding strong too. Non-vegetable oil feedstock is the only thing holding their value.”

On the bright side, biomass-based diesel RIN values “have held up okay,” Gebolys said. “Heating oil has taken a beating, but not as bad as gas.”

After 24 tough months without the $1 per gallon biodiesel blenders tax credit, many producers had either idled production, throttled output way back or were preparing to do so by the end of 2019. Then Congress surprised nearly everyone by including an unprecedented five-year reinstatement of the incentive in end-of-the-year appropriations legislation, reinstating the credit retroactively to Jan. 1, 2018, through Dec. 31, 2022.

The IRS began accepting tax credit refund applications Feb. 14 and committed to getting payments out in 60 days. As of March 31, Gebolys said World Energy had yet to receive its share and, furthermore, he wasn’t aware of anyone else receiving a check yet either.

When asked about the timing of the pandemic and how it might play into the pending resurgence of the biodiesel industry, since producers are still awaiting tax credit refunds to either ramp production up or restart operations, Gebolys said, “Whatever happens in real time doesn’t matter. If you were running a plant a few weeks ago, you’re probably still running it now. Margins right now are kind of a push. They’re not something you’d start a plant up for, but they’re not so brutal that if you are running a plant that you’re getting killed, either. Anyone in our industry who’s still sticking around in first quarter 2020 has been through some tough stuff. Our industry is uniquely well-positioned for dealing with this. When the pandemic hit, I sent a note around our company saying, ‘At least we are battle-tested.’”

In August, World Energy announced it was shutting down three of its five operating biodiesel manufacturing plants in Georgia, Pennsylvania and Mississippi due to poor market conditions resulting from the prolonged tax credit lapse and EPA’s prolific granting of SREs. Its two other operating biodiesel plants in Hamilton, Ontario, and Houston, Texas, would continue running, along with its renewable diesel refinery in Paramount, California. World Energy’s two nonoperational projects in Sombra, Ontario, and Estill, South Carolina, were effectively put on hold.

“We were bringing our plants back online that we shut down in Georgia, Mississippi and Pennsylvania when this hit,” said Gebolys, referring to the coronavirus pandemic. He said the 18 MMgy Georgia biodiesel plant—World Energy Rome at U.S. Biofuels Inc.—is running again, “but not at full bore.” In Natchez, Mississippi, the company has been waiting for the annual rise of the Mississippi River to subside before restarting the 72 MMgy facility there, since this impacts supply chains to and from the site. “In any case, the plan has been that the Pennsylvania plant (the 45 MMgy World Energy Harrisburg in Camp Hill) would be the last one up,” he said. 

Shifting back to the impact current events are having on the global oil market, Gebolys said, “The interesting story for me is, a lot of people are saying we’re going to get through this and then ‘get back to normal,’ but the old normal will never be the new normal. The entire oil complex is absolutely getting devastated. Some of the oil majors have lost $100 billion in value this year—each. At that level, this is complete value destruction.”

Gebolys pointed to Marathon Petroleum’s acquisition of Andeavor (formerly Tesoro) in 2018. Today, Marathon is valued at just half of what it paid to acquire Andeavor less than two years ago.

“There is an absolute drubbing happening—and the worst is upstream on the E&P (exploration and production) side,” he said. “That sector has lost upwards of 90 percent of its Jan. 1, 2013, enterprise value.”

Despite what opponents say about the environmental concerns tied to shale fracking, this boom from Texas to North Dakota helped the U.S. foster energy independence and secure a top spot among the world’s largest oil-producing nations. “They’re all wiped out,” Gebolys said. “It’s just amazing what happened. Over nine of every 10 cents invested since January 2013 in those companies is gone.”

The biodiesel sector is a small part of a big energy complex, and that energy complex will be different when this is all over, Gebolys predicted. “You can’t go through this level of bloodletting and it all be the same afterwards,” he said. “So, as happens in downturns the strong will get stronger, and my guess is there may be a fair bit of consolidation in that sector too.”

In the wake of the coronavirus pandemic, Gebolys said he will be very interested to see how we as a species react to known but unseeable risk in the future.

“It amazes me how this was rolling through China and both the government and the press in the western world didn’t do a damn thing,” he said. “It was completely predictable but none of us identified the now obvious risk. Another big risk is coming—the kind we can’t see and some consider a hoax. I wonder if our relationship to climate change changes after this. That will be a silver lining if it does. We’re in the low carbon fuel space, we’re not offering a miracle solution, but using our products is dramatically more responsible than doing nothing. I think there might be greater sensitivity coming out of this now that the world is coming to grips with the fact that scientifically identifiable risk is very real, whether we can see it or not.”

World Energy’s short-term goals for 2020 include moving forward with the $350 million expansion of its renewable diesel refinery in Paramount, California, which the company announced in 2018, and doubling down on the commitment to making its biodiesel plants as efficient as possible.

“There are improvements we can still bring to those assets,” he said. “I may be in the minority thinking that biodiesel is still quite alive and well. There is this perception that renewable diesel will replace biodiesel. I don’t think so. We will continue to invest in our biodiesel plants, and in biodiesel in general.”