The Renewable Fuels SituationThe Renewable Fuels Situation

Agricultural Lender’s ConferenceAgricultural Lender’s Conference

2006 2006

Mike WoolvertonMike Woolverton

Kansas State UniversityKansas State Universitymikewool@agecon.ksu.edumikewool@agecon.ksu.edu

Energy: Non-petroleum SourcesEnergy: Non-petroleum Sources

WindWind

SolarSolar

HydroHydro

Hydrogen cellsHydrogen cells

NuclearNuclear

Bio-fuelsBio-fuels

Years of Oil RemainingYears of Oil Remaining

Total Reserves Total Reserves 1,277,702,000,0001,277,702,000,000 5050yearsyearsUsage Rate Usage Rate 25,000,000,000 25,000,000,000

(Barrels)(Barrels)

Source: en.wikipedia.org/wiki/Fossil_fuelSource: en.wikipedia.org/wiki/Fossil_fuel

U.S. Oil Import SuppliersU.S. Oil Import Suppliers1.1. CanadaCanada

2.2. MexicoMexico

3.3. Saudi Arabia Saudi Arabia (OPEC)(OPEC)

4.4. Venezuela Venezuela (OPEC)(OPEC)

5.5. Nigeria Nigeria (OPEC)(OPEC)

6.6. IraqIraq

7.7. AngolaAngola

8.8. Algeria Algeria (OPEC)(OPEC)

9.9. RussiaRussia10.10. EcuadorEcuador Source: Energy Information Administration Source: Energy Information Administration

Estimated Extraction Cost per Estimated Extraction Cost per Barrel of Oil Barrel of Oil

U.S. U.S. $10 to $12$10 to $12

Arabian PeninsulaArabian Peninsula $1$1

The United States and OilThe United States and Oil

Use 20 million barrels per dayUse 20 million barrels per dayProduce 6 million barrels per dayProduce 6 million barrels per dayOil usage increases 2% per year but the Oil usage increases 2% per year but the economy has been growing at 3.3% per economy has been growing at 3.3% per yearyearUsage in barrels per dollar of GNP is one-Usage in barrels per dollar of GNP is one-half of the 1947 levelhalf of the 1947 levelCost per year to import oil - $175 to $200 Cost per year to import oil - $175 to $200 billion billion

What it will take to replace imports?What it will take to replace imports?The U.S. uses 140 billion gallons of gasoline and The U.S. uses 140 billion gallons of gasoline and

41 billion gallons of diesel fuel per year made 41 billion gallons of diesel fuel per year made from oil of which 65% is imported.from oil of which 65% is imported.

To replace the imported gasoline with ethanol To replace the imported gasoline with ethanol would require 33.6 billion bushels of corn. This would require 33.6 billion bushels of corn. This year’s production – 10.9 billion bushels.year’s production – 10.9 billion bushels.

To replace the diesel with soy-diesel would To replace the diesel with soy-diesel would require 26.9 billion bushels of soybeans. This require 26.9 billion bushels of soybeans. This years projected production – 3.2 billion bushels. years projected production – 3.2 billion bushels.

Renewable Fuels DriversRenewable Fuels Drivers

High oil priceHigh oil priceInstability in oil exporting regions of the worldInstability in oil exporting regions of the worldFlow of dollars out of the United StatesFlow of dollars out of the United StatesEnergy Policy Act of 2005Energy Policy Act of 2005Mandates and tax reductionsMandates and tax reductionsPhase out of MTBEPhase out of MTBEGood Returns on InvestmentsGood Returns on Investments

Bio-refining AssumptionsBio-refining Assumptions

Petroleum will remain relatively expensivePetroleum will remain relatively expensive

Raw materials will be relatively inexpensive Raw materials will be relatively inexpensive

Raw materials can be replenished each year Raw materials can be replenished each year (sustainable)(sustainable)

Net Energy BalanceNet Energy Balance

ProductProduct Energy Out/Energy InEnergy Out/Energy In

GasolineGasoline .81 .81

Ethanol from grainEthanol from grain 1.351.35

Ethanol from celluloseEthanol from cellulose4.174.17

DieselDiesel .91 .91

Bio-dieselBio-diesel 3.243.24

Sources: Argonne National Laboratory and OECD International Energy AgencySources: Argonne National Laboratory and OECD International Energy Agency

ETHANOLETHANOL

Ethanol Industry at a GlanceEthanol Industry at a GlanceNumber of operating ethanol plants: 105 Number of operating ethanol plants: 105 Plants under construction and expanding: 48Plants under construction and expanding: 48Announced plants: 100+*Announced plants: 100+*2005 production, 3.9 billion gallons per year (BGPY)2005 production, 3.9 billion gallons per year (BGPY)Current production capacity: 5.0 BGPY Current production capacity: 5.0 BGPY Projected production capacity, 7.9 BGPY by early 2007Projected production capacity, 7.9 BGPY by early 2007Size: Newer plants 100 MGPYSize: Newer plants 100 MGPYProcess: wet or dryProcess: wet or dryDaily water usage – 1.5 million gallonsDaily water usage – 1.5 million gallonsFeedstock percentage:Feedstock percentage:

