[00:00:00] Speaker A: This industry will continue to exist in some form. The question is, from an economic perspective, who's capturing that value? Is it the feedstock providers or is it the producers? And I think the jury's still out on that.
[00:00:17] Speaker B: Welcome to the Next Imperative, a podcast hosted by A and M energy leaders tackling key issues and trends in the industry.
[00:00:27] Speaker C: Welcome back to the Next Imperative. On this episode, we're going to dig into the biofuels industry.
Joining me for this conversation are my A and M colleagues, Mark Clevenger, John Walsh. And joining from Munich, Germany, is Tushar Bansal. Gentlemen, welcome to the Next Imperative.
[00:00:42] Speaker B: Thanks for having us, Jeff.
[00:00:43] Speaker D: Thanks, Jeff.
[00:00:44] Speaker C: Why don't we just jump right in? John, can you kind of share your perspective on what the current state of the biofuels industry is in the US and then we'll ask Tushar to do the same for Europe in a minute?
Sure.
[00:00:54] Speaker A: I think the industry is at an interesting juncture in that coming out of 2024, the space was really defined by transition, and that transition has bred uncertainty.
And by transition, what I mean is exiting 2024, the industry was aware that the blender's tax credit would be expiring to be replaced by 45Z under the IRA interpretation. And IRS's guidance on 45Z was still an open question.
More guidance has come out throughout the year, but what was known at the time was the tax credit was moving from a volumetric base credit to something more like the LCFS program in California tied to emissions.
The other thing that was creating transition and ultimately bred uncertainty in 25 was the expectation around EPA's guidance on renewable volume obligations for 26 and 27.
EPA put out guidance in June, but prior to that, there was very little certainty as to which way EPA was going to go, particularly as a result of the changeover in administration. I would say prior to the announcement, biofuels producers in the US Were experiencing tepid demand, weak margins because guidance on RVO had not yet been memorialized by epa.
And that resulted in assets that were either running below capacity or in some cases, idling.
So the transition has. Has created uncertainty.
As we've approached June and the second half of 2025, there's been additional guidance that's come out of the government. But in an industry that is propped up by legislation, there's a requirement that the government puts out as much guidance as possible in order to give producers insight into what the next 12 to 24 months will look like.
[00:03:13] Speaker C: Mark, what can you add?
[00:03:14] Speaker B: I'll just add that in addition to the differences in the regulatory environments and the uncertainty that that's created, we're seeing a different set of players and investors in this market. From 2020 through 2022, 2023, most of the investment was coming through corporates that we're doing, transitions of conventional refineries into renewable diesel or sustainable aviation fuel production. We're seeing fewer of those conversions being done and more of the investment is coming through private investment at much smaller scale through new build refineries.
And that presents a whole new set of challenges from an operator perspective.
[00:03:58] Speaker C: Tushar, what's the view in Europe?
[00:04:00] Speaker D: So the line which John said just now, that demand is driven by regulation, I think that's a common theme also in Europe we see that very much. We see demand across, be it biofuels in gasoline or biofuels in sustainable aviation fuel or others, we see the demand primarily driven by regulation, the changes in regulation, the red directives, etc. Right.
What we see on the supply side, however, is that it's relatively flattening out.
There is limited room for growth.
Some of the plants are coming up, but certain plants, the big plants by oil majors, are starting to get cancelled. And so what we see is that supply is likely not growing as fast as the demand is growing, growing or demand can grow. And there are some cost pressures which multiple participants are echoing. And across that we see a similar theme about viability becoming more and more important and more and more evaluated by the various market participants. And as a result, we see changes in the profile of players who are investing in this market. That's the overall theme that we're looking at.
[00:05:26] Speaker C: Thank you. Switching back to the U.S. john, you mentioned that the renewable volume obligations have recently been released from the epa and at the same time I think they put some penalties on imports.
What's been the impact of that?
[00:05:40] Speaker A: Yeah, so as alluded to, EPA came out with their announcement in June around 26 and 27 volume requirements for conventional refiners. And, and as we've alluded to a few times here, supply, demand dynamics and biofuels is really or are really driven by legislation. And so supply comes from biofuel producers. The demand is created by the renewable volume obligations that EPA puts out for conventional folks.
They're supposed to do it every year. They were a little late getting 26 and 27 guidance out, but once they did, I think the market reacted favorably because it was a fairly bullish pronouncement for the biofuel industry.
Now, at the same time, there's still Some regulatory issues that are overhanging what this administration will ultimately do with respect to conventional refiners, namely around small refinery exemptions.
But if you just look at RVO in isolation, I think the industry viewed it as positive for the biofuel market. Ethanol remains the workhorse. Renewable diesel has somewhat leapfrogged other biofuels.
