Biodiesel is a pioneer industry. Its journey is in its early stages and will take years, but chances are good that fuel made from vegetable and animal feedstocks and blended with diesel will someday become commonplace in trucking.
This is not an absolutely sure thing.
Much is made of biodiesel's properties – clean-burning, renewable, an economic engine for rural revitalization and a step toward energy independence. But those claims must be tempered by the day-to-day reality of biofuel quality, production and distribution, engine performance, federal and state tax policy and the global petroleum market.
Start with the big picture. The trucking industry burns about 40 billion gallons of diesel fuel a year. U.S. biofuel refiners aim to brew about 2 billion gallons from vegetable and animal feedstocks by 2015, up from about 250 million gallons this year. So in eight years biofuel could make about a 5 percent contribution to the trucking industry's fuel supply.
Rich Moskowitz, who handles biodiesel issues at the American Trucking Associations, put it this way: "We are not going to grow our way into diesel independence"
That small but significant portion of the petroleum diesel market is the background against which biodiesel's operational, environmental and strategic attributes must be measured.
While biodiesel is not the fuel that will liberate heavy-duty transportation from the whims of the petroleum market, it is the harbinger of a future that will include a variety of fuels rather than just the old standby of diesel. It also is attracting the attention of a growing number of investors.
Weston Heide, senior manager of Global Energy Markets for Deloitte & Touche LLP, provides business services such as auditing, accounting, risk management, commodity transactions and tax advice to the emerging biodiesel industry.
"I think that the most important thing we can think of here is that (biodiesel) creates an environment in which people are looking for alternative and diverse sources of energy," he said. "The investment community is looking at all types of clean, renewable energy. In biodiesel's case there is a tremendous growth opportunity. If you just look at what, for example, a 2 percent biodiesel blend could mean relative to the overall distillate (diesel) market relative to the U.S. alone, let alone globally, it really presents an attractive opportunity."
Thomas Dorr, undersecretary for Rural Development at the U.S. Department of Agriculture, puts a high-torque spin on the same observation: "(Alternative fuels are) probably the greatest new opportunity for investment, for growth and for wealth creation for America in our lifetimes."
Dorr, who was speaking to agricultural carriers gathered recently in Washington, D.C., was referencing President Bush's call in his January 2007 State of the Union address for mandatory increases in alternative fuels. Bush wants Congress to set a goal of reducing gasoline use by 20 percent in the next 10 years, partly by increasing fuel efficiency and partly by expanding alternative and renewable fuel supplies to 35 billion gallons by 2017.
The bulk of the alternative fuel will be the gasoline additive ethanol. Ethanol is derived mainly from corn right now, but that particular feedstock has practical and political limitations. For example, demand for corn has risen to the point that it is affecting the price of tortillas in Mexico, setting up a conflict between fuel and food. Scientists and policy makers believe ethanol needs to migrate from corn to other "cellulosic" matter such as agricultural waste and switchgrass, but this will require technological breakthroughs to bring processing prices down.
Rep. Collin Peterson, D-Minn., chairs the House Agriculture Committee and heads the effort to write this year's farm bill – a key legislative vehicle for alternative fuel policy. He recently told the National Biodiesel Board that the U.S. will stop building ethanol plants within five years, saying, "There's a limit on how far we can go."
"To get where I want to get – 50 percent of our fuel out of agriculture – we need to go to cellulosic ethanol, and we will," he said. "Switchgrass, for example, will produce twice as much ethanol per acre as corn. That's going to be the big focus of our farm bill."<
A COMPLEX MARKET
Currently, the fuel that is blended with diesel to make biodiesel comes mainly from soybean oil, although other vegetable oils – palm oil, for example, and even used fryer oil – and animal fats also are used. Each feedstock has its own chemical, economic and political characteristics, all of which interact to create a fluid and complex supply-side market.
Take, for example, the recent announcement by ConocoPhillips and Tyson Foods that they have developed a new process to refine animal fats into a biofuel. ConocoPhillips says it can process the feedstocks in its refineries, blend the biofuel in concentrations of 5 percent to 10 percent with its diesel product, and distribute the blend in its pipelines. Tyson, the world's largest processor of chicken, beef and pork, will supply the animal fats.
