|Access to year-round water can greatly
increase yields of biodiesel feedstock
Editor’s Note: Growing biofuel, whether it’s biodiesel or bioethanol, whether it’s jatropha or sugar cane, is not easy. Like many emerging clean technologies, biofuel production is a challenging, knowledge-intensive enterprise in an emerging industry. There are no guarantees of success.
This article by biodiesel entrepreneur Louis Strydom, who is endeavoring to establish a biodiesel plantation and refinery on a massive scale in Kenya, serves as a sobering reminder of how many factors have to be aligned before biodiesel fuel moves from dream to reality. Ultimately, biodiesel plantations have to be profitable, and the requirements for success are myriad.
It’s important to distinguish between large-scale commercial biofuel growing and refining, versus biofuel as a supplemental crop, pursued profitably on a small scale by farmers around the world, who see this crop as a means for themselves and others in their locale to become energy independent. Subsistence biofuel growing and refining is a viable economic model – and a very interesting one – but very different from the one examined here.
For biodiesel to become a measurable supplement to petrodiesel on the world markets, then sceptical analysis of its financial and operational viability will have to be performed on every large-scale undertaking – and from that perspective, this article is required reading.
Ed “Redwood” Ring
My experience on projects concerning biodiesel perennial crops and subsequent refineries began a few years ago when I was approached to raise funds for a biodiesel project.
It turned out that particular project was poorly planned and it was therefore not viable for me to proceed on it. In 2005 a client of mine was investigating the initial viability of promoting a Biodiesel project in Kenya, East Africa. The initial advisors he had never focused on the fundamentals of the project and thus it never got off the ground. I was then approached to develop this project into a bankable undertaking. This has required much research and in the process we have been in discussions with a variety of parties and consultants (including from India, Australia, Africa, Europe, UK and the USA) on this and other biodiesel projects. What has become clear over this period was that:
|Abundant land and willing investors are only part of the
successful equation to create a viable biodiesel enterprise
Not all entities have considered their undertakings in detail, although most portray themselves as experts, which has resulted in some cases in a serious lack of sound business approaches to make their existing or intended projects viable;
Some of these parties have actually managed to raise millions of dollars on their projects without having a sound business plan and viable business structure to make their projects successful, and yet investors seemed willing to provide funds to these undertakings.
This article looks at a specific segment of the biodiesel market and based on our experiences investigates some of the basic requirements to promote a successful project within this market segment. The article does however not cover issues pertaining to crops and other input alternatives (such as recycled oils) in first world countries, which have significantly different market dynamics.
For the purposes of this article the market segment in question is the development of a biodiesel project that covers both the agricultural input for biodiesel production (crops) as well as the refining thereof.
General Criteria for a Viable Biofuel Operation:
Not Dependent on Subsidies: The project should be sufficiently viable not to require any kind of subsidies, thus not requiring government support to keep the projects afloat. All subsidies come from the consumer at the end of the day and thus the more viable the project can be without subsidies the more the benefit to governments and their citizens. There is however one caveat, “Carbon Credits” as provided under the Kyoto protocol can initially enhance the viability and provide a sufficient return on investment on the project so as to attract investors.
Vertical Integration of Farms and Refinery: The project must have primary control over the crop feedstock. This results in a more controllable cost scenario for the feedstock and thus the project can be competitive against petro diesel at lower petro diesel prices.
Location in Developing Nation: The reason for this is that land and labor are significantly cheaper which reduces both capital and working costs.
|More than 50% of the vast continent
of Africa may support biofuel crops
But success depends on many factors
Large Scale: The project must be done on an economy of scale in order to attract appropriate investors. Given the scale of the project and the commercial objectives, mechanization of the project is required as far as cost-benefit analysis allows. Out-grower schemes can however be added as a secondary production feedstock and to enhance corporate responsibility and job creation. Further, even with mechanization, a significant number of employment opportunities will be created.
Perennial Crop: The project must have a perennial crop. This increases the initial input cost, but thereafter the annual costs significantly decrease as the crop does not have to be replanted annually and therefore only maintenance costs are incurred.
Local Market for Biofuel Sales: The primary output – Biodiesel – must be sold in the country it is produced. The reason for this is because the project business model is based on becoming a low-cost leader, thus the main objective is to keep operational costs as low as possible. This is done to enhance the shareholders return and also aims to deliver a substitute to petro diesel that can be competitive at the same prices as petro diesel world market prices. Given the typical location of such projects in rural areas, logistics are often difficult in terms of land and sea transport to get the product to an alternative end market.
In order to cover some of the basic requirements necessary for the evaluation of a biodiesel project within this framework, let us consider the particular project we are working on in Kenya. Although this project is still in the due diligence phase, we believe that some of our experiences may be of benefit to promoters of similar project, financiers and investors.