The RIN market has not caught up to the increase in feedstocks feedstock pricing that occurred post RVO because of the SRE overhang. I think what is yet to be seen is the extent to which rins, which is really the floating attribute that makes these assets and these refiners in the space, economic or not, the extent to which the RIN price catches up to what is referred to as in the industry as the, as the boho spread, which is by definition negative. And the RIN is supposed to compensate producers for that negative margin. The nice thing about what IRS has done with respect to 45Z, while I alluded to the fact that BTC went away and BTC was somewhat of a more favorable credit, 45Z does stack on top of the RIN. So it's incremental margin.
And with IRS's guidance around 45Z being settled law at this point, I think producers feel confident in their ability to the extent they're selling into the California market Capture, they're in 45Z and local programs like LCFS.
So at the end of the day the RVO was bullish for the industry.
Still some guidance required coming out of treasury around implementation and then SRE continues to be something that will need to be evaluated as more exemptions are either granted or not by epa.
[00:08:47] Speaker B: John, you kind of alluded to it there around some of the changes that came through the one big beautiful act and how the 45Z credit has been extended.
But at the same time it also eliminated that that credit for any foreign feedstocks. And that's going to create upward inflation on on feedstock prices and collapse the bean oil heating oil spread, which I think creates an interesting dynamic from a ren pricing perspective. Further, we're already seeing a drop in imports of renewable diesel and sustainable aviation fuel as a result of the loss of those tax credits. Looking back to 2024, biodiesel renewable diesel imports were on the order of 30,000 to 35,000 barrels. A looking at the first half of 2025, those imports are down to around 5,000 barrels a day. So a pretty sharp decrease in a short period of time. And I think that's the speed at which the Market has adjusted. Just exemplifies the pinstroke risk that's associated with these markets.
[00:09:58] Speaker A: Yeah, and I'll add on to that.
And you reminded me of something, Mark, that I didn't mention previously, which is 45z did limit or effectively exclude imported biofuels from capturing that credit.
The other thing that RVO did in June was it haircut, the value of the RIN for imported biofuels and imported feedstock going into US assets.
At the end of the day, what that creates is pressure on the input cost. So feedstock prices and the cost curve are expected to increase. And in an industry that is propped up by legislation, only exists because the RIN is something that came through legislation. You would expect with higher feedstock prices to see higher RIN values.
[00:11:01] Speaker C: So we expect those to rise, to.
[00:11:03] Speaker A: Increase, and that should improve margins.
[00:11:06] Speaker B: Yeah. Ultimately, going forward, I think we're going to. We can expect to see an increase in US consumption of biodiesel and RD to meet the RFS standards and other mandates. But imports around these volumes, both in finished product and in feedstocks, I think will remain low, too.
[00:11:24] Speaker C: Sure. What's the big regulatory issue going on in Europe today?
[00:11:27] Speaker D: What we see in Europe is essentially REC3, the Renewable Energy Directive. And if I may summarize it, then it basically looks at three things. Number one is it looks at having advanced biofuels or things like renewable hydrogen. It adds subcaps to it, number one.
Number two is it adds certain fuels which are made from added wastelands, essentially lands which are not really useful or producing something. It adds those which are to be counted. And number three is it tries to discourage or eliminate the use of biofuels which come from plantations that are leading to deforestation. So essentially, things like palm oil are going to be included and they're going to try and minimize the double counting in there. Right. So it essentially captures three things. Now, the underlying reason is primarily that the supply of biofuels is not really increasing at the pace that the regulators would have liked it. And so the attempt to add supply certain other biofuels or advanced biofuels or from the wastelands is basically an attempt to increase the available supply. But that isn't very much available.
It does not increase the overall quantity significantly.
These are the main items that we see. And a lot of the biofuel supply that was earlier directly or indirectly coming from things like palm oil, which are coming, which are leading to deforestation, essentially, it's going to reduce that availability. So we see essentially supply pressure getting exacerbated at the same time, these sustainable aviation fuel, the saf.
There are directives on increasing the amount of, or the quantity of SAF available, but the industry is pointing out that not enough SAP is actually available in the market.
And that's what we see.
So to reiterate, basically, demand continues to increase, driven by regulation, but there isn't enough supply.
And then the regulations are looking to add on to that.
[00:13:58] Speaker B: I think if we look at both the dynamic that you described there in Europe and what we're seeing in the us the regulatory environment and changes, it's all pointing towards a tightening of the bean oil heating oil spread.
And as a result, we see two things. One, it's going to cause a need for greater working capital for operators.
The tighter the margins are, the more important scale becomes and the more working capital is needed to operate these businesses. And then the. The other item is that it's really an indication that price is inelastic. Consumers aren't going to pay a premium at the pump.
