Northwest's biofuel boom goes bust

By Scott Learn
The Oregonian
Friday June 05, 2009

Jay Holthus is the plant manager at Pacific Ethanol's Boardman plant, still operating despite a recent Chapter 11 bankruptcy filing. (Thomas Boyd/The Oregonian)

In two short years, the Northwest has gone from biofuels boom to biofuels bust.

The boom began in August 2007, when Imperium Renewables opened a 100 million-gallon-a-year biodiesel plant near Grays Harbor, Wash. A month later, Pacific Ethanol opened a 40 million-gallon corn ethanol plant in Boardman. In June 2008, Cascade Grain opened a 113 million-gallon corn ethanol plant in Clatskanie.

Encouraged by tax breaks and Oregon and Washington standards designed to require biofuels' use, the companies promised environmental benefits on an industrial scale, a quantum leap from smaller-scale producers making fuel from cooking grease and Northwest crops. Nearly 30 more projects were under discussion.

Then came this year.

In January, Cascade Grain filed for bankruptcy six months after it opened, idling its plant and putting a $20 million loan from the state of Oregon in jeopardy. Imperium, whose grand opening was attended by both Washington senators, idled its Grays Harbor plant indefinitely, laying off 24 workers in March.

And Pacific Ethanol, which received $14.6 million in Oregon tax credits for its plant, filed for bankruptcy for five of its subsidiaries last month, including the subsidiary that owns its Boardman plant. It warned that it has enough money to continue operations only through June.

U.S. Ethanol had plans to open Washington state's first industrial-scale ethanol plant in Longview last summer. That plant is "continuing to develop," the company says, but it is not providing a new opening date.

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Biofuel supporters expect the industry to rebound quickly once the economy turns, fueled by federal requirements for increased biofuel use.

But the boom-to-bust cycle -- coupled with increasing scrutiny of the green payoff from industrial-scale biofuels -- has raised more concerns about the stability of the industry and the wisdom of subsidizing it.

Federal tax credits of 45 cents a gallon for ethanol blenders mean taxpayers were set to pay about $50 million a year to subsidize fuel from Cascade Grain's plant, or about $625,000 annually for each of the 80 jobs promised there. That doesn't count the Oregon loan, roughly $15 million in state tax credits or local tax breaks.

Last year, the U.S. produced more than 9 billion gallons of biofuels, almost all corn ethanol, using a quarter of the nation's corn crop. The fuel displaced enough petroleum gasoline to power 2.1 million cars. But it reduced greenhouse gas emissions from the U.S. transportation sector by less than 1 percent, the Congressional Budget Office estimates.

"There are big questions about whether (biofuels) are really helping in terms of improving energy security and reducing fossil fuel use," said William Jaeger, an Oregon State University economist who has studied biofuels. "Given all the deficit spending we're doing, we should be even more conscious of what bang we're getting for our buck."

Widespread downturn

Industry leaders counsel patience for a relatively young industry in the midst of an economic downturn.

Higher biofuel content requirements in California and at the federal level will help the industry recover, they say, paying taxpayers back through new jobs and tax payments. Federal requirements call for boosting biofuel use fourfold by 2022, to 36 billion gallons a year.

Technology will provide fuels with deeper environmental benefits.

Construction of the Northwest's hydropower dams was subsidized by the federal government, noted John Plaza, Imperium's president and founder. Coal, nuclear and oil exploration are subsidized, with oil benefiting from research and development expenditures and low-cost land rights for mining.

"Every form of energy has been facilitated in one way or the other by the government," Plaza said. "Biofuel is no different."

Democratic leaders echo the industry's sentiments. Earlier this month, President Barack Obama offered loan guarantees and other financial help to struggling ethanol producers. David Van't Hof, Gov. Ted Kulongoski's sustainability adviser, calls Oregon's fuel plants a "bridge" to more advanced biofuels.

The biofuel downturn has been a national phenomenon, Van't Hof noted. Oregon's plants are likely to be restructured under Chapter 11 proceedings or sold, not shuttered. And the federal plans for more biofuel use in coming years leave Oregon in a good position to capitalize as the industry grows, he said.

Efforts in the Legislature to curb Oregon's business energy tax credits, which include tax breaks for biofuel producers, appear to have vaporized. Same goes for calls to eliminate Oregon's aggressive 10 percent ethanol content standard. A bill that should guarantee that a 2 percent biodiesel content standard kicks in soon is faring well so far.

"It's unfortunate the hiccup we're going through," Van't Hof said. "But we still think it's the right place to be moving, and we're still ahead of the game."

