Market Overview & The Syn Tawa Advantage

MC900440112Stimulated by environmental and security challenges and assisted by a favorable regulatory environment, many companies have sought to develop technologies for the production of advanced biofuel. These companies have faced a number of challenges that are likely to impact their success.

“The U.S. Congress passed the Energy Independence and Security Act of 2007, which sought to move the United States toward greater energy independence, to improve national security and to increase the production of clean renewable fuels.”

Market Challenges:

1. Feedstock Challenges: The business models of many renewable fuels competitors rely upon the purchase of feedstocks that present numerous challenges:

  • Volatile pricing: Many competing feedstocks have high historic pricing volatility and short-dated, illiquid forward markets. Several of these commodity inputs have markedly increased in price after significant investment had been made, materially eroding investor returns.
  • Lack of reliable feedstock supply: Certainty and availability of feedstock supply are ongoing challenges for many competitors who rely on feedstocks that are not currently grown or available in the large quantities required for a commercial facility. Challenges also arise as the infrastructure to harvest feedstock may not be in place, may not remain operational over the long term, and may be subject to a transient labor supply. Such challenges may create significant supply uncertainty or cost increases.
  • Dependence on arable land and natural resources: Many competitors are dependent upon the use of arable land for feedstock supply. For instance, first-generation renewable fuel producers require vast swaths of farm land for corn and sugarcane production. As such, these producers require access to new acreage to increase their production. In addition, other approaches to biofuels such as biomass may require access to natural resources such as timber and forest lands.
  • Competing uses of feedstock: Many biofuel companies, including advanced biofuel companies, use feedstock like soybeans, corn and sugarcane, which can also be used as a component of food supply. As a result, the increased use of these feedstocks could adversely impact the market price and availability of certain foods. In addition, wood-based feedstocks can be used for non-food applications such as building products and paper.

2. Scale-Up Issues: Many advanced biofuel competitors face difficulties commercializing their products due to an inability to access capital to fund projects where the technology has been demonstrated on a very limited scale. Scale-up risk is not only a factor contributing to uncertainty for the first commercial-scale facility but also for subsequent large facilities.

3. Dependence on Yield Improvement and Future Technological Advances: The business models of many renewable fuels competitors are premised upon continued yield improvement to transform feedstock into an end product at a rate that generates sufficient economic returns. The need to achieve future technological success in order to be economically viable introduces a tremendous amount of uncertainty into that business model.

4. Dependence on Government Subsidies: The economic viability of some renewable fuels is heavily dependent on the continuation of government subsidies and support available today. On an unlevered, unsubsidized basis, many renewable fuels competitors have low or even negative returns on capital.

Competition:

There are several factors that influence the price of Bio-fuels within the market, and that likewise, will determine how competitive the price of any Bio-fuel created from a particular feedstock supply will be against a fuel created from any other type of feedstock supply. Primary factors include:

  1. Price of feedstock and cost of production
  2. Price of the renewable biofuel
  3. Product performance and yields
  4. Compatibility with existing infrastructure
  5. Sustainability
  6. Dependability of supply
  7. Availability of multi defined Carbon and RIN Credits

Multiple production and technology companies using various technologies and pathways are producing, or working to develop, renewable biofuels. Since 2010 there were over a dozen companies that filed for an IPO in the industrial biotech boom.

Big companies like Waste Management and General Motors have invested hundreds of millions of dollars in gasification companies like InEnTek and AlterNRG for the production of ethanol. Without government subsidies, the renewable ethanol market will have severe challenges.

In the Long term, the Syn Tawa advantage is that our Renewable Fuels will compete directly with petroleum-based products that have to be blended with diesel and gasoline to serve the transportation fuels market. Within the transportation fuels market, some of the primary competitive factors include:

  1. Product performance
  2. Price
  3. Ability to produce meaningful volumes
  4. Dependability of supply
  5. Non need to blend with other fuels

The combination of the TRI proprietary gasification process and our supply of low fixed cost feedstock, provide us with a substantial competitive advantage over producers utilizing alternative feedstocks and technologies. In addition, we will be able to compete favorably because our renewable liquid fuels are compatible as drop in fuel with the existing production, refining and distribution infrastructure in the broader transportation fuels market.

