innovate arkansas

Strange bedfellows are united in hope for the future of the biodiesel industry, and the bed is getting bigger.

The recent runup in fuel prices has renewed interest in biodiesel and other biofuels such as ethanol. And it has “captured the imagination” of Arkansas’ soybean farmers, said state Agriculture Commissioner Richard Bell.

Soybeans are one of the state’s largest agricultural enterprises, with a crop value that averages $500 million a year. With some 3 million acres planted each year, Arkansas ranks eighth nationally in soybean production.

Come next spring, the future will be even brighter for biodiesel in the state with the opening of the state’s first independent producer. Partners in the new company,

called Patriot Biofuels, are President Tommy Foltz, a clean fuels industry veteran from Little Rock; Cal McCastlain, a Little Rock lawyer who serves as general counsel/secretary; and Mike Shook and Steve Danforth, who are the principals of Agri-Process Innovations at Stuttgart. Shook is chief operating officer of the company.

It’s actually hard to find anyone against biodiesel. It’s been around for years and is the “most-tested fuel ever in the world,” said Robert Stobaugh, who farms between Morrilton and Atkins and is on the National Biodiesel Board.

But petroleum used to be cheap enough to make biodiesel impractical. With a barrel of oil now consistently $60-$70, biodiesel makes economic as well as environmental sense.

And, of course, it could provide a big boost to the agriculture industry.

Biofuels are renewable, clean-burning sources of energy that come from organic matter. Biodiesel comes primarily from vegetable oil, while ethanol is made from fermented sugar — yes, the same stuff that’s in alcoholic drinks.

If the price of oil continues to stay high, as most energy experts expect it will, then all Americans will be seeing a lot more biodiesel and ethanol.

Biodiesel could be made from any type of vegetable oil — even oil pressed from chicken fat or leftover vegetable oil from restaurant deep-fryers — but soybeans are a natural in Arkansas. “They’re the easiest to work with,” said Stobaugh, who calls soybeans a miracle crop.

The National Biodiesel Board sees these alternative energy sources as one of the main ways to decrease America’s dependence on foreign oil imports.

From just about any angle, biodiesel looks like a winner. The blend would stretch fuel supplies and reduce America’s dependence on imported oil, according to a report from the Renewable Fuels Association.

And there’s the extra bonus that biodiesel and ethanol can be used in existing engines with little or no modifications. Biodiesel can actually improve the life a diesel engine, although some truckers say there’s a slight loss of power.

Patriot BioFuels

Patriot BioFuels will locate its state-of-the-art equipment in a production facility at Stuttgart. The 31,000-SF building will be producing alternative fuel sources by early spring 2006.

Initially, the production facility will employ five to eight operations personnel, but the equal partners have plans — and room — to expand over the next few years as biodiesel demand grows.

All of the partners in the startup have been involved in this emerging industry for several years. Foltz spent four years in Washington, D.C., overseeing the U.S. Department of Energy’s National Clean Cities Program, a market-development program for alternative fuels. After leaving the federal agency, he opened a clean fuels public affairs firm in Washington. He returned to Little Rock in 2001 to work for Blue Energy, selling natural gas for vehicle use. Before starting Patriot BioFuels, Foltz owned his own consulting firm in Little Rock.

Shook and Danforth are both agriculture engineers. Shook helped author a recent feasibility study on biodiesel production in Arkansas for Winrock International.

McCastlain, who also owns a farm, helped write the state’s biodiesel incentive act earlier this year.

“Mike and Steve bring a level of technical expertise that few other biodiesel companies in the country can match,” Foltz said. “With their experience, we can move quickly from conception to production, getting needed product to our customers.”

Investors and directors include Foltz, McCastlain, Shook, Danforth, Mike Coulson of Coulson Oil in North Little Rock, Noal Lawhon of Delta King Seed Co. in McCrory, Wade Whistle of Osceola, Bobby Gammil of Blytheville, Mike McCarty of Blytheville, Richard Vincent of Houston, Bryan Fancher of Huntsville, Ala., and Andrew Browning, director of government affairs for Methanex in Washington, D.C., the world’s largest producer of methanol, a critical ingredient to biodiesel production.

Alternative History Alternative fuels such as biodiesel or ethanol have been around since the dawn of automobiles. Rudolf Diesel designed his engine in 1900 to run on peanut oil. And Henry Ford designed the Model T to run on ethanol and gasoline.

But with an abundance of oil, nothing much came of those early plans. In the 1980s the nation finally began to see that ethanol could lessen dependence on imported oil, make for a healthier environment and give farmers an economic boost.

Biodiesel production looks to be following that pattern and appears to be on the verge of real growth with new environmental regulations that require the use of ultralow-sulfur diesel fuel beginning next June.

The ultralow-sulfur diesel loses lubrication, but biodiesel adds that lubricity back, Stobaugh said.

Despite almost unanimous backing from all political sides, biodiesel is still a far cry from where it can be.

Total biodiesel sales in 2004 totaled only 30 million gallons. The U.S. Department of Energy has forecast that the market could reach as much as 1.2 billion gallons a year in the next decade.