Our project is located along a perennial river on land currently not being used for commercial purposes. The project size is 150,000 acres (~60,000 hectares), with land being leased from a state owned enterprise. The crop we have selected is Jatropha Curcas and the refinery will be onsite. It is interesting to note that there are quite a few international companies that intend to use this crop as their main feedstock. It is particularly in this regard that we have encountered some companies that do not fully consider all the requirements to make a project work using this feedstock.
Our approach has been that a viable biodiesel operation will require a number of areas of expertise, and we have sought to secure the partnership and or services of some of the leading international experts in each particular field of specialization with appropriate management structures to support the successful development of the project. Apparently, there are companies that do not consider it pertinent to follow such a “best-of-breed” philosophy to provide a suitable turnkey solution to their projects.
It should be further noted that although Jatropha Curcas is a crop touted by many parties as the solution to biodiesel feedstock, there is not a significant amount of reliable scientific data on the crop in terms of commercial application.
Most of the current reliable data covers the use of the crop on marginal land and preliminary research into long term commercial viability. A lot of research is of course being done in terms of commercial use but from a scientific perspective we have not yet encountered proven data for commercial application on issues such as crop yields, optimal phenotype selection, etc. This of course does not mean that Jatropha Curcas is not a viable crop, it does however mean that one should be diligent when evaluating the crop’s potential in a specific area for commercial cultivation. It also means that although it is very reasonable to expect significant crop yields from Jatropha Curcas per hectare, it is imperative to ensure that the botanical and agricultural assumptions surrounding the projected crop yield are sound.
Commercial Viability of a Jatropha Plantation
|Potential biodiesel plantations can’t just look good
from the air – they also have to be close to markets
Site Accessibility: In terms of being readily accessible for all input and logistics factors required for production as well as getting the end products to market at the lowest cost. We have encountered a number of projects where the promoters focus on the land that is available and yet do not consider the cost of accessing the site as well as getting the end products to market. If the logistic costs are not minimized over the long term then there is a material risk that the biodiesel output will not be competitive against petro diesel. We have found some projects which seek to produce and market the biodiesel in the production country as well as certain refineries who seek to purchase either crude Jatropha Curcas oil or refined oil to sometimes not analyze the issue of logistics to market sufficiently. Particularly, from the perspective that in-country the transport costs to a credible market can affect the return on investment and that for export the logistics of transporting the product from site to harbor and then off-shore can adversely affect a project.
Multiple Harvests per Year: In terms of producing high crop yields per hectare, and besides the soil requirements, it is necessary to get three harvests per year. This allows for a reasonable estimate – subject to soil quality, nutrient and fertilizer application, water application and macro and micro-environmental variables – of 10 tons per hectare. In order to achieve this a relatively low rainfall area is required (~500 mm) with a limited and relatively short rainy season, which allows for irrigation as the main source of nutrient and water provision and thus sufficient crop control to enable three controlled harvests per year. We have found hugely varying estimates of crop yield, and often with very little scientific basis therefore.
Phenotype Selection: Although there is relatively limited supply of scientific data in this field for Jatropha Curcas, it is still crucial to select the best available phenotype given the data available. Furthermore, research and development facilities for the project is critical to ensure the best possible phenotype can be developed. Jatropha Curcas provides a major advantage in that it can be grafted and thus as optimal phenotypes are developed these can be brought into production in a relative short space of time.
Land Preparation, Nursery and Planting: On smaller scale projects this of course does not have such a major impact but on large scale plantations this area plays a significant role. The main driver being that the quicker the crop can be planted and growing the quicker a return can be realized to the investors. A detailed cost-benefit analysis therefore needs to be done with the main focus being on cultivating and planting the seedlings in as short as possible time. Mechanization of the process as far as possible greatly enhances the success of this component. During the analysis we found some companies do not consider this factor adequately. Furthermore, there appears to only be a limited amount of companies/projects that include detailed forestry assessment of the soil preparation (including ripping to ensure better root establishment) and fire risk management.
|The dry season in Kenya, near the site of the
author’s proposed biodiesel plantation and refinery
Irrigation: In our analysis we found that drip irrigation is the most optimal solution. Without controlled water application some of the projections on crop yield published in the media should be considered very critically as it is uncertain if there is proven a scientific basis for these projections. Drip irrigation does significantly increase project capital costs initially, but it addressed a number of areas required for a successful feedstock production. Scientific application of drip irrigation allows for short harvest production periods. This is very pertinent to the harvesting process which is discussed later on, without a controlled harvesting period where the seeds ripen in a short time the cost of harvesting and mechanization of this process is adversely affected.
Climate: Given a relatively low rainfall with a short rainy season it enables the harvests to be controlled, allowing for 3 harvests per year. If the water application for the crops is not controlled, it is not possible to control the harvest production pattern and thus the crop yield will be materially affected.