CornCorn 97 97SorghumSorghum 2 2Other 1Other 1

Kansas Ethanol IndustryKansas Ethanol Industry

Number of operating plants: 8 – 215 MGPYNumber of operating plants: 8 – 215 MGPY

Plants under construction: 4 – 225 MGPYPlants under construction: 4 – 225 MGPY

Plants in the planning stages: 14 – 500 MGPYPlants in the planning stages: 14 – 500 MGPY

Corn usage: 440 MGPY – 163 mil. Bu. Corn usage: 440 MGPY – 163 mil. Bu. (25%)(25%)11

940 MGPY – 348 mil. Bu. 940 MGPY – 348 mil. Bu. (53%)(53%)11

11 Percentage of the 2005 Kansas corn and grain sorghum crops. Percentage of the 2005 Kansas corn and grain sorghum crops.

Ethanol Plant EconomicsEthanol Plant Economics

Cost to build a 100 MGPY plant -Cost to build a 100 MGPY plant - $140 million$140 millionWill purchase about 37 million bushels of corn Will purchase about 37 million bushels of corn

(Corn from 240,000 acres)(Corn from 240,000 acres)

Natural gas expense - $16.5 millionNatural gas expense - $16.5 millionPayroll expense about $2 millionPayroll expense about $2 millionDistiller’s Dried Grains income about $25 Distiller’s Dried Grains income about $25 millionmillionCOCO22 income about $4 million (314,500 tons) income about $4 million (314,500 tons)B.E. ethanol price $1.20 to $1.30 per gallon B.E. ethanol price $1.20 to $1.30 per gallon when corn is $2.50 per bu.when corn is $2.50 per bu.Goal 30% R.O.I. Goal 30% R.O.I.

Corn/Ethanol Projections, U.S.Corn/Ethanol Projections, U.S.

06/0706/07 07/0807/08Corn AcresCorn Acres 78.6 mil.78.6 mil. 82 mil.82 mil.Corn ProductionCorn Production 10.9 bil. Bu.10.9 bil. Bu. 12.3 bil. Bu.12.3 bil. Bu.Corn ExportsCorn Exports 2.25 bil. Bu.2.25 bil. Bu. 2.0 bil. Bu.2.0 bil. Bu.Corn for EthanolCorn for Ethanol 2.15 bil. Bu.2.15 bil. Bu. 3.4 bil. Bu.3.4 bil. Bu.Ethanol ProductionEthanol Production 5.8 bil. Gal.5.8 bil. Gal. 8.6 bil. Gal.8.6 bil. Gal.DDG ProductionDDG Production 18.3 mil. T.18.3 mil. T. 28.9 mil. T. 28.9 mil. T. (Thirty to 40 percent will replace corn in rations. Sixty to 70% will replace soybean meal.)(Thirty to 40 percent will replace corn in rations. Sixty to 70% will replace soybean meal.)

Source: Paul Smolen, AgriNetwork Management and Mike Woolverton, KSU.Source: Paul Smolen, AgriNetwork Management and Mike Woolverton, KSU.

Dangers Ahead for EthanolDangers Ahead for Ethanol

Over expansion – On-line capacity in 2007 is Over expansion – On-line capacity in 2007 is expected to be 7.9 billon gallons expected to be 7.9 billon gallons

Competition from iso-octane and iso-octene Competition from iso-octane and iso-octene oxygenates made in converted MTBE plantsoxygenates made in converted MTBE plants

Competition from imports (tariff $.54/gal.)Competition from imports (tariff $.54/gal.)

Food or fuel debateFood or fuel debate

Drop in the price of ethanolDrop in the price of ethanol

Cost of Fermentable Sugar Cost of Fermentable Sugar per Gallon of Ethanol per Gallon of Ethanol

SugarcaneSugarcane $.30$.30

CornCorn .91 .91

SugarbeetsSugarbeets .95 .95

Ethanol Futures Price, Weekly, $ per Gal.Ethanol Futures Price, Weekly, $ per Gal.

