Bryan Sherbacow is the chief commercial officer for World Energy, a biofuel producer that owns the only dedicated sustainable aviation fuel refinery in the US. The company, in partnership with Shell and SkyNRG, last week started supplying alternative aviation fuel to three airlines at San Francisco International Airport. In this interview, edited for length and clarity, Sherbacow talks about the effect of California's decision to add alternative jet fuel as an eligible credit generator to its Low-Carbon Fuel Standard (LCFS).
Tell me about your Paramount facility, which remains the only facility currently in operation dedicated to alternative jet fuel.
It is near and dear to me because I started that company, so I love to talk about it — World Energy Paramount, formerly AltAir Paramount.
The project itself, in terms of breaking ground, started in the second quarter of 2013. We finished construction in 2015 and started operations January 2016. We have been awarded the first ever operational contract by the Defense Logistics Agency, which is the procurement arm for the Department of Defense, for their customer, the US Navy. The first fuel that came out of that plant was a military-grade diesel called F-76. It was utilized that year for what then-secretary of the navy Ray Mabus called the "Great Green Fleet." We fueled that fleet, which sailed around the world demonstrating renewable fuel.
We are to date still the only renewable company awarded an operational contract by the Department of Defense for regular operational use with renewable fuel. We are currently in our third contract with them.
Pretty much immediately after that we did our first delivery for United Airlines into LAX and we have been delivering to them ever since.
Give me a sense of the current production capacity at the Paramount facility and your expansion plans for it.
The facility was originally designed to process 2,500 b/d of feedstock. We are exceeding that today, processing about 3000 b/d, which equates to approximately 40mn USG of combined liquid product. That liquid product is a combination of renewable diesel, renewable jet and naphtha. We have been doing that consistently for three years.
We will make an additional investment of $350mn into the refinery over the next two years to increase production up to 20,000 b/d. For jet, that is a very significant game-changer.
It is a unique refinery. If the market is telling us that jet has more value, we can crack diesel into jet and naphtha, as opposed to just selling it as diesel. It is the only refinery in the world that has that capability. When we expand, we will have an installed production capability of about 150mn USG/yr of jet fuel, if we wanted to make that. We will see what the market does. There are some problems with incentives today, government incentives that disproportionately incentivize diesel over jet, but we believe the industry is working on that.
What explains the advantage that renewable diesel currently enjoys over alternative jet fuel?
Aviation fuels are not regulated, at least in the United States, the same way as ground transportation. One is regulated at the federal level with the Federal Aviation Administration. The other is often regulated both at the federal and state level.
California is an example. They have an exemption from the Environmental Protection Agency to regulate the ground fuels themselves. They cannot compel the aviation industry to do things that they can compel the ground transportation producers to do.
California is the most relevant state right now. They have got the most incentives for renewable fuels. The world is tilted toward California — certainly in the United States, but also international production.
Petroleum diesel that sells across a truck rack, as most of that fuel does, has fees that are collected from the buyer for the petroleum diesel that go back to pay for the Low-Carbon Fuel Standard (LCFS), as well as the cap-and-trade program. Those fees today combined are equal to approximately 25¢/USG. Renewable fuel is exempted from those. However, renewable diesel meets the same spec as petroleum diesel. There is a margin opportunity for renewable diesel that is the better part of 25¢ that does not exist for jet, because jet does not trade across a rack and it is exempted from that program because California does not regulate jet fuel.
I can produce at essentially the same cost, but my revenue opportunity is significantly better on diesel, so I am incented to do that.
What are the policy distortions that push producers toward diesel and how could they be corrected?
One of the things we have done over the years is create opportunities to generate credits for aviation fuel within existing programs. The federal Renewable Fuel Standard does not require anybody to use jet, but it allows you to create RINs [Renewable Identification Numbers] by producing renewable jet.
We did the same thing with the California LCFS. It starts 1 January. For the first time in its history, renewable jet fuel will qualify for generation of credits in California. That takes us a long way toward parity. It does not solve everything, but it is a huge piece of the puzzle.
That was one solution. The aviation industry has also essentially self-regulated. They are putting a price on carbon themselves via a trading scheme that should also create, over time, some additional credits through the International Civil Aviation Organization. If you are going to self-regulate, you are not going to do it with a heavy hand. It is not a perfect solution, but it will grow into something that is a positive contributor to creating an equal playing field for all fuel types.
The Renewable Energy Directive program in Europe is thinking about putting in a multiplier for renewable jet fuel so that it gets additional amounts of credits relative to other types of products. You are not obligating the user, but you are incentivizing the producer.
Put in perspective the impact that adding alternative jet fuel to the LCFS will have, and how quickly. Have you done any projections on what you anticipate the market to be in 5-10 years?
I can do it more qualitatively at the moment than quantitatively. Qualitatively, it is a very significant game changer. Before, it was an easy decision for potential developers to not even contemplate putting in jet production capability. Now the gap between diesel and jet has dropped to a very reasonable difference.
There is far more activity and momentum in aviation than there is in ground diesel for renewables today. There is not an alternative long-haul, low-carbon fuel, other than renewable. The ability to monetize the credit for aviation fuel is making it such that people are now willing to pursue investments in jet production as a result.
By reducing the cost exposure as a result of the LCFS credits, I believe you are going to see significantly more offtake contracts.
Can you give any sense as to how you are pricing offtakes for alternative jet fuel, given that it must compete with production for renewable diesel?
We are pretty candid about it. I have got a fiduciary responsibility to my investors. We are not a cause. We are a company. We need to compensate for the difference between the highest and best opportunity for our molecules.
I am going to price our jet to be essentially at parity with what my diesel opportunity is. We are realistic. We understand that is the number one expense for these users. I might be able to make a little extra profit on a small amount today because we are the only producer. That is not scalable. As the industry ramps production, we just need to be competitive. We are looking to create long-term relationships.
