Renewable Energy Products

Source: Energy Digital

Date :3/18/2008 5:56:03 AM

Frank Benson, Renewable Energy Products’ Senior Vice President of Supply and Marketing explains how the move from oil to biodiesel has brought his company to the forefront of green solutions

Written by Emmet Cole and Produced by Melissa Abbott

When Energy Merchant Corp. reacquired an oil refinery in 2004, it recognized the site’s future potential. In the summer of 2006 Energy Merchant formed a subsidiary, Renewable Energy Products, LLC (REP), and knew exactly what they wanted to do: build into the future of the energy industry through small biodiesel plants, close to existing infrastructure with an initial emphasis on California.

“We wanted to be able to put smaller scalable plants in high demand centers at strategically locations where we could utilize existing infrastructure like chemical or petroleum terminals,” says Frank Benson, REP’s Senior Vice President of Supply and Marketing. “We looked for non-green field sites, where we wouldn’t have to build everything from the start.”

None of it would come easy. But with some persistence, shrewd maneuvering and a little bit of luck, Renewable Energy Products has navigated the tricky waters of turning innovation into reality and now sits on the forefront of green energy solutions.

Big Ideas

In the mid 1990s, Energy Merchant purchased the Powerine Oil Company Refinery in Santa Fe Springs, California under a distressed sale. By the late 1990s, Energy Merchant flipped the refinery but the new owner lost the operating permits and the refinery was permanently mothballed in 2002 through the influence of what Benson calls “a clear case of advocacy groups.”

Energy Merchant reacquired the refinery in 2004 from the same party with a view for the future. With no re-start of the refinery possible (due to outside influences) Energy Merchant proceeded to sell off the refining assets and prepared the site and remaining infrastructure for alternative business use.

Seeing a push in the United States towards the use of renewable fuels, and having a background in marketing distillate products, the company moved towards biodiesel solutions. Energy Merchant’s team had extensive experience in operating oil refineries (which are far more complex than a biodiesel plant) and terminalling and marketing of refined products, including diesel fuel. So biodiesel was a natural fit. Energy Merchant was comfortable doing business in California and felt it would overcome the barrier of entry to permitting.

California also presented a potential economic benefit in that the CARB (California Air Resources Board) diesel market historically trades at a premium compared to the rest of the United States due to refinery constraints, tight storage, and stringent air quality requirements. Biodiesel sells relative to the price of diesel, and CARB diesel trades on average 12 cents higher per gallon than diesel on the Gulf Coast”.

“Right off the bat, we have 12 cents per gallon incentive over other biodiesel producers east of the Rockies, and sometimes that market can blow out to 20-30 cents,” We call this price disparity the CARB Diesel Disconnect. Benson says. “When it comes to the petroleum market California is like an island, we have to import the majority of our crude oil, our refining capacity is constrained, and we have very limited storage tank space. Any disruption in this market will send our biodiesel price up.”

Big Bio Challenges

Through perseverance and timing, REP overcame major hurdles that affect other potential California biodiesel startup companies for site approval and permitting. First, REP looked at a chemical terminal in the Port of Long Beach. The terminal company liked the deal, but couldn’t supply the storage space REP needed. So REP moved up the coast to San Pedro, to another chemical terminal in L.A. Harbor. Once again, both sides liked the deal, but the Port of Los Angeles’s real estate division soon nixed the deal.

The site, it turns out, will soon be demolished and turned into a park, leaving the Long Beach terminal as the only available chemical terminal. “Storage capacity and finding open free storage in LA is almost unheard of,” Benson says. “We’re extremely constrained in storage capacity in the LA basin.”

Raising critical private investment is another challenge. Nearly 85 percent of biodiesel’s costs come from feedstocks, and the feedstock market like soybean oil, palm oil, and animal fats have more recently been extremely volatile due to the rise of alternative fuels. High prices make both profits tenuous and investors nervous. REP’s production plants are multi-feedstock compatible. REP will initially be producing with animal fats which are locked in under a forward fixed price.