Oregon's advances

Oregon's big leap into biofuels came in 2007, when the Legislature passed nation-leading rules designed to boost biofuel production and trigger 10 percent content standards for ethanol and 2 percent for biodiesel.

The legislation, which also provided tax breaks for farmers and refineries, passed handily, appealing to environmentalists, farmers and rural legislators seeking badly needed jobs in their districts.

At the same time, the federal government was increasing its commitment to biofuels, and Portland kicked in its first-in-the-nation biofuel requirements, calling for 10 percent ethanol and 5 percent biodiesel blends in fuels sold in the city.

All that activity prompted a rush to expand capacity, with companies borrowing heavily to pay for plant construction.

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Then the economy plunged, drying up investment and driving down prices for petroleum gasoline. Lower gas prices reduced the price that refineries would pay for ethanol and biodiesel. That dramatically narrowed the spread between biofuel prices and prices for Midwest corn, canola and other biofuel feedstocks, prompting plant closures nationwide.

"Oil dropped, the demand for gasoline dropped, and that made for a tremendous struggle," said Chuck Carlson, Cascade Grain's president.

Cascade also was hurt by a dispute with its construction contractor, who has placed a lien against the property that Carlson said takes legal priority over Oregon's loan. A valuation for bankruptcy court puts the plant's worth at about $56 million at most, though debt, including Oregon's $20 million loan, totals roughly $120 million.

Pacific Ethanol officials wouldn't comment on their subsidiaries' bankruptcy filings. But Tom Koehler, the company's policy adviser, said it's not time to lose faith in biofuels. Along with electric cars, they're the best bet for reducing the country's reliance on foreign oil.

"Sure, business is cyclical," Koehler said. "But we put steel in the ground, and this plant will continue to provide renewable fuels for a long time to come."

Smaller players, including Oregon's SeQuential Pacific Biofuels, will benefit if the state's biodiesel content requirement kicks in. SeQuential uses a lot of used cooking grease, which has a limited supply but few environmental questions.

Next generation

The bigger players have bigger problems.

After years of not tying biofuel subsidies to environmental standards, the U.S. Environmental Protection Agency and California have proposed standards that would take biofuels' "life cycle" footprint into account. Oregon's Legislature may follow suit.

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In California's "low carbon fuel standard," life cycle effects -- including the power used to produce biofuel, the use of petroleum-based fertilizer and displacement of forests as land is used for biofuels -- give average Midwest ethanol a worse carbon profile than the state's petroleum gasoline.

The EPA's proposed standard assumes that corn ethanol reduces emissions over 30 years by 18 percent if the refinery is fired by natural gas -- and increases the emissions by 34 percent if it's fired by coal. Soy-based biodiesel, the main type, increases emissions 4 percent over 30 years compared with conventional diesel, the agency estimates.

The industry disputes those findings. But the move toward life cycle analysis has increased pressure to get to the next generation of biofuels.

The Obama administration plans to use nearly $800 million in stimulus money to pay for research into alternative fuels. The federal government's biofuel mandates call for 21 billion gallons a year of advanced fuels -- those that cut greenhouse emissions by half or more -- by 2022.

In Oregon, ZeaChem plans a 1 million-gallon biofuel demonstration plant in Boardman. ZeaChem plans to take fast-growing poplar trees from a nearby 17,000-acre tree farm owned by GreenWood Resources of Portland, then convert them to ethanol using microbes found in termites.

Woody "cellulosic" feedstocks -- from trees to switch grass to forest slash -- are not food crops, don't require fertilizer and can grow on marginal lands. As feedstocks, they should be more stable in price than food crops such as corn and soybeans.

Jaeger, the OSU economist, is skeptical: Advanced biofuels won't make a big dent in fuel use within 10 or perhaps 20 years, he said. They also cost more to process than first-generation biofuels.

"We should be careful not to be motivated by wishful thinking," said Jaeger, who favors a more straightforward tax on carbon -- some in Congress have suggested offsetting it with payroll tax cuts -- to get to emissions reductions.

ZeaChem CEO Jim Imbler said the company's fuel will have 12 times the energy content that went into producing it and needs far less land than corn ethanol. Its investors include Valero Energy, the largest oil refiner in the United States.

ZeaChem plans to open the demonstration plant in Boardman in 2010, with construction on a full-scale plant as early as 2012. The company can compete with oil at $50 a barrel, Imbler said, but "a lot is dependent on state and federal help for the first few plants."

Scott Learn; scottlearn@news.oregonian.com