GE Aviation - Alternative Fuels & Energy

I Was Wrong.

If you clicked on my blog, you might have been expecting a narrative on what I was wrong about, why I was wrong, and other juicy details on the train wreck associated with my advertised wrongness.  Perhaps that would have been followed by rationalization, denial, and defensiveness.  Alas, though I am often wrong, my subject is not a confession but rather what it means to be wrong, how humans deal with being wrong, and how we can harness the incredible emotions and energy that come with errors large and small.

A few months ago I stumbled across an interesting video on Youtube.  Author and journalist Kathryn Schulz talked about the concept of being “wrong” and how human beings deal with making mistakes.  What caught my attention was that she specifically held up the aviation industry as an example of how to effectively deal with errors so they don’t happen again.  Our industry long ago moved away from pointing fingers at individuals and has, in the main, taken a systematic approach to accidents. We, as an industry, focus on making structural changes to address the inevitable shortcomings of any human designed system.  The video is here:

http://www.youtube.com/watch?v=WE3cyE5-UyM

I walked away from that video with the sense that she was right about how to be wrong.  With the magic of the internet, I chased down a little more about her message.  Turns out Ms. Schulz also spoke at the 2011 TED conference, which is a forum for bringing together interesting people who talk about “big” ideas. TED started out (in 1984) focusing on three worlds: Technology, Entertainment, Design. Since then its scope has become ever broader.  Her talk is interesting, funny, and insightful…

http://www.ted.com/talks/kathryn_schulz_on_being_wrong.html

All of this stemmed from a book she wrote last year called “Being Wrong…Adventures in the Margin of Error.”  So this was on my to-do list for a few months and when I finally bought my wife a Kindle for Mother’s day, this became the perfect opportunity to “borrow” it and download the book from Amazon.  Although Ms. Schulz is a journalist, the style of the book is a bit of Malcolm Gladwell (Blink, Outliers) and a bit of a very sincere, thoughtful, and slightly romantic literature professor all rolled into one. In the process of reading the book, I learned a lot of really neat things…rather than recount them all, I’ll highlight two:

1.  In our stream of consciousness, each of us has two little voices talking inside our heads…the story teller and the fact checker.  The story teller is the creative side of our brain.  It makes up theories for this, theories for that, and in the business world, helps us to innovate and see things not as they are but as they might be.  Balancing out our little story teller is the fact checker - nagging at us to check our facts, to compare to reality, hard data, physics, science, and engineering.  When one of these voices completely dominates, bad things happen to individuals.  Balance is necessary for optimal performance in both individuals and groups.

2.  A recurring theme is that always being right is a terrible place to be. If you’re always right then you’re never testing the edge of the envelope, you’re always taking small steps to ensure you avoid the “shame” and “disgrace” of being wrong. Yes…being wrong can have enormously grave consequences, and in those circumstances tremendous diligence is necessary and required.  But a much larger circle of human interaction and endeavor contains situations where wrongness is not so catastrophic and in fact can lead to amazing advancements. 

My purpose in sharing this on a blog devoted to energy & aviation biofuels is that we must keep ideas like this in front of us every day.  The business case for aviation biofuels does not close.  If it did, we would all be flying on renewable fuel every day.  While tremendous progress has been made in a short period, there is so much more to do.  And we won’t get there unless and until we let ourselves and others (safely) experiment, innovate, create, and yes…sometimes be wrong.

Aviation Biofuels…1 Degree of Separation and Counting

The summer of 2011 in the Epstein household has thus far consisted of a vacation trip to Michigan, lots of day camp for the kids, and participation in a community production of a Dr. Seuss musical in which a large number of young and middle-aged “Who’s” in “Who-ville” sing and dance across the stage for 90 minutes.  All three of my children are currently engrossed in this latter activity.  My wife and I have no acting ability whatsoever and have therefore been relegated to lowly duties such as standing watch over backstage rehearsal rooms, providing food and comfort to the residents of Who-ville, and other acts of support and occasional kindness.  In the course of discharging these solemn duties I have found more than enough time to catch up on some of my favorite energy blogs using my now indispensible Blackberry. I was struck this evening by one RSS feed in particular which recounted several recent events in the aviation biofuels space:

• Mozambique’s Agencia Informacao Mocambique news agency announced that Sun Biofuels Mozambique, a subsidiary of U.K.-based Sun Biofuels, has exported the first batch of 30 tons of jatropha oil produced from its fields in the central Mozambican province of Manica to Germany’s Lufthansa airline.
• China National Petroleum Corp. announced that it had delivered 15 tons of jatropha oil to help Air China operate the country’s maiden biofuel-powered test flight, tentatively scheduled for later this year.
• A European consortium of Airbus, Romanian state-owned airline Tarom, Honeywell’s UOP and CCE (Camelina Company España) announced plans to establish a bio-fuel production center in Romania to manufacture civil aviation fuel, using camelina as a feedstock.

