Challenges and Opportunities in the Renewable Energy Sector

- March 6th, 2017

A look at biofeuls company Gevo (NASDAQ:GEVO), producer of renewable gasoline and jet fuel.

The global biofuels market is said to grow steadily at a compound annual growth rate of 5.87 percent from 2016 to 2020.
Agriculture feedstocks go hand in hand with biofuel production. Robert Wisner, Professor of Economics and Energy Economist in Iowa State University, wrote in an article that due to the rapid growth of the ethanol industry, corn has slowly become an energy crop, apart from being a feed grain. In fact, in 2014 alone, 5,200 million bushels of corn in the US were used for alcohol for fuel.

A company that is poised to benefit from this growing market is biofeuls company Gevo (NASDAQ:GEVO). Headquartered in Englewood, Colorado, the company produces renewable jet fuel, renewable gasoline (isooctane), and isobutanol (IBA). Its isobutanol is produced in a facility in Luverne, Minnesota, while its jet and isooctane are from a biorefinery in Silsbee, Texas.
Recently, Gevo was ranked #10 in the “50 Hottest Companies in the Advanced Bioeconomy” by The Digest, a publication focused on biofuels.
INN spoke with Gevo CEO, Patrick Gruber, about the company, the challenges in the renewable technology sector, and why there has been a huge decline in the stock since last year. Some highlights of our conversation include:

  • “What’s different about us compared to a lot of companies looking to produce renewable jet fuel is that our technology isn’t hypothetical.”
  • “So, if we’re going to use renewable carbon, we are going to have to grow something, that’s the fact of life.”
  • “We will continue to develop the marketplace for isobutanol.”

Continue reading below for the full transcript of our conversation with Gevo’s Patrick Gruber. It has been edited for clarity and brevity.
INN: Can you tell us about isobutanol and how it helps the agricultural sector?
Patrick Gruber: Isobutanol is a chemical product that has four carbons and it’s pretty useful in that it makes for very excellent gasoline blend stock, and increases performance: it is non-water soluble, has low vapor pressure and contains high octane and high energy. So it’s attractive in that regard, but it also has many other applications, such as it can be readily converted into making renewable gasoline or into jet fuel, and it also has a market in chemical products. So the target markets of isobutanol are very large. Isobutanol is made from carbohydrates, and carbohydrates are made by plants, and so this is where it starts to impact the agricultural sector — it creates new opportunities for growing things that produce carbohydrates.
The potential of isobutanol is that it can use sugars or carbohydrates from many different kinds of agricultural feedstocks. That will be the case as we hopefully deploy the technology around the world. Here in the US, we focus on using cornstarch. Right now, we also have a partner working to adapt it to molasses in India, and we’ve done work on sugars that come from wood. In fact, we’ve already converted wood sugars into jet fuel and flown this fuel with Alaska Airlines.
INN: How far along is your company in the process, in terms of offtake agreements and testing isobutanol for jet fuel?
PG: We have been producing jet fuel since late 2011. We have a demonstration plant down in Silsbee, Texas, at South Hampton Resources. It took us about six years to get the ASTM certification — ASTM is the large voluntary standards developing organization where volunteer members that are producers, users, consumers, government, and academia from more than 140 countries participate and say what works and what doesn’t. Our fuel finally got cleared through the ASTM process last year, and now we’re able to sell it as jet fuel to be used to power commercial flights.
This certification process took a lot of fuel over the years, and a lot of money to accomplish. Since then, we have a “Heads of Agreement” or an LOI that we announced with Lufthansa. We’re in discussions with lots of other airlines. We’re trying to pin everybody down to see how much do they want exactly, on what terms and when do they want it.
What’s different about us compared to a lot of companies looking to produce renewable jet fuel is that our technology isn’t hypothetical. Our goal is to have multiple airlines participate, and so that’s what we’re working on in discussions with some of the key players.
INN: Does your LOI with Lufthansa have a set quantity?
PG: The way that we do the business development is that when we approach an airline, we want to pin down the tough things. Usually that’s about price, volume and timing — the most important things. Because we want to make sure that everyone understands how much money is at stake. We pin it down that way to save time. We usually want those signed off at a senior level because that saves time when it comes to dealing with lawyers where we actually spend real money to get contracts done. That’s why we do it that way, but the tricky parts are always getting agreement on price. So that’s what we accomplished already with Lufthansa. That helps us understand what price is acceptable in the marketplace as well as a benchmark that helps with everybody else. So that’s where the LOI stands.
INN: So, how does this work in other sectors like rubber manufacturing?
PG: So, with isobutanol, if you strip off the alcohol group from it, i.e. strip off the oxygens, it can be converted into isobutylene. Isobutylene can be further converted into synthetic rubber, in a standard process. Lanxess had worked with us on that long ago. However, butyl rubber has been under price pressure in recent years, so we haven’t focused on it lately because we’ve been making too much progress on the jet fuels and the isooctane.
INN: Does that mean your focus is now on the jet fuel side versus manufacturing or agriculture?
PG: No, think of it as I have several target markets that are attractive: isobutanol for gasoline blends, chemical markets for isobutanol, and isooctane – isooctane is a chemical product used to make renewable gasoline – it’s a way of putting in very high renewable content into gasoline – and then I have jet fuels. And so those are the markets that we think about and in each of them, we have things in the works. All of them have in common that the end products are made from renewable resources, i.e. carbohydrates that will be processed by fermentation, with chemical processes then used to turn the isobutanol into hydrocarbons.

