Refiners display increasing interest in ethanol

By Kris Bevill | September 23, 2010
In their hunt for captive ethanol supplies, petroleum refiners have been pursuing a steadily increasing role in the ethanol production industry. The latest refiner-turned-ethanol producer is Flint Hills Resources LP, a subsidiary of Koch Industries Inc., which agreed to acquire two Hawkeye Growth LLC facilities in August. Flint Hills said in a statement to EPM that it will continue to explore opportunities within new and emerging markets, including renewable fuels. The refining and chemical production company beat out dozens of interested parties in a "highly competitive" private auction for the 115 MMgy facilities located in Menlo and Shell Rock, Iowa, according to Scott Chabina, associate at Carl Marks Advisory Group LLC. Carl Marks represented the secured lenders in the Hawkeye sale and has been involved in numerous ethanol plant auctions and restructurings over the past few years, including several VeraSun Energy Corp. properties which were eventually acquired by refiner Valero Energy Corp.'s renewable fuels division.

Chabina said he believes there remains significant interest from refiners seeking to vertically integrate their operations and expects more of these types of players to step in to acquire ethanol plants in the future. "Refiners have already demonstrated a meaningful interest in the ethanol industry and I believe there remain a number of additional opportunities given their appetite," he said. "Refiners have been the consolidators since the VeraSun auction."

Valero Renewable Fuels LLC was the first refiner to enter the ethanol industry when it purchased seven VeraSun plants through a bankruptcy auction. In the two years since the initial purchases, Valero acquired three more ethanol plants in locations scattered throughout the Midwest and now controls more than 1 billion gallons of the industry's annual capacity. Valero is also working on next-generation biofuels projects, including cellulosic ethanol and algae-based biofuels.

The company continues to explore other ethanol acquisitions, according to Valero media relations director Bill Day, but is "very particular" as to which ethanol plants it purchases. "We haven't [recently] found any sites that meet the criteria we would require," he said. The VeraSun plants were all relatively new facilities with production capacities of at least 100 MMgy, excellent rail access, steady supplies of corn complete with existing supply contracts, and livestock producers nearby willing to purchase the plants' distillers grains, he said, adding that the other three Valero acquisitions had similar characteristics.
Murphy Oil Corp. was another refiner to snatch up a bankrupt VeraSun facility. The company purchased the 120 MMgy plant near Hankinson, N.D., from VeraSun creditors last October for $92 million and immediately began operations at the facility. Hankinson Renewable Energy LLC provides Murphy Oil with approximately one-quarter of its total retail ethanol requirements, according to company treasurer Mindy West. While the Hankinson plant serves an important role in the company's retail network, Murphy Oil still has to purchase three-quarters of its ethanol from outside sources so, according to West, there's definitely room for growth. "We obviously have room to do more when the right opportunity comes along," she said. "We've made no secret about the fact that we might expand in that business." Murphy Oil announced in August that it would be leaving the refining industry to focus on its upstream and retail businesses, of which West maintained that ethanol would continue to play a vital role for the company.

In September, Murphy Oil had reportedly taken steps to purchase the former Panda Ethanol Inc. plant near Hereford, Texas. The 105 MMgy Panda Hereford Ethanol LP plant was never fully operational, reportedly due to faulty construction, and the company filed for bankruptcy in January 2009. In April, a federal bankruptcy court approved the sale of the plant to its lead creditor, Societe Generale, for $25 million in credit.

Northeast U.S. refiner Sunoco Inc. recently restarted the former Northeast Biofuels LLC plant, which it purchased last year through a bankruptcy auction for a mere $8.5 million. Substantial retrofits were required to bring the plant, now known as Sunoco Fulton Ethanol Facility, up to grade and the company said it spent approximately $25 million to restart the plant. The 85 MMgy facility began producing ethanol in June. For now, all ethanol produced at the plant will be used to supply Sunoco's blending needs. The plant will supply up to 20 percent of Sunoco's demand for ethanol, which leaves plenty of room for more acquisitions. Sunoco has publicly stated that it will continue to consider additional investments in ethanol as well as advanced biofuels.