The EIA’s Annual Energy Outlook 2012 forecasts an overall renewable fuel shortfall. Total production of renewable fuels is now projected to be 25.7 billion gallons versus 36.0 billion gallons required under the RFS2 mandate in 2022 and the entire 10.3 billion gallon shortfall is a shortfall in advanced biofuel.

biofuel_chart_market_overview

The Syn Tawa Advantage:

This summary highlights data from multiple sources, including the U.S. Energy Information Administration (“EIA”)| Annual Energy Outlook 2012 that makes the case for the deployment of our green wood waste conversion to liquid fuels technology solution at project sites around the country.

Energy Facts:

  • Crude oil prices are forecasted to increase through 2035 to $145 per barrel as global demand increases.
  • Consumption of petroleum fuels is forecasted to decrease through 2032 and be replaced by renewable fuels.
  • Liquid fuels from renewable sources are forecasted to increase through 2035 as global demand increases and government mandates increase.
  • The renewable share of total energy use (including biofuels) increases from 8 percent in 2010 to 14 percent in 2035 in response to the Federal RFS2 mandate requiring increasing consumption of renewable fuels.

Industry Facts:

The Traditional Transportation Fuels Industry

  • The transportation sector dominates the demand for liquid fuels, representing 71% of total petroleum consumed in the United States in 2009.
  • In 2009, the United States consumed approximately 138 billion gallons of gasoline and approximately 52 billion gallons of diesel.
  • The U.S. Congress passed the Energy Independence and Security Act of 2007, which sought to move the United States toward greater energy independence, to improve national security and to increase the production of clean renewable fuels.
  • The resulting Renewable Fuel Standards Program, or RFS was updated in 2009 to establish an annual mandate for the production and consumption of renewable fuels along with renewable energy credit incentives and penalties for non-compliance.

The Renewable Fuels Industry- Biodiesel and Naphtha

  • Agricultural feedstock prices are rising due to demand and competition from food requirements.
  • Agricultural biomass plants are idle due to high production costs.
  • Agricultural biomass plants rely heavily on government subsidies to survive.
  • Most liquid fuel technologies are too expensive or are not proven.
  • RFS2 annual mandates increase annually for consumption of renewable fuels.

The Municipal Solid Waste Industry

  • Overall, wood waste accounts for about 17% of the total waste received at municipal solid waste landfills in the United States (EPA 1999).
  • In 1998, the amount of urban wood waste generated in the US was more than 160 million tons. Decomposition of MSW in landfills produced harmful GHG emissions, including high levels of methane.
  • The Resource Conservation and Recovery Act, or (RCRA), was passed by Congress in 1976 and sets forth a framework for the management of non-hazardous solid wastes. Standards imposed under the RCRA include location restrictions and more comprehensive monitoring requirements that increased costs for landfill operators and accelerated the closure of many of the nation’s landfills.
  • Transportation costs keep increasing due to longer hauling routes to landfills.

The Syn Tawa Integrated TRI Technology Solution and Business Model Facts:

  1. We address all of the challenges listed above.
  2. The renewable fuel we produce meets all of the RFS2 standards and qualifies for multiple types of RIN and Carbon credits.
  3. We create jobs.
  4. ur green wood waste feedstock is priced at a low fixed cost, which eliminates price volatility.
  5. Our licensed TRI technology solution is proven and in production.
  6. Our licensed TRI technology solution process uses zero combustion of feedstock, thus producing near zero emissions from the gasification process.
  7. Our technology solution is economically viable without government subsidies.