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INN: Thank you for that. So, what are some of the challenges you have faced in the renewable technology sector?
PG: One of the common things, broadly speaking, is that renewable resource-based products generally are held to a higher standard of scrutiny than petroleum-based products.
What I mean by that is, I have to justify my product through a life cycle analysis – all kinds of stuff that non-renewable fuels don’t have to do. And so we have to prove our performance before the product is made from an environmental standpoint. So, there are all kinds of hurdles that we have to overcome–now we’re pretty good at doing that because we’ve been doing it for so long–but there are roadblocks all over the place, and it makes sense that the petroleum industry would try to put those up because they don’t want to lose market share to something that’s green. So those are the kind of inherent things we have across the industry.
There are also inherent biases that are found in different places of the world because products like these touch agriculture, and because people have different ideas of what’s good use of land or not a good use of land. One of the classics is that people think land is important for growing food. I totally agree. We should grow food, absolutely. What’s important is growing protein, because it’s the essential amino acids and protein that matter if we’re going to do something about starvation. It’s not the carbohydrates, in other words. And so when you grow plants, ideally you want to be using land that grows plants that generate a lot of protein because that ultimately is what’s going to matter. It turns out the two best crops for growing protein in the world are corn and soybeans – two plants that have generated some controversy in environmental circles. But there’s no controversy for sugar cane — which doesn’t generate protein, doesn’t feed people and takes very excellent land. This seems to be okay compared to corn for some people.
The isobutanol process is the best of both worlds: we use only excess carbohydrates, which aren’t useful for food anyway. We ferment those and in the process we capture 100 percent of the protein that’s grown by corn and return that to be used as food for livestock. And we work with farmers to improve their farming practices so that they’re improving the quality of the land and protecting the water and all those sorts of things that improve the environment.
In fact, that’s what happens around our plant in Minnesota. We have pretty sophisticated farming groups who supply us. We’ve done studies on them and they’ve improved their environmental footprint; it’s dramatically less environmental impact than the USDA reported industry averages.
The assumption I’ve heard is that agriculture is mature in its processes. No, it’s undergoing a revolution right now which has been going on for a few years because the technologies have improved so much as well as the ability to monitor the crops and their impact. With GPS-type technologies, farmers can track where they plant things and can minimize chemical use. People are putting in tiles in their field for the ground water runoff and buffer strips around water, and protecting habitat for quails and other animals. Farmers are getting way, way, more sophisticated than they had been.
So, if we’re going to use renewable carbon, we are going to have to grow something, that’s the fact of life. It can be wood, it could be something we grow for crops that generates protein, it could be that in some places, the ideal crop is a sugar cane. In other places that ideal crop is beets; it could be ultimately anything but we’re going to grow stuff because that’s how you capture renewable carbon. It comes from CO2 in the atmosphere via plants by growing something. The question is, what, where, why, and what circumstances.
INN: Are you affected at all on the jet fuel side by oil prices? Is that something that you are faced with?
PG: Interestingly enough, the airline industry is a growth industry for fuels. Jet fuel is a growing market as compared to gasoline in the US which has been, in the past, a declining market although this year it might be up a little bit. Jet fuel is a growing market, with incremental growth, year on year, projected to be on the order of 3 billion gallons. The airline industry recognizes that they have not been taxed or penalized for generating lots of CO2. They recognize that they fly over lots of regions and what they want to do as an industry is avoid piecemeal regulation in the regions that they fly over because they could see the terrible circumstance of being taxed by every country a flight goes over. The cost of compliance therefore would be ridiculous.
