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Betting on Biorefining

Valero Energy Corp.’s investment in the advanced biofuels sector benefits startups and lends an increased aura of confidence to the industry
By Erin Voegele | October 24, 2011

While members of the first-generation biofuels industry and those in the petroleum industry have too often been poised as competitors, the growing presence of petroleum companies in the advanced biofuels sector is actually helping many startups expedite the scale-up process. One company that has traditionally been active in petroleum refining has been particularly supportive of second- and third-generation biofuel companies. Valero Energy Corp. has made investments in a variety of biorefining operations that target the production of a wide range of fuel molecules.

Valero first entered the biofuels space several years ago, and purchased a total of 10 corn ethanol plants. “We realized that ethanol was going to be an important part of the fuel mix going forward in this country; that the demand for ethanol wasn’t going away,” says Bill Day, Valero’s executive director of media relations. “So, Valero looked for a couple of years for opportunities to get into the ethanol production business. We were required as a refiner to have ethanol in our gasoline.”

Although Valero is an independent petroleum company, Day stresses that his company does not consider itself an oil company. “We are a fuels company,” he says. “We figured we might as well be on the production side of [the biofuels industry], rather than just the buying and blending side.” After purchasing 10 plants out of bankruptcy, Valero is now one of the nation’s largest ethanol producers.

Since then, the company’s interest in biofuels has expanded to include next generation technologies. “We are making some selective investments in next-generation biofuels technologies,” Day says. “We have some investments with companies that are making things like synthetic fuels from algae, or making fuels from landfill waste. We have some investments in companies that are working on cellulosic ethanol technologies, and we are working with a company called Darling International to process a type of renewable diesel fuel at one of our petroleum refineries.”

Day explains that Valero doesn’t do a lot of research and development itself; however, the refiner does make a lot of investments with companies that are actively pursuing the development of new technologies. To date, Valero has made investments in the Darling International Diamond Green Diesel project, Solix Biosystems, Mission NewEnergy Ltd., Terrabon Inc., ZeaChem Inc., Mascoma Corp., Enerkem Inc., Algenol LLC and Qteros Inc.

Motivating Factors

According to Day, a primary motivation behind Valero’s investments is its desire to take part in the future of the fuels industry. “We want to make sure that whatever comes next, Valero is part of it,” Day says. “I don’t thing anybody is certain yet what the fuel of the future will be, but all these technologies are very exciting and any of them has a chance to be an important part of the way Americans make transportation fuel.”

“We think of ourselves as a fuels manufacturer,” Day continues. “We take in a raw material, whether it’s petroleum, corn, animal fat, wood pulp or switchgrass. We turn that raw material into valuable clean burning transportation fuels. We are not an oil company, we are a fuels manufacturer. Whatever the future is going to be, Valero wants to be part of that future.”

According to Day, Valero looks for investment opportunities with companies that have good track records, both in terms of the research they have completed and their business model. “For proprietary reasons I can’t really get into specific factors that we look at, but we do a lot of research and are very selective in making our investments,” he says.

The renewable fuels standard has also been a factor motivating Valero. Valero first got into the biofuels business because the company anticipated that demand for ethanol would be increasing. “With the renewable fuels standard being in place, we saw a growing demand for ethanol,” Day says.

Regarding the corn ethanol plants Valero purchased, Day notes that his company was able to improve the facilities and increase their efficiencies by increasing the output of the 10 plants by a total of 100 million gallons. “Those plants have been profitable in every quarter since we brought them back in 2009,” Day continues. “That’s something that we are proud of. We were able to take something that was kind of a questionable business model for some of the companies, and turn it into a profit center for Valero.”

The refiner’s first generation plants may also offer opportunity as the industry moves to second-generation technologies. “With each of the plants that Valero bought out of the bankruptcy, one of the things that we liked…was that they are all relatively new,” Day says. “They have up-to-date technology, and they are on sites that allow for expansion. One of the things that we have looked at is that as cellulosic technologies become available, we could add those technologies as bolt on equipment to the existing corn ethanol plant—not to replace corn ethanol production with cellulosic [production], but to add it on and do it in conjunction.”

While cellulosic biofuel technologies are still working to reach full commercial production, it is highly possible that Valero could add them to its existing ethanol plants in the future. When cellulosic technology is available and when it can be done on a large commercial scale, we’ll have the sites already in place that that have the necessary infrastructure and already have the personnel, Day says. “All of that will be ready to go.”

Impacts of Investment

Valero is poised to experience obvious benefits through its investments in advanced biofuels technologies. However, the companies the refiner partners with are also able to leverage a range of advantages that a traditional venture capital group might not be able to provide.