I had no line of sight to any of these events and I am absolutely thrilled to report this fact.  Over the past three years my role as leader of alternative fuels at GE Aviation has kept me in the center of any point where aviation and alternative fuels intersected.  Virtually everything reported in the press - up until a month or two ago - was not a surprise to me…in many cases GE was a significant participant or a leader.  The aviation biofuels space was small enough so that everybody knew everybody else and everybody knew everything that was going on.

The great news is that this is now rapidly changing.  There are so many people and companies and agreements and progress that a measure of separation is occurring due to the sheer volume of this new activity.  All of this points to the beginnings of a new industry.  Industries generate revenue and profit and research and growth.  It will no doubt be a long slow, climb to get to volumes of fuel that really matter but this is a great start. 

We’re probably now at 1 degree of separation…in other words, I can pick up the phone and connect with an industry colleague who will have 1st hand knowledge of the event or announcement in question.  I look forward to the day when we reach 4 or 5 degrees of separation because then we’ll have a real aviation alternative fuels industry.

Gotta go….The Who’s in Who-ville have told me it’s time for a scenery change.

Part I - How Many RINS Does It Take to Build a Biorefinery?

(photo from the Creative Commons, courtesy Chris Upson)

So…you’ve never heard of Renewable Fuels Standards?  If ”RIN” sounds like that new laundry detergent everybody’s talking about then stick with me and I’ll explain what’s happening in the alternative fuels world and why all of this stuff is really important.  You won’t even have to buy me a beer sample of biofuel.

In this first of multiple posts, I will give you an overview of the renewable fuels landscape from a legislative standpoint.  I’ll narrow it even further by focusing on the US.  As with almost anything that comes from Washington, it’s messy, it’s complicated, and it’s like watching a soap opera.  So in Part 1, I’ll start with the basics and we’ll break things down to manageable chunks in subsequent posts.  I live in the aviation world so from time-to-time I’ll call timeout and comment on what the legislation and regulations mean for our industry.

In 2005 and 2007, two pieces of federal energy legislation became  law.  The Energy Policy Act of 2005 (EPACT 05) and the Energy Independence and Security Act of 2007 (EISA 07) created, and then updated renewable fuel standards.  To understand what a renewable fuel standard is, think about it this way…when a biofuel producer manufacturers a gallon of fuel, a certificate is also ”manufactured” that documents the production of this fuel.   Refiners and distributors are then - by law - required to purchase a certain percentage of renewable fuel and produce the certificates as proof of this transaction.  The certificates are called RINS - Renewable Identification Numbers.  The folks who need to buy the renewable fuel and the RINS are given the fancy title “obligated parties.”  Because the governement requires these companies to purchase fuel and RINS, they have value in the marketplace.  A typical obligated party would be Exxon-Mobil, Shell, and other refiners, importers, and distributors of conventional gasoline and diesel in the US.

A little bit more about the RIN itself.  It’s a 38 digit serial number that identifies a certain fuel lot, fuel, type, manufacturer, etc.  ONLY the federal government could come up with a system that requires 38 digits.  Wouldn’t 6 or 8 or 10 suffice? 

The original system - RFS - was created under the first piece of energy legislation, The Energy Policy Act of 2005 or EPACT 05 - and primarily focused on corn based ethanol.  It was relatively simple in concept and scope and set increasing mandates and obligations over time.  The logic behind the system is simple…obligated parties have a quota of RINS to acquire in any given year.  They will therefore go out to the marketplace and purchase those RINS - and the renewable fuel - at the lowest possible price.  So, biofuel producers are competing with other biofuel producers to sell the fuel and the RINS to refiners and distributors.   The biofuel producer with the lowest cost structure - and therefore the lowest price - will “win” in the marketplace.  Renewable fuel standards are NOT tax credits, so sale or purchase of RINS does not result in revenue or loss of revenue to the federal government beyond the relatively modest burden associated with administering the program.  There is no free lunch however…you and I will pay incrementally more at the pump, as refiners and distributors ultimately pass these costs along to motorists.

One thing to remember is that renewable fuel standards, and in particular RFS2, is not only law, it is an active, functioning, up-and-running system administered by the Environmental Protection Agency (EPA).  As alluded to above, Renewable Fuel Standards are completely seperate from and not directly related to other tax credits you may have read about in the news.  For instance, the $1 per gallon biodiesel blender’s credit is an additional incentive, separate from renewable fuel standards.  I’ll talk about tax credits and their on-again, off-again whiplash impact in another post.

