Risk Assessment and Economicsof Forest Biorefinery Concepts

USDA Forest ServiceForest Products LaboratoryMadison, Wisconsin

Visions of the Past & Future: The hydrocarbon economy . . .

( . . . Oil Refinery)

The Carbohydrate Economy . . .

(Cellulosic Biorefinery . . .)

Future economic impact depends oninvestment and enterprise development,which are largely determined by economicopportunity and risk.

An opportunity may exist for biofuelproduction based on wood, but what are some key economic risks?

Some key economic risks* (or uncertainties) related to wood biofuel development . . .

(1) Fuel price (peak oil or not?)(2) Corn supply (impact of future yield gains?)(3) Technical progress in reducing costs (?)(4) Wood cost (affordable feedstock source?)(5) Other feedstocks (is corn stover cheaper?)(6) Profits from competing wood uses (?)

*Note: This list is not exhaustive – other risks could be added such as capital availability, interest

rates, regulatory and tax framework, change in transportation infrastructure, etc.

(1) Fuel price (peak oil or not?)

The future feasibility of biofuel productiondepends on fuel prices . . .

The outlook for oil price remains volatileand risky amid speculation that global oil production may or may not be peaking.

Biofuel markets also remain volatile andrisky, as evidenced by ethanol prices.

The future feasibility of biofuel productiondepends on the outlook for fuel prices, but the2006 DOE projections show a wide range . . .The “high” outlook is twice as high as the “low”:

{The range between “high” and “low” oil may spell the range between feasibility and infeasibility for cellulosic biofuel development.

The 2006 DOE projections show that U.S. ethanoloutput based on corn grain peaks around 2015 in the “low” oil price scenario, but in the “high” oil price scenario ethanol output expands based on expansion of cellulosic ethanol output . . .

Not just oil . . . Ethanol is volatile too. In 6 weeks from June 20 to August 1 ethanol prices dropped by ~40%. Volatility was linked to mandated replacement of MBTE in reformulated gasoline . . . By contrast, gasoline blend-stock price (RBOB) was less volatile . . .

Source: OPIS – Oil Price Information Service

June 20

Aug. 1

Ce

nts

Pe

r G

all

on

NY Harbor RBOB

(ethanol prices); US Dept. of Energy, EIA (RBOB)

In general the ethanol cash market has been more volatile than the ethanol futures market, which in turn has been more volatile than bulk gasoline price . . .

(2) Corn supply (impact of future yield gains?)

Sources: Renewable Fuels Association (RFA), National Corn Growers Association

U.S. ethanol output (4 billion gallons in 2005) is increasing, and it is based on corn grain.

Consumption of corn grain for ethanol will likely exceed 1.5 billion bushels in 2006 (or ~15% of the total U.S. corn grain crop). Will corn yield gains sustain future expansion?

{USDA projects fuel ethanol to be by far the fastest growing demand for corn grain tothe year 2015

Fuel ethanol is the fastest growing element of corn demand. Other uses are large but relatively flat . . .

However, U.S. average corn yield per acre has been on the rise for decades, and corn yield is projected to continue rising with expansion of genetically modified corn (first introduced a decade ago). By 2015, average U.S. corn yield is

projected to be around 170 bushels per acre (Sources: USDA ERS and Corn Grower Association estimates)

Corn grain output meets ethanol needs to 2015:

2005 2015

Acres harvested (millions) 75.1 75.1(National Corn Growers Assoc.) (assumed constant)

Average Yield (bushels/acre) 149.7 170

Corn harvest (billion bushels) 11.1 12.8 (+1.8)

Corn Ethanol Output (billion gal.) 4.0 9.4

Corn for Ethanol (billion bu.) 1.4 3.2 (+1.8)

With other uses of corn relatively flat, gains in corn yield may possibly meet U.S. ethanol needs to 2015(Ethanol yield in 2005 at 2.8 gal./bu.; Estimated to be near 3 gal./bu. by 2015; Source: RFA)

Corn grain output may never “peak” because ofcontinued yield gains, yet by 2015 the growth in corn grain use as a biofuel feedstock is expected to slow and be replaced by cellulosic materials . . .

By 2015 U.S. grain ethanol production may reach 9.4 billion gallons. According to NREL cellulosic ethanol output will then expand beyond 2015. . . However, what are the risks of assuming that corn use for ethanol will level out beyond 2015?

What about further yieldgains, or corn stover?

(3) Technical progress in reducing costs

The future feasibility of biofuel production from cellulosic feedstock also depends on some fairly optimistic assumptions about technological progress, including more than 50% cost reductions relative to the current estimated cost for cellulosic ethanol of around $2.25 per gallon based on corn stover (National Renewable Energy Laboratory - NREL).

