Hero BX eyes expanding biodiesel footprint when pandemic subsides

By Ron Kotrba | April 15, 2020

“We’ve had our belts tightened for the better part of two years, watching our pennies, and in the short term we will continue in that mode,” said Chris Peterson, president of Hero BX. Biodiesel Magazine spoke with Peterson April 9 to discuss how Hero BX, its employees and the handful of biodiesel plants and projects the company owns are faring through the ongoing coronavirus health crisis and the resulting economic fallout.  

“We are surviving day by day,” Peterson said. “All our people are still employed.”

According to Peterson, Hero BX owner Pat Black strives to provide stability for his staff to assure them with confidence that, no matter what happens, paychecks will be issued, and medical benefits will stay in place.

Like millions of other businesses trying to survive the historic pandemic, Hero BX is working to utilize the tools provided in the $2 trillion CARES Act, such as the Paycheck Protection Program. “Since we are making a conscious effort to keep people employed and not laying them off, if our government is willing to help us by providing low-interest loans that are potentially forgivable if we keep people employed, then yes—absolutely,” Peterson said. “With the PPP and the added unemployment benefits, hopefully people find the help and support they need. The government seems to be working overtime to get dollars in people’s pockets.”

Peterson said Hero BX had yet to receive its biodiesel tax credit refund from 2018 and 2019, as of April 9. In late December, after the $1 per gallon biodiesel blenders tax credit was expired for two years, Congress reinstated the incentive retroactively from 2018-’22 in end-of-year appropriations spending.

“Many of our vendors and customers are helping us through this,” Peterson said. “Customers are paying us ahead of time while our vendors are stretching payment terms on feedstock purchases. They, and we, see a light at the end of the tunnel. It’s just a matter of time.”

When asked about if and how Hero BX’s plans for 2020 have been disrupted by the health crisis and economic downturn, Peterson said, first and foremost, he hopes as many people as possible remain healthy, and that this unfortunate pandemic goes away sooner rather than later.

In addition, Peterson said the company is “extremely pleased” the blenders tax credit is in effect three years forward. “We’ve never had that,” he said. “With that confidence and knowing this going into transactions, Mr. Black is [committed] to growing the footprint of our company in this space. And we are taking steps to execute this.”

Hero BX’s flagship biodiesel production facility in Erie, Pennsylvania, a 50 MMgy plant, continues to operate, as does the 20 MMgy Hero BX Alabama facility in Moundsville.

In May 2018 Hero BX began a tolling arrangement with Iowa Renewable Energy in Washington, Iowa. Peterson said IRE was not running April 9, but the facility has been operating sporadically. “We’re waiting to get off winter-spec fuel there,” Peterson said. “Once we’re out of winter fuel blending season and we can move to a higher cloud point fuel, we’ll bring in some animal fats and run it harder.” He said by late April or early May, Hero BX tolling at IRE will be ramping up.

In summer 2018, Hero BX bought at auction the former Midwest Biodiesel Products facility, an idled 12 MMgy biodiesel plant in South Roxana, Illinois. After Hero BX purchased the plant, its original plan was to make it multifeedstock-capable and slightly increase capacity from 12 to 15 MMgy. But once the company dug into the engineering, it soon realized the cost difference to move from 15 to 20 MMgy was negligible.

“We’re finishing final engineering for South Roxana,” Peterson said. “As soon as the weather and the pandemic allow, we will be putting construction people to work.”

He said the site needs environmental remediation before construction crews can disturb the land, and to do this, the ground temperature must be at least 55 degrees Fahrenheit. “It’s a 12- to 18-month project, depending on lead time for the equipment,” Peterson said, adding that the contractor has been given incentives to expedite the timeline. If Hero BX can begin the work May 1, Peterson said it’s possible the project will be completed between May and end of summer 2021.

In September 2018, Hero BX acquired the former Clinton County Biodiesel facility in Clinton, Iowa, from Tenaska Commodities. Named Hero BX Iowa, the facility was running at drastically reduced production rates last fall, but Hero BX has been retrofitting the site to handle feedstock with higher free fatty acid content. Peterson said the last step to the retrofit is installation of an acid esterification unit, which should be complete in the next few weeks. “The whole system in Clinton should be running more consistently by May 1, but not necessarily at capacity,” he said.

On top of the four biodiesel plants Hero BX owns and the IRE tolling arrangement, Peterson said the company is actively searching for new acquisitions. “We are even looking at maybe a new plant build or two,” he said. “We are very bullish on biodiesel. We believe certain separate geographies in the U.S. are underserved and additional production assets are needed.”

Despite this bullishness, travel to perform due diligence is difficult—certainly not advised—in today’s climate with the coronavirus crisis in full swing. “Furthermore,” Peterson said, “bankers are tepid to put new money out without a line of sight on how long this will last.”

Peterson said feedstock prices have “not moved much,” but given restaurants’ limited output in only offering curbside pickup and delivery, “used cooking oil will be priced at a premium at some point in the near term,” he said. “Pandemic aside, the recycled waste feedstocks like used cooking oil, distillers corn oil and some animal fats have largely transitioned to low carbon markets. It is a natural progression for those to find their way in larger quantities into California and other West Coast carbon markets. They’re paying premiums out there.”

