A Constant in Changing Times

One plant’s success story in an ever-evolving industry
By Kris Bevill | July 20, 2011

In three decades of industrial ethanol production in the U.S., there is really only one summation that can be made with total accuracy—nothing ever stays the same. Policies change, prices skyrocket and drop, some technologies advance while others become obsolete, new competitors emerge. The volatility and thin margins of the industry have taken their toll on a number of companies through bankruptcies, mergers and reorganizations. But other members of the ethanol industry have had the good fortune to travel down a different production path.

Near Hastings, a community of about 25,000 people nestled amid the seemingly endless corn fields of south-central Nebraska, Chief Ethanol Fuels Inc. has been steadily churning out ethanol since late 1984. The oldest dry-mill ethanol facility in Nebraska, Chief Ethanol celebrated a milestone earlier this year when it produced and sold its billionth gallon of ethanol in February. For a plant that began operations with just 10 million gallons of capacity, reaching the billion-gallon mark is quite a feat. So, considering its humble beginnings, and the wild swings of the industry, we just had to know: What’s their secret?

“We expect times to change,” says Duane Kristensen, Chief Ethanol’s general manager. “We’ve been through the markets enough to know that when things are at their darkest it’ll get better and when things look bright there’s probably something that’s lurking out there that’s going to come back.” Kristensen joined Chief Ethanol in its early years of operation (he’ll celebrate his 25th employment anniversary later this year) and has served as general manager of the plant since 2004. He’s seen the plant through multiple technology and capacity upgrades, ramping from the initial 10 MMgy to its current capacity of 70 MMgy, and says the constant effort to strive for improved production plays a large role in the plant’s success. “We run an efficient plant,” he says. “We’re a continuous-flow Vogelbusch-designed plant. I think we know what our capabilities are, or have a good idea of them, and that enables us to have some flexibility.”

Nebraska’s first ethanol plant opened its doors in December 1984 under the ownership of American Diversified Co. The 10 MMgy plant would be a small mom-and-pop shop in today’s industry, but back then it was a large facility, Kristensen says. Because it was the first ethanol plant to establish itself in Nebraska, would-be customers were unfamiliar with the products it produced, and those in charge of marketing found themselves in uncharted territory. “When we first started, there were no distillers grains here,” Kristensen says. “We were the first facility in Nebraska, and one of the first west of the Mississippi, as far as dry mill ethanol facilities, so we had to go out and develop our own feeding relationships and also our own alcohol markets. The ethanol board in Nebraska has been very supportive of our industry and helped us out a lot, but we got out there in some of the terminal sites and had a presence much greater than what it would reflect today because now, ethanol is a legitimate product in the fuel supply. Twenty-five years ago it was a struggle sometimes just to get it included in the gasoline.”

Keeping on Top of Technology

Rough markets made the first five years or so of the plant’s existence a bit of a struggle, Kristensen admits. “It was pretty dark and dismal there for a little bit in the late ‘80s when fuel prices were cheap,” he says. “Oil prices were cheap and fuel was cheap and ethanol was just a gasoline additive—used as a replacement for lead and as an octane enhancer. Ethanol was a pretty small, almost niche industry at that point in time.”

All that soon changed. In 1990, Chief Ethanol, a wholly owned, independent subsidiary of Chief Industries Inc., stepped in to purchase the plant. Shortly after plant ownership changed hands, the U.S. entered into the first Gulf War and Chief Ethanol soon began work to increase its capacity in response to spiked interest in ethanol stemming from concern over oil supplies. “That had a major impact because oil prices shot higher. It was very good returns almost immediately when Chief stepped in,” Kristensen says.

The first major expansion, complete in 1993, increased the capacity to 28 MMgy and included the installation of molecular sieves. This was a marked improvement over the previous process, making production easier and enabling the industry to move forward, Kristensen says. Other significant expansions were carried out in 1996, 1999, and about every three years thereafter as various technologies became available to improve the production process. “It’s easy enough to add some of the better technology as we move forward,” Kristensen says, dispelling any claims that older plants can’t compete with newly built facilities. “If the technology’s available the older plants can certainly incorporate it, and that’s more or less what we did. You find out what your bottleneck is and then you work on that to achieve some better efficiencies and that type of thing. You stair-step it through.”

Chief Ethanol has been able to accomplish what every ethanol producer knows should be done—implementing technology innovations as they become available in order to stay on the cutting edge of production and remain economically competitive, says Brian Jennings, executive vice president of the American Coalition for Ethanol. Chief Ethanol has been a member of ACE since 2005 and Kristensen has served on its board of directors since 2007. “Duane, like many of the ethanol producer general managers I visit with, is constantly examining opportunities to innovate through technology improvements,” Jennings says. “Part of the success of this plant is that they’ve had a group of long-term employees with a commitment to long-term success, and they’ve worked as a unit to identify how and when to innovate.”

