AMSTERDAM – The opening of POET’s 21st ethanol production facility in Portland, Indiana, turned it into the largest ethanol producer in the world with an annual production capacity of 1.1 billion gallons. The Sioux Falls-based company also received an 80 million USD grant from the United States Department of Energy to convert an existing 50 million gallon per year dry-mill ethanol plant in Emmetsburg, Iowa into an integrated 125 million gallon per year corn-to-ethanol and cellulose-to-ethanol plant. POET seems to be in a strong position, which is exactly the opposite of what analysts have been saying about the industry as a whole for the last few months. With significant additional capacity coming into the market in 2008, limited blending, logistics and consumption capacity and narrow margins as a result of high corn and low ethanol prices, the industry seems to be heading towards consolidation.
Ethanol Statistics sat down in Amsterdam with Mark Stowers, Vice-President of Research and Development at POET, to discuss what looks like an interesting period lying ahead. Dr. Stowers expressed his vision on the market, discussing the E10 blend wall in the U.S., the maximum corn-ethanol production capacity, financing issues and current market conditions. He explains why POET isn’t concerned about what’s happening to the industry at the moment, based on the efficiency of all its processes, from building plants in under a year to yielding close to 3 gallons of ethanol per bushel. POET is “ahead of the industry”, according to Dr. Stowers.
The E10 blend wall
With POET growing so rapidly, we asked Dr. Stowers what he sees as the main challenges in further expanding production capacity. “I think that broadly speaking, expansion for POET and the rest of the industry is ultimately limited by the E10 blend, the so called blend wall. I think a lot of activity has to be focused on breaking the blend wall in terms of new formulations that allow for greater inclusion of ethanol into fuels. All other limitations I see now are traditional things associated with emerging industries, such as financing, marketing and logistics.”
Financing new projects
As capital markets became much tighter in the last couple of months, project financing has become a much bigger issue in the ethanol industry and it is expected to stay that way as the margins are under pressure. Dr. Stowers is much more confident about this. “I think that there is still enough financing available for good projects that make sense. From our own perspective, we currently have about 6 projects that are under construction and several others under development. Financing these projects is built around maybe three different aspects. One is having a performing technology that gives us a low cost position. Second is having the construction capabilities to build very efficient plants and then the third piece is having the management team able to manage up to 21 plants. I think it is our competitive position that makes financing easier”.
Mergers and acquisitions
And if the industry would move towards consolidation. Is it part of POET’s strategy to become active in M&A? “Whether the industry goes to consolidation mode has to be determined, although there have been some acquisitions recently. Verasun in particular comes to mind. If there is opportunity, I’m sure we’re looking at it. One of the interesting aspects of our model is we would be very interested in managing another plant, we don’t necessarily have to acquire the plant. We think that if we come in and provide management, access to our technology and access to our marketing strength, that it may be a real advantage for companies in tough times. Of course, you always run the numbers and if it makes sense to build, you build, and if it makes sense to acquire, you acquire. I think that our history has really proven that building has worked very well for us. But we offer an additional option.”
The limits of using corn as feedstock
Similar to almost all U.S. ethanol producers, POET is only using corn as feedstock for its 1.1 billion gallon ethanol production. Some analysts suggest that the maximum volume of ethanol produced from corn is approximately 15 billion gallons. “That is based on the national corn growers, who said that making 15 billion gallons of ethanol from corn would not be disruptive to any of the other markets. And that assumes a 10 year historical average of corn yield increase and it makes an assumption for how corn and distillers products would be used and what the conversion rate is. If you talk to the seed companies, then a lot of people believe that the yield of corn is likely to be greater than the historical trend from the past 10 years and people in the ethanol industry believe that there is a big opportunity to be more efficient in production, so the 15 billion gallons from corn could actually be a conservative estimate.” As POET is currently producing 1.1 billion gallons of ethanol from corn, what would be a realistic near term goal? If you add the plants under construction to our current capacity, that would move us up to around 1.5 billion gallons and I think the company has set a near term vision of producing 2 billion gallons. When I say near term, I mean that it took us 20 years to go from 0 billion to 1 billion gallons. The period between 1 billion gallons and 2 billion gallons will be much shorter.”