And likewise, if costs are going up and, you know, prices are kind of capped at the top, we're going to continue to need incentives to, to make this a viable entity.
[00:14:58] Speaker D: And on that note, actually, if I may say, yes, we're seeing a very similar thing in Europe as well, whereby the costs are increasing.
The investment rationale, the viability is coming into question and various players have been voicing their concern.
And some of the players have also taken the dip or taken the leap to essentially cancel the projects.
Some of the big projects, for example, Shell or bp, and that is essentially echoing exactly the same thing, which is that feedstock costs are rising. The viability, this is putting the viability in question. And so the investors, the refiners essentially are starting to vote by pulling the projects.
[00:15:46] Speaker C: Okay, thank you, Tushar. In the US there's headwinds arising from the new administration's resurrection of the small refinery exemptions. What's that driving in the market? What are the issues that are coming up and need to be addressed?
[00:16:00] Speaker A: Yeah, I would say that it's not so much a resurrection as it is. The administration has indicated that similar to what was done during Trump's first presidency, there's going to be an appetite to grant small refinery exemptions. And as of August, there was indication from EPA that a large portion of the backlog related to 2016 to 2024 SRES was going to be cleared. What that means is if you meet the requirements for a small refinery exemption, your RVO obligation for those prior years goes away.
The question really comes down to what happens to those volumes and whether those volumes get reallocated to larger refineries.
And I think there's some indication that that is the direction that the administration is leaning. If that happens.
I would say the combination of RVO, which was bullish in June for 25, sorry, for 26 and 27 volumes, as well as SRE reallocation of volumes that volume obligations that were obligations of small refiners to larger refineries, I would say that creates a probably the most optimistic set of circumstances for the biofuel industry in the U.S.
there's still a question though as to one whether reallocation will occur. I think I would say we're probably headed in that direction.
And then ultimately, what does the guidance on future SREs look like? What is the guidance on the monetization of the RIM market post RVO interpretation from the administration and how that ultimately impacts the cost of feedstock here in.
[00:18:17] Speaker B: The US I think you summed it up well there, John.
It's a pretty complex situation and with a lot of uncertainty and pins on how we handle the SRE exemptions going forward.
[00:18:30] Speaker D: Right.
[00:18:31] Speaker A: And then, and then I would say, you know, as you look out to future periods, once there's some clarity, I would say, you know, the industry as a whole tends to think about margins as somewhat of a. I don't want to call it aspirational, but there's a theoretical required margin that these assets or producers need in order to break even and generate returns.
And absent a strengthening in market support from the administration around continuation of 45Z and these local programs, you will not get back to stable margins. And what that will mean is a environment's very much similar to what we experienced at the end of 24 and 25, beginning of 25, where production was effectively idling because the fixed costs associated with these facilities is such that absent regulatory support for the industry, the margins just won't, won't be there to, to generate positive returns.
[00:19:51] Speaker B: Yeah, I agree. There's a number of levers that we can pull and have had a decent experience with optimizing cost structure and getting it right sized.
But to really improve contribution margin, it's difficult in the small volume producer.
There's levers out there that on fixed cost insurance, real estate, corporate overhead, I guess most impactfully is around, right? Sizing volumetric commitments, bringing them to market pricing, but also reducing the the volume committed on a long term and essentially turning what is a fixed cost into a variable cost.
That's Pretty effective. But at the end of the day, there's still subscale refiners.
There's a reason that the SRE is put in place in the US and it's targeting refineries that are below 75,000 barrels a day production and because they are deemed in a economic hardship, disproportionate economic hardship. And so I think if we think about a renewable diesel or a sustainable aviation producer that's producing at less than 75,000 barrels a day, there's no reason to think that they aren't subscale as well.
[00:21:12] Speaker C: Tushar, what's the story in Europe for the small volumes?
[00:21:15] Speaker D: I think it's very similar.
The big plants that were here, 800,000 tons, 900,000 tonnes, that's basically the max size that you see. And that's primarily driven by supply. So it's never there at the scale that which a regular refinery is there, which also again, adds to the cost. So absolutely similar thing that we're seeing in Europe as well.
[00:21:39] Speaker C: Tushar, refining is a business with large capital requirements. How are the challenges we've discussed today impacting the ability of the Europeans to raise money?
[00:21:47] Speaker D: Very good point, Jeff, Very pertinent question.
What we're seeing is there are three main kinds of investors or people providing capital in this business. Right. Number one is what we would call as the government backed investors, so the likes of European Investment bank, for example, number two are the institutional investors, so the likes of pension funds and also private equity.
And number three is the grants or subsidies that are available or made available by the governments. What we're seeing is a fundamental reshaping of these. Right. And so the government sector, the likes of EIB are still providing the loans available.