That forecast is likely to depend on the continuation of government subsidies, which come from both the federal and state government incentives to promote the use of biodiesel.

In 2003, the Arkansas Legislature passed two acts: the Consolidated Incentive Act (Act 182) and the Biodiesel Incentive Act (Act 187). The first act makes biodiesel plants eligible for tax incentives depending on facility location, investment and number of jobs created. One option offers up to a 10 percent investment tax credit. Another option offers a job creation tax credit of 1 percent to 5 percent of payroll. Both options offer a refund of sales and use taxes and a job creation cash rebate of 3.9 percent to 5 percent of payroll yearly up to 10 years. The biodiesel act offers a tax credit for biodiesel suppliers (5 percent income tax credit for cost of facilities and equipment directly in the wholesale or retail distribution of biodiesel).

It also offers biodiesel producers grants of 10 cents a gallon of biodiesel produced that is limited to the first 5 million gallons produced annually.

There are no incentives for biodiesel use.

In its most recent session this year, the Legislature approved Act 2223 to stimulate biodiesel production. It allows a biodiesel supplier to receive motor fuel tax refunds on biodiesel mixtures that contain at least 2 percent biodiesel after the Arkansas Alternative Fuels Commission has approved a biodiesel producer with an annual production capacity of at least 1 million gallons.

At the national level, the American Jobs Creation Act that was signed into law in October 2004 provides a biodiesel incentive in the form of a federal excise tax credit for the biodiesel blender.

The American Soybean Association says that incentive will lower the cost of biodiesel to consumers. Based on the U.S. Department of Agriculture’s estimates for future soybean production, over a five-year time period the biodiesel tax provisions could add almost $1 billion directly to the bottom line of U.S. farm income. In addition, the provisions will significantly benefit the U.S. economy and could increase gross output by almost $7 billion.

In addition, the USDA’s Bioenergy Program pays ethanol and biodiesel producers for removing commodities from the market.

Will It Work?

A University of Arkansas at Fayetteville economist, the state’s new agriculture secretary, farmers and those at Patriot BioFuels all believe biodiesel production in Arkansas looks to be a solid winner.

Michael Popp, agricultural economist at the UA, has done what he called a “back-of-the-envelope” study and says oil prices have pretty much taken the risk out of biodiesel production.

Foltz concurs. He said the price of oil would have to fall below $40 a barrel before “it would mean our economics don’t work out as well.” And with current worldwide demand outpacing supply, most economists don’t see oil falling to that level again in the near term.

Foltz and McCastlain wouldn’t disclose their startup investment, but Popp estimated that for a facility that produces less than 3 million gallons, investment cost per gallon is $2 to $3. Foltz said Patriot BioFuels would begin production at 2.5 million-3 million gallons a year and eventually hoped to ramp up to 25 million-30 million gallons. “We want to be a regional player.” Foltz said.

Popp said as a facility’s production is raised to 30 million gallons, the investment cost for production capacity can dip to as little as 50 cents per gallon.

Foltz said Patriot would shop for the best available prices on feedstock to make the biodiesel but will focus on soybeans and animal fat.

While soybean farmers are hoping for a big boost, so is Tyson Foods Inc. of Springdale, which would like to sell its chicken fat as a biodiesel moneymaker.

The Users

The market is wide open for biodiesel. Already, more than 400 trucking fleets use biodiesel at some level. School buses and city buses are other potential users. For school buses, the Arkansas Energy Office provides matching funds with the U.S. Department of Energy to offset any added expense of using biodiesel blends.

The American Trucking Associations, which last month said motor carriers will spend $85 billion on fuel this year — a $23 billion increase over 2004 — has unanimously endorsed an energy resolution to “promote biodiesel use” of up to 5 percent. The resolution says “biodiesel may be an effective means to extend the supply of diesel fuel.”

Or as Foltz put it, “The more biodiesel that’s produced, the more raw oil will be available to consumers. It helps everyone.”

And McCastlain thinks that as consumers become more aware of the benefits of biodiesel that they’ll be switching to diesel cars. The performance of today’s diesel engines are vastly improved over those of the 1980s, he said. In Europe, half the cars have diesel engines, McCastlain said, while in the U.S. only about 1 out of 100 is diesel. In Germany alone, 350 million gallons of biodiesel was sold in 2004.

Foltz said his primary job will be selling the trucking industry in the state as well as heavy-duty industrial users on the benefits of biodiesel — most farmers already know the advantages and most already use it. He said there’s a 980 million gallon diesel market in Arkansas alone, with 65 percent of that on the highways.

Popp said having an Arkansas-based biodiesel facility will add value to the state’s soybean production and to its economy, whereas now the state exports 80 percent of its soybeans with no value added.

Foltz said the investors in Patriot BioFuels are very forward thinking. “We’re going into this with our eyes wide open,” he said. “There’s no reason Arkansas can’t be a top energy producer in the country. We haven’t even begun to tap the potential of the Delta for energy.”