Saturday October 17, 2009

Northeast Biofuels: What Went Wrong

Plant might be up and running again in mid-2010
By Ken Little

    The brief, troubled life of Northeast Biofuels began with a wave of optimism from elected officials and others touting renewable fuels as a way to boost the sagging economy of upstate New York.

    By the time the company ended up in U.S. Bankruptcy Court in January, and was later acquired at a bargain-basement sale price by corporate giant Sunoco, many of those voices had gone silent.

    What happened, and why didn’t anyone see the problems that beset NEB coming?

    The answers are complex. Design problems that prevented the Volney facility from producing ethanol at its planned capacity factor into the equation, in addition to the crash of the nation’s economy in 2007.

    The bright spot remains Sunoco’s commitment to have the plant up and running by mid-2010. Up to $20 million in capital improvements at the facility are planned.

    Sunoco paid $8.5 million for the former Miller Brewery property in Riverview Business Park.

    “This is a first step into an area of possible growth for the company that we continue to evaluate. We can use our considerable manufacturing and logistics experience to make it successful,” Sunoco spokeswoman Virginia Logan said.

    Initial optimism

    Back in June of 2005, the future of Northeast Biofuels and ethanol production in Oswego County seemed bright. The state pledged $4 million toward the NEB project and was expecting a handsome return for the taxpayer money. About $200 million was invested in the plant by the company and other partner-suppliers, including Perdue Farms and BOC Gases.

    NEB was to be the largest ethanol production facility in the northeast.

    “This project will reinforce New York state’s position as a national leader in advancing both renewable resources and biofuels industries and at the same time, provide Fulton, Oswego County and Central New York with new jobs and economic opportunities,” then-Gov. George Pataki said.

    Former Congressman John McHugh (R-23rd Dist.) added the investment in NEB “will make New York state one of our nation’s leaders in the production of biofuels and renewable resources, which is good for both the economy and for our environment.”

    NEB started producing ethanol in the summer of 2008. By January of this year, the company was in federal court, seeking Chapter 11 bankruptcy protection. Documents show NEB had between 50 and 99 creditors, stated assets of between $100 and $500 million, and estimated debts exceeding those assets.

    L. Michael Treadwell, executive director of Operation Oswego County, said the demise of NEB stemmed largely from design flaws engineered into the ethanol production facility.

    “The way the plant system was laid out, it created a problem relating to the fermentation and the plant was not capable, the way it was designed, to meet efficiency levels of production,” Treadwell said. “It was primarily the piping and the product flow within the facility. The maximum they could produce was 65 to 70 percent of capacity and they couldn’t make a profit running at 60 to 70 percent of capacity.”

    The design for NEB “did not pan out to what was wanted,” Treadwell said.

    “This was not a cookie-cutter ethanol plant. It was taking an existing brewery and converting that,” he said.

    Treadwell offered other perspectives on why NEB failed.

    “It was somewhat of an experimental project in terms of retrofitting an existing facility. They relied on their engineers to design something that would work and operate,” Treadwell said. “I’m sure it’s nothing unusual for a complicated design to have some bugs in it. Because they could not get into production they became short on cash.”

    At the same time, the shrinking national economy meant fewer borrowing markets.

    “The economy was a factor,” Treadwell said. “The availability of capital, particularly for startup companies, was difficult to get.”

    Because of ethanol production outages, NEB “was sitting there with their lights out” instead of generating revenue.

    Outside funding

    Operation Oswego County provided a $1 million loan to NEB for equipment acquisition. The non-profit agency should recoup most of that money from Sunoco because the bankruptcy court ruled that all secured loans must be repaid.

    New York state provided $4 million to Northeast Biofuels, including $2 million for economic development and $2 million for technology and development.

    “It is important to note (that) the total projected cost of the project was some $270 million, most of which was provided by private equity and lenders,” said Jola Szubielski, spokeswoman for Empire State Development.

    In 2005, Pataki put the projected price tag of NEB at about $160 million. About $200 million was spent to design, modify and provide equipment for the facility before it opened in 2008.

    “As for any state oversight during the startup phase of the project, the company complied with the details in the Grant Disbursement Agreement, therefore qualifying it for payment of the grant,” Szubielski said.