Cellulosic ethanol R&D efforts are needed to compete with corn grain (at break-even costs of around $1/gallon)

Goals: Cellulosic ethanol at $1.07/gallon by 2012, and feedstock at $30/dry ton! These goals are challenging!

(4) Wood cost (affordable feedstock source?)

Assuming that cellulosic ethanol production becomes more economically efficient, will wood be an affordable feedstock?

It depends on the size-class of trees (larger trees are much more valuable), the source (e.g. clean pulpwood versus waste wood), and other market factors.

$ p

er D

ry T

on

on

the

stu

mp

$40

$0

$80

$120

-- Peter Ruschmeier, 2006 PIMA Conference

Larger trees (>10”) are too valuable to use as biofuel feedstock. Only smaller trees (6-8”) are affordable as feedstock.

$ p

er D

ry T

on

on

the

stu

mp

$40

$80

$120

$0

Price is much lower and less volatile (less risky) for small diameter trees, used mainly as pulpwood.

-- Peter Ruschmeier, 2006 PIMA Conference

How much wood biomass (small trees & wood residues) might be available as feedstock for biofuels, and at what cost?

Sources: Quantity estimates from “Billion-Ton Biomass Report”. DOE, USDA;Cost estimates from Timber Mart-South and Fuel Treatment Evaluator

$0

$20

$40

$60

$80

$100

0 50 100 150 200 250 300 350

Available Quantity (millions of dry tons annually)

Avg

. Del

iver

ed C

ost

($

per

dry

to

n)

$0

$20

$40

$60

$80

$100

0 50 100 150 200 250 300 350

Available Quantity (millions of dry tons annually)

Avg

. Del

iver

ed C

ost

($

per

dry

to

n)

Sustainable U.S. Wood Biofuel Feedstock Supply (current)$120$120

Mill Residues Logging Residues Forest Thinning (Western U.S.)

41 6036

About 137 million dry tons of wood biomass is available annually, sufficient for about 8 billion gallons of ethanol (double U.S. output in 2005), but costs vary by feedstock and pose profitability risks.

137

(5) Other cellulosic feedstocks (corn stover?)

Sources: Quantity estimates from “Billion-Ton Biomass Report”. DOE, USDA;Cost estimates from NREL (future corn stover) and other sources

$0

$20

$40

$60

$80

$100

0 50 100 150 200 250 300 350

Available Quantity (millions of dry tons annually)

Avg

. Del

iver

ed C

ost

($

per

dry

to

n)

??

$0

$20

$40

$60

$80

$100

0 50 100 150 200 250 300 350

Available Quantity (millions of dry tons annually)

Avg

. Del

iver

ed C

ost

($

per

dry

to

n)

Sustainable U.S. Corn Stove Feedstock Supply (current)$120$120

Corn stover dried and baled (est.) Corn stover future NREL cost (est.)

75

About 75 million dry tons of corn stover is available annually, sufficient for about 4.5 billion gallons of ethanol output, but costs of this competing feedstock vary depending on material specifications. Lower-cost corn stover may pose a competitive risk to wood.

(6) Profits from competing wood uses

Lastly, there is risk that other competing wood uses may be more profitable in relation to utilization of smaller-diameter wood or biomass in biofuel production.

Product values and approximated costs provide a basis for comparing economic returns among different products on a dollars-per-ton-of-feedstock basis . . .

0

100

200

300

400

500

WoodPulp

OSB CellulosicEthanol

$ p

er t

on

of

feed

sto

ck

Profit & Returnon CapitalOther OperatingCosts (approx.)Feedstock Cost(pulpwood)

= Range of net returns given product price range since mid-90s

Approximate returns for competing wood uses at current product prices & historic range of prices

(ethanol currently less profitable per ton than pulp or OSB)

September ‘06 prices: Pulp @ $750/ton OSB @ $210/MSF Ethanol @ $2.50/gal

Costs approximated from following sources: NLK (kraft pulp), Spelter-FPL (OSB), NREL (ethanol), Timber Mart-South (feedstock)

SUMMARYThe future economic impact of wood biorefining is probabilistic, with future development influenced by some key economic risks or uncertainties.

Leading risks that need to be monitored and evaluated include risks that (1) oil or biofuel prices may subside, (2) corn grain yield may expand, (3) technical R&D may not deliver anticipated cost savings, (4) wood cost may be unaffordable, (5) competing cellulosic feedstocks may be cheaper, (6) competing wood uses may be more profitable.