The federal government has mitigated this somewhat with a subsidy - $1 a gallon for virgin feedstocks and 50 cents for non-virgin but this incentive is set to expire in December 2008. Currently, two bills the Farm Bill and the Renewable Energy and Energy Conservation Tax Act of 2008 would extend the tax credits, but few investors are willing to put money on it just yet.

“We need this tax subsidy to compete with big oil,” Benson says. “There are other feedstocks on the horizon like algae, where if they come to fruition the feedstock cost will be low enough to not need the tax incentive. But today we need the subsidy.”

Tough government permit procedures create another road block. But in 2007, REP found a suitable biodiesel site in a familiar place. REP received permits from City of Santa Fe Springs and the South Coast Air Quality Management District to put their first biodiesel plant at its former refinery site where they could utilize some existing infrastructure including thousands of barrels of storage capacity.

The biggest hurdle was the permit process, Benson says – especially from a city government conscious of the closure of the Powerine Refinery nearly a decade earlier. “The South Coast Air Quality Management District – SCAQMD, as it’s called, is one of the most stringent air districts in United States,” Benson says. “They are their own government entity within California.”

With 60,000 barrels of storage (more than most biodiesel plants have and providing REP with optionality), the new plant should be operational in April 2008. “So out of the ashes of this refinery going down, you sort of have this phoenix rising up,” Benson says.

Big Victory for REP

After heading out with A.G. Edwards/Wachovia in spring of 2007 in search of private equity, REP became one of the few biodiesel companies to land a substantial private equity investor. The equity will be used to expand REP’s overall business model.

In the spring of 2006, California governor Arnold Schwarzenegger issued an executive order requiring that 20 percent of the state’s renewable energy sources come from in-state resources by 2010. In response, the California EPA launched an incentive program offering $5 million in grants to startup of small biofuel production companies. REP landed $630,000 in grant money – one of the largest in the program – and with that tacit backing from the state, REP received final approval from the city in the summer of 2007.

Meanwhile, back at the chemical terminal in Long Beach, one of the terminal’s customers moved out of some tankage which freed up storage space. REP, with the support the terminal company applied to the Port of Long Beach for a Harbor Development Permit to build a 10 mil/gal/yr biodiesel on open space at the terminal and to tie into the storage tanks.

The Port of Long Beach granted the permit in June of 2007 after detailed review and analysis. Awash with private capital, REP is now able to proceed with the Long Beach project. Benson believes that the Port of Long Beach will probably go down in biodiesel history as one of the premier sites and one of the most difficult locations in the United States to obtain a permit to build a biodiesel plant. “The Long Beach terminal is a marine terminal, so we’ll have the ability to bring in multiple feedstocks via large chemical tankers as well as selling biodiesel into the marine sector,” says Benson, who noted that the terminal gives them the ability to optimize around all modes of transportation including water, rail and truck. REP expects this plant to be operational by the end of the third quarter in 2008.

The company expects to have four ten million gallon plants operational by the spring of 2009, including one on a 4.4 acre plot at a small port near the south end of San Francisco Bay, with 60,000 barrels of combined feedstock and finished product storage, a rail siding, and a marine wharf with deep water access. The company has already been approved to start the CEQA (California Environmental Quality Act) study on the site.

Future Challenges

REP continues to prepare itself for the rapidly changing landscape of green energy – including legislative and subsidy challenges, commodity price risks, and a new era of feedstocks like jatropha, algae, and wastewater sludge which could revolutionize the energy industry.

“We see consolidation happening in this industry, similar to ethanol,” Benson says. “There are going to be certain players left, and we’re planning to be one of them. We think we will be one of the largest producers on the West Coast. We will also build all of our plants on skids in case local or national market economics change - we can more easily move our plants across the nation or overseas to a more profitable market.”

But with its patience, persistence, REP appears primed to pioneer its way toward a sustainable future in green energy.

Click here to view the corporate brochure on REP