In another small but sharp blow to the Trump Administration’s strategy for American manufacturing revival, news arrives from Texas of a second smaller biodiesel shuttering owing to “ challenging business conditions and continued federal policy uncertainty,” as Renewable Energy Group phrased it in announcing the closure of its15 million gallons per year New Boston, Texas biorefinery. The company is currently working with plant employees on relocation opportunities within the production network.
Earlier this month, the Duonix joint venture between Flint Hills Resources and Benefuel announced the closure of their biodiesel plant in Beatrice, Nebraska.
Both the Duonix and New Boston decisions were styled as plant closures, rather than idlings, and the future of the respective project sites is unclear at this time, though we can essentially rule out re-opening of the plants under current conditions. Divestiture or scrapping — and re-purposing under new management — all have to be considered possibilities for the projects., For the employees, it represents a heartbreaking cessation, and the loss of good-paying jobs in rural America.
The New Boston backstory
We reported in November 2012 that REG had acquired the 15 million gallon per year biorefinery located in New Boston, Texas, REG paid $300,000 in cash and issued 900,000 shares of its common stock to North Texas Bio Energy for the multi-feedstock biorefinery located about 22 miles west of Texarkana. It was REG’s second Texas biodiesel production facility, following its 2008 acquisition of its Houston-area plant. The New Boston facility began production in June 2008 and has been idled for approximately four years.
We reported that the plant underwent construction and upgrades and re-opened in July 2013. At the time, REG planned to utilize animal fats and other high free fatty acid feedstocks to produce biodiesel at the refinery.
In many ways, a change in policy helped propel REG to make the acquisition in the first place. As we reported in August 2011, a change in Texas law came into effect that month that offered a more straightforward way of tracking biodiesel use, and therefore qualifying for a tax exemption. Previously, oil companies had been required to track and report biodiesel blending to the tenth-of-a-percent but the new rule allowed tracking to a whole percentage point. The old rule had been burdensome for most, meaning many didn’t take advantage of the tax break nor biodiesel blending. The change had been tied to hopes for a stronger biodiesel market in Texas.
The New Boston story over the 6-1/2 years of REG ownership had been one of significant strides towards better operation and cost. In the end, not enough.
“We truly appreciate all the efforts of our team and those that support our New Boston plant,” said Brad Albin, Vice President of Manufacturing. “They significantly improved safety, demonstrated capacity, yield, quality and costs. However, these improvements could not overcome the unfavorable economics of the plant relative to our other options for ongoing focus and forward investment.”
The tax credit issue
The forces impacting the US biodiesel industry at present are complex, but REG in this case is pointing the blame at the biodiesel tax credit, the renewal of this tax credit has been stalled for more than 18 months in Congress — the credits expired at the end of 2017 — and there has been no definitive progress on renewal (or clear progress on new directions) from Congress, which has stymied the US biodiesel industry in terms of its long-term capital and operating strategy formation and execution.
“This closure comes today as a result of the poor economics over the last 18 months resulting in large part from the uncertainty surrounding the Biodiesel Tax Credit,” said Cynthia J. Warner, REG President and CEO. “Despite significant bipartisan support, Congress’ inaction on this value-added incentive has led to unsustainable market conditions.”
Other forces at work
Low soybean prices. Trade difficulties with China have been cited as a factor in low prices for US soybeans, and that’s meant that plants using advanced technology to process more exotic feedstocks, such as waste oils and greases, have faced tougher competition from first-generation soy oil-only plants.
Facility size increases. While a 15 million gallons facility would not have been considered large by industry standards even back in 2012, the size of typical biodiesel or renewable diesel plants has been on the rise. NEXT Renewables has announced a 600 million gallon project for the Columbia River, REG and Phillips are planning a 250 million gallon renewable diesel plant in Washington state, World Energy is expending to 300 million gallons in California, and Diamond Green Diesel is expanding its 170 million gallon facility in Louisiana. The pace of construction and the scale of production is widely considered to be great news for renewables, but puts added pressure on smaller facilities.
EPA policy on biodiesel expansion. The EPA has proposed, even in the face of massive proposed capacity expansions, to keep US biodiesel mandates at the 2,4 billion gallon mark through 2020 and 2021. And, small refinery waivers have destroyed demand for biomass-based diesel as well as ethanol in the US.
Exports. Export conditions are not favorable owing to trade wars, low oil prices, and uncertainty over the future of diesel engines, and international policy uncertainty.
California’s Low Carbon Fuel Standard impact. The LCFS favors renewable diesel, which generally has lower carbon intensity scores and higher blend rates than conventional biodiesel. This has the impact of steering REG’s attention, among others, towards large-scale renewable diesel plants using waste-based fats, oils and greases.
Capex opportunities elsewhere
For companies such as REG and JVs such as Duonix, the capex requirements — for creating a scale of production and favorable feedstock mix that made these two projects more competitive — proved to be prohibitive. Simply put, companies like REG have been forced by US policy uncertainty into a quandary over potential costs of capital (not knowing whether expansion could be financed through cash flow or by debt, for example), and that’s bound to stymie investment at the more marginal project sites, possibly now as well as into the near future. Only the largest and most profitable refineries and new projects are likely to clear the risk vs return hurdle while bumpy US policy continues to confound experts, producers, and analysts.
The Bottom Line
Is this the end to plant closures, or idlings and slowdowns? Unfortunately, it is not likely to be the case — more facilities are bound to be impacted the longer this policy impasse remains. Though the nameplate production is small in the case of New Boston, it’s a sign of the times and not a good one.
The fix? For now, there are three opportunities, all in the hands of the US federal government, that could provide more support for the renewable fuels industry and the advanced manufacturing job growth.
1. More positive action from the Trump Administration on trade that could re-open export opportunities for fuels or soybeans.
2. EPA action on biomass-based diesel demand targets.
3. Action from the Congress on the renewal of the biodiesel tax credit.
Longer term opportunities? Oil prices are expected to rise in 2020 and may remain elevated over current conditions throughout 2021. Currency moves may help US producers more in the future — the dollar is strong at the moment, making exports even tougher than they already are. Also, further bans on palm oil as a feedstock for biodiesel — in the EU or elsewhere — would also be beneficial for US producers though not for overall global biodiesel demand.