Amelot Holdings Inc. is not producing biodiesel yet, but it is planning to buld a facility in Nashua, N.H., and the company recently entered into a supply agreement with Loud Fuel, a Massachusetts-based distribution service. The company is an ambitious, publicly traded enterprise with some grand forward-looking statements. "Our objective is to have 50 [biodiesel] facilities, one in each state, over a five-year period," the company said in a news release. In early November, Ultra Soy of America LLC announced its intention to build a soybean processing facility in Indiana that would eventually include a couple of biodiesel plants. The crushing plant is expected to be large enough to supply feedstock for about 120 MMgy of biodiesel production. Pronouncements of this nature were the norm in the biodiesel business in 2006.

As more companies enter the business with promises to ramp up production, many in the biodiesel industry are keeping a wary eye on soybean production figures. Peering into the future, the USDA has predicted a five-bushel-an-acre increase in soybean yields by 2015. This would add another 500 MMgy of oil surplus into today's supply. Furthermore, if the oil content of soybeans across the entire U.S. crop could be increased by 1 percent, that could lead to an additional 250 MMgy of capacity. "The reason to walk through those metrics is, even if we increase [production of] the feedstock, we are not going to get to 2 billion gallons (of biodiesel) coming from soybean oil," says Jim Eiler of Cybus Capital Markets LLC, a food and agribusiness investment banking firm headquartered in Des Moines, Iowa. "What's the feedstock going to be? And, is all of this 2 billion gallons of capacity under construction going to get built?"

These are the burning questions for investors, financiers and business people who have an interest or a stake in biodiesel. A year ago, there were only two plants in operation that were producing more than 30 MMgy, which is now considered small when compared with some of the plants currently under development. However, those larger plants-capable of producing 60 MMgy and more-have yet to come on line. So the question remains, what is the true operating efficiency of a 60 MMgy plant versus a 30 MMgy, or even a 10 MMgy? "As an investor I think you want to be sure that you're in the bottom quartile of operating costs for a sustainable competitive advantage," Eiler says. A company's location is one of the characteristics that distinguish a low-cost, well-managed company from an inefficient, at-risk venture. More than 80 percent of the production cost of biodiesel occurs in the procurement and transportation of feedstock to the biodiesel plant itself. "I think [a No.1 priority] is logistical advantage," Eiler says. "Either you have to have something unique in your feedstock supply, or you need to be located near the terminal where the blending is going to occur."

For instance, NewGen Technologies acquired three fuel terminals on the Colonial and Plantation pipelines from Crown Central LLC in February, which have a storage capacity of over 10 million gallons and an annual throughput capacity of more than 500 million gallons, which will be used for the distribution of renewable fuels. At these terminals, ReFuel America, a subsidiary of NewGen, will begin blending and distributing biodiesel currently on the market. Ultimately, the terminals are intended for NewGen's own biodiesel once its production facilities are up and running.

"Where I would put my money today is in larger plants that have significant logistic advantage," Eiler says. "These would be plants 50 MMgy or larger located on waterways, either deep water ports or on the Mississippi, to access feedstocks and ship finished product."
Does that mean that independent companies will need to find and maintain strategic partnerships to stay competitive? "There's no question about that," Eiler says.

Strategic Processing Partnerships
The consolidation and diversification of services and abilities will be characteristic of the industry in the months and years to come, Eiler says. Leveraging the specialties and expertise of other companies, and possessing the negotiating skill this requires, will be crucial for survival in the biodiesel business.

Rather than recruit an independent management team, a company could move right into consolidation, Eiler says. For start-ups, this would involve finding strategic players in this phase that would have an interest in either managing a facility or being an investor as a minority or majority holder in the project. "So move toward the consolidators, the people who have the management team and the risk management skills to really run a company," he says.

Exemplifying this strategy, Renewable Energy Group Inc. (REG) started a new company, reformulated its business structure and brought in Bunge as its partner. This was a necessary step "to provide a dedicated supply of various raw materials, site locations, risk management and logistics expertise, and enable growth in biodiesel production capacity to the volumes necessary to meet the consumption demands of large customers nationwide," the company says. Having negotiated partnerships with Bunge, the largest oilseed processor in the world, and ED&F Holdings Ltd., a major trader of fats and oils, REG says it has expanded its transportation and distribution networks both domestically and locally.

Nova Energy Holding Inc. is also one of the start-ups that seems to be adhering to this advice. The Houston-based future producer entered into feedstock supply and sales agreements with ConAgra Trade Group Inc. in July for a biodiesel facility slated to be built in Oklahoma. The agreements provide that ConAgra Trade Group will procure the vegetable oil and animal-based feedstock required for Nova Energy's plant, as well as market the fuel and manage the logistics for the facility. Eiler believes that the addition of a partner like ConAgra will lower the operating costs for a plant. "I think the best way to view this is, if you are a low-cost operator, you'll be one of the last plants operating because you can afford to buy the soybean oil versus some of these other guys where these plants may get shuttered … particularly the smaller ones," Eiler says.

Fossil Players
Another trend that started in 2006, and is likely to continue, is that large ag purchasing and processing companies, many of which have been involved in biodiesel in Europe for some time, have been making their presence felt in the U.S. industry. Cargill is now producing in Iowa, Archer Daniels Midland Co. has an 85 MMgy plant under construction in North Dakota, and ConAgra Trade Group, the commodity trading arm of ConAgra Foods, will begin marketing ethanol and biodiesel within the next several months, according to Martin Higgins, executive vice president of business strategies for ConAgra. He told EPM that the company is uniquely positioned to support the range of participants in the renewable fuels industry. "We have infrastructure, financial strength, and we're actively involved in renewable fuels by providing feedstocks and marketing by-products."

The interest and power of traditional companies that have held the liquid fuels market in North America also began to make business moves in the renewables sector. "I think what you are going to see is joint developmental alliances with some of the petroleum interests," Eiler says. Certainly, biodiesel companies wouldn't turn away the deep pockets or the expertise of petroleum enterprises, that want to partner in research, distribution or production in the methyl-ester sector of their liquid fuels operations.

British Petroleum's study of biodiesel production using jatropha as a feedstock in India and Chevron's formation of a new biofuels business unit is of particular interest to the biodiesel industry. Chevron spokesman Leif Sollid says the company is spending $300 million a year on renewable energy technology. In addition, Chevron Technology Ventures LLC, a subsidiary, bought a 22 percent stake in BioSelect Galveston Bay, which claims its 20 MMgy Texas plant will be among the biggest in the United States after it is expanded to 50 MMgy in the future.

The entrance of the major petroleum companies may signal the maturation of an industry that has been in its infancy. Forming alliances or securing financial alliances from multi-billion dollar corporations adds legitimacy to the sustainability of biodiesel manufacturing. Many of the maneuvers in the development of any business, however, involve a significant amount of risks and uncertainties. "Biodiesel is going to be here, but we are going to see importation of other vegetable oils that are going to supplement [soybean oil] … if they can get it here," Eiler says.

Nicholas Zeman is a Biodiesel Magazine staff writer. Reach him at nzeman@bbibiofuels.com or (701) 746-8385.