With low carbon markets soaking up available recycled feedstock and the health crisis limiting output of used cooking oil, Peterson said Hero BX is making adjustments.

“We’re running heavier rations of soy oil,” he said. “That’s what is available. Margins are thin at best, if not slightly negative. They may not cover depreciation costs, but they may slightly cover the cash price paid. It’s a push. We’re not in a big hurry to go crazy and run at capacity. But we are getting the bugs worked out and keeping people working so that when the markets turn positive, we are ready to run. Instead of spending time commissioning and bringing operators off unemployment, we can hit the ground running.”

RIN prices “have been relatively flat,” Peterson added. “They’re creeping up, but given biodiesel feedstock and fuel prices, they’re nowhere close to where they need to be to make our economics work. Some things are beyond our control. The biggest thing is to worry about what you can control, and don’t worry about what you can’t. There’s no sense in getting in a lather over something that is beyond your control. We are doing what we can to minimize our losses and keep our customers wet. Things will sort themselves out.”

How 2020 shakes out with respect to the Renewable Fuel Standard and oil companies’ renewable volume obligations (RVOs) is yet unknown. However, it seems clear that RVOs will be lower than planned since they are based on percentages of overall fuel demand projections for any given year. And with the steep decline in gasoline consumption as a result of the health crisis and stay-at-home orders for a vast majority of Americans, overall fuel consumption will be significantly less than projected.

“The other indirect impact will be on nesting, in the advanced category,” Peterson said. “Specifically, obligated parties deal with the ethanol blend wall by over-blending biodiesel to make up for the shortfall in D6 RINs. Now, with the absolute destruction of gasoline demand, the D6 requirement will be much smaller, so they will not need the excess D4 RINs to make up for this. We’ll feel the pain too in RIN compliance and valuation. Luckily the crisis has not hit us nearly as strong yet as it has the ethanol industry. It’s coming though, hanging over our heads, so we need to be cognizant of this. One piece of recent good news in the midst of all this is the Trump administration is not challenging the Jan. 24 court ruling on small refinery exemptions (SREs), so this should prevent more widespread use and abuse of SREs in coming years. The current issue with gasoline demand will certainly have an impact though, and it will play a role in what biomass-based diesel demand will look like for 2020, for sure.”

More troubling than the coronavirus impacts on the biodiesel and diesel markets is the feud between Russia and the Organization of the Petroleum Exporting Countries and Saudi Arabia, Peterson said. “OPEC is sending mixed messages, and the petroleum complex is tanking again,” he said. “Diesel and gasoline futures [are the lowest we’ve seen in a long time].”

The shelter-in-place orders are obliterating gasoline demand, but Peterson said diesel use is holding steady, or maybe even increasing. “If anything, we’re hearing our customers saying quarter over quarter diesel demand is actually up compared to previous quarters,” he said. “People are still putting fuel in trucks and taking products to market. We’ve also heard rail volumes have not been as strong, and more products are moving in trucks vs. rail. While this may be good news for diesel, the problem is that the world is swimming in petroleum products right now. But the U.S.-based petroleum industry has taken an aggressive approach to this by idling drilling rigs and taking production offline, which helps supply more closely meet demand. The ethanol industry is taking a beating. It’s a difficult time for them. This will indirectly spill into our business. If ethanol plants are not running, then they’re not producing distillers corn oil and there’ll be a shortage of supply, which will be seen in pricing. We thought back in December or January that 2020 was going to be a good year for biodiesel, but maybe not so much. It may be a struggle. Companies that were diligent and did their homework, and those that have been managing their expenses and keep a good book of business with their vendors and customers will survive. They’ll weather the storm. We’ll be okay.”

Peterson is hopeful the American economy and the biodiesel industry will get through the ongoing health crisis quickly. “The underlying economy is still strong,” he said. “A lot of people are really hopeful about this, even though the job numbers are bad. But this is no surprise when you shut down the economy. As soon as it is medically responsible, the government will turn on pieces of the economy and get this country running again. It will not take long. There is a lot of pent up consumer demand, people waiting to buy cars and houses. They’ve not gotten out of the house for weeks, or a month, during the quarantines or shelter-in-place orders. People want to go to the mall, the movies and restaurants again. It’ll come back.”

As for Hero BX’s short-term plans, the company will continue to keep its belt tight. “Our plant employees are doing the best they can with the least amount of capital expenditures from a maintenance and operational standpoint,” Peterson said. “We continue to innovate and do things more efficiently to survive the best we can. In the long term, those added efficiency measures—our whole mentality to succeed—will be beneficial. The markets will come back. Unfortunately, it may come at others’ expense, but this will create new opportunities for plant acquisitions. There will be opportunities for those who choose to stay in the industry. In the short term, it will be painful. But in the medium to long term, it will be good for those who choose to stay, compete and grow.”

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