Author: Larry Sullivan
Aviation produces as little as 2% or up to 5% of the world’s carbon or GHG emissions depending on whether UN or EU data sources are used. While either figure is small in the global scheme of things, the industry and government has set lofty and perhaps unattainable reduction goals This could portend more investment decisions which could crash and burn, similar to the KiOR/Range Fuels and Solena/British Airways adventures. As we see with most of the second-generation biofuels, hubris leads the way by executives who promised far more than can be delivered, at least to commercial markets. The world trade group for the airlines, the International Air Transport Association (IATA), seeks carbon neutrality by 2020 and a reduction of GHG emissions by 50% in 2050. Yet again, these planners with their tidy number schemes set lofty and unattainable goals. The International Civil Aviation Organization (ICAO), which is part of the UN, has proposed comparable targets. Together, they set the directions of civil aviation and that includes the North American markets, companies and associations. Will investors rise to these emerging markets given their commodity pricing? In some cases, paltry investments could sustain limited market shares; however, except for military missions, the feedstocks, technologies and risk profiles fail standard investor profiles. These are substantial risk propositions with limited rewards in terms of equity. After all, these are global commodity markets with low grow margins, difficult IRR and many players who are national oil companies with limited transparency.
The U.S. and to a degree Canada, not to be outdone by IATA and ICAO, set a voluntary goal of one billion gallons from 2018 in consumption – a target clearly to be missed. These goals set the stages with international including the N. American realms for disappointment at least in the commercial markets.
Let us examine the risks and rewards for “aviation turbine fuels in N. American markets.” Are we going nowhere? Is this tune The Beatles, “Nowhere Man….?”
This blog focuses on the N. American markets, not military markets, nor even international markets for aviation turbine fuels based on biological sources. It can be an exciting market but those players must recognize the inherent limitations based upon raw materials constraints, limited range of conversion technologies and, most importantly, the harsh realities of corporate responsibility of public traded companies who buy aviation turbine fuels to be held accountable to shareholders and management to be low cost buyers. Jet fuel buyers cannot be seen to invest in risky hedges and biofuels are one.
Markets
The market for aviation turbine fuels in the world is nearing 6 million bbl/day (b/d) according to the U.S. DOE EIA, and the U.S. consumes over 25% of that volume or about 1.6 million b/d (25 billion gallons per year). In the N. American markets, the balance is approximately 20 billion gallons for commercial use and 5 billion for military and governmental use. This is typical in the sense that many references to energy consumption point to the U.S. with 4% of the world’s population consuming approximately 23% of the world’s primary energy in electrical, liquid fuels and renewables. International transactions where a flight originates in N. America but refueled in Asia, S. America or Europe are not generally accounted for in these numbers. Worldwide aviation kerosene fuel consumption is growing with Platts forecasting 9.3 million b/d by 2040. Nearly 50% growth in somewhat over 20 years runs counter to most petroleum product forecasts so one must always be cautious with forecasts, to paraphrase Yogi Berra, “Forecasts, especially about the future, are risky.” Aviation biofuel forecasts present even more problems as feedstocks, processing and marketing are all unproven at full commercial scale. Investors are looking at the market with an eye to secure a position(s), but must tread carefully as we saw with cellulose to ethanol debacles over the last 30 years. U.S. numbers from EIA show a rise to 31 billion gallons by 2040 – hardly a market for a new entrant to compete given the well-developed supply chains. Asia is where the growth is expected. I live near the Boeing 787 plant here in Charleston, and the livery on the empennages is nearly all Asian!
This blog focuses on the emerging use of renewable fuels in N. America for the middle distillate markets. Currently, about 40% of the U.S. market demands for these biobased middle distillates are imported from S.E. Asia, S. America and Europe. Previously, TM&C published an important article focused on the E85 and E15 market developments in the U.S. regarding the use of fuel ethanol in motor gasolines. Unlike the gasoline and diesel road and off road markets, there is no obligation under RFS regulations for RVO in the U.S. aviation turbine fuel markets; however, Renewable Identification Numbers (RINs) can be generated for sales into this market. Over time, perhaps bio jet can be 10% of the market like we see with biodiesel and renewable diesel, but U.S. laws will need to change regarding imports of palm products and forestry sources of cellulose which must drop greatly in value. Feedstocks remain the key to this market.
There are excellent examples in the press of trials, and many interested parties are seeking to position themselves well into the markets. Currently, there is a very limited amount of RIN-based aviation turbine fuels sold. DOD, DOE and the USDA signed a MOU regarding the construction of facilities to produce military jet fuels. This MOU was signed under Presidential power derived from the Defense Production Act of 1950 or DPA which requires the President to declare a crisis and commit resources to the production. Soon the selection process will narrow it down to one for about 50 million gallons.
The U.S. Navy is leading the efforts and that will be the most likely candidate for biobased jet fuels. As DOD demands are only a small part of the equations, the commercial carriers’ success does not hinge upon military success, but in the past DARPA and DPA programs did yield commercial programs. TM&C (in 2012) identified these pitfalls and potentials in a conference speech on aviation biofuels in Washington, D.C.