Terrabon is one such biorefining company that is benefitting from Valero’s investment. The company is working to scale up a technology that ferments biomass feedstock—primarily municipal solid waste—into organic acids that can be further refined into chemicals and fuels. Terrabon has been operating a 150,000-gallon-per-year demonstration plant since 2009 and expects to have a 5 MMgy commercial plant operational by 2013.

According to Terrabon CEO Gary Luce, Valero signed on to invest in his company right after the first phase of its demonstration scale facility was up and running. At that time, Terrabon was focused on converting energy crops—sorghum—into biofuels, Luce says. “What they wanted to do was take the organic acids that we were creating and actually create a fuel that they could test in their labs. That’s what we did, and that’s kind of where they came into the process.”

Luce notes that Valero is slated to be an off-take partner for its future commercial-scale refinery. But, Luce points out that the company offers benefits far beyond the purchase of fuels. “I think from a strategic standpoint, there is a different level of value they add,” he says. “One is just credibility. Those guys are smart, so it gives credence to our technology. They also have a big presence in the energy space, so as we are trying to figure out how to deploy our production into the market; what the mechanics of marketing are; and what the regulations and rules are that we need to make sure we have qualified through, they work with us on that.” Luce stressed that Valero has worked with Terrabon to support a USDA loan guarantee and other government funding opportunities.

There are also technical advantages. “They can take a look at our engineering designs and offer access to other market participants [such as] EPC firms or other types of vendors,” Luce says. “They make great introductions [to those parties].” While venture capital funds are primary looking for strong returns on investment, strategic investors like Valero are also concerned with how an investment can impact their value chain, Luce says. For example, the fact that Valero has positioned itself through its investments to potentially off-take cellulosic and advanced biofuels will bring added benefits to the company beyond investment returns as the volume requirements of the RFS2 ramp up.

Luce also points out that having a strong industry investor like Valero onboard with your project can drastically improve your ability to finance a project. The industry now is evolving to a point for many, like us, Luce says, where technology really isn’t an issue anymore; finding equity to build a plant isn’t really an issue anymore. “The real issue is how do you get debt on one of these plants,” he says. “One way that you try to credit enhance a project is with [feedstock supply and off-take agreements].”

In addition, Luce says that as a true independent refiner, Valero offers a different perspective and different expectations than a global, vertically integrated “Big Oil” company. “They are true independent refiners, so they really better understand, I think, their market costs and how they participate,” Luce says. “They have been a [strong] partner as we have moved along.”

Valero has also invested in ZeaChem, which uses a specialized microorganism to convert biomass into a wide range of chemical and fuel molecules. The company is currently developing a 250,000 gallon per year demonstration plant, and is targeting to begin development of a 25 MMgy commercial-scale plant in 2012.

Valero made a strategic investment in the company during its Series B round of funding, which took place a couple of years ago. “We found Valero is very, very helpful,” says ZeaChem CEO Jim Imbler, noting that part of the relationship between the two companies will include an off-take agreement for fuel.

“What has been great about Valero as a partner is they are extremely focused on first commercial,” Imbler says. “They want to see things get built that make money. They’ve been a big help to us in a number of things; getting validation, getting engineering advice.” Like Luce, Imbler stresses that venture capitalists are primarily focused on the exit, Valero is more concerned with the entrance. “Your VCs are looking for how do we get the most money out of this investment,” Imbler continues. “About the time they are realizing what they want to do, Valero is just starting to get excited, because Valero wants to own operations. What you have with a strategic [investor] is generally a very long-term outlook, a very stable outlook, a very disciplined outlook, and somebody who can provide you with some good feedback.”

“I find that having those kinds of companies in our deal is very, very helpful,” Imbler says. “There are very rigorous, very disciplined, they are very execution oriented, all things that kind of fit our style, and they are also very focused on making molecules that make money. That’s a good thing for people to focus on. I think sometimes in startups people can get to excited about the love for the science or the technology, but really at the end of the day, you better make something that somebody wants to buy and you better be able to do it for less than they want to pay for it.”

Investments from strategic investors are obviously benefiting the biorefining sector, and Valero is showing no signs of slowing down. Day confirms his company is continuing to seek out new investment opportunities. “We are looking all the time,” he says. “We evaluate many, many projects. We don’t get involved in all of them that we look at, but we do evaluate a lot, and not only with our existing business lines, but we are also interested in whatever is coming next.”

Author: Erin Voegele
Associate Editor, Biorefining Magazine
(701) 540-6986
evoegele@bbiinternational.com

 

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