Donald Rumsfeld said it best: There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.
We’re going to use this to examine the development of unconventional fuels, and among them renewables. Let me put it this way:
There are known oils; there are the oils we know we know how to produce at a reasonable cost. We also know there are known unknown oils; that is to say we know there are some things we do not know how to produce at a reasonable cost. But there are also unknown unknown oils – the ones we don’t know if we don’t know how to produce them at a reasonable cost. And if one looks throughout the history of energy, it is the latter category that tend to be the extraordinarily profitable yet difficult to finance ones.
The truth of fracking
In that light, let’s state as an obvious truism that there is just about nothing in North America more alluring to the mainstream energy investor today than a really good fracking opportunity – extracting known oils from a known position using a previously unknown technology.
Another obvious truism. There was nothing in North America less alluring to mainstream energy investors 15 years ago than a really good fracking opportunity. It took something like 17 successive technology demonstrations and iterations, the steadfast support of the Department of Energy, and a pioneer named George Mitchell who just refused to leave all the oil in the Eagle Ford he knew was down there. That one story has done more to upend world politics and economics than anything since the rise of Al-Qaeda.
You may not love all of the executions of fracking technology — and I’m not a huge fan and neither was George Mitchell, come to think of it, or so he told me. But t’s a stupendous success story when measured solely as a profitably extractive technology.
And it reminds us that one of the great tipping points for world civilization is when technology liberates a value great enough that the fear of the risk fades for investors too greedy for the returns, and allows for the accumulation of capital.
The pivot to biomass
There’s energy value in biomass — we all know it, and the tipping point for a particular raw material comes when an extractive technology first arrives that can profitably support the extraction. One of the factors is the scale on which the biomass is grown and aggregated – no one is going to make money off biomass available nearby in quantities short of world-scale. That’s why conventional grains and oilseeds have been the first to be used for biofuels.
Woody biomass should have been next. The problems of extraction of value from woody biomass have been a huge stumbling block. Nature designed a tighter protection around wood than grains and oilseeds. And the problem is not entirely unlike the problem that Mitchell faced with the Eagle Ford.
The energy is there, but a new technology must come along to extract it. And in the technology business as with the Parable of the Banquet as related in the Gospel of Matthew, “many are called, but few are chosen”.
Someone must fracture the biomass to give up its energy value. There are many, many candidates and of late there have been solvent liquefaction and hydrothermal liquefaction. And companies pursuing them all have cute and proprietary names for the process technology.
But it’s all the fracking of biomass.
Turning to Steeper Energy
Two years ago, we reported that Steeper Energy had received a $3m grant from Sustainable Development Technology Canada towards development of a $30M 100 barrel per day demonstration project for the company’s hydrofaction biomass-to-liquids technology platform. The plant, co-located with the Daishowa Marubeni International Alberta Peace River pulp mill would eventually lead to commercial plants will ranging from 2,000 to 5,000 barrels per day.
It’s a supercritical technology. For those new to the the field, that means high temperatures and high pressures, and relies on the strange and useful physical properties of water when it reaches the supercritical temperature range – at 374C and 221 atmospheric pressures.
That’s an exotic region within the Digest Cinematic Universe where everyday physical norms break down – under the anvil of temperature and pressure, the barrier between steam and liquid water begins to get decidedly fuzzy and water begins acting like an acid and a base, at the same time.
Supercritical water is an amazing solvent — Renmatix uses it to separate C6 sugars from lignin in seconds, compared to the hours or days associated with enzymatic systems. And Licella uses a proprietary Super Critical Water reactor to attack organic polymers, cutting them directly into highly desirable energy products.
Hydrofaction economically converts a variety of forestry residues or agricultural (non-food) waste to a petroleum equivalent renewable fuel oil. Based on a high pressure/temperature process or supercritical water chemistry, the produced oil is suitable as liquid fuel for large compression engines for electricity generation as well as rail or marine propulsion, or can be upgraded using hydrogenation into renewable diesel and jet fuel. The technology is a net water producer (no water consumed) and achieves a feedstock-to-oil energy recovery efficiency of more than 80 percent, making it highly sustainable and economical.
The Steeper backstory
Steeper Energy’s CEO Perry Toms recalled, “we wrote a bunch of patents in 2011 around a particular protocol and raised $6M from a Calgary based group – these were predominately investors in traditional oil & gas, but who also invested in unconventional oil. They could see what we were trying to do is liberate shut-in resources in the form of forestry residues. We proved to them that we had a clever and simple hydrothermal application that could keep the capital costs down and drive a better oil out of the door for lower than $80/barrel.