Technologies
What is the potential in the U.S. for renewable fuels to penetrate the aviation turbine market? First, the size of the market is approximately 24 billion gallons with it divided between the DOD at 6 billion and the commercial aviation market at 18 billion gallons. The ASTM approved hydrotreating lipids as D7566 and recently approved pathways for alcohols to jet fuels. Earlier ASTM approved the GTL routes to jet fuel. Military data is often misleading as an obvious purchasing could send signals to foreign actors as well as world oil markets.
Another interesting aspect of this market is the fit with heating oil (HO). In the summertime U.S., the demand for heating is very low and the aviation demand is high. This helps northern hemisphere countries and regions, like the U.S. and Canada, as well as EU, and their respective refiners balance the middle distillates throughput since the HO and jet production in refineries overlap in boiling ranges. There is a limited amount of processing necessary in some cases where HO is not required to be low sulfur (although those markets are disappearing). Additional jet fuels into the well-serviced markets would invite more competitive pricing; however, if refiners have incentives (no importation restrictions, California LCFS, airlines demand, etc.), then it is expected that the primary U.S. refiners would enter this market as Valero did with UOP technologies. It is too soon to comment if independent entrepreneurial ventures can sustain the low margins typical in aviation fuels. Most technologies are generic as hydrocracking and/or treating is an established petroleum refinery technology.
Additional factors are the requirements in the EU that fuels used meet Green House Gas (GHG) targets and that effects the U.S. air carriers to fuel in the EU for returns to the U.S., and, that is also the case with Asia and to a degree, Canada, within the N. American markets.
Feedstocks
So, with the market and the technologies noted, the only missing part is feedstocks. ICCT, who blew the whistle on VW, noted the U.S. will be constricted for fats and oil to meet RFS biomass-based diesel and then more so with turbine markets. With the current feedstocks constricted (by narrow and unrealistic EPA Pathways, primarily), the importation of feedstocks becomes a natural fit for petroleum refiners to enter production. Tesoro acquired Virent technologies so the next issue would be the EPA’s restriction on co-processing Inside Battery Limits (ISBL) – Tesoro would have access to low cost cellulose from Canada where governments and not markets set timber prices. If there are no restrictions on importation of feedstocks or finished fuels, and refiners can process ISBL, then the potentials for a 10% market share by 2040 of biobased fuels is conceivable (about 3 billion gallons). Yet, the emerging industry is still focused on protectionist agricultural agenda and not the reality of world trading in petroleum products. Only time will tell how the U.S. moves. EU moves to limit agricultural narrow pathways could play out in the U.S. and open more world feedstocks to arrive into the U.S. like low cost sugar from Brazil, palm fatty acids from S.E. Asia and low cost cellulose from Canada.
I conclude that the drivers for biobased jet fuels are strong, notwithstanding the lack of a RVO, DOE, USDA and DOD that know aviation is not threatened by electric vehicles to the degree that light duty gasoline and ethanol markets are in the future. Hydrotreating and hydrocracking conversion technologies are off the shelf now or open architecture for conversion of materials to jet fuels. The question I ask is simple and related to feedstocks: With the demand, will feedstock suppliers in S.E. Asia (palm fatty acids) or Argentina (soybean oil) be able to access the N. American markets? Will low cost cellulose be available in the West Coast of the U.S. like we see with low cost forestry in the S.E. U.S.? And, will another Solena, KiOR or Range Fuels handicap this emerging industry as investors have limited patience?
Emerging biobased jet fuels businesses will likely be developed by incumbent petroleum refiners and not agricultural-based developers as witnessed over the last 30 years. National security or WTO issues related to agricultural trade in sugars, fats & oils, cellulose could cease to be setting the agenda. Witness the expansion of Valero’s biofuels business in renewable diesel and one will see biobased aviation turbine fuels develop along the same lines.
Turner, Mason & Company follows and analyzes the impacts of all developments, whether policy or market related, affecting the global petroleum markets. Biofuels, which have been driven by policy mandates and incentives, have become a growing, though still small part of those markets. What the future holds is clearly still up in the air and we here at TM&C are spending a lot of time analyzing the potential outcomes and impacts of biofuel developments. Our best thinking on the subject will be included in our next editions of the Crude and Refined Products Outlook (C&RPO) and the Worldwide Refinery Construction Outlook (WRCO), both of which are scheduled to be released in late July. We are also involved in specific consulting engagements for companies involved in the biofuels markets. If any of you have any questions on this, or any subject related to the petroleum industry, please feel free to contact us through our website (www.turnermason.com) or by calling us at 214-754-0898. We can also put you in touch with Mr. Sullivan if you have any specific questions regarding this blog about aviation biofuels or his other areas of expertise as detailed in his bio which follows.
Guest Blogger – Lawrence D. Sullivan
Larry is Adjunct Professor at Trident Technical College and The Citadel in Charleston, SC. Additionally; he is a principal with Lawrence D. Sullivan & Company, Inc. with his partner, Carla M. Wood, Ph.D. They provide due diligence, expert witness and thought leadership services to petroleum, biotechnology and advanced biomass, biofuels and renewable energy markets for companies and financial institutions. Larry earned his BA and MA in Geosciences at the University of Texas and Arizona State University, respectively. He completed graduate training at the Ph.D. level at Texas A&M University in Planning and Geosciences. He also completed his MBA at Warwick and studied Refinery Engineering at Oxford’s St. Catherine’s College and Corporate Strategic Planning at the London School of Economics.