Changing Hands Safely

Safety risks and costs with restarting previously idled biodiesel plants
By Bryan Sims | November 22, 2011

It’s no secret that the biodiesel industry has experienced record production levels in the past several months—volumes the industry hasn’t seen since its days of breakneck growth in 2006-‘08. The achievement of this milestone can be traced back to the coexistence of a tax credit and high RIN prices coupled with regional pockets of demand in both on- and off-road applications, such as Bioheat. But the welcome uptick in production volume can also be attributed to the number of idled biodiesel assets that have been acquired and brought back online to operate more efficiently.

Before a valve is ever turned, however, when a plant—especially one that has been mothballed for an extended period—changes ownership, the prospective buyer must be mindful of the safety risks and costs of updating the process technology, equipment, instrumentation and the personnel needed. This is the advice of Paul Tantillo, director of operations and managing partner at Enervation Advisors headquartered in New York, which advises on the acquisition, sale, turnaround and financing of distressed biodiesel assets. Having managed the acquisition of two previously idled biodiesel plants this year in Iowa and another in Michigan, Tantillo says his company is on the lookout to handle the acquisition of more.

“We’re not looking to turn on the switch immediately,” Tantillo tells Biodiesel Magazine. “We have to go in and bring these plants back to life, so to speak, with new parts and simplify the process, and then make the process easily duplicated with staff and personnel so that everyone is reading the same sheet of music.”

Because the existing equipment at each plant is unique to that facility, Enervation Advisors takes a cautious approach when targeting a distressed biodiesel plant to ensure a successful restart without repeating the incidents that caused the plant to originally shut down, Tantillo says. To make sure that every plant is safe and profitable, Tantillo says that Enervation Advisors enforces uniform procedures and strict safety protocols at all of its client plants.

“Standardization is key for us,” Tantillo says. “At the end of the day, the plant is going to have a standard set of protocols and state-of-the-art processing equipment.”

Whether the mission is to evaluate existing safety or technology features at a biodiesel plant or to physically make upgrades or replacements, the interface between a reputable design/build firm and the entity that acquired the plant is critical when inspections occur to achieve maximum operational performance as safely as possible during startup.

Knowing is Half the Battle

While maintenance activities must be performed on an ongoing basis at all biodiesel facilities, the requirements for idled plants are dramatically different than those for operating facilities, therefore assessing the quality and reliability of particular equipment is only as good as how well maintained it was in mothball status. For many of those plants, design glitches or processes that needed adjusting were part of why they were not able to remain profitable. This is where engineering and design firms come in.

Important items that EPCs and chemical process licensing companies such as Lurgi Inc. look for when evaluating whether a plant needs equipment or technology upgrading include safety of the overall process design, the robustness of the process, as well as the overall reliability of the design. These considerations are key to ensuring long operating periods without interruption by unforeseen circumstances, says John Monfre, director of business development at Lurgi. Since 2007, Lurgi, a member of the Air Liquide Group, has designed and built more than 30 biodiesel plants worldwide spanning Latin America, China, Europe and Southeast Asia. In the U.S., three biodiesel plants were built by Lurgi within the past three years and four within the past five.

“If it’s been a mothballed facility, one of the things that we would help look at and evaluate would be the quality of the maintenance, if there are records of the facility during operation, and also during the time that the facility might’ve been mothballed, because that can really affect what the long-term reliability of the equipment would be and the potential need for replacement or refurbishment,” Monfre says.

According to Roger Gilchrist, chairman of Lurgi, thoroughly documenting dates of when and how pieces of equipment such as centrifuges may have been replaced or upgraded during a plant’s operating life, including the idle period, is critical for ensuring a smooth transition for a successful operation. Doing so allows the design/build firms to match them with the original design of the plant, which helps it know exactly what recommendations to make to its clients to ensure long-term operating efficiency and profitability.

“New owners frequently will be given information from existing owners, and it depends on the quality of the owner that had the plant as to how valid the design records are,” Gilchrist says. “The equipment list may not be necessarily ‘as built’ and therefore it is necessary to go back through and verify that the process and equipment that exists in the plant in fact matches the drawings, flow sheets, heat and material balance and so forth.”

According to Mike Shook, co-owner of Stuttgart, Ark.-based engineering and design firm Agri-Process Innovations, the company has been busy bringing previously idled plants back online for new and prospective owners at various locations across the U.S. API has more than 60 years of experience in the biodiesel industry, having designed and built more than 20 plants worldwide.