    She continued: “We look at each company’s grant application on a case-by-case basis to determine if it would contribute to the growth and development of the region and the state. On background, this particular project was identified as a renewable energy project and was consistent with one of the local and regional target industry cluster groups.

    “Oswego County includes energy-related projects as part of its comprehensive plans for furthering economic development,” Szubielski said.

    The New York State Energy Research and Development Authority only contributed about $4,000 to the project, to pay for an engineering survey evaluating the efficiency of NEB’s equipment. NYSERDA spokesman Raymond Hull said the failure of an ethanol production facility like NEB is not unusual given factors like the recessionary economy and corn supply versus food question.

    “Those things are falling like flies across the country. They just aren’t panning out,” Hull said. “There’s a lot of technical as well as political pressure coming and going.”

    Back in 2005, “There was a tremendous amount of optimism seeing an idle manufacturing facility being converted.

    There were three, four, five hundred construction workers up there every day. Everything looked good from the Northeast angle until the (design) snag hit, the economy tanked and the financial markets dried up,” Treadwell said.
    Sunoco’s corporate headquarters are in Philadelphia.

    “The outcome was to sell off the assets and fortunately for Oswego County, the assets were purchased by a long-standing company based in the northeast with a track record in ethanol,” Treadwell said. “I guess if we had to paint the picture we had to paint with a bankruptcy, we got that piece of art with Sunoco acquiring the facility.”

    Sunoco forges ahead

    Sunoco has retained its own engineering firm to make design corrections at the NEB facility. Company officials are optimistic about the future of ethanol production and other alternative energy options at the Volney facility.

    “Sunoco is currently in the process of finalizing the scope of work necessary. We expect work to begin this fall and the plant ready to start in the second quarter of next year. Full production is targeted for second quarter 2010,” Logan said.

    The plant, as originally designed, can produce 100 million gallons of ethanol a year. Ethanol is used as a gasoline additive. Sunoco would use all of the ethanol produced there.

    At full capacity, the plant would consume approximately 101,556 bushels of corn each day, or almost 36 million bushels each year, Logan said.

    Sunoco plans to purchase “as much corn as possible from local farms,” she said.

    “Sunoco recognizes that ethanol production is an agri-business. Given this, Sunoco is looking forward to establishing partnerships within the northeastern agricultural community,” Logan said.

    NEB employed between 50 and 60 workers. “They certainly anticipate a staff comparable to what Northeast had,” Treadwell said. Logan did not cite specific employment numbers.

    “We will better understand how the plant modifications will impact word load and resource requirements anticipated as we move forward in the construction process. It is expected that hiring will begin some time after the first of the year, based upon construction schedule and progress. The staff will be brought on board to ensure ample time for training prior to the start of plant operation,” she said.

    Observers like Treadwell are hopeful the global reach of a company like Sunoco will ensure success of the operation.

    When running at full capacity, company officials said the ethanol plant is expected to supply about 25 percent of Sunoco’s ethanol needs.

    Sunoco is a leading manufacturer and marketer of petroleum and petrochemical products. It has a refining capacity of 825,000 barrels a day and 4,700 retail sites selling gasoline and convenience products.

    Alternative fuels a possibility

    “Sunoco has a long history of involvement in alternative fuels,” Logan said. “The facility is strategically located and its acquisition provides Sunoco with the opportunity to further several key objectives.”

    Those include to “continue to develop alternative fuels, to build upon an already strong reputation as a good corporate citizen, to capitalize on the high-quality employee base available in the region and to develop options for the consumer,” Logan said.

    The company is making a “significant investment” and “recognizes the importance of bringing this plant into operation,” she added.

    That’s good news to people like Treadwell, who is hopeful Sunoco will use the spacious former brewery as a center for the development of other alternative fuel sources, such as biodiesel.

    “They are looking at a much broader use of the facility,” Treadwell said. “They have implied in their discussions that they see this facility as more than just a 100 million gallon-per-year ethanol plant.”

    The company is committed to making the operation a success, Logan said.

    “It is important for Sunoco, for the employees, and for the community that this investment pays off,” she said.