U.S. Advanced Biofuel Targets Inflated Expectations
September 03, 2013
LONDON, Sept 3 (Reuters) - The latest financial results from advanced biofuel producer KiOR illustrate how over-ambitious U.S. targets inflated industry and investor expectations, after the company's share price halved on disappointing production.
The company's sluggish start at its Mississippi facility is awkward for the Environmental Protection Agency.
Only last month, EPA confirmed its forecasts for national biofuel production this year, and said it expected KiOR to be by far the biggest producer of cellulosic biofuel.
Following KiOR's second quarter results, that 2013 national cellulosic output goal is already almost certainly beyond reach.
Advanced biofuels are made from biomass including wood and crop waste rather than food crops, and are meant to avoid the problem of corn ethanol which has consumed vast quantities of the U.S. crop and so inflated food prices.
The industry's slow ramp-up reflects the technological difficulty of extracting useable energy from tough, complex molecules in the woody part of plants, as opposed to using the far more valuable carbohydrates and pure sugar found in food crops including grains and sugar cane.
A slow start is understandable.
The trouble is that the U.S. 2007 energy act introduced overly ambitious targets which created euphoria, followed by disappointment.
Advanced biofuels cannot compete for now with alternative techniques for cutting crude oil-based road fuel consumption, including conventional biofuels made from food crops; more efficient, conventional combustion engines; and hybrid electric vehicles.
Last month, EPA confirmed a cellulosic biofuel blending target this year for some 6 million (ethanol-equivalent) gallons. That was a colossal revision down from 1 billion gallons, as mandated for this year under the 2007 Energy Independence and Security Act.
It compares with total U.S. gasoline consumption in 2011 of 134 billion gallons.
According to EPA, KiOR would be the biggest producer this year, accounting for almost all of the cellulosic target.
The company itself confirmed in May that it expected to produce 300,000 to 500,000 gallons of fuel in the second quarter, and 3 to 5 million gallons in full-year 2013 (equivalent to up to 7.5 million gallons of lower calorific value ethanol), from its first commercial scale facility in Columbus, Mississippi, commissioned last year.
But it announced last month that it shipped just 75,000 gallons in the April-June period.
And it cut its full-year production forecast to 1 million to 2 million gallons.
If total U.S. production falls short of 6 million gallons this year, production will have failed to meet an already-downgraded target every year since the cellulosic blending mandate was introduced in 2010.
KiOR's technology is based on a fluid catalytic cracking process used extensively in oil refining to break up, or crack, heavy oils into more valuable and higher octane hydrocarbons.
In such conventional cracking, heavy petroleum products are vaporised at high temperatures and cracked by contact with a powdered catalyst.
The catalyst is recovered for re-use, employing steam to separate it from the hydrocarbon vapours, and intense heat to burn off carbon deposits.
The hydrocarbon vapours are distilled into various oils and gases for the production of gasoline and other fuels and chemicals.
Catalytic cracking was first applied commercially in 1915 but only acquired momentum in the 1930s.
That timeline is a reminder of the ambition of the original U.S. target to produce 1 billion gallons of cellulosic biofuel in 2013, from a standing start at the time of the implementing act in 2007.
KiOR was only founded in late 2007.
The company in May said downtimes, which have slowed a ramp-up in production, were a result of teething problems for example affecting the back-end of the process in its hydrocarbon vapour recovery unit.
"The good news is that these issues are not indicative of a major design issue or an issue with our core (biomass cracking) technology," said chief executive Fred Cannon in a conference call in May.
"It is not uncommon to encounter issues like these in a new first of the kind facility. Eventually, Columbus, like every other production facility, will hit its sweet spot and get to the point where the run-time is 24-7 for months on end."
On August 8, the company identified similar start-up issues.
"These start-up issues ... are all relatively small in nature. These issues are not related to our core technology. They are simply part of the break-in process," said Cannon in a conference call for analysts.
"Ramping up is what the rest of 2013 looks like. Given our operational priorities (building up throughput reliably) we are not intending to run the plant towards specific volume targets during 2013. As such we expect our full year production levels will be in the 1-2 million gallon range."
"I look for us to achieve normal steady state optimal operations at Columbus in the first half of 2014."
Following that August announcement the company's share price has fallen 55 percent.
KiOR has used the sheer scale of the expanded U.S. renewable fuel standard (called RFS2) under the 2007 act to underline the size of its potential market.
In a recent presentation, the company described the RFS2 as its "catalyst for growth", describing a market opportunity of $700 billion over the next decade.
The problem for the industry and its investors is the mismatch between the ambition of those RFS2 targets and the actual timescale to develop a new technology.
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