Shook says the company has been approached several times by banks that were holding a plant in receivership due to original owners filing bankruptcy, or had a prospective buyer interested in acquiring a plant outright. API can come in and draw up reviews and make recommendations for new buyers to make updates if they’re needed, and determine if existing equipment is arranged and functioning in a manner that conforms to local, state and national safety codes.

 “Unfortunately, a lot of these plants were built without a lot of engineering put into them,” Shook says. “Most of them probably wouldn’t pass OSHA or any other type of inspections for meeting code.”
Depending on the size of the plant, the cost of conducting an inspection and review of a biodiesel plant can cost anywhere between $10,000 and $25,000, Shook says. “Travel costs are factored in there,” he says. “If it’s close, it’s cheaper.”

Shook says API assists new and prospective owners of biodiesel plants typically by sending a crew, usually two or three people, to open tanks, take samples of liquids and send them off for testing, check pumps so they’re not locked up, make sure lines are clear, or power up all the instruments to get signals to verify components are functioning properly before making recommendations for any upgrades.

“We draw up a report with pictures and a budget that they can use as part of their negotiation to say, ‘Alright, before this plant begins operation, here are the things that you need to do,’” Shook says. “We also give the client a budget on what it’s going to take to make replacements on instruments and equipment.”

As one might expect, deficiencies are expected at a plant that has been idled. Among the most common that API has run into, Shook says, deal with the placement of electric components. “The biggest thing we see is electrical, where they don’t use proper classification of electrical equipment for the environment that it’s in,” he says.

During the walk-through inspection process, companies like API and Lurgi must navigate through the nuances of adopting the most current fire and chemical safety codes within the given location because codes can change over time, according to Monfre. “Some of that is driven more so in the lag with which a lot of municipalities perhaps adopt the latest international fire codes or [National Fire Protection Association] codes,” he says. “Even on a year-to-year basis, somebody has to look at that to see if the municipality has restarted it, and certainly if they’re restarting the facility, more than likely the facility would not be grandfathered. Any potential upgrades would have to be discussed with the local authorities in terms of what their expectations are for meeting any changes to the codes.”

Shook echoes Monfre’s statement, adding that the reason many newly acquired plants that changed ownership may be slow to adopt the latest fire and safety codes depends on where they’re located. “A lot of these plants were built in rural areas where they don’t have formal inspectors like a big town that has a fire marshal,” Shook says. “Sooner or later though, someone is going to want to show up and inspect you.”

Outside Perspective Pays Off

There are several methods of acquiring a distressed biodiesel plant with the intent to restart production. One way is purchasing a plant through sale or auction. Before prospective buyers consider purchasing entire facilities or individual components at auction, it’s recommended that they first be inspected by qualified appraisers because equipment components and instrumentation can depreciate over time, which can dramatically affect the value, according to Cathy Rein, owner of Colorado-based Sandalwood Valuation LLC and appraiser with Lee Enterprises Consulting. In addition to offering appraisals on equipment at biodiesel plants, Rein also conducts fixed asset management services for buyers and sellers as well.

“Having the equipment idled definitely has an impact on its value,” Rien says. “We’ve definitely seen those auction values drop off over the last three years, particularly for equipment components auctioned off piecemeal, in addition to plant entities that were auctioned as an entire plant.”

According to Allison Guyton, direct of operations for Rochester, Minn.-based asset recovery and auction firm Maas Companies, most of the facilities it offers to prospective buyers are lender-owned facilities or diluted foreclosures where lenders are involved in transactions, not the original purchasing entity that’s doing the selling. She adds that most of the assets on the properties that were bought at auction  have been well-preserved thanks to proper maintenance procedures. An important item that has come up in recent years more than it used to, Guyton says, are issues over how warranties and licenses on equipment and technology and how they are transferred from one owner to another.
“In some cases they are transferrable—but not always,” Guyton says. “It just varies case-by-case if the property has gone through bankruptcy or how the assets acquired are to be liquidated. There’s really no set formula for that.”

When an experienced appraiser inspects an idled biodiesel plant prior to being acquired, Rein says they do both a market approach, where they look at comparisons between similar sales of similar equipment, and a cost approach, where they look at equipment based on cost.

“They’ll look at what the cost of that equipment was and then depreciate that based on its physical depreciation,” Rein says. “That physical depreciation is typically tied to age, but it can also be impacted by how well it was maintained. If the equipment has been idled and not maintained, it’s definitely going to increase its physical depreciation and it’s going to lower its value on the cost approach.”
Author: Bryan Sims
Associate Editor, Biodiesel Magazine
(701) 738-4974

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