The institutional investors are essentially taking a pause or there's a reshaping in it. So the private equity essentially is looking at the overall returns.
The pension funds are looking at long term capital and long term returns and they are happier with stable returns, but they are also driven by regulation. And so you see more of the European pension funds investing in this, much more than American funds. At least what we see in Europe and the grants, et cetera, they are available, but the usage has reduced because of the overall economic viability.
And what this is resulting in is we are seeing a fundamental difference in the kind of questions that are being asked by the client. So a lot of questions are about restructuring of loans, the restructuring of working capital, finding new revenue streams for them, which can lead to an increase in viability or improvement in viability and reducing the cost. Those are the key questions that clients as a result have been grappling with and have been focusing on.
[00:23:51] Speaker B: I think just to add on there, we've seen a tremendous amount of growth in private credit into this sector, especially given with the favorable environment it's had for the last several years now facing several headwinds, some tailwinds in that environment, I have concerns that we've seen a period of potentially overinvestment and it's going to create challenges going forward for operators to raise capital in the future.
[00:24:21] Speaker A: I think that's right. I think the industry would say that given the amount of capital that's been invested over the last five years, perhaps prior to some of these recent tailwinds, there may have been some overbuild, which is why you saw capacity utilization and idling of assets earlier this year.
I think what that means in the US and what we are attempting to do for our clients is first and foremost help them look around the corner from a forecasting perspective. And to do that, Mark alluded to this earlier, you have to have a fundamentally bottoms up view of the difference between your fixed and variable costs.
And if you don't, you're never going to get the contribution distribution margin question right.
The other thing that we're ensuring or trying to ensure that our clients focus on is how to manage the kind of intra month swings of working capital.
If you are a producer that has contracted feedstock, contracted offtake, that probably means you require some access to working capital financing because you likely don't have the balance sheet to finance those volumes on your own.
And so we have been working with clients to ensure that they're not only forecasting free cash flow from a EBITDA less capex perspective, but that they're also very granular around forecasting, working capital and liquidity.
And when you start getting into working capital trends and the granularity of fixed versus variable, we think it's very helpful to have some points of comparison to how other assets are operating, which we try to bring to our clients from a new perspective when endeavoring to help them with forecasting challenges.
[00:26:53] Speaker C: Tushar, what are some of the ways you've been helping the European clients navigate through these headwinds?
[00:26:57] Speaker D: So we've been discussing a lot with the clients about as I said, number one is refinancing, restructuring of the loans, refinancing.
Number two is value creation through addition of new revenue streams slash reduction in costs. That has been the key focus. That is how we've been working with the clients into developing more sustainable solutions.
[00:27:26] Speaker A: You know, I think that one thing to keep in mind is when you're dealing with an industry that has support from legislation, in other words, the industry doesn't exist without the legislative requirements in the US that come from RVO and the RIN market and you're dealing with some of the price inelasticity issues that Mark was referring to earlier.
You really, as a producer and a management team have no other choice than to be extremely diligent around rigorous cost control.
And that's something that we try to bring to every engagement.
[00:28:20] Speaker B: Yeah, And I just say that the, the successful investors in this space are viewing today's markets that are oversupplied with renewable fuels, that are facing regulatory uncertainty, shareholders that are demands for capital discipline, they view these aspects as currently noise and that the long term signal is clear we're heading towards a decarbonized future and renewable fuels is going to be a pathway to get there.
The question is how fast? And so for market leaders and investors is how do you create a cost structure and a balance sheet that can weather the trough of that change?
[00:29:04] Speaker D: And just to add to that, the participants, the refineries essentially need to fundamentally relook their strategy and now take into account the fact that what happens if that regulatory support reduces, gets pushed back or changes. Right. And so far there was an assumption that that's not going away, but that assumption is now being broken.
That assumption now needs to be re looked at. And so the strategies need to be re devised.
[00:29:33] Speaker A: And in the US it changes every four years because so much of this industry is tied to who's in the White House.
And setting assets up for success that can somewhat be agnostic to who's in the White House has been challenging historically.
But to Mark's point, we believe that the capital or swaths of capital that exists out there is committed to a decarbonized world. And so this industry will continue to exist in some form. The question is, from an economic perspective, who's capturing that value? Is it the feedstock providers or is it the producers? And I think the jury's still out on that.
[00:30:22] Speaker C: Gentlemen, thank you. We really appreciate you sharing your great insights on the biofuels industry today to our audience. Thank you for watching. We hope you found this conversation as robust as we did and we look forward to seeing you on a future episode.
[00:30:36] Speaker B: Thank you for listening. Make sure to subscribe to the next imperative so you never miss a new episode. Also visit our
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