Talking Point

An integrated bio-refinery solution nets efficiency, diversity and enhanced returns
By Mark Warren | August 01, 2006
In a commodity-based business, it is imperative to look for ways to differentiate and improve the value of your brand and product when compared to that of your competition. Changes that bring more flexibility, diversification and leverage by capturing economies-of-scale benefits can add new value to a plant and help establish a competitive advantage. One emerging approach in the biofuels industry is an integrated bio-refinery strategy that combines the refining of ethanol and biodiesel on one site. This approach enables plants to better capitalize, capture and leverage its core set of assets; diversify its risk and revenue streams; develop new market opportunities; and deliver enhanced shareholder value to its investors.

The integrated bio-refinery strategy delivers numerous synergies and advantages to its shareholders and management when compared to stand-alone projects:
-Enhanced scale efficiencies and cost savings
-Capital cost savings by optimizing upfront costs for initial project development
-Rail, road, natural gas, water, waste water and electricity capital costs
-Potential for storage synergies
-Minimized development costs for project
-Labor savings between facilities through the sharing of resources
-Administrative savings through elimination of overhead, which is geared around a single management team
-Improved freight rates from moving more gallons of renewable fuel coupled with the opportunity to develop unit train capabilities at the facility
-Diversification of revenue and risk while providing greater flexibility
-Instead of one major feedstock and one major product and coproduct, the bio-refinery has double the feedstocks and products, thus diversifying risk and its revenue streams
-A Midwestern location can be an advantage because of the relatively large soybean and corn production coupled with crushing assets and rendered plants in the region. If feedstock oil prices for biodiesel materially appreciate, the bio-refinery could add oilseed processing assets. This would allow the venture to manage feedstock oil risk and capitalize on the high returns from oilseed processing.
-Capture of higher-value opportunities
-Corn oil from the ethanol process can be utilized as a feedstock to make biodiesel. This process converts corn oil, a low-value feed ingredient, into biodiesel. A 100 MMgy ethanol plant could supply up to 20 percent (5 million to 6 million gallons) of the feedstock needs for a 30 MMgy biodiesel plant.
-Opportunity to leverage unutilized carbon dioxide from the ethanol plant to crush soybeans on-site, thus minimizing the biodiesel plant's feedstock exposure in the market
-Longer-term opportunity to transition into other ag, alcohol and petroleum derivatives

These represent very real examples of ways that a self-contained and integrated business platform can help create a more sustainable business and enhance shareholder value. Instead of depending on new and potentially riskier technology, the bio-refining strategy mitigates risk by bringing together proven business models in a manner that enhances shareholder return. In fact, by taking the integrated bio-refinery approach, shareholders can conservatively expect to improve returns on initial investment 8 percent to 12 percent.

A Case In Point
The evolution of the renewable energy sector is moving at a rapid clip, and those anticipating the next evolution of the business will be better positioned to succeed over time. Today, biofuel businesses are enjoying the benefits of strong petroleum prices coupled with relatively stable-priced agricultural inputs. At some point, markets will tighten and competition will increase, all of which underscores the importance of defining and quantifying your plant's competitive advantage in order to improve your odds of success. Finding and implementing ways to position your plant to move off the "margin" of the industry cost curve will become increasingly important to long-term sustainability.

Ascendant Partners is presently working with industry leaders to develop renewable fuel portfolios and integrated bio-refining business models. A project in northeast Kansas-Northeast Kansas Bioenergy LLC-is positioned to be the first integrated biodiesel and ethanol bio-refinery to come on line. That bio-refinery expects to produce 30 MMgy of biodiesel and 50 MMgy of ethanol, both of which were based on regional market fundamentals.

Mark Warren is a partner at Ascendant Partners Inc., an independent consulting organization dedicated to helping agribusiness, food and renewable energy companies succeed. He can be reached at (303) 221-4700.
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