CO2, anyone?

To some, the Devil Behind Global Warming.

To Aemetis, a route to improved margins that will also help the environment. Here’s how.

News arrives from Aemetis, via its latest SEC filings, that the company has “entered into an agreement with Denmark-based Union Engineering to design and construct a 300 ton per day capacity (approximately 220 million pounds per year) liquified carbon dioxide facility.”

In our Bioenergy Project of the Future series, if you’ll recall, we reported that industry has identified CO2 as a key target for monetization and for further improving the performance of biofuels relative to baseline gasoline.

So, let’s look at how a CO2 plant can change the economics and performance.

The addition of CO2 liquefaction

The facility will liquify the CO2 produced at the Aemetis ethanol biorefinery in Keyes, California at an expected construction cost of approximately $15 million.

The additional operating cost of the Liquid CO2 facility will be primarily comprised of electrical power consumption. The Company plans to sell the liquefied carbon dioxide to end users and distributors primarily in the Central Valley of California. Design and engineering work has begun, and liquid CO2 production is expected to begin in the fourth quarter of 2015.

The Keyes ethanol plant already uses a dual-pass wet scrubber to produce 99.9% pure CO2, and the compression process does not have significant yield loss. The process uses a “screw” design that compresses at a 750:1 gas:liquid ratio.

The going rate for CO2

Right now, the end user price of pure CO2 is about 8 cents per pound ($160 per ton). The Keyes plant would likely about 180,000 tons of CO2 per year, with peaks and valleys in CO2 production level based upon the fermentation cycle, and the CO2 plant would convert 110,000 tons (the consistent, base production level from fermentation) into liquid CO2.

Now, the company is likely to have a blend of wholesale and retail distribution — so think in terms of 80% of theoretical revenues to allow for the middleman, or around $128 per ton. That’s roughly $14 million.

The costs and margins

Roughly $3 million for power and maintenance, leaving around $11 million of new cash flow.  So, think payback of the capital cost in around 16 months, and 50 cents per share of new cash flow (based on roughly 20 million Aemetis shares outstanding at present).

It also adds roughly 72 cents to the “crush spread” between the value of a bushel of corn and the value to the biorefinery (11.3 pounds of liquefied CO2 per bushel * $0.064 per pound) — mighty useful in times where the crush spread narrows and otherwise would make ethanol production uneconomic — so, reduces the risk of plant shutdowns due to upside down margins.

The Keyes ethanol plant, redux

The 55 million Cilion ethanol plant was originally built by an investor group including Vinod Khosla and Sir Richard Branson for $132 million, After being idled during the global financial crisis of 2008-09, the plant was leased by Aemetis in late 2009, and Aemetis then retrofitted the plant to implement Aemetis design upgrades at a total cost of about $8 million before acquiring the plant outright in July 2012 for about $15 million in cash and approximately 11% of Aemetis fully diluted shares.

The plant was restarted in May 2011, but the upgrades did not stop there.

Just before Christmas 2012, the EPA issued a final rule, determining that ethanol made from grain sorghum at dry mill facilities qualifies as a Renewable Fuel under the Renewable Fuel Standard — and that “grain sorghum produced at dry mill facilities using specified forms of biogas for…process energy and…electricity, qualifies as an advanced biofuel under the RFS program.”

Shortly afterwards, Aemetis introduced Argentine grain sorghum (milo) and biogas at Keyes. At the time, import costs for grain sorghum from Argentina – feasible for ethanol plants with access to deepwater ports – was running $0.90 per bushel less than corn. And those advanced biofuels RINS were available at a substantial premium to corn ethanol RINs. Despite the $13M in additional cost for running a plant on biogas, the net benefit to a plant in late 2012 could total as much as $0.57 per gallon, or $57 million.

In June 2013, the switchover was complete at Keyes, and upon completion of approved EPA registration, Aemetis would begin to produce D5-qualified advanced biofuels and D5 RINs.

Looking at Carbon Capture and Use vs Carbon Capture and Storage

Carbon Capture and Storage is popular in Washington because it offers a reduction in carbon emissions — and using injected CO2 into oil wells offers financial opportunities for enhanced oil recovery. But we don’t know how stable those CO2 storage pools are, long-term. Actual storage in long-term vessels designed to hold CO2 underground has been described by project developers as “wildly expensive” who add comments like “no one in private industry would put feedstock into the ground”.

By contrast, there’s Carbon Capture and Use — like this Keyes project, which works by displacing carbon dioxide production from fossil resources.

CCU has been described as “the viable, longterm solution” whether the project onsite is simple liquefaction of CO2 or using CO2 to produce algae or cyanobacteria (e.g Algenol or Joule), or renewable sugars (e.g. Proterro) as an intermediate towards high-value fuels, chemicals or fertilizer.

Liquefaction is particularly interesting because it offers opportunities to transport CO2 to locations where algae growth or algae project economics can be optimized.

The Bottom Line

CCU is highly popular in the industry — whether from ethanol producers who see additional revenue streams or algae producers who see potential feedstock.

One potential problem with using liquified CO2 for algae production? Retail CO2 costs of $160 per ton offer tough economics for algae based fuels, since it takes about a ton of CO2 to produce 40 gallons of algae oil (at 30% oil content).

Now, there’s around 660 pounds of carbs and proteins left after algae oil extraction that are monetized, so don’t just divide 40 into $160 and get “$4 per gallon” — but algae developers talk in terms of CO2 costs ranging from zero to $70 per ton.

For now, the customer base if likely to be the broader CO2 customer market which can pay the $160 per ton cost for 99.5% pure CO2. At those prices, there’s substantial upside for the ethanol producer — and it also improves the “crush spread” between the value of corn and the value of the extracted products.