Case Study: Renewable Fuels - Helping an energy company navigate agricultural markets

Written By Henry Walsh

Working with one of APAC largest fuels and energy distributors, GSX, advised the company on how incorporate agricultural based feedstocks into their plans for a renewable fuels plant in Australia

Executive Summary

Ampol announced in March 2023 that it had entered into a MOU with ENEOS Japan, to assess the feasibility of building a renewable fuels plant on the East Coast of Australia. Press release. The main fuels to be produced are Sustainable Aviation Fuel (SAF) and Renewable Diesel (RD). In Australia, the main feedstocks are tallow (animal fat), used cooking oil (UCO) and Canola Oil.

There are various sources of imported feedstocks such as Palm Oil Effluent (POME) and Palm Oil itself. However, these were not favoured due to environmental and perception risks.

Ampol needed to know how to approach these feedstock markets and the drivers of price across the grains and oilseeds complex.

As a result, Ampol understood the various markets, available feedstocks, procurement and trading methodologies and the various strategic approaches to entering the market.

Since then it has signed another MOU with GrainCorp, to outsource its feedstock trading capability.

Background

Ampol, in partnership with ENEOS, is undertaking a feasibility study on building an advanced biofuels facility up to 500MLpa (product basis) capacity at Ampol’s Lytton refinery in Brisbane with a focus on HEFA. As part of this study, Ampol and ENEOS are working through various aspects of building the business case, including assessment of likely feedstock procurement capability, technology/plant configurations at the refinery, competitive landscape, financial modelling etc. As feedstock supply security is identified as a primary risk to the project, we are seeking to form a feedstock procurement strategy in this phase to properly size plant capacity and deeply understand project risk and direction for the next phase of work.

Part 1: Technical and Market Assessment

Technical and market assessment of HEFA feedstocks, including domestic:

  • Tallow

  • Used cooking oil

  • Canola oil

  • Cottonseed oil

  • Sunflower oil

  • Safflower oil

  • Grease trap waste

  • Novel crops

  • And other domestic and imported feedstocks

GSX provided feedback on the work done to date by Ampol and other parties and provided further insights around

  1. Feedstocks available, production volumes, current domestic and export use

  2. Pricing fundamentals for each feedstock, what sets floor/ceiling, alternate uses

  3. Sustainability credentials for each feedstock; qualification in overseas jurisdictions for credits/incentives

  4. Market structure – long list of all participants, market share, competitive landscape

  5. Production risks – seasonality, quality variability, future production trends

Part 2: Feedstock Ranking

Develop criteria for feedstock ranking and determine preferred feedstock targets

GSX was engaged to:

  1. Define list of desirable feedstocks

  2. Rank according to sustainability, availability, and price stability and other criteria as provided by Ampol

  3. Devise a consistent method of ranking that can be scaled for domestic and as well as imported feedstocks

Part 3 Strategy Development

Develop a feedstock procurement strategy across various dimensions. These would include:

  1. Ability and scale to direct source feedstocks within Australia

  2. Ability procure feedstocks directly from the import market

  3. Identify strategic industry players within the domestic market to secure long term supply agreements

  4. Explore opportunities for Merger, Acquisitions or Co-investment in a feedstock trading vehicle

  5. Evaluate alternative pathways to scale the procurement and trading of feedstocks for an estimated 500ktpa greenfield processing facility in 2027/28

  6. Assess the impact of facility on domestic markets and how to ensure security of supply domestically

  7. Review current and potential future government policy that may impact feedstock security

  8. Market risk management strategies across physical basis, physical flat price and relative derivative strategies for hedging

  9. Incorporate sustainability strategies into the feedstock sourcing requirements to improve carbon intensity scores

Solution and Implementation

Outcomes

  1. GSX provided a complete domestic and import landscape of availability feedstocks.

  2. From this perspective of availability, determined a ranking methodology that took into account various conflicting objective

  3. GSX provided a comprehensive strategy outlining the following:

    • The recommended methods of procurement for each feedstock for the short term and Ampol’s longer term ambitions

    • Provide a list of recommended third parties to partner with up and downstream. These parties could include companies that are:

      1. Potential acquisitions or mergers

      2. Co-investors

      3. Joint venture partners

      4. Other suitable long term arrangement that meets Ampol’s criteria

    • Developed a trading and hedging strategy that met with Ampol’s risk policies and frameworks

    • Ensure the strategy is consistent with Ampol’s broader sustainability targets

Results and Impact

Market Analysis

  1. The client could now model feedstock pricing, correlation and volatility across every feedstock in each major market and commodity type

  2. Supply and demand models for each were provided to allow them to forecast possible risks to supply in the future

  3. The various pricing mechanisms available and the degree of sophistication of each market and the participants within it

  4. Provided various modelled scenarios to identify the various business models available and trade-offs of each

Education

  1. Ampol had a thorough understanding of agricultural commodity markets and the various drivers of price

  2. How to incorporate this analysis into today’s energy markets and see the similarities and differences between the two

  3. An appreciation for the risk and rewards of establishing a new trading enterprise, and how to ensure the choice you make fits from a cultural perspective

Lessons Learned

  • Large corporations are busy and time poor. Simplify alternatives as much as possible

  • Listen to the various stakeholders about the challenges they face

  • See where solutions can be provided that fit within the framework of a large organisation

  • Change is always hard within a large business, so where possible make decisions that provide an option for a change of mind. In building a new business, mistakes will be made, so it is how you learn and incorporate those lessons going forward

  • Do not let perfection get in the way of progress

Future Opportunities

  • Renewable fuels is going to become a larger industry within Australia due to the lack of realistic alternatives

  • Within Australia, there is a wonderful opportunity to be seized to be a leader in renewable fuels and the feedstocks that provide them

  • We see plenty of opportunities as the worlds of agriculture and energy become more intertwined.

If you are looking at ways for your firm to become more involved in renewable fuels or seeking a better understanding of the various commodity markets, please reach out.

Henry Walsh
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