BIO-DIESELBIO-DIESEL

The Bio-diesel FormulaThe Bio-diesel Formula

100 gallons of veg. oil or animal fats100 gallons of veg. oil or animal fats

+10 gallons of methanol+10 gallons of methanol

==

100 gallons of bio-diesel100 gallons of bio-diesel

+10 gallons of glycerol+10 gallons of glycerol

Advantages of Bio-dieselAdvantages of Bio-diesel

No sulfur and less carbon emissionsNo sulfur and less carbon emissions

Higher cetane rating – better mileageHigher cetane rating – better mileage

Superior lubricitySuperior lubricity

One disadvantage:One disadvantage:

Bio-diesel requires an additive to prevent Bio-diesel requires an additive to prevent jelling at low temperaturesjelling at low temperatures

Bio-diesel Processing Margin per Gallon, Bio-diesel Processing Margin per Gallon, Oct 17Oct 17thth 2006 2006

Diesel Fuel Diesel Fuel (Wholesale per gallon)(Wholesale per gallon) $1.7783$1.7783

Soybean oil Soybean oil ($ .2493 per pound)($ .2493 per pound) $1.87$1.87

Glycerin credit = Methanol cost 0Glycerin credit = Methanol cost 0

Net Margin Net Margin $-.09$-.09

U.S. Soy-diesel ProductionU.S. Soy-diesel Production

Currently 65 plants in U.S. Currently 65 plants in U.S.

Total capacity 365 mg – ave. size 7.45 mil.Total capacity 365 mg – ave. size 7.45 mil.

Output 2005 – 75 mg of biodiesel Why?Output 2005 – 75 mg of biodiesel Why?

Plants under 10 mg batch process using waste Plants under 10 mg batch process using waste fats and oils fats and oils

Much of output has been going to soap and Much of output has been going to soap and shampoo rather than biodieselshampoo rather than biodiesel

U.S. Soy-diesel ProductionU.S. Soy-diesel Production

58 plants expanding or under construction58 plants expanding or under construction

projected capacity 713 mil. gal.projected capacity 713 mil. gal.

Many of the new plants - 30 mil. gal. Many of the new plants - 30 mil. gal.

(Requires the oil from 400,000 A. soybeans.)(Requires the oil from 400,000 A. soybeans.)

Continuous processing using multiple Continuous processing using multiple feedstocks of vegetable oilfeedstocks of vegetable oil

Vegetable Oil YieldsVegetable Oil Yields

CornCorn 18 Gal./A. 18 Gal./A.

SoybeansSoybeans 66 66

SunflowersSunflowers 102102

RapeseedRapeseed 127127

Castor BeansCastor Beans 151151

Oil PalmOil Palm 635635

World Production of Fats and Oils, World Production of Fats and Oils, 2003/04, MMT2003/04, MMT

VegetableVegetable TropicalTropical

SoySoy 30.130.1 PalmPalm 28.728.7

RapeRape 14.114.1 Palm Kernel Palm Kernel 3.5 3.5

SunSun 9.3 9.3 CoconutCoconut 3.3 3.3

PeanutPeanut 5.0 5.0

CottonCotton 3.8 3.8

OliveOlive 2.8 2.8

Source: USDA, Agricultural Statistics, 2005.Source: USDA, Agricultural Statistics, 2005.

Soybean/Bio-diesel Projections, U.S.Soybean/Bio-diesel Projections, U.S.

06/0706/07 07/0807/08Soybean AcresSoybean Acres 75.675.6 73.0 73.0Soybean ProductionSoybean Production 3.2 bil. bu.3.2 bil. bu. 3.0 bil. bu. 3.0 bil. bu.Soybean ExportsSoybean Exports 1.1 bil bu.1.1 bil bu. 900 mil. bu. 900 mil. bu.Soybean Oil for BDSoybean Oil for BD 2.35 bil lbs.2.35 bil lbs. 4.65 bil. lbs. 4.65 bil. lbs.Bio-diesel ProductionBio-diesel Production 400 mil. g. 730 mil. g. 400 mil. g. 730 mil. g.

(330 from SBO) (600 from SBO)(330 from SBO) (600 from SBO)

Soybean Meal ExportsSoybean Meal Exports 7.5 mil. T. 11 mil. T.7.5 mil. T. 11 mil. T.

Source: Paul Smolen, AgriNetwork Management and Mike Woolverton, KSUSource: Paul Smolen, AgriNetwork Management and Mike Woolverton, KSU

Bio-diesel ConclusionsBio-diesel Conclusions

The industry is ramping up production capacity.The industry is ramping up production capacity.

Increased demand for vegetable oil will drive Increased demand for vegetable oil will drive price up.price up.

Bio-diesel production will be constrained by the Bio-diesel production will be constrained by the supply and price of vegetable oil.supply and price of vegetable oil.

Soybean meal will become the by-product and Soybean meal will become the by-product and increased supply will cause price to fall.increased supply will cause price to fall.

U.S. soybean meal exports will increase.U.S. soybean meal exports will increase.

The price of petrol-diesel will determine the The price of petrol-diesel will determine the economics of bio-diesel.economics of bio-diesel.

Alternative TechnologiesAlternative Technologies

Cellulosic EthanolCellulosic Ethanol

Bio-diesel from Algae OilBio-diesel from Algae Oil