Biodiesel investments discussed in St. Louis

By | June 01, 2006
Integrated crush/refineries, offtake agreements and EPC production guarantees are vital keys to obtaining biodiesel project financing, according to renewable fuel industry investors. These topics and others were discussed at the Biodiesel Opportunities and Investments Summit on April 27-28 in St. Louis.

The integrated oilseed crush plant and biodiesel refinery appears to be a trend in the biodiesel industry. The integration takes advantage of synergistic infrastructure and consistent feedstock availability and quality.

Feedstock procurement contracts are a must, said potential investors considering the biodiesel industry. The current lack of risk management in this area is considerable. According to pro forma financial statements presented by several speakers, changes in feedstock price have a great effect on the plant's potential profit-generating capability. A 1-cent change in feedstock price can equate to a 7.8-cent change in the end biodiesel product.

Large oilseed crushing and oil handling companies are beginning to enter the industry. Archer Daniels Midland Co. recently announced its groundbreaking of an 85 MMgy plant collocated with its canola crush facility near Velva, N.D. Cargill is constructing a 37.5 MMgy biodiesel plant in Iowa Falls, Iowa. Louis Dreyfus also recently broke ground on what will eventually be an 80 MMgy biodiesel plant in Claypool, Ind.

The trend to larger plants may signify a maturing industry. Approximately 70 percent of operating biodiesel plants are 5 MMgy or less. Of the biodiesel plants currently in the construction or pre-construction phase, the average size is 22 MMgy.

Several potential investors believed the best model for the biodiesel industry is a "company strategy," where multiple plants are owned and operated. This helps mitigate the risk of relying on a single facility. A minimum of a three- to five-year offtake agreement for at least 50 percent of the biodiesel was also discussed.

Production guarantees are a standard in many renewable-fuels-related projects. Investors often require EPC contractors to guarantee their projects. However, not many U.S. design/build firms are providing the guarantees. Those that are can typically only bond a certain number of projects, leading to a backlog of development.

The glycerin market continues to be an issue with few solid answers. The product sometimes sells for as little as 5 cents per pound or less, making it difficult for biodiesel producers to dispose of it.

Another concern among investors was the lack of correlation between the vegetable oil and biodiesel markets. While some are beginning to see trends, it's difficult to hedge when the two commodities don't follow each other, speakers said. Soy oil prices have spiked as much as 30 cents per pound in the early 1980s to less than 15 cents per pound as little as five years ago.

The extension of the biodiesel production tax credit continues to be a hot topic among biodiesel investors. Sen. Chuck Grassley, R-Iowa, recently introduced Senate Bill 2401, which would extend the credit two more years to expire in 2010. Sen. Kent Conrad, D-N.D., introduced Senate Bill 2571, the BOLD Energy Act of 2006, which would extend the credit through 2013.

Attendees also discussed whether government support for biodiesel will be needed in the long run. It was generally agreed that biodiesel could compete with diesel fuel without subsidies if crude oil maintained at least $80 per barrel.
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