POET’s business model: dry mills and farmer investors
What has sparked this growth? Why has POET surpassed agricultural giant ADM as the largest ethanol producer? “I think it is because of our business concept, that we moved in this direction. The way we are structured is that each plant is an investment opportunity for individuals and farmers represent a significant number of these investors. We currently have 10,000 farmer investors, many of which ensure a stable supply of corn for our mills”. Not surprisingly, that is also the reason why POET only has dry mills, contrary to ADM who is predominantly a wet mill producer. “Because the capital required to build a dry mill is much smaller, farmers are able to invest in the plants. These decentralized plants allow us greater penetration into the corn belt. If I’m a wet miller, I would probably have 1 or 2 plants at a very large capacity, where as we might have on an equivalent basis 4, 5 plants or 7 plants and it allows us to gain better access to corn and better access to financing.”
The Future of POET: Liberty Project
The 80 million USD grant that the Department of Energy has given to POET is meant to convert a 50 million gallon per year ethanol plant in Emmetsburg, Iowa. The new plant, once converted, will produce 100 million gallons of corn-ethanol and 25 million gallons of cellulosic ethanol. Why convert an existing plant and why the Emmetsburg plant? “The economics are very important, but it also gets back to the farmer network. The ability to collect cellulosic biomass is a very challenging situation for any market and having an existing farmer network already associated with the plant location, we believe provides advantages for the cellulosic plant. The other aspects relate somewhat to economics but also to ‘ease of operation’: the plant already has a rail connection, the plant already has ethanol storage and the plant already has a natural gas pipeline should we not be able to generate the energy that we expect. It has a lot of site specific activities that we just don’t have to replicate or go through process leads to restart. In addition, DOE’s interest in our project is in how fast we can replicate this model. If we learn how to do this by modifying one of our existing plants, the ability to replicate Liberty across our other 20 plants should be easier than doing them from a greenfield.”
The specs of Liberty Project
How will the Emmetsburg plant compare to current ethanol technology. What yield will it produce, is the technology yeast-based or bacteria-based? “If we talk about yield in cellulosic ethanol, we can’t talk about gallons per bushel, so we shift our terminology to yield per ton and those numbers are still too early to get a ledge on. If you look at other people’s work, not POET’s work, a lot of people use between 90 gallons and 100 gallons per US ton of biomass. I think that those are reasonable numbers once the operation gets going. We also know that producing ethanol from cobs and corn fiber will allow us to extract 11 percent more ethanol from a bushel of corn and 27 percent more ethanol from an acre of corn. Regarding our technology, we are not disclosing that, because we are looking at both. The biggest pro for working with yeast is that we have such a great familiarity with it. Working with bacteria allows you greater utility in terms of how you can engineer your microbe to do what you want it to do. I think that’s the trade-off, one that is really easy and robust to work with versus one that is really easy to manipulate.”
Will cellulosic ethanol shift production more towards the coast?
One of the main problems of U.S. ethanol at the moment is that it’s mainly produced in the mid-west, but the main fuel markets are located at the coast. Logistics are a significant cost factor for ethanol because of this. Could cellulosic crops shift production more towards the coast? “I think that the challenge that you have is looking at the economics of those marginal lands with new cropping systems. I think that eventually it will happen, but I think that the time required to produce, let’s say switch grass at a closer to destination market will have many challenges. I really don’t know how to grow switch grasses commercially at large scale. Challenges are plenty: where is the seed, what is the seed source, how are we going to harvest, collect, store and supply? The density of the materials is far less compared to what we have in cobs for example. Currently we still see the highest concentration of biomass in the corn belt, so I think that you will still see the vast majority of ethanol coming from the corn belt. Whether it is cellulosic or first generation. We will continue to use our expertise with corn, corn by-products and residues. But we are very aware, very much watching, very much understanding that the technology we develop for corn is also applicable to switch grass or woodchips and we have to evaluate those on a case by case basis.”
© Ethanol Statistics 2008