“And we were using commodity pulp prices for the cost of biomass, and we believed then and now that we can beat that and deliver a barrel of biocrude for less then $70, that could be upgraded to renewable fuels, lubricants or biochemicals for well under $90 a barrel.
“Now today, you can sell renewable diesel, when you count in the RINs and everything else, for around $140/barrel, so the business opportunity makes some sense now, and if you think back a few years to when West Texas Intermediate was $107, in the fullness of time we will be a truly competitive blendstock, especially if some amount of the externalities of petroleum are attributed in the oil price.”
Let’s examine some of those themes.
The Better Oil
What is compelling about Steeper’s claim is that their biocrude has 8-10% oxygen content. That’s within the maximum tolerance of hydrotreating technology that is found within conventional oil refineries — we know that because of the KiOR saga – KiOR was delivering a product with around 17% oxygen content, and we reported that this was a major factor in KiOR’s troubles in maintaining offtake arrangements for biocrude and forced it to go down the path of upgrading its own oil.
Now, claims are not proof — it would be years before investigative reporting uncovered the fact that KiOR wasn’t delivering low-oxygen oils. But let’s mark this technology down as having special properties of interest for conventional refiners seeking renewables. Especially those in the California market where the Low Carbon Fuel Standard might offer exotic premiums for exotically low-carbon fuels.
Lubricants or biochemicals
The path to renewable fuels via hydrothermal or solvent liquefaction is reasonably well-worn. We’ve reported on Chumbawumba — our name for the old Chevron technology, now in development at Iowa State, here.
And Shell has been working on its own brand of HTL technology — and you can see a Multi-Slide Guide to that here.
And a year ago we reported that CRI entered into a Front End Loading (FEL-2) evaluation package license agreement for IH2 technology, a continuous thermal catalytic process which produces liquid hydrocarbon transportation fuels from forest residues, and other renewable resources. More on that here.
There’s been some discussion of heading for higher-value lubricants or biochemicals market via an HTL process, but we’ve yet to see a technology get there. The closest we’ve seen is Licella, which has chemicals as well as fuels in sight, and formed a JV with Canfor to integrate its Catalytic Hydrothermal Reactor upgrading platform into Canfor Pulp’s kraft and mechanical pulp mills. More on that here.
But let’s mark this technology path one down as “aspirational, rational, but not quite yet proven at world scale”.
$140 per barrel renewable diesel, really?
Can you really sell renewable diesel for $140 a barrel? Well, yes, there’s evidence for that. That translates to $3.33 per gallon, or roughly $1.63 in carbon credits north of diesel’s current wholesale price of $1.70 per gallon. LCFS credits are trading around $1.00 and we don’t have data for D7 RINs but D3 RINs are trading at $2.55 each. You could make a scenario of up to $3.00 per gallon in carbon credits in the market right now without being taken to the insane asylum — or $4.70 per gallon for cellulosic fuels.
And that’s without a renewable diesel tax credit which, if restored, would add another $1.01. In all, the cost would reach something like $5.70 before you’d be strapped in a straight-jacket, and that translates to $239 a barrel.
Now, let’s mark down a caveat. We have a new Administration in the United States with an untested level of support for renewable fuels and the RFS, and D6 corn ethanol RIN prices have been crushed since December. Two months ago, they were trading at $1.08. Today, they are down to $0.45.
It’s that kind of RIN volatility that was unanticipated by the designers of the RFS and is the single most important, though not the only, reason for the low availability of cellulosic biofuels.
Where is Steeper in its evolution?
It wouldn’t surprise that the company is out raising money. Everyone is out raising money, or out to keep shareholders happy with a rising share price. The company has a long ways to go — the completion of a demonstration plant, the necessary operating hours to obtain data and get investor confidence for the commercial plant, then the capex for the first commercial, the construction and deployment. Think years, not months, before anyone raises the “Mission Accomplished” banner on Planet Steeper.
But still — let’s put this in the small basket of the 10 technologies of most interest for 2017. Why? For one, look at Licella’s progress, and this is not operating in a completely different technical space. For another, renewable diesel really is a big product and renewable credits really do add substantial lift to the economics. Third, woody biomass really is replete in Canada and it is getting harder and harder with Canadian logistics to liberate the value using conventional technologies and markets.
Unconventional oil it may be. But look what happened to Alberta when it went all in on petroleum unconventional oil.