This "renewable diesel," as ConocoPhillips calls it, must be cleared by the Environmental Protection Agency, but is scheduled to come to market by the end of the year. ConocoPhillips also is processing vegetable feedstocks at its plant in Ireland and is evaluating whether or not to bring that process to the U.S., says company spokesman Phil Blackburn.
This product is made from a refining process that is different than the one used to make soy-based biofuel, and it could change the biodiesel market in two significant ways.
For one, it may signal a change in the current biodiesel distribution system, and possibly the creation of a second biodiesel industry.
Currently, most biofuel is refined at plants that are close to the fields where the feedstock is grown, and is distributed by truck or rail to diesel distributors who manage the blending. This logistical circumstance, which makes biodiesel more a regional fuel than a national one, arises in part from the reluctance of petroleum refiners to allow biofuels to enter their pipelines. They fear that the solvent properties of biofuel can break down deposits in the pipelines and contaminate other products such as jet fuel.
ConocoPhillips' move would alter the status quo by introducing the economies of scale that accrue from producing fuel in a large refinery, and the distribution savings from using pipelines rather than trucks.
Over the next three to five years, ConocoPhillips will spend $100 million on renewable diesel, says CEO James Mulva. The company expects to be producing 175 million gallons a year within 18 months of startup, which will amount to 3 percent of the company's domestic diesel output, Blackburn says.
The other important aspect of the deal is that it relies on a tax interpretation by the U.S. Treasury Department that gives ConocoPhillips a dollar-per-gallon tax credit for the fuel. ConocoPhillips convinced the IRS that a credit Congress originally gave to promote a new refining process for turning waste, including poultry offal, into boiler fuel should also apply to its business.
The credit makes renewable diesel "marginally commercial," Blackburn says. Without the credit, he says, it is not commercial.
The biodiesel industry, which has its own dollar-per-gallon blender's credit from the IRS as well as tax incentives in some states, views this tax development with absolute alarm.
"We oppose the IRS ruling," says Joe Jobe, CEO of the National Biodiesel Board. "It's bad public policy. It's bad energy policy. It's very bad agriculture policy. It's extremely bad fiscal policy."
An NBB statement goes right to the heart of the matter: "The oil companies could put a stranglehold on materials used to make biodiesel, stunting the growth of the biodiesel industry."
In addition, Jobe argues, the incentive subsidizes oil companies without adding any new refining capacity, does nothing to sustain the rural revitalization that biodiesel is driving, and creates an unexpected drain on the U.S. treasury. The NBB is pursuing legislative relief on Capitol Hill.
The ConocoPhillips-Tyson deal illustrates just part of the turbulence on the supply side of biofuels.
In the biodiesel sector, for example, pricing is driven by the blender's credit and by fluctuations in commodity prices. The blender's credit is necessary for most producers to be profitable, although that is changing, says Heide of Deloitte & Touche. Some producers have grown and improved operations to the point that they can make money without it – depending on the price of feedstocks.
"You definitely have volatility in feedstocks," Heide says. "In the past year soybean oil has gone up substantially – it's now up to 35 cents per pound on the Chicago Board of Trade. This can make the economics a little challenging."
Charles "Shorty" Whittington is president of a truck line, Grammer Industries, and of a biofuel enterprise, Integrity Biofuels, which makes him perhaps the preeminent pioneer in the business (See related story, page 62).
His take on the supply side: "The economics of biodiesel are hard to pin down – extremely complex and in constant motion, propelled by local, regional, national and global forces that are hard to understand and impossible to control. It takes a lot of nerve to play this game."
Given the economic and political turbulence on the supply side, not to mention questions about the quality and performance of biodiesel, it is no wonder that trucking interests are approaching biodiesel with their eyes wide open.
The American Trucking Associations sees biodiesel as a way to extend the diesel supply and it supports managed growth of the industry.
