The Untold Upside of Low Oil Prices

by Ron Kotrba (Biomass Magazine) Alternative energy companies typically prosper when oil prices are high, but it’s not all doom and gloom when the cost of crude nosedives.

So what does all this mean for the wood pellet and other bioenergy industries? It’s a mixed bag, certainly, but not the doom and gloom one might expect. “If you look at the logistics side of the equation, a drop in oil prices means the cost of diesel for railroad and truck transport is lower, leading to an increase in profitability,” says R. Delbert LeTang, founder and CEO of SG Preston, a bioenergy startup with four biobased segments—SGP Biomass, SGP Wood Pellets, SGP BioEnergy and SGP Biofuels. The company most recently made news in October when it announced an agreement with Houston-based EPC contractor IHI E&C to develop five renewable diesel projects scaled at 120 MMgy each.

“At one time we were supplying wood chips to major global biomass company in the far Northeast when diesel prices were up as high as $4 a gallon,” LeTang says. “That translates into a delivered cost for wood chips that’s fairly high. For end-product pricing, customers look for parity with petroleum products and high input costs make that more challenging. But when those input costs, or related costs for transport, decrease 40 to 60 percent, the companies that are more customer-centric pass on that savings to their customers while keeping some for themselves. It can have a very positive impact.”

Cory Schrock, plant manager of Fiber By-Products Inc., an 80,000-ton pellet mill in White Pigeon, Michigan, says the company was founded by his father in the early 1990s to provide a service to area sawmills and other wood industry manufacturers by contracting for their waste vs. them paying for disposal. The company amassed a fleet of diesel trucks to haul the raw material and its refined mulch and animal bedding products for which it was developing growing markets. “By the time 2004 came around, the business had grown, and there was more wood fiber and scraps than we knew what to do with,” Schrock says. The growing pellet market got the company’s attention, and by mid-2006, it was steeped in the pellet manufacturing business. The company manufactures its ProPellet brand and fills various private label bags.

With its own fleet of trucks, Schrock says lower diesel prices are a positive for the company’s bottom line.

Lower freight costs can broaden the radius around a pellet mill within which its goods can be economically delivered.

On the flip side, however, biomass power, pellets and renewable fuels typically become more popular when traditional energy prices are high. “We are an alternative energy business and we like seeing high conventional energy costs,” says Schrock. “It makes our product more attractive. It may seem selfish, but in America we are trying to develop alternative energy, and when oil prices come crashing down, all our efforts seem to have been in vain and we have to start all over again.”

For liquid biofuels, LeTang says what sustains a company’s ability to ride the tough time of low oil prices is its ability to control feedstock. “The technology we will use has the ability to use all the feedstock options, but what we will focus on is a small family of plant oils,” he says, unwilling to disclose further details. “We have direct control over this process. We de-commoditize that, and as result, we control our feedstock input price.” He says the renewable diesel SG Preston will produce comes at a fixed price and value-addition to the market with standard escalations to avoid the market lulls associated with low oil prices. “We don’t have a price that’s hedged to any index,” he says. “It may be slightly higher today, and anyone who’s looking at fluctuations in petroleum knows this will, at some point, go back to where it was and customers are asked to place hedges against that. What we offer is finished product that’s a natural hedge. We have a fixed, long-term predictable price. We designed our model to project a long-term predictable value. That’s what the customers are looking for, and it’s what the investment community is looking for.”

“One of the things I hope these low oil prices will do is keep some of the folks from jumping into the industry,” Brant (Claire Brant, owner and managing partner of Equustock) says. “Money guys jump in and dilute the production pool by building additional plants to alleviate the product shortages we’ve seen in the past few years. READ MORE