The global aviation industry accounts for roughly 2% of all greenhouse gas emissions. On a per-passenger basis, a flight on an airplane emits far more greenhouse gases than the same trip in a car. The industry knows it needs to improve its carbon footprint -- and it knows consumers are watching. While new lightweight aircraft offer one valuable solution by improving efficiency (perhaps the most valuable option), aircraft manufacturers are also searching for more sustainable sources of jet fuel.
Enter Boeing (NYSE: BA ) , which has been pushing global regulators to approve renewable diesel as a suitable blendstock for Jet A. While you may think the costs of renewable diesel would prohibit its use, the more sustainable fuel is actually cost-competitive with the petroleum-based incumbent with government incentives. The message appears to have gotten through: The global body responsible for approving and evaluating the specifications of new fuels is expected give the green light sometime in 2014. That could be a big development for the long-term success of the farnesene-based jet fuel being commercialized by synthetic biology pioneer Amyris (NASDAQ: AMRS ) and global energy powerhouse Total (NYSE: TOT ) , which is quickly moving through the approval process itself.
There are quite a few angles to digest, including sustainability features, costs of production, and selling prices. What are the opportunities for each company, and what roles will each play in making the global aviation industry more sustainable?
Why renewable diesel?
Renewable diesel, also called green diesel, is not the same as biodiesel. It's produced in a different process and is chemically similar to petroleum-based diesel, which makes it engine-compatible and allows it to be used in higher blends than biodiesel. And, while it would require ASTM International certification and approval, renewable diesel could one day be used as a 100% substitute. In the near term, renewable diesel will likely be blended with Jet A at a 10% rate and gradually approved for greater blends over time.
The benefits of using renewable diesel would be substantial. It emits at least 50% less carbon dioxide than fossil fuels over its life cycle and greatly reduces emissions of particulate matter and nitrogen oxide compounds, even at 10% blends. The reduction in particulate matter stems from the production process and feedstock sources used to manufacture renewable diesel, while petrochemical refining leaves various impurities that must be further refined to an ASTM acceptable level.
Boeing believes renewable diesel fuels could have an enormous impact on the global aviation industry. It may take several years to truly notice the difference -- the 800 million gallons of global renewable diesel capacity represents just 1.3% of the industry's fuel use and can be used outside of aviation -- but ASTM International approval is a giant first step to a more sustainable industry.
What are the hurdles?
Even with global approval for renewable diesel, individual companies must prove that their fuels meet the standards. Specifically, a new fuel must be validated and supported by an existing ASTM aviation turbine fuel standard, such as Jet A and Jet A-1. In other words, new fuels must be compatible with the existing infrastructure of the aviation industry. The fuel must be validated by ASTM International before it can be used, and must usually be verified by independent government agencies for use in each country.
That makes for an expensive and time-consuming process for Amyris, which is why Total is such an important partner. Not only does it offer access to a global logistics network and infrastructure, but Total also provides the Total Amyris BioSolutions joint venture with a strong balance sheet -- a necessity for commercializing novel fuels. The good news is that the farnesene-based renewable jet fuel being developed by the duo is the highest-quality variety on the market.
Quality helped Amyris and Total receive requisite approval from the ASTM aviation fuel subcommittee in March, thanks in part to test flights on a Boeing 777 aircraft. A final committee balloting (likely completed by now) was the last step prior to ASTM validation for the fuel. If the process proceeds, the partners expect to sell Amyris renewable jet fuel by the end of the second quarter or early third quarter of 2014. Several airlines and customers, such as Brazil's GOL, are in negotiations for offtake and supply agreements. You may be able to fly to the World Cup next month on Amyris' renewable jet fuel.
What about prices?
This is where I see a lot of confusion among investors. How can Amyris sell renewable fuels at cost-competitive prices, especially given its high production costs? Simply put, it can't (yet), but it's important to note a few things. First, Amyris will sell renewable diesel and renewable jet fuel to Total, which will then sell it to customers for niche applications. Amyris sure can't produce the volumes required to make a big splash in the aviation industry. That's reflected in the company's short-term expectations for revenue contributions from fuels.
What people overlook is that Amyris and Total don't have to sell massive volumes from Day 1 to successfully commercialize renewable jet fuel. So what the heck is a niche fuel? The goal is that airlines looking to clean up their environmental footprint will purchase Amyris renewable jet fuel for specific flights to demonstrate their long-term sustainability commitment to consumers. The routes in question won't fly every day, but that won't be necessary to have a meaningful impact for Amyris. As CEO John Melo stated at a recent conference:
Why don't [airlines] go all the way out? Because frankly I don't think that the industry, us included, is prepared to produce the volumes at the cost required to make it economical for a jet to fly with a sustainable renewable jet.
Now we have a great product. It will be certified. But it's going to be expensive. And as a result, again, I don't see that being very material for the airline industry. I see it being very material for us. It will be a lot of volume for us, a lot of volume relatively speaking, and it will be interesting.
It is not what I see generating a lot of the cash in the business over the next three to five years.
Second, Amyris has a long way to go to achieve cost parity with petroleum-based diesel. The company's biorefinery in Brotas, Brazil, is achieving production costs in the range of $3-$3.50 per liter for farnesene, which is then processed into its renewable jet fuel. Petroleum-based Jet A sells for just $0.76 per liter in the United States. There's a long way to go, but Amyris and Total are already selling their renewable diesel to metropolitan bus fleets at 200%-300% premiums. A similar premium for renewable jet fuel would fetch between $1.51 and $2.27 per liter -- still not cost parity, but much better than many envision. Robust strain development and a larger future facility with 600,000-liter fermenters (Brotas uses only 200,000 liter fermenters) should help to close the gap in production costs and market prices. Just remember that fuels are a long-term opportunity for Amyris and Total.
The expected approval of renewable diesel for a Jet A blend this year will mark a major step forward for the aviation industry. Consumers and investors can expect airlines and manufacturers such as Boeing to fully support its use, which will further catalyze the global commercialization of renewable fuels. Approval would also crack the door open for a major long-term opportunity for Amyris and Total. Renewable jet fuel won't contribute much to product sales in the near term -- and won't be a profitable product for years to come -- but continued progress in production costs will slowly create value in the world's largest chemical market.
3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free.