Duprey strikes gold in ethanol
CL Financial chairman deepens investment in biofuel industry
Thursday 3rd May, 2007
Trinidad ExpressFlashback:
Angostura Ltd executives: Michael Carballo, group company secretary from left; Patrick Patel, group executive director; and Curtis Mohammed, capital projects, engineering and maintenance. Mohammed is now general manager of Trinidad Bulk Traders Ltd.
BY VERNE BURNETT
CL Financial’s visionary chairman Lawrence Duprey seems to have struck gold again with his foray into the ethanol business, after finding success in methanol.
Two years ago when he created Trinidad Bulk Traders Ltd (TBTL), a subsidiary of Angostura Holdings Ltd, it was intended to take advantage of a significantly under-utilised quota under the Caribbean Basin Initiative (CBI) allowing duty free entry of ethanol—or fuel alcohol as it is more popularly known—into the US.
Duprey asked his bright young men and women to explore the feasibility of the project also with an eye to possible synergies between ethanol and the potable spirits which are the stock in trade of the group.
He believed he could craft a profitable business out of the continuing worldwide concern about the environment and energy security. “Those two items are the push factors for ethanol worldwide,” said Curtis Mohammed, general manager of TBTL.
Duprey could not have chosen a better time to get into the business. Already in high demand when he conceived the idea, the CL Financial chairman has seen worldwide demand for ethanol explode and the fuel become headline-making news. Indeed, global demand for ethanol is forecast to outstrip supply for the foreseeable future.
Ethanol got a big push when US President George W Bush recently mandated that the US must consume 35 billion gallons of biofuels by 2017 in an effort to reduce American dependence on oil. Bush believes the expanded use of ethanol could eventually help wean the US off its need for foreign oil, officials say, lessening energy dependence on volatile Middle Eastern nations and Venezuela where President Hugo Chavez has been increasingly strident of late in his anti-American rhetoric.
Future so bright
Curtis Mohammed, general manager of TBTL, said the company has contracts up to 2010 for the output of the existing plant and a firm two-year contract for the production from the second phase expansion. He also has some “good and firm contracts for three years.”
In a Wall Street Journal article published on March 9, Mohammed admitted that TBTL wasn’t profitable last year “because its 50-million-gallon-a-year dehydration plant couldn’t get enough fuel from Brazil.”
The paper quoted Mohammed as saying he is confident of profits this year.
Mohammed told the Guardian that last year was really the plant’s first full year of operation, its set up year, during which it was working out all the “little bugs.”
He also explained that the ethanol market was not favourable “which is a real risk for all persons entering this business.”
He said TBTL was also working out its relationship with Petrotrin but now things are more like “business as usual.”
He said, “at the end of the day it will be very good financially for our business here because we have worked out all the bugs. It will be good going forward. Definitely. we are going to make a profit this year.”
Indeed, Mohammed said the plant has “already surpassed our production commitments for this year.”
He observed that the cost of fuel alcohol on the world market is high and rising. He said fuel alcohol has even graduated to commodity status with increasing volumes being traded on exchanges.
In the overview to its Annual Energy Outlook 2007, the US Energy Information Administration, reporting on Energy Trends to 2030, said that “the use of alternative fuels such as ethanol, biodiesel and CTL, is projected to increase substantially...as a result of the higher prices projected for traditional fuels and the support for alternative fuels provided in recently enacted Federal legislation.”
The document went on to predict that the use of ethanol would rise from four billion gallons in 2005 to 14.6 billion gallons in 2030 (about eight per cent of total gasoline consumption by volume). It said that ethanol use for gasoline blending would rise to 14.4 billion gallons and E85 consumption 0.2 billion gallons in 2030.
Quick to build, quick to market
Facts about ethanol
Ethanol is made from corn, sugarcane, switchgrass and other plant materials. It has a variety of uses: it is heavily used as a solvent in the manufacture of varnishes and perfumes, essences and flavourings, medicines and drugs, in disinfectant and to preserve biological specimens.
However, its fastest growing use is as an additive in gasoline to produce E85, a blend of up to 85 per cent fuel ethanol and 15 per cent gasoline by volume, and E95, a blend of 95 per cent fuel ethanol and five per cent gasoline by volume.
Securing a large part of its financing at “extremely low interest rates” from a US ExportImport (Exim) bank and taking advantage of freezone status, the project was off and running despite a few early missteps which put the company in trouble with the Environmental Management Agency.
TBTL set to work constructing a 50 million gallon a year ethanol dehydration plant inside Petrotrin’s abandoned Point Fortin refinery compound, in an agreement exploiting synergies between the two companies.
Construction of the original plant began in January 2005 and the facility was online by August 2005. It began commercial production in September 2005. At a formal opening ceremony on September 12, 2005, Duprey said the plant was being built “to capitalise on the growing global demand for cleaner motor vehicle fuels.”
With plans for future expansion to 100 million gallons a year, TBTL is now moving ahead on schedule with the second unit that would double the output of the facility.
Discussing the project with representatives from a range of European spirits companies acquired by Angostura and executives from the group’s other subsidiaries at Angostura’s annual Spirits Group Technical Seminar and Workshop two months ago, Mohammed make the expansion sound like child’s play.
He said the plant was designed as two separate units of 50 million gallons each.