The Syn Tawa business model benefits from a number of competitive strengths, including the following:

1. Attractive Feedstock: The use of green wood waste affords us numerous benefits:

  • Contracted at low fixed cost: We have executed a feedstock contract with the largest green wood waste provider in the Southwest and Arizona that will supply us with sufficient feedstock, at low fixed cost, to produce more than 8-16 million gallons of advanced renewable fuel annually for up to 20 years at our MBF project currently under development. Our use of green wood waste removes the largest, and most volatile component of traditional renewable fuels production cost from our cost structure. We believe this provides us with a significant cost advantage over competitors paying higher prices for feedstock or utilizing purpose-grown feedstocks.
  • Transportation advantage: Significant volumes of green wood waste are generated in the Phoenix and Tucson metropolitan areas, providing us with a transportation advantage compared to feedstocks harvested or grown in rural areas that must ultimately transport either the feedstock or the fuel to metropolitan areas.
  • Reliable supply: The United States generates over 160 million tons of green wood waste annually, which is rich in organic carbon, providing sufficient feedstock for our process.
  • Established infrastructure: By using green wood waste, we benefit from existing infrastructure for collection, hauling and handling. No new logistical networks would be required to transport the feedstock to our facilities.
  • No competing use: We produce advanced renewable fuel from a true waste product that has no competing use, is not sought after by food producers and has no impact on food prices.

2. Cellulosic Diesel Product:

  • A true drop in fuel: Our cellulosic diesel product is a game changing fuel. Specifically, this is because as a true drop in biofuel no downstream infrastructural changes are required by the wholesale petroleum distribution system. This is very much unlike ethanol and biodiesel which are inferior as renewable alternatives due to their reliance on blending infrastructure. This gives Syn Tawa’s Projects the ability to compete with traditional petroleum players for business rather than be reliant upon them for blending and distribution; thus significantly augmenting the leverage afforded us in the competitive landscape.
  • Impact on EPA’s Renewable Fuels Standard 2 (RFS2): The unique combination of feedstock derived from cellulose and ASTM D975 diesel fuel affords Syn Tawa’s Project facilities the ability to generate D7 RINs. These RINs have the unique ability to be used for all four mandates under RFS2. That is to say that they may be used as Cellulosic (D3) RINs, Biomass-based Diesel (D4) RINs and no matter what type is selected, both contribute to compliance under the Advanced Biofuel and generic Renewable Fuel mandates.

This will become of escalating importance as the mandate for Advanced Biofuels (D3, D4, D5, D7) RINs builds and the supply of Cellulosic Biofuel remains negligible. This gap was unexpected by policy makers and leaves a shortfall that must be filled by unanticipated growth in non-cellulosic advanced biofuels. In lieu of that unanticipated growth any facilities generating D3, D4, D5 or D7 RINs should expect to sell their RINs for prices premium to today’s prices.

3. RIN Value & Monetization:The full economic value of the RINs associated with a gallon of the Project’s fuel in today’s market (7/10/12) is $1.670/gallon. During 2011 this price ranged from $1.36/gallon to $3.45/gallon with an average price of $2.29/gallon. Carbon Solutions Group expects that a realistic 10 year curve is likely to be maintained at or exceeding the 2011 average price.

4. Carbon Offset Value and Monetization:Under the Kyoto Protocol, all CDM projects must be subjected to validation / certification by a designated operating entity (DOE). Validation assesses the design of a CDM project and its estimated reductions before it becomes operational. This validation is required in order to have it accepted and registered. Registration is a prerequisite for later verification and certification of emission reductions generated by a project. Verification and certification happens after a project is implemented. Upon successful verification, the designated operating entity will determine and certify the emission reductions (CERs) and request the CDM Executive Board to issue certified credits to a project.

5. Business Model Built for Long-Term and Sustainable Profitability: We do not rely on government subsidies to make our product commercially viable. While we benefit from policies such as RFS2, and will access incentives available for the production of our advanced renewable fuel, we expect our product to be sold on a cost-competitive basis with existing transportation fuels without any reliance on subsidies. We also believe we have greater certainty around our cost structure compared to traditional Biodiesel producers due to our existing contractual arrangements for low fixed cost green wood waste feedstock. We expect this certainty regarding our cost structure will allow us to enter into financial and/or physical renewable diesel hedges to lock in a portion of our unit economics.

6. Flexible Production Process: The modular design and zero emissions of our licensed TRI gasification process allows us the flexibility to use multiple feedstocks and produce alcohols other than renewable diesel and take advantage of opportunities in other renewable fuels and chemical markets, based on changing economics.

7. AIG Insurance Wrap: Our entire system will be insured against business disruption as well as the quality and the quantity of the fuels we produce, thus mitigating any system performance risk.