With the Solar Impulse plane on a flight path now headed toward New York, it seemed only natural to focus on the quiet transformation happening in the airline fuel business which refiners should be taking very seriously.
The idea of using sustainable, cleaner burning fuels for aircrafts has been around for a while. However, considering the U.S. Senate rejected a measure back in March to cut spending on military biofuels consumption, it seems very likely that the continued use of cutting edge fuel technology isn’t going away any time soon. In fact, it’s only increasing. That may bode well for energy startups like Gevo, Virent, Solazyme and Syntroleum working on the production of jet fuel from bio-based feedstocks. One thing is for sure, failing to adopt a modern fuel mix could force refiners to be on the wrong side of a game of chicken with jet fuel revenues.
Quite simply, refiners need to embrace change set forth by the Renewable Fuel Standard (RFS). Why? According to American Energy Independence, roughly 71% of oil production is used for transportation fuels such as jet fuel, gasoline and diesel. The U.S. military is the largest consumer of jet fuel, diesel and other petroleum products and they are aiming to replace half of their fuel with renewable biofuels. So if advances in technological innovation are making biofuels more affordable and more readily available to the private sector, that could disrupt the refining sector as we know it. In fact, we’ve already seen airlines take the making of jet fuel into their hands, literally.
Recall in Spring of 2012 when Delta bought an East Coast refiner from ConocoPhillips for $150mln in order to save on refining cost. That move was certainly out of the box. However, I believe banking on traditional oil to continue playing a large role in the creation of jet fuel will prove a short-term victory considering there is a longer-term move in play to make advanced biofuels more relevant as a transportation fuel source. In fact, just last week, United Airlines forged ahead with a historic move to definitively purchase 15 millions gallons of advanced biofuels from AltAir Fuels for commercial use over the next 3 years.
To put the significance of United’s biofuels announcement with AltAir into perspective, United’s Managing Director for Global Environmental Affairs and Sustainability Jimmy Samartzis was quoted in the June 4th United press release as saying, “This is a great day for United and the aviation biofuels industry. This agreement underscores United’s efforts to be a leader in alternative fuels as well as our efforts to lead commercial aviation as an environmentally responsible company.”
Ironically, United, one of the country’s largest airline carriers, has come under recent public scrutiny from ‘Flying Clean’, a group of frequent flyers and several nongovernment organizations who believe United is on one hand all for supporting the creation of the Eco-Skies commitment to the environment and yet on the hand lobbying against climate change regulations for airlines. Yesterday Flying Clean announced it had accumulated over 85,000 electronic signatures, including 2,700 elite frequent flyers to require the reduction of carbon emissions from planes. The timing of this letter, sent to United, comes right ahead of tomorrow’s annual United shareholder meeting inVirginia. The press given to Flying Clean by various newswires may help influence the looming Fall decision by global governments, including the U.S., who are considering putting some formal guidelines in place to reduce climate pollution from planes. If formal legislation is put into place to restrict carbon emissions from planes, refiners would have no choice but adopt greener forms of jet fuel.
While United is dealing with the PR nightmare related to Flying Clean, other airlines are also seeking ways to more widely adopt the use of biofuels for its aircrafts include Alaska Airlines, Lufthansa, KLM, Finnair are also on the biofuels bandwagon. Last month even Airbus and Air Canada signed an agreement with BioFuelNet to focus on next generation biofuels for aviation. So the idea of ramping up biofuels exposure could result in a Darwinstic style survival of the fittest and greenest since jet fuel derived from AltAir will cut greenhouse gas emissions by 50% on a lifecycle basis.
Could Tesoro become a green jet fuel leader?
Valero satisfies roughly 12% of the U.S. jet fuel demand, providing commercial jet fuel to airlines, re-sellers and fixed-base operators according to the company’s website. While Valero has invested in algae-based fuel companies such as Solix Biofuels and Algenol Biofuels, the company has focused increasingly on becoming one the largest ethanol producers in the U.S. The problem is jet fuel is not subject to federal mandates for renewable blending (only gasoline and diesel are) with transportation fuels sold domestically according to Environmental Protection Agency (EPA). This could possibly open the door for Tesoro to play a bigger role in advanced jet fuel production in the future. Tesoro has been expanding its refining capacity and is positioning well to purchase proven renewable fuel feedstock camelina oil from AltAir Fuels (this is the company mentioned in the above mentioned deal with United Airlines and just so happens to be partnering with Tesoro at Tesoro’s Anacortes refinery in the state of Washington).
Tesoro is also partnering with algae-derived crude oil from Sapphire Energy, a company backed by the likes of Bill Gates (through Cascade Investment), Venrock, Arch Venture and The Wellcome Trust. Sapphire’s “green crude” can be refined into jet fuel as well as diesel fuel and gasoline and it seems Tesoro stands ready to come to market more aggressively on using algae to create jet fuel. Of course Sapphire using algae to create oil which can be converted to jet fuel is still at an early stage with only 100 barrels a day of oil capacity but hey, it’s in indication that change is coming to the jet fuel market. It also validates that Sapphire’s technology to be deployed commercially.
Tesoro counts aviation fuels as one of its largest commercial marketing business (heavy fuels are the other major segment for the company) thus saying management should keep their heads in the clouds maybe isn’t such a bad thing. Judging by the growing number of airlines interested in cleaner fuels, it will be a big issue for other refiners that don’t follow Tesoro’s lead and look to find ways to fuel the friendly and soon-to-be “cleaner” skies.