“The plan was to install a 100-million-gallon-a year plant; all the apparatus was for something on that scale. But from a commercial risk point of view, it was decided to put the heart in first because that lowers your working capital requirement and minimises your risk. During the course of the plant working we licked any problems in start up and operation, then we decided to go ahead and complete the rest.”
He said since all the infrastructure—including all the necessary engineering work for the second phase expansion—was done at the time the plant was established in 2005, phase two is virtually “plug and play,” to borrow an IT term. Mohammed said the expansion is expected to be completed and commissioned by June, 2007.
Backward integration
Ethanol is made from corn, sugarcane, switchgrass and other plant materials. It has a variety of uses: it is heavily used as a solvent in the manufacture of varnishes and perfumes, essences and flavourings, medicines and drugs, in disinfectant and to preserve biological specimens.
However, its fastest growing use is as an additive in gasoline to produce E85, a blend of up to 85 per cent fuel ethanol and 15 per cent gasoline by volume, and E95, a blend of 95 per cent fuel ethanol and five per cent gasoline by volume.
TBTL does not produce the alcohol itself but uses “feedstock” initially imported from Brazil and, more recently, also from Central America, China and other Asian countries.
Mohammed said the company would prefer to deal with a regional supplier who would grow the sugarcane and produce the alcohol. He said he has already held talks with the Guyana and St Kitts governments.
Mohammed said the company’s vision is to eventually integrate backwards into regional sugar production “once the political will and the economic backing is there.”
That means acquiring huge plantations, a proposal likely to be assisted by the collapse of the sugar industry in the Caribbean.
Indeed, Mohammed observed that people are talking more and more every day about converting the failing sugar production facilities in the region into ethanol production.
He estimated the company would need 150,000 acres of land to grow sufficient sugarcane to produce the alcohol it needs to meet the requirements of the existing 50 million gallon a year facility alone. To satisfy the expanded plant its needs would double to 300,000 acres of land.
“Where will I get that? Certainly not in Trinidad,” he said, answering the question of whether TBTL is talking to the Government about acquiring the assets of the defunct Caroni (1975) Ltd.
Mohammed acknowledged that “backward integration” will probably have to happen through arrangements with governments rather than outright ownership of the plantations. This is because all cane lands in the region are owned by governments rather than private companies, quite the opposite of what obtains in Brazil, for instance.
He added that such backward integration will produce synergies for the rest of the group as far as sugar sources and security of feedstock for molasses and cane juice and high test molasses. He said 90 per cent of the sugar cane production from these estates could be for the group’s commodity alcohol (fuel alcohol) business while the remaining ten per cent would go to its rum production.
Mohammed told participants at the Angostura Spirits Group Technical Seminar that the success of the project was due to the plant being quick to build and quick to market, and backed by a large and stable parent company. However, he said there were challenges: one was the uncertainty surrounding the CBI quotas and the other was “getting the State petroleum company—Petrotrin—to work with us.” VB
Another challenge
One of the challenges Curtis Mohammed failed to mention was the ever-present lobbying by US politicians against imported ethanol. Senators representing corn growing states are eager to erect barriers to keep foreign ethanol out of the US to protect US corn farmers.
But president of the Inter-American Development Bank (IDB) Luis Alberto Moreno in an IDB article published February 7, pointed out that the US ethanol industry clearly cannot produce enough ethanol to meet the country’s needs.
“The limits of this approach are already apparent,” he said. “Corn prices shot up 80 per cent in 2006 due to booming demand from ethanol distilleries. Rising prices for cornflakes, corn tortillas and corn-fed beef could easily produce an anti-ethanol backlash among consumers.
“If US ethanol producers are struggling to meet today’s demand without unacceptable consequences, how are they supposed to supply the vastly greater quantities envisioned by President Bush’s proposal?
“The markets are already providing an answer,” he said.
“Despite a 54-cent a gallon tariff, US ethanol imports more than quadrupled last year, to 616 million gallons, according to the US International Trade Commission. Brazil accounted for more than two thirds of the total, followed by Jamaica and China. Now, in addition to Brazil, half a dozen Latin American governments are either expanding or launching serious ethanol programmes, and investors are underwriting more than 100 new distilleries in Central and South America.
“The economic and political case for importing ethanol is compelling. Ethanol derived from sugar cane is far more energy-efficient than that produced from corn and, as a result, far cheaper. Thanks to their climate and abundant endowment of agricultural land, many Latin American nations are uniquely suited to grow sugarcane. Importing Latin American and Caribbean ethanol would make the US supply more reliable by diversifying sources and minimising disruptions caused by bad weather or plant diseases in a single producing country. It would also lead to lower and more predictable prices for ethanol-gasoline blends at the pump.
“A hemispheric ethanol market is already taking shape. Major US agricultural firms such as Cargill Inc are forming ethanol joint ventures with counterparts in Latin America and the Caribbean. Last month Maple Cos, Houston-based energy firm, broke ground on an ethanol complex in northern Peru that will export all its production to the US.
“International trade in ethanol, though still less than ten per cent of total production, is rapidly increasing. And the Inter-American Development Bank is providing technical assistance to several Central American governments that intend to create ethanol industries with technology and expertise provided by Brazil and other countries.”