RFS2 (Renewable Fuel Standards II) was created under the Energy Independence and Security Act of 2007….EISA 2007.  RFS2 is A LOT more complicated than the original renewable fuel standard legislation.  In fact, it took EPA about 2 years to hold hearings and write the regulations that supported and conformed to the mandates in the legislation.  Under RFS2, there are 4 types of fuel classifications:

Type C. Cellulosic Biofuels must meet various requirements including at least a 60% GHG (Greenhouse Gas) reduction.

Type B. Biomass-Based Diesel must meet various requirements including at least a 50% GHG reduction.

Type A. Advanced Biofuels must meet various requirements including at least a 50% GHG reduction.

Type R. Renewable fuel must meet various requirements including at least a 20% GHG reduction.  However, existing ethanol production facilities are subject to grandfathering requirements that exempt them from the GHG performance requirements for a defined period of time.

Of particular note, for the first time in US history, EISA 07 defined greenhouse gas requirements in order to qualify for participation in the program.  Existing ethanol and biodiesel plants were “grandfathered” in, but any facility coming online after December 2007 was and is required to address CO2 (greenhouse gas) emissions.  The CO2 assessment itself quickly became a regulatory nightmare.  The legislation didn’t - and really couldn’t - precisely define how the greenhouse gas calculations were to be made…it’s way too complicated and would take hundreds if not thousands of pages to fully define.   That was left to the EPA and it’s hard not to sympathize with the enormity of the task they faced.  If you’ve ever done these sorts of “well to wake” or “till to wake” analyses they are filled with hundreds, if not thousands of small assumptions which can dramatically change the results. 

I’ll continue my discussion next week in a subsequent post.  A few thoughts to leave you with:

• In the legislative world, 1 gallon isn’t necessarily 1 gallon.  If you make certain types of advanced biofuels, you get to create and sell 1.5, or 1.6, or even 1.7 RINS for every gallon you produce.

• EISA 07 created increasing volume mandates for each of the 4 biofuel types.  Even corn based ethanol requirements initially go up between now and 2022, although they do eventually level off.  Therefore,  EPA is required to assess manufacturing capacity each year and adjust those mandated volumes if the infrastructure isn’t in place to meet the legislative goals.  This has naturally created a regulatory battleground.  Obligated partiles want the bar set as low as possible because the cost of the RINS will be significantly reduced if there is excess capacity and biofuel on the market.  Biofuel producers - of course - want just the opposite.  They want the bar set as high as possible because the value of the RINS increases and it encourages expansion of their facilities.

Thanks for plugging in  - there are a huge number of issues that follow from the broad outline I’ve shared above - and I will continue discussing the many details and nuances of these renewable fuel policies next week.  I’ll also touch on how and when and where aviation biofuels fit in.

Choren Industries in bankruptcy proceedings

The Energy Collective and other bloggers are pointing to the subject story this morning (Saturday, July 9th) at the link below.  For those of you who may not be familiar with Choren, they are a small but interesting outfit in Germany focused on Fischer Tropsch technology using biomass feedstocks to produce diesel, electric power, etc.  They are reportedly using Shell Technology and Shell is or was also an investor.

If this is true, it certainly reinforces the observation that the alternative fuels business is a tough business.  The product - fuel - is a commodity and it must compete with infrastructure and technology in the conventional fuels world every day - with on again, off again support from the government.

http://bit.ly/pV2VLd

Aviation Biofuels Rising

Two events in June, approximately 4,000 miles apart, combined to capture the attention of the aviation world.

Event number 1 occurred in Baltimore, Maryland where engineers from over 100 companies and assorted government agencies finally approved a specification for renewable aviation fuel. Your friendly neighborhood airline can now fly you from point A to point B using a blend of up to 50% bio derived renewable fuel and an aviation industry renowned for it’s technical acumen has unequivocally said that it is perfectly safe to do so.

Event number 2 occurred in Le Bourget, France as it does every 24 months. This is, of course, the Paris Air Show, aka the “big dance” for the world of both commercial and military aviation.  GE alone booked over $27B of orders for current and future engines and all of the services and spare parts that come along for the ride.

For an industry hungry for both energy and answers, biofuels provide a hopeful option, even if it will likely be a long slow climb to get to solutions that truly matter. The sheer number and nature of the announcements at, and directly following Paris were astounding…

1.  KLM announced that it will start a series of biofuel powered flights between Amsterdam and Paris using Boeing 737’s (powered by CFM engines!)

2.  Virgin Australia aims to have a commercial scale plant turning eucalypt trees into aviation biofuels within the next three years.

3.  Honeywell International flew a Gulfstream business jet across the atlantic using a blend of biofuels produced by it’s subsidiary, UOP.

4.  Not to be outdone, Boeing flew it’s newly minted 747-8 to the Paris Air show as well (using those super efficient GEnx engines!!).

5.  A company called Biojet Limited announced they will sell 1 billion gallons of jet fuel at $2.97 per gallon. In February, the same company announced they had $1.2B in funding from equity investors.