Application of Nutrients and Insecticides: Some nutrients and insecticides can be applied through the drip irrigation system thus reducing amount of labor required and the logistics surrounding the management of labor to apply these manually.
Plantation Management: It is important to appreciate that on a large scale Jatropha Curcas a plantation is effectively created. It is therefore necessary to bring to the project plantation management expertise. We have to date found only few projects that have considered this issue, or have credible expertise in-house in this area.
Harvesting: This is a critical element to the project. First, if an effective harvesting process is not in place the quality of the crop will deteriorate. Jatropha Curcas seeds build up Free Fatty Acids (FFA) once they have ripened and lie on the ground. Fortunately refining technology has improved to handle high amounts of FFA but nevertheless the better the quality of the harvested crop the better and more efficient the refining process. Second, if grown on a commercial scale the labor requirements without mechanized harvesting can be very large and the time to complete the harvesting process ineffective. It is therefore necessary to mechanize the process as far as possible – subject of course to cost-benefit analysis. We have found projects to cover this component insufficiently to the extent that we have seen some very large plantations underway without due consideration of the harvesting factor. Our approach has been to look to expertise in other harvesting industries where expertise is available that can deal with the mechanized harvesting of the Jatropha Curcas crop.
|Jatropha seedlings ready to plant|
Processing of Crop/Refining: There are a number of excellent companies who have developed suitable processes to deal with the turn-key refining process of Jatropha Curcas seeds. Two excellent companies who can supply equipment for large-scale refining are Lurgi AG and Energia. From the Jatropha Curcas perspective however two areas that do require a specific focus are fertilizer and biogas. On fertilizer it is necessary to do a detailed cost-benefit analysis to determine if the conversion of the expelled residue from the refining process can be viably sold as fertilizer. Of particular note is considering the transportation costs of the fertilizer and the determination of a suitable market given these costs. This is of particular importance given that the specific fertilizer requirements, in terms of composition and volume, of the country in which the crop is produced may not suit the type of fertilizer being produced and export and transport costs of the fertilizer do not make sales to off-shore markets viable. In our case we found it more productive to focus efforts on the development of biogas processing capabilities to generate electricity from the expelled Jatropha Curcas residue. There does not however appear to be an established industry norm and these factors are project specific.
Carbon Credits: There are a number of consultancies who will advise and structure application for all carbon credit application covering Carbon Emission reductions, Clean Device Mechanisms, Carbon Sinks, etc. Areas for consideration regarding Jatropha Curcas with our project context include that in some cases there are not established protocols for the applications under the Kyoto protocol such as Carbon Sink applications. It is therefore better to separate the various areas where application can be made for Carbon Credits into separate submissions thus increasing the overall possibility of some of the applications being successful and not possibly being held up by an overall approval under one submission. Further, at this stage it is uncertain for how long the Carbon Credit markets will continue to be in existence and in what form and to this extent caution should be applied to the extent to which these potential cash flows are included in the financial projections.
Strategy Implementation & Monitoring: Various expert companies are required to bring sufficient expertise to the project as described in this article to ensure reaching commercial viability. Most of these companies will at least be required to enter into technical support agreements if not into turn-key management contracts for certain components. This will inadvertently result in varying labor and management practices for certain components of the project. It is therefore necessary to ensure that sufficient overall strategy implementation and monitoring expertise is available in-house, or brought in externally. From my interaction with a number of companies seeking to participate in this particular market sector it seems that a number of future projects seem to neglect this component. A number of future projects and established companies involved in similar projects appear not to have applied the process at all. This typically results in declining investor confidence and lower return for investors due to either the changing of objectives due to an inappropriate initial business model or to due to poor communication and remedial action resultant from non or poor achievement of initial strategic objectives.
This article is not intended to cover all issues relating to a Jatropha Curcas or similar crop plantation and refinery project. It does however seek to share some of the experiences we have encountered on our project and some of the weaknesses we have detected in other similar projects. To this extent, the article seeks to provide a basic checklist of some of the key areas to address when considering such a project either from a development or a financial perspective.
About the Author: Louis Strydom is an expert in new venture creation and project finance with wide experience on projects in the developing world. One of Louis’ main projects for the last year has been conducting a pre-feasibility study and promotion of a 230,000 acre site for a Jatropha plantation and biodiesel refinery in Kenya. Previously he was Senior Vice President of Project Finance at Decillion – a company listed on the Johannesburg Stock Exchange. Other positions included Senior Economist managing the Credit Policy and Risk Management division of the Export Credit Insurance Corporation of South Africa. Prior to that he was a Director with Triumvirate responsible for Marketing and Consulting on Crisis Management. Louis also has extensive experience in short term insurance with American Insurance Group on fire/casualty risks, niche products and political risks in Africa, Europe, the Middle East, UK and USA.