2023-04-24 00:00:53 ET
Summary
- The worldwide demand for SAF might be enormous reaching close to 15 million bpd by 2050.
- With its Montana location, Calumet sits in the catbird's seat being in the middle of almost an unlimited supply of low-cost feedstocks.
- Although finely undetermined, the immense capital costs to fully develop the local resources will likely require outside partnerships.
- In the meantime, the MRL part of Calumet is in the final start-up of a process for generating $300-$400 million in operating cash.
Calumet Specialty Products Partners ( CLMT ) finds itself in effectively an infinite world with its pristine location, Great Falls, near for now, an unlimited supply of feedstock for producing a renewable form of jet fuel. The projected total world markets are even more infinite. Let's explore the opportunities with the best resolution possible within the seemingly infinite possibility.
The Chemistry
Jet fuel from crude oil is considered a third cut from a distillation tower, (a technology which heats crude separating products by differences in boiling points). Kerosene and kerosene-type jet fuel account for roughly 4 gallons of a standard barrel, making it 10% of the total feed component. In more traditional processing technologies, natural crude enters the refining operations and is separated through distillation. In the past, lighter products such as gasoline have been in higher demand. To enhance profits and match demand vs. supply markets, refineries added means to crack longer hydrocarbon chains into shorter ones. A much more difficult process , though not totally impossible, is to lengthen chains by combining shorter components.
Although it is true that traditional natural crude consists of more long chained hydrocarbons capable of being directly refined into kerosene, the natural crude mix is changing as a result of fracking, which is lighter, becoming the more prevalent source. One source estimates this change shown in the next table.
Gasoline | Distillates | Fuel Oil | |
WTI * | 33% | 33% | 33% |
WCS ** | 15% | 20% | 65% |
* West Texas crude is made from about half fracked sources. In time, fracked oil will become the primary source.
** Western Canadian heavy crude.
With higher percentages of fracked based crude oil, jet fuel easily extracted becomes more difficult.
A more viable method for renewable production begins with plant or animal waste already rich in very long carbon chains. Cracking a digested liquid mixture using existing unit operations opens more easily achieved results. The product, Sustainable Aviation Fuel ((SAF)), is manufactured feeding animal tallow and a variety of plant products including: corn oil, soybean oil, canola oil and camelina.
Animal tallow "is the rendered fa t of cattle and sheep predominantly," It also may be used for cooking oil. From plants, Calumet identified several varieties from which feed stock could be obtained. Those types are shown in the next slide.
Calumet Specialty Products
Corn oil is an extract from the germ of corn. Canola oil results from the pressing of the canola plant seed, a crop widely grown in western Canada. The seed is 45% oil. Soybean oil is the extract from a soybean and widely used in generating renewable products. Its high demand has significantly impacted renewable product profitability.
Camelina produces an oil when treated and pressed. According to Barney Bernstein, vice president of North American operations with Sustainable Oils who answered this in an interview, it's grown "[i]n North America camelina . . . Montana, Colorado, Wyoming, eastern Washington and Oregon, a few southern states and Canada. Most current commercial production is located in Montana ." It is also a plant requiring little water. Continuing, he stated:
It can be used like a cover crop. Cover crops are becoming very important except camelina you can harvest and make money on, whereas most cover crops you terminate them by spraying them with a herbicide, kill them and then plant your summer crop, . ."
Calumet, with its location in the middle of this agricultural rich area of Montana and near southern Canada, is wise for its particular strong interest with camelina. Yet, interestingly enough, management at the last conference offered this comment on feeds for SAF:
As that happens, real broad brush, the animal side feed products are preferred to the vegetable side feed products, a couple exceptions to that, but generally that's one of the reasons why our feedstock supply department is led by an industry veteran trader from the beef tallow side of the street. We don't see any difficulties, . . ."
While the final optimal feed is yet to be determined, it is clear that Calumet has multiple sourcing options.
The Market Place
Future market size predictions claim massive demand for SAF. An organization, Air Transport Action Group (ATAG), predicts significant growth indicated in the following slide.
ATAG
IATA
IATA's world demand estimate, shown in the lower right-hand corner in gallons, equates to 9 million bpd at 65%. The total demand in equivalent SAF equals 14 million bpd. Jet fuel usage peaked in 2019 at 6 million bpd. Even without possible mandated changes toward SAF from fossil based kerosene, the 8 million bpd difference is huge.
Considering the following conundrum with natural crude oil becoming lighter and electric vehicles biting into gasoline demand going forward, refineries will be more challenged in producing enough heavier products. Investors are almost forced into asking about the possibility of gasoline becoming a by-product with EVs denting the markets. All of this places marketing pressure for higher, more difficult means for producing SAF.
Calumet's management identified sources for 150,000 bpd of viable feed stocks within 500 miles of the Great Falls plant. This isn't a small opportunity.
Note: Renewable diesel carries a natural $2 per gallon margin ($80 per barrel) under existing laws. SAF carries a margin approximately $1.25 higher or $130 per barrel. In October of 2022, the cost of SAF was approximately double of kerosene based fuel.
Meeting Demand
A strong case can be made for massive growth in SAF. Challenges in future gasoline demand, production of higher hydrocarbon crude oil, political pressure to abandon fossil fuel (correct or not), and predicted strong growth in air travel all point to lucrative investing in SAF. A paramount concern for investors would be what role and at what cost might Calumet's participate in this growth.
Our first step in defining this problem involves defining possible capital needs. In this industry, project managers use several tools for determining costs. The method we chose begins with the costs for the most recent green-field refinery in the U.S. Strangely, it just happens to be an endeavor taken on by Calumet itself, the Dickinson, N.D. project. Its final cost was $480 million and was finished in 2015. A tool used by estimators, with acronym, CEPCI, offers information for scaling costs based on inflation. An internet search showed that over the past 20 years, inflation increased construction costs by approximately 50%. In today's dollars that equates to $700 million for the 12,000 bpd capacity.
We addressed the scale up problem next using a power factor tool, one commonly used by project estimators. The equation is the scaled cost equals the unscaled cost times a factored difference to a power. The power used in our study was 0.60 or approximately a square root. The result equaled approximately $10 billion. For investors, in no fashion are we trying to estimate a cost, but rather convey a cost magnitude, one in the $10 billion range.
When considering the profit side, a $3.25 margin per gallon generates $8 billion in cash with an IRR approximately equaling 100%. This significant return could come very quickly or not while representing an enormous opportunity.
Risks
Pursuing large scale SAF production requires significant capital. The needs are immense and won't likely be addressed without significant partnerships. Markets and technologies change within the time frame set by the ITAG adding risk. And then, would the market accept a fuel at double or more in cost? Fuel at recent prices ($4 per gallon) make up 30% of the cost for operations. At double the cost, ticket prices would increase significantly. Most likely, a transition between fuels would occur. Project implementation becomes incremental and not in whole. What is clear is that Calumet sits in the catbird's seat with enormous potential. Company plans already include operations to produce 60 million gallons per year or $200 million in cash, plus approximately another $250 million in renewable diesel. With demand significantly higher, this drop in the bucket production creates little, if any, marketing risk even with its higher cost. Calumet's potential is off the charts and will be dealt within a managed order. With 80 million units at $17, the company is a strong buy.
For further details see:
Calumet Specialty Products: Large Potential Opportunity