At this point, ATA wants to stick to a low blend – 2 percent by 2015 is a reasonable goal, Moskowitz says.
"We hope that research and experience will lead to higher blends, but we're not there yet," ATA President and CEO Bill Graves recently told the NBB. "That should not be taken as an unwillingness to embrace higher percentage blends."
THE QUALITY QUESTION
The problem revolves around the market uncertainties described by Heide and Whittington – and around the quality of the fuel.
"I can tell you first hand that while biodiesel is relatively simple to manufacture, high-quality biodiesel is very difficult to produce consistently," Shorty Whittington told a panel of senators at a hearing earlier this year.
Problems show up when the biofuel blender or distributor gets a product that has not gone through a complete quality process – the fuel contains water or too much glycerin, a byproduct of the refining method, Whittington told HDT.
Also, the fuel requires additives to maintain its flow properties in cold weather. Trucking companies learned this the hard way in Minnesota, which in 2005 began requiring 2 percent biofuel content in diesel that is sold in the state. Carriers that used the B2 blend found their filters clogging up in winter, an incident that got the National Biodiesel Board scrambling to upgrade industry performance.
On the other hand, Whittington and others say that if the fuel comes from good feedstock and is refined and blended properly, it works just fine. Whittington is running some of his trucks on B20, and used B10 in some through this past winter. "Once it's blended properly, we're having great luck."
The mix of biodiesel with ultra low sulfur diesel raises questions, Whittington acknowledges. "We have found now, when you look at some of the major producers of ULSD, their processes can vary greatly and it can have a large effect on the product. Then you add a little bit of questionable biofuel and you have a real problem. The trucking industry will take one unknown, but why take a chance on two or three unknowns?"
The National Biodiesel Board is well aware of trucking's concerns about quality. It has put together a voluntary program called BQ9000 designed to promote compliance with guidelines for biodiesel set by the international quality standards group ASTM (the ASTM 6751 standard). That program is a work in progress. At this point just 40 percent of the biodiesel industry has made the commitment. (For more on fuel quality issues with biodiesel and ULSD, see story beginning on page 30.)
ATA wants to see the federal government step into a quality enforcement role. "It is a mistake for the federal government to promote biodiesel and at the same time abrogate its responsibility to ensure biodiesel quality," says ATA's Moskowitz.
State weights and measures agencies are supposed to be enforcing quality, but the right outfit for the job is the Environmental Protection Agency, he says. EPA already has fuel-testing labs around the country as part of its reformulated gasoline program.
"And," he added, "they have an enforcement division that has experience in bringing cases against fuel producers who are making off-spec gas."
THE CONTROL QUESTION
Concerns about quality and enforcement inevitably lead to the overarching issue of who should set biodiesel standards – the states or the federal government.
Until now it has been a matter for the states. Minnesota, for example, has implemented its own 2 percent mandate. Washington and Louisiana have laws that are supposed to take effect next year that will require 2 percent biodiesel consumption over the course of a year. And New Mexico has set a 5 percent standard to take effect in 2012.
For the trucking industry, this situation creates the risk of multiplying current problems with boutique fuels – different diesel standards in different states. And in this case the multiplier is a fuel whose quality may be unknown and is at this point not adequately regulated.
To solve this problem, ATA and the National Biodiesel Board are working on legislation that would set a national standard for a biodiesel blend.
What ATA wants is a voluntary standard so carriers can use biodiesel where it makes sense to use it – in the farm belt, for example, where most biodiesel is refined, or near ports where refineries might use imported feedstocks.
While ATA would prefer a lower blend to start, a political consensus around a 5 percent blend seems to be emerging, Moskowitz says.
Whatever blend level is set, ATA wants there to be a safety valve in the event that commodity prices take an unexpected upward turn and drive up the cost of biodiesel. The secretaries of Energy and Agriculture should have the power to jointly adjust the mandate so carriers are not hit with an uncontrollable spike in costs, Moskowitz says.
