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By Robert Rapier on May 21, 2013 with 9 responses

Who Loses from Rising Natural Gas Prices?

Chemicals and Fertilizer Industries

In last week’s post Who Wins from Rising Natural Gas Prices?, I discussed the sectors that would benefit from rising natural gas prices. This week, let’s talk about the potential losers.

Natural gas is an important feedstock for the chemicals and fertilizer industries, so higher prices could pressure those sectors. Oil companies with significant chemical operations could also see this business segment take a hit, but based on ExxonMobil’s (NYSE: XOM) advocacy of liquified natural gas (LNG) exports, it clearly believes the net effect of rising natural gas prices on the company would be positive.

Dow Chemical (NYSE: DOW), on the other hand, has come out strongly against LNG exports because of the potential cost to its own business and that of other heavy users of natural gas. Ironically, last week the Department of Energy granted a permit to a facility called Freeport LNG — in which Dow owns a 15% stake. Dow’s answer to that is that they invested in the facility when it was supposed to be an LNG import facility.

Biofuels Sector

But the risks to the chemicals and fertilizer industries are well-known. What isn’t as well-known is the risk from higher natural gas prices to the biofuels sector. This may be counterintuitive, since renewables like wind and solar power become more competitive as natural gas prices increase.

The difference (unappreciated by many biofuels investors) is that many biofuel technologies rely heavily on natural gas. Corn ethanol production, for instance, is dependent on process steam that is mainly produced from natural gas. And since natural gas is also a key component in fertilizer, higher natural gas prices tend to drive up fertilizer prices and eventually corn prices, subjecting ethanol producers to a double whammy.

But the advanced biofuel industry may be at an even greater risk, since it hasn’t yet become economically competitive.

Take KiOR (Nasdaq: KIOR), for instance. KiOR’s technology starts with a fast pyrolysis process that heats up biomass rapidly to break it down. KiOR uses a common oil refining process called Fluid Catalytic Cracking (FCC) technology for the pyrolysis step in a process they call Biomass Fluid Catalytic Cracking (BFCC). The end product is partially upgraded pyrolysis oil (still very different from crude oil), which is further upgraded to gasoline and diesel blendstocks via another common oil refining process called hydrotreating.

The entire process is heavily dependent on hydrogen from natural gas. Based on my calculations from KiOR’s published statements on wood feedstock inputs (500 bone dry tons) and gasoline, diesel, and fuel oil outputs (13 million gallons per year), as much as half of the energy content of the produced fuel has to be derived from natural gas.

Natural Gas Laundering

As an aside, even though half of the BTUs are derived from natural gas, the fuel that is produced qualifies as 100% renewable fuel, and therefore receives tax credits as 100% renewable fuel. One might think of this as natural gas laundering, where the natural gas “becomes” renewable by being combined with biomass. And because this natural gas is being provided by companies like ExxonMobil, and is still relatively cheap due to the new supplies brought about by the fracking revolution, many advanced biofuel producers are ironically dependent upon both ExxonMobil and the fracking revolution.

Thus, KiOR — and certain other advanced biofuel producers — have a very high sensitivity to natural gas prices. This is another reason to shy away from investing in KiOR, which I have been advising investors to do since 2011. This has proven to be good advice, as the company’s share price has fallen 70 percent since mid-2011.

Meanwhile, KiOR recently announced a net loss of $31.3 million for the first quarter of this year