Making Cents Count

“Chief Ethanol offers an example of success and longevity that are, in part, tied to the stability of the company, sound management, adoption of technology and innovation, development of solid business relationships and astute financial management,” says Todd Sneller, administrator of the Nebraska Ethanol Board. “State and federal public policies that encouraged the production and use of ethanol helped to provide an environment in which Chief Ethanol could invest capital. The increased capital investment created additional capacity, additional jobs and expanded the economic impact of the ethanol plant.”

Nebraska is home to two dozen ethanol facilities producing a combined 2 billion gallons of ethanol annually, placing the Cornhusker State second only to Iowa in terms of production capacity. The industry as a whole plays a significant role in the state’s economy, with each plant noticeably impacting its home area. Chief Ethanol is one of the state’s major grain buyers, according to the Nebraska Ethanol Board, taking in 25 million bushels of corn annually—about 80 percent of the crop grown in the county in which the plant is located. It also markets all of its own ethanol and distillers grains. As a result, the company has developed close relationships with many of its customers, including the surrounding cattle yards, where Kristensen says it would be unusual to find any cattle producer not using distillers grains as feed.

The plant also supplies 60 full-time, well-paying jobs. According to Kristensen, the workforce at Chief Ethanol may be a little inflated compared to other similar-sized plants, but he attributes that to the fact that the company does everything in-house and says that is one of the reasons for the company’s longevity. “We make all of our decisions, so it’s very easy for us to sit down and have quick conversations about what the market is doing, what our options are and where it leaves us economically,” he says. “So we can probably adapt quickly and make some snap decisions because we’re not burdened by extreme levels of management or have to contact outside people to find out what the market is doing. Also, because we’ve been around for a long time, we have very good and loyal customers. To a certain degree, we feel we have a stake in what they’re doing and they feel they have a stake in what we’re doing.”

The Volumetric Ethanol Excise Tax Credit played a very helpful role when the plant was first establishing itself and other state and federal incentives, particularly the Clean Air Act, have been vital to the plant and industry’s success, Kristensen says. Increased market share through the removal of MTBE was a milestone for the industry and led it to become what it is today, he says. These factors all contributed to Chief Ethanol’s longevity, but they have affected other facilities equally and so can’t be considered underlying reasons for the plant’s success. One quality that does set Chief Ethanol apart from many other producers is its lack of debt. Kristensen says the plant has never really been burdened with a high debt load and has been able to finance all of its expansions internally with its own equity. It’s also a private company, so isn’t hampered by the reporting duties required of public firms.

Financial stability will surely play a role in Chief Ethanol’s future activities, which are likely to include continued diversification through technology upgrades. Kristensen “absolutely” sees a future for cellulosic ethanol production at corn-ethanol sites because of the infrastructure and feedstock compatibilities. He also has his eye on a number of other value-added product additions, such as corn oil and biogas, but isn’t ready to say yet which direction Chief Ethanol will go. “I don’t know if there’s anything in today’s market that’s a slam dunk. But there are things coming down the road that can assist in spreading out your risk and giving you more revenue streams and I think that’s something everyone will want to look at doing,” he says. “It’s not going to be everybody doing the same thing. It will depend on your location and what works for you.”

In the coming decade of ethanol production, expansion of the marketplace through blender pumps will be vital to the industry’s success, Kristensen says. He sees it not only as a way to expand ethanol’s market share, but also to gain a closer connection to the consumer and pass along a greater share of ethanol’s economic advantages. “Frequently what we’ve seen with ethanol is when it’s valued below gasoline neither the customer nor the ethanol plant really benefits,” he says. “By having blender pumps, when ethanol’s cheaper the consumer can get more of a direct benefit. It’s also difficult sometimes when we’re selling to a blender who doesn’t necessarily want to buy our product because it cuts into their refining capacity. You’re selling to a reluctant customer. I think there’s better ways to get us to the final consumer which would benefit both the ethanol industry and the consumers themselves.”

Policy will continue to play a role in shaping the industry, Kristensen says, just as it has for the plant’s entire history. However, as he looks ahead to compare the next two decades of ethanol production to the past 20 years, he believes the policy of the future that could be most significant for the industry and his plant will be emissions related. “Carbon is a big one that I don’t think we have the answer to right now,” he says. “You can say we’re starting down the road to lowering everybody’s carbon footprint, but what sort of economic incentives or disincentives are out there? That’s something that’s going to be in play. Do we need to be looking at biogas systems to help get away from fossil fuel use for energy, or do we grow algae off our carbon dioxide? What are the things we need to be doing as an industry?”
 
Author: Kris Bevill
Associate Editor, Ethanol Producer Magazine
(701) 540-6846
kbevill@bbiinternational.com