Also, the standard should include a labeling requirement so carriers can know exactly what biodiesel blend is going into their tanks. "We need to be educated consumers. If it's February and we're refueling in Southern Indiana on the way to North Dakota, we might want to be careful about the amount of biodiesel we use because of its cold-weather performance."
In political terms, these issues are relatively straightforward compared to the difficulty of passing a law that pre-empts the states' right to set their own diesel standards.
House Agriculture Committee Chairman Peterson is keen to move biodiesel along. But state pre-emption will be hard to achieve, he adds.
Peterson's farm bill is due to be completed this year. Meanwhile, there are at least 25 measures in Congress that address biodiesel in one way or another – a level of activity that reflects the public's intense interest in cleaner, renewable fuels.
A major concern for any fleet thinking about fueling its trucks with biodiesel is availability. According to the National Biodiesel Board, there are currently 105 plants producing the fuel in the United States, most of those concentrated in the Midwest.
Rich Cilento, CEO of FuelQuest, a fuel management firm headquartered in Houston, says the fuel is drawing increasing interest and his company is prepared to begin offering customers the tools they need to manage biodiesel.
"We are also looking toward providing capabilities through our system as the biodiesel industry matures," he says. "Customers will also be able to procure biodiesel with our service. If they need a particular blend – say a B20 – we would have that product type identified and as biodiesel producers come on line, we can execute the same process we use with straight diesel fuel. We would manage the logistics from point A to point B."
Cilento expects there to be even more interest in the fuel and says that by the end of the year, there should be 150 plants in the U.S. producing biodiesel. The Biodiesel Board features a producer and distributor map on its web site, www.biodiesel.org, and also offers other buying guidelines for fleet managers.
Most fleets using the fuel have it delivered to their terminals where they refuel their vehicles. Finding it over the road can still be difficult. While biodiesel groups point to a growing list of retail sites, there are still fewer than 1,000 retail outlets nationwide. Most of those are concentrated, like the producers, in the Midwest.
In an interview last year, Dave Kiely, president of Roadshow Services, a company that hauls for concert tours such as Santana, Jimmy Buffet and others, said they use B99 in their trucks and buses when the performers request it. Roadshow gets the biodiesel from distributors all over the country while on the road, with the fuel delivered to the trucks and buses at the concert sites. He warned that not all biodiesel fuel is the same and that "some blends work better than others."
The NBB has been working with producers over the last few years on industry standards for biodiesel and recommends fleets contact several potential suppliers and verify the quality of the fuel before filling their tanks with it.
Using a biodiesel blend to fuel your trucks will not void the engine warranty. As long as the fuel meets their fuel standards, most engine OEMs are OK with B5 diesel fuel – a blend of 5 percent biodiesel. Some have approved higher mixes of biodiesel. Cummins Engine announced in March that they approved B20 blends (20 percent biodiesel) for 2002 and later emissions-compliant ISX, ISM, ISL, ISC and ISB engines.
While using biodiesel may not void engine warranties, all engine OEMs say their warranties do not cover any problems caused by fuel. Engine warranties only cover failures of materials and workmanship of engine.
Biodiesel has its adherents in the trucking industry, but the plain fact is, fleets don't have enough information to make an informed judgment.
That's why Decker Truck Line put together a 2 million mile over-the-road test to measure all aspects of the fuel's characteristics and performance.
Decker, which is based in Fort Dodge, Iowa, and hauls refrigerated, van and flatbed products in 48 states and Canada with a fleet of more than 475 tractors, considers this test a civic duty to the industry, said Industry and Government Relations Director Dale Decker.
"When we got interested in biodiesel, we could not find any definitive data on it," Decker explained in a presentation to the National Biodiesel Board. "So we kind of put our neck on the line.
"It's not just for ourselves, it's for the entire industry. We will share the data so others can make their own decisions."
The test is being conducted in partnership with the NBB, Caterpillar, the U.S. Department of Agriculture, and Iowa Central Community College, along with soybean interests.
