Category: Articles

Two weeks ago I posted about an ethanol production breakthrough at Rice University and I promised more info when I got it. I recently spoke with Ramon Gonzalez, the William Akers Assistant Professor in Chemical and Biomolecular Engineering about his breakthrough.

Here is the math. We have a 100 mgpy biodiesel plant. In our production of the biodiesel, one of the by products is glycerin. Currently, most producers must pay to have it disposed of. Now, using Mr. Gonzalez’s methods, they can convert it to ethanol.

100 mgpy of biodiesel produces roughly 75 million pound of glycerin. That glycerin can be converted into ethanol at a cost that is 40% cheaper than the current corn to ethanol cost (about 40 to 45 cents a gallon). How much ethanol? 75 million pounds of glycerin would produce about 9.3 mpgy of ethanol. Now, the ethanol production from glycerin would produces as a by-product “performance acids” that can used in then production of fuel cells.

We now have a process that takes the cost of disposing glycerin and turns it into a profit of roughly $13 million dollars for the biodiesel producer. This profit, it should be noted does not take into account the ancillary sales of the other by-products.

Currently the technology is in the hands of Houston VC’s and a production facility is expect to be operational next year as “several” companies have contact Professor Gonzalez about using the process.

The U.S. biodiesel industry is expected to produce an estimated 1.4 billion pounds of glycerin valued at $289 million between 2006 and 2015, according to an economic study by John Urbanchuk, director of LECG Inc. According to projections gleaned from NBB estimates, the industry could produce as much as 200 million pounds this year alone.

This 200 million pounds would produce an additional 17 million gallons of ethanol this year, not a huge number, but it does make biodiesel production dramatically more profitable which will invariably lead to more producers entering the market.

Crude glycerin that once fetched between 20 and 25 cents per pound is now edging closer to 5 cents and lower. This is down from the high of $1.08 in 1996. The glut and pricing pressure have led Dow Chemical (DOW) to close it’s 150 million pound per year facility in Freeport, Texas.

Ethanol giant Archer Daniel’s (ADM) had previously put glycerin facility plans on hold at the turn of the century as prices collapsed. ADM will produce an estimated 250 mmgpy of biodiesel in the US by the end of 2008 which equates to 188 million pounds of glycerin. ADM could convert that to an additional 16 million gallons of ethanol and other by products for sale that it either now pays to dispose of or received very little n return for. This is only US production numbers, ADM is also Europe’s largest biodiesel producer.

Every time we get an alternative source of ethanol production, we widen the possibilities and lessen our dependence on oil. Good

I think we have all read with nauseating frequency how high corm prices are shrinking margins for ethanol producers (the irony here is that these very same producers are reporting record results). What we have not read is how multi year low natural gas prices should provide another boost to earnings. Guess what, now you are.

August natural gas touched $6.68 per million British thermal units today (Thursday), the contract’s lowest level since late May of 2005. It was last down 5.7%, or 40.3 cents, at $6.68, after the Energy Department reported a bigger-than-expected rise in last week’s natural-gas supplies. During its tenure as the near-month contract, the futures contract for July delivery at the Henry Hub posted a decline of $1.012 per MMBtu or nearly 13 percent. Natural gas in storage was 2,443 Bcf as of June 22, which is 18 percent above the 5-year average (2002-2006).

Nearly 95 percent of U.S. ethanol distilleries use natural gas boilers. Citigroup analyst Gil Yang estimated 28 billion cubic feet of natural gas would be consumed for every one billion gallons of ethanol produced.

The cost of producing ethanol varies with the cost of the feedstock used and the scale of production. Approximately 85 percent of ethanol production capacity in the United States relies on corn feedstock. The cost of producing ethanol from corn is estimated to be about $1.10 per gallon. Although there is currently no commercial production of ethanol from cellulosic feedstocks such as agricultural wastes, grasses and wood, the estimated production cost using these feedstocks is $1.15 to $1.43 per gallon.

The second largest cost in ethanol production, second to corn is the cost of energy, generally natural gas. Energy costs typically make up about 15 percent of a dry-mill plant’s total costs. for large producers like ADM (ADM), Verasun (VSE), The Andersons (ANDE) and Pacific Ethanol (PEIX), the costs run well into the millions.

A glut of natural gas is expected on the market soon. So much in fact, Dow Chemical (DOW), a prolific user of the stuff is not signing any new natural gas contracts in the near future in anticipation of a “dramatic fall” in prices as large amounts of new production comes on line.

What does this mean for ethanol producers? It would appear we are at the peak of the cost cycle for them. A record corn harvest is coming in better than the most optimistic projections and this has caused corn prices to fall over 11% since their February highs. With natural gas falling and no real impetus to reverse that, we have declining input costs and with gas prices having no reason to fall, a steady or rising price for the finished product.

All in all a nice scenario.