Biodiesel production soars, and so do prices

Brad Nettles
The Post and Courier

OMFuels CEO Charles Robert Adams fills up with biodiesel at Fox Music in North Charleston. OMFuels operates the Charleston area's only retail biodiesel pump at the Montague Avenue music store.

Brad Nettles
The Post and Courier

Southeast BioDiesel partner Dean Schmelter explains how his company processes chicken fat into fuel in an October photo. The rising cost of raw materials is keeping his company from making much profit despite surging interest in the renewable energy source.

The Post and Courier

Video

The SouthEast plant in North Charleston produce around 18,000 gallons of biodiesel a day by chemically treating truckloads of heated chicken fat. Watch »

The license plate reads BIODZL, and for almost a year now, Dean Schmelter's dark Mercedes sedan has run almost exclusively on chicken fat.

Schmelter and his business partner built a $3.5 million plant on the former Navy base in North Charleston, where a dozen workers chemically convert the poultry goo into fuel. Dubbed Southeast BioDiesel LLC, the facility mixed its first batch in July 2007 and now cranks out 18,000 gallons of biodiesel every day, 360,000 gallons a month.

"There's nothing like driving down the road on fuel that you didn't pay your enemy for," Schmelter said. "Let me tell you, it's a great feeling."

But the wonder-fuel is no longer cheap unless you work at Schmelter's plant. Demand for biodiesel and the oils that are used to make it have surged in step with the cost of crude oil and conventional gas.

"The chicken guys have figured out the exact point where we stop making a profit, and that's where they keep it," Schmelter said. "We're not making money, but we're not losing it, either."

Biofuel has been championed as a way to reduce U.S. reliance on foreign oil. But much of the biodiesel produced in South Carolina is shipped to Europe, where stronger currencies have more buying power and suppliers can get higher prices.

Meanwhile, plans for four more plants in South Carolina are on hold while state lawmakers consider a package of more robust incentives.

$4-plus

Biodiesel comes from renewable sources such as chicken fat, soybeans and peanuts. It emits one-fifth as much carbon dioxide as conventional, petroleum-based diesel and gets better mileage. And you can drink the stuff.

Schmelter, a businessman by training and a former biology teacher, cobbled together the North Charleston plant through trial and error for about half what it would have cost to hire a contractor to build it. The plant essentially is a tank farm — tanks for chicken fat, cooling water, chemical additives and the finished product. Three adjacent trailers house a makeshift lab, bathrooms and offices. The place whirs and clangs like the nearby MeadWestvaco Corp. paper mill, but it smells like a cafe.

"It's basically like a thick chicken soup," Schmelter said of the main ingredient. " 'Everything but the cackle' is what they tell me."

The process is relatively simple. For every 100 gallons of chicken fat, workers add 10 gallons of methanol, a type of alcohol used as a catalyst to make the fat more combustible. After mixing, heating and filtering, they are left with 100 gallons of biofuel and 10 gallons of glycerin, which can be used in a variety of products, including soap, toothpaste and animal feed.

Every week, about 1,000 gallons of Schmelter's fuel is poured into cars just down the road at the Fox Music store, where OM Fuels LLC has set up the only retail biodiesel pump in the Charleston area. The cost last week: $4.12 per gallon, roughly the same as a gallon of conventional diesel.

OM Fuels said it isn't making money on biodiesel, either. Chief Executive Charles Robert Adams said the green fuel is tightly tied to commodities markets, where restless traders push prices through volatile swings and surges.

"It's just gambling," Adams said of the market action. "They don't add one iota of value to the product going to the public."

When the OM Fuels facility started pumping in December 2006, its product was about 10 cents a gallon cheaper than conventional diesel — for about two weeks. Still, the vanguard pump has steadily drawn customers.

"Most people are willing to pay more for it," Adams said. "This country is going to blow $800 billion this year on imported oil. We can't continue to do that."

Renewable but finite

There are 170 plants making biodiesel in the United States, 65 of which cranked up in the past year. In 2007, those plants cranked out 500 million gallons of fuel compared with 20 million in 2003.

The burgeoning industry is particularly robust in South Carolina, where three plants, including Southeast BioDiesel, produced almost 239,00 gallons of the fuel last year.

The growth, however, has been costly. The price of soybean oil, the main ingredient in most U.S. biodiesel, has risen faster recently than that of crude oil, almost tripling in five years. The prices of alternatives such as chicken fat and canola oil have surged in lockstep. And yellow grease — cooking oil collected from restaurants and food companies — increasingly is in short supply.

"Our feed stock is basically tied to light, sweet crude right now," said Southeast BioDiesel lab technician Tom Gion.

Some biodiesel makers are scaling back operations, according to Amber Pearson, spokeswoman for the National Biodiesel Board, a trade group composed mainly of biofuel producers and farmers.

There are 57 biodiesel plants under construction, roughly 12 percent less than there were a year ago, according to the Missouri-based group, which was founded in 1992 by soybean interests.

"It's just a strange time for feedstock prices right now," Pearson said. "Some of the producers are not as concerned with profit as just getting by right now. ... As with any industry, what goes up, must go down — we hope."

The nation's biodiesel engine is idling on government subsidies and exports. The federal government offers $1 per gallon in tax credits to biodiesel blenders, and most states offer additional incentives. South Carolina gives tax credits of up to 30 cents per gallon produced and up to 25 percent of the cost of a new plant. On the retail side, stations can get a tax break amounting to 25 cents for every gallon of biodiesel pumped.

Lawmakers also considered biodieselmakers in drafting the farm bill that passed last week. It includes $300 million to offset surging feedstock prices. President Bush has said he may veto the bill, which he says is fiscally irresponsible.

Still, biodiesel is an increasingly tough sale. Some of the fuel pumping out of North Charleston's Southeast BioDiesel plant goes to the state's fleet of school buses and other vehicles, under a legislative mandate that the government burn alternative fuels when feasible. But about a third of the facility's fuel is siphoned into tankers heading to Europe, where more than half of all cars run on diesel, and the fuel is roughly twice as expensive as in the U.S.

"That's the trend of every biodiesel producer in the state," said Erika Hartwig, the state's renewable energy coordinator. "Even the feedstocks are leaving the country, which was news to me until recently."

Alternative alternatives

For now, Southeast BioDiesel is coasting, trying to get as far as it can on a tiny profit margin. To pay the bills, Schmelter relies on two other factories that he owns, which make chemicals to purify water.

The so-called silver bullets of the biodiesel industry — fast-growing fuel sources such as algae and rapeseed, the source of canola oil — are still at least a few years from being grown and harvested en masse.

Plans for at least four other plants — facilities that would make South Carolina the nation's No. 3 biodiesel producer — are on hold while lawmakers consider a plan to extend and boost the industry's incentives. Hartwig of the Energy Office said the legislation has been driven in part by biodiesel exports; politicians who push for energy independence would like to keep the alternative fuel pipeline within the borders of the nation, if not the state.

"Everybody can see that this is potentially temporary," Hartwig explained. "And we'd rather see these companies operating rather than shutting down entirely."

Meanwhile, Schmelter spends his days hunting for cheaper chicken fat and alternative ingredients such as beef tallow. And an empty rectangle of land sits next to his North Charleston factory, a site his company has snapped up for a second plant.

Reach Kyle Stock at 937-5763 or kstock@postandcourier.com.