6. In the R&D world, professor Wankei Wan from the University of Western Ontario announced that he was able to increase algae oil production 4X by subjecting a particular strain to a magnetic field.  

7.  Airbus declared that the industry may be powered by 30% biofuels by 2030.  Boeing’s Billy Glover provided a more modest goal of 1% in the next 5 years.

For the aviation biofuel industry, it may now be time to grow up…and growing up is all about delivering on promises.  Several years of R&D and a lot of money and resources have led to these and other announcements. The next year or two will provide answers relative to which of the above are hype and which are the real deal.

Tapping The Strategic Petroleum Reserve…Success or Failure?

On June 23rd, the Obama Administration announced that it would coordinate with other OECD countries and the IEA (International Energy Agency) to release a total of 60 million barrels of oil into the market.  The US release, via the strategic petroleum reserve (SPR), accounted for 30 million barrels or half of the total.  Details of how and when the oil will be auctioned off can be found in numerous articles and citations on the web.  

Let me throw a few additional numbers on the table to put this in perspective…the US SPR contains about 725 Million barrels of oil, the US consumes 19M barrels each day, and the world consumes roughly 85 million barrels.  So in the scheme of things, 60M barrels represents less than 1 day of global demand.

Some of the spin that rattled around the blogosphere compared this action to the Federal Reserve system, which among other things controls the money supply.  At first glance this seems to be a worthy goal but a wild stretch of the imagination.  For instance, by controlling the rate that banks charge each other for loans (the Federal Funds rate), the Federal Reserve has effectively varied mortgage interest rates from highs of 18% or more in the early 80’s to something near 5% today.  Now that’s control.  On the flip side, the fact that the administration is releasing oil from the SPR - for only the 4th time in 36 years - now carries the very real threat of market intervention, even if it is short lived. So the potential impact of a hypothetical future release at an unknown point in time to long positions on oil could be severe and therefore may have the intended effect of damping some of the short term price oscillations observed in the market.

Public response was immediate…according to Bloomberg, traders were taken completely by surprise and in fact there was discussion in the mainstream press that the move was intended to “drive speculators from the market.”  Several OPEC countries vaguely threatened to retaliate by reducing output.  As with anything that has to do with oil, politics followed at light speed.  Many Obama administration supporters praised the President, describing the move as brilliant, while administration detractors described the very same move as desperate.

With all of that out of the way, I will comment that the action taken by western, oil consuming countries is attempting to get at one of the most corrosive aspects of the spot market - namely the vicious price spikes we’ve experienced over the past 3 or 4 years.  In fact, all 6 of the last recessions in the US - stretching back to 1973 - have been preceded by oil price spikes.  Most recently, the West Texas Intermediate (WTI) benchmark kissed $114 last April giving pause for concern that we are potentially entering a double dip recession.  These spikes are essentially a tax on the economy and are very difficult for both short and long cycles businesses to respond to since economic things like pricing, and brick-and-mortar things like the cost to manufacture durable goods cannot change on a dime.  If the spikes can be leveled out, the price of oil - by definition - becomes more predictable and therefore less corrosive to the developed economies of the west, even if the overall cost of energy is more expensive.

I make no judgment on whether the President’s move was an act of desperation, folly, or brilliance…time will tell.  It has certainly raised some interesting discussions around other policy options that could potentially restrain - but not eliminate - oil market speculation.  

I follow these things closely because they’re important and therefore want to keep score.  So…with that in mind, I will continually update and tabulate the spot market price of oil for the next 6 months to assess whether the use of the SPR as a market management tool is working or not. Sorry…no fancy statistics.  The price of oil is incredibly complex - a downward trend or an upward trend may have little or nothing to do with the SPR action.  But President Obama will get the political credit or blame depending on the direction of the price of oil, and it will be fun to track.

Stop back and have a look at the data from time-to-time.  I have started by tabulating the price of WTI below, spotting several key data points in the run up to June 23rd and will continue to tabulate each Friday when the market closes for the weekend.  In a few weeks when more data is available I’ll plot it up as well.

A cursory look at the data collected thus far would indicate that oil was already on a downward glide slope prior to the announcement.  Traders quoted in the press were blaming a bow wave of bad economic news.  The immediate effect of the announcement on June 23rd was to drop the price by an additional $4+ per barrel.  More recently, oil seems to have bounced back and stabilized at about the level it was at prior to June 23rd.  We’ll see how this plays out as the oil hits the physical market over the coming weeks! 

April 29 - $113.9     ‘peak price for 2011 YTD

June 02 - $100.2 

June 22 - $95.4      ’oil price just prior to IEA announcement

June 23 - $91.0      ’oil price after IEA announcement

June 24 - $91.2

July  01 - $94.9

July  08 - $96.2

July  15 - $97.2

July  22 - $99.9