So, what the airline industry did was band together and say “let us set our own standards. We’re going to be carbon neutral from 2020 onwards, and we’re going to put penalties in place for compliance and carbon tax by 2027.” The airline industry also, of course, listened to consumers–and greenhouse gases from airlines are a significant issue for them. So, to their credit the industry is doing something collectively rather than being mandated.
The oil price does matter, but the airline industry believes, and I think most people that I run into also believe that the oil price will go up over time. Looking forward, they project it will be somewhere north of $60 per barrel – sometimes people tell me $75 a barrel. In that range, products like ours start to become competitive with petrojet fuel, which is interesting because you can see how you have to pay a premium first to get us there but once we’re big and optimized, you can see how we can actually compete with the petrochemical products, assuming we have an RFS (Renewable Fuel Standard) policy in place.
This will be impacted as well by tax credits, and US biofuels policy. But, in other parts of the world there are different incentives. I was in Australia for a conference and I was told that Australia imports 93 percent of its jet fuel from Singapore. But there is this huge agricultural resource base in Australia that could produce some of this fuel domestically. So how do they get that shifted? What’s the full cost to get jet fuel landed in Melbourne or Sydney, compared to a home-grown domestic option? People are starting to look at these kinds of things to see now that these alternatives are real.
The world is starting to change–perspectives are starting to change–but the big giant companies like Lufthansa, they’re sophisticated, they want to see this happen, they believe in it and so that’s why they are stepping up.
INN: There has been a huge decline in the stock since last year. What do you tell investors about this?
PG: We’ve had a balance sheet overhang issue. You see from our filings that we’ve been exchanging some of our debt which has caused dilution. We’ve also had to raise money to fund operations. This has hurt our stock price. But we’ve reduced our debt significantly in the last year. A year ago, we had approximately $50 million in debt and now we’re down to $27 million – $28 million as of last week. For the first time in several years we actually have more cash on our balance sheet than debt. So, we have been trying to tell people exactly what is happening. It’s hard to get that message across because a lot of folks forget that we had $26 million in debt due in March, now extended to June. That’s the kind of stuff we’ve been dealing with over the past year and we’ve been trying to keep our investors informed.
INN: What’s next for Gevo?
PG: We’ll continue to do the restructuring of the debt and get that done. Then it’s about getting to build-out, about getting supply contracts pinned down with customers, building out our case to expand the Luverne plant, figuring out how we’re going to finance it and getting on with building a business.
We will continue to develop the marketplace for isobutanol. We’ve got a great distribution partner in Musket which is spearheading retail isobutanol sales. We’ll continue to work on getting more demand on the jet fuel side–I think it’s an interesting product and so we’ll continue to plug away there. Same thing on the isooctane/renewable gasoline story, we’ll continue to try to bring in some more customers.
The Haltermann Carless LOI that we announced last week is interesting because we expect that they’ll buy product in 2017 from our plant in Silsbee. But they are also going to buy product out of our expanded plant that we’re now planning. So, we’re starting to put all the pieces together — we will continue to do build the market and then get on with expanding our plant.
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Securities Disclosure: I, Pia Rivera, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Interviews conducted by the Investing News Network are edited for clarity. The Investing News Network does not guarantee the accuracy or thoroughness of the information reported. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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