US Biodiesel Industry Gets Government Boost

By Angel Gonzalez
A DOW JONES NEWSWIRES COLUMN

HOUSTON (Dow Jones)--A federal mandate on use of biodiesel and the likely extension of a tax credit for the fuel are resurrecting hopes for the industry in the U.S.

Production of the fuel--which is similar to crude-oil-based diesel but made from vegetable or animal oils--essentially came to a halt over the past several months due to the economic downturn and the expiration of the $1-a-gallon tax credit at the end of 2009.

Signs of a tentative turnaround point to how government action remains vital for renewable fuels, which proponents say can help mitigate climate change and foster domestic energy security.

Although biodiesel production saw explosive, privately financed growth when crude oil prices were hitting all-time record highs in 2008, it was always "smaller and more fragmented" than the corn ethanol sector, said Melissa Stark, a consultant with Accenture. While the politically savvy ethanol lobby managed to carve out their place in the U.S. fuel market early on, biodiesel producers had trouble drawing attention to their plight until recently, Stark said.

Higher prices on fossil fuels make alternatives more economically viable. The subsequent plunge in crude oil prices at the beginning of the recession hit renewable fuels hard and exposed their reliance on government support.

In a ruling last month, the Environmental Protection Agency officially made biodiesel part of the nation's renewable fuels standard, requiring the use of 1.15 billion gallons of biodiesel in 2010. Implementation will start on July 1. And in early March, the Senate passed an extension of the tax credit. The Senate bill must be reconciled with similar legislation passed in December by the House of Representatives, but that's expected to occur within months.

"We've got the policy that we need in place for the industry to survive," said Jeff Stroburg, chief executive of the Renewable Energy Group Inc., or REG, a privately held Iowa biodiesel producer. Last week, REG acquired two biodiesel plants with a total of 75 million gallons of additional capacity. The decision to complete the purchase--which had been negotiated for nearly a year--was due in part to the implementation by the EPA of the renewable fuels standard, which is expected to force petroleum refiners to buy biodiesel in order to blend it with regular diesel.

Now that the policies for which biodiesel makers lobbied are falling into place, the industry is likely to rebound from its "rock-bottom" status, said Stark. The market environment will still be challenging, as the U.S. production capacity is three times greater than the amount required by the mandate, she said. Moreover, biodiesel is facing tougher competition from natural gas--a cheap, relatively clean-burning fuel--among municipal and company fleets, one of the fuel's key markets, Stark said.

The new policies, however, could help some biodiesel producers on the brink.

GreenHunter Energy Inc. (GRH), which built one of the largest U.S. biodiesel plants in Houston, has until the end of March to negotiate an agreement with its lenders about the future of the facility. The plant is currently used as a storage terminal and isn't producing any biodiesel. GreenHunter could either give it back to the lenders, restructure the loan and get an extension, sell the property or get a joint-venture partner to relaunch biodiesel production there, said Jonathan Hoopes, president of GreenHunter Energy. The renewable fuels standard, in addition to the tax credit, boosts the value of the facility, and perhaps increases the chance that an investor with $20 million to $30 million of working capital will be found, Hoopes said.

"We'd love to see (the plant) operate," Hoopes said.

(Angel Gonzalez is Houston Bureau Chief for Dow Jones Newswires. He can be reached at 713-547-9214 or by email:angel.gonzalez@dowjones.com.)