Decker is running B20 (80 percent diesel, 20 percent biofuel) in 10 trucks running between Fort Dodge, Chicago and Minneapolis, and comparing its performance against a control group of 10 identical trucks on the same route. The trucks are Peterbilts pulling mostly flatbed trailers, powered by Caterpillar C13 or C15 engines. The drivers will shift from one group to another to compensate for variations in driving style.
The company has logged more than 500,000 miles so far. What he's learned, Decker said, is exactly what everyone else connected with biodiesel is saying: The quality of the fuel must be good.
"By far the largest issue for us is that if it's not quality it's not going to work."
He's also learning that the cost comparison between biodiesel and pure diesel is not simple. For example, there are times when biodiesel costs more at the pump – but it may extend maintenance intervals and reduce downtime costs.
At this point in the test, Decker said, it is hard to determine fuel economy due to variations in driving styles. Driver-to-driver variability within each group is two to three times greater than the difference in fuel consumption between the groups, according to a report from the Iowa Soybean Association, a partner in the test. The B20 group showed a slight decrease in mileage during the winter: an average of 5.8 miles per gallon versus 6.01 mpg for the control group.
On the other hand, oil samples from the biodiesel trucks are coming back cleaner than the other trucks, Decker said. And the biodiesel trucks have not had any problems with gelling – a concern often raised by fleets worried about using biodiesel in cold weather. There have been some plugged filters but not because of fuel quality, the soybean association said.
Other pluses Decker is seeing: Because biodiesel produces less particulate matter, the time between particulate trap maintenance intervals is extended. In addition, biodiesel restores much of the lubricity that was lost in the conversion to ultra low sulfur diesel, which extends equipment longevity and helps the resale value.
Over the course of the test, Decker aims to capture data on these variables: cost per mile; cost at the pump; cost of additives and parts; the effect on maintenance, including lubricity, parts degradation and filters; emission controls; downtime; biodiesel availability; the effects of additives on cold-flow properties; the effect of blending biofuel with ULSD; and self-blending of biodiesel.
His recommendation to other truck lines is that they try biodiesel at a comfortable blend. "Know your product," he cautioned. Buy biodiesel only from an accredited BQ9000 blender, and make sure your source meets the ASTM 6751 standard by demanding to see the certificate of quality analysis.
Other fleets besides Decker are testing biodiesel. Schneider National, for example, is running the fuel in some trucks and measuring engine wear, fuel economy and winter operability. It has not reached any conclusions yet.
HE'S A BELIEVER
Charles "Shorty" Whittington is a truck guy who believes in biodiesel.
Charles "Shorty" Whittington started his tank line, Grammer Industries, in Central Indiana in 1977 and grew it to a $20 million fleet that delivers fertilizer products through the eastern half of the country. In 2004 he began investigating biodiesel, liked what he saw, and built a 10 million gallon refinery in Indiana that opened for business last summer.
Along the way, he has become trucking's biodiesel cheerleader.
He's a vice chairman of the American Trucking Associations and chairman of the Agricultural Transporters Conference, among other industry commitments, and he recently took ATA's message on biodiesel up to Capitol Hill.
"Increased voluntary use of biodiesel is an acceptable means to extend supply of diesel, reduce particulate emissions and reduce dependence on foreign oil," he told Senators Jeff Bingaman (D) and Pete Domenici (R) of New Mexico, who were drafting alternative fuels legislation.
At the same time, he warned that the fuel cannot be taken lightly. It is not hard to make biodiesel, but it is very difficult to consistently make high-quality biodiesel, he said.
He was talking from personal experience. Integrity Biofuels got off to a good start last summer, but toward November ran into quality problems. Whittington shut the plant down while he fixed the process. He got back up in January and things are running smoothly. "We are making a little money right now, but we are going carefully."
"Going carefully" means paying scrupulous attention to the details of the refining process, starting with the feedstock. Integrity Biofuels uses "refined bleached deodorized" soy oil, checks the product at each stage of the refining process and dispenses each day's production into separate holding tanks for yet another test, the company said. The fuel is tested a last time for compliance with the ASTM 6751 standard when it is loaded into the tanker for delivery.
"Quality fuel is our No. 1 objective," said John Whittington, vice president of Integrity Biofuels. John is Shorty's son. "It is imperative to this industry that each producer do their part to ensure that each and every gallon of biodiesel distributed meets or exceeds the ASTM 6751 specifications."
Integrity's experience illustrates the biodiesel industry's most immediate challenge. Quality is the big issue for producers, blenders and distributors, Shorty Whittington said.
He thinks the issue arose in part because the industry created a demand before it was quite prepared to provide quality.
There are many different business models in the industry, but a typical one has local farmers supplying soybeans to a local facility that crushes the beans and sells the meal and the oil. A processor like Integrity Biofuels buys the oil and refines it into pure biofuel, or B100 as it's called. The B100 is then sold to a diesel distributor, who blends it in whatever concentrations his customers prefer, typically ranging from 2 percent, or B2, up to B20.
"What's happened," Whittington said, "is that you've got some very innovative brokers that go out and buy product from a whole bunch of little people, and they mix it in a tank and hopefully when they get their tank full it's going to be pretty good stuff. They put bad and good in the same tank, and it's been a real tough road for the industry."
He said the biggest problem occurs when the blender or distributor gets B100 that has not been fully processed and contains too much glycerin, a byproduct of the refining method.
"It's kind of like making wine," Whittington said. "If you take good grapes and a good process, you've got some wine that's pretty easy to drink. If you take some rotten grapes and put it in with some good grapes, you've got some stuff in there that you're not sure you want to take a sip of."
But bigger bio refineries are coming on line, and the quality is getting better, he said. "The people that are being players are now understanding what it is they need to look for, what kind of test that they need to understand."
If the fuel is properly processed and blended, it works just fine, he said. "We're having great luck."
He's testing biodiesel in several of his Grammer Industries trucks in a variety of concentrations, from B100 to B20, and says he successfully ran a B10 mixture through the winter.
As a provider and user of biodiesel, Whittington must contend with the other major challenge of the fuel: the complexity and volatility of supply side of the market.
Right now, for instance, the market is tough because the price of soybeans is high.
Soybean oil pricing is basically global, as opposed to regional or national, he said. "The interesting thing is, you trade on the commodity market in Chicago ... and in the last year or so soybean oil has changed drastically in the pricing structure. It's trading at about a 125 percent premium to what it traded for a couple of years ago because of the increased demand from the biodiesel industry."
Farmers don't need to grow more soybeans – they wouldn't anyway because they can get more for their corn, which is needed for ethanol – but they do need to grow a different kind of soybean that produces more oil.
"A lot of the soybean seed producers had bred a variety of soybeans that produced less oil," Whittington explained. "Now they are going back to producing a high-oil bean, but we're probably a year or two out before that's going to come back into the marketplace. You'll very quickly see that there will be twice as much oil as there was a couple of years ago from the same amount of acres, which will help things out a whole lot."
To say that the supply side of the business is in a state of flux is an understatement, Whittington acknowledged.
"What's happened here is that you've created unbelievable interest and demand, and everybody's interested in buying, but only a few people are buying.
"There's soybean oil in storage in the Midwest right now, ready to be sold at a very high price, but there's no buyers. And the market in Chicago is letting those guys keep that in place.
"Now, there will be a day when this thing will come back together. The thing is, where's the world going to go in the price of diesel fuel and the price of crude? There's just so many unknowns that it makes it pretty tough."
As he put it, the biodiesel industry is still in "the workout stages." But there are a couple of things he knows for sure:
First, for the time being, biodiesel is a regional business. "I know for a fact that we can sell 5 million gallons of biodiesel within about a 40-mile area of our plant and in most cases we can save people 10, 15 cents a gallon in transportation charges."
And this: "I've got a fleet of about 25 or 30 trucks, and if oil goes to $10 tomorrow, I can smile all the way to the bank because we can convert them over to B100 and we don't have to get 50 gallons at the truckstop. And if the oil gets shut off tomorrow, I know a truck fleet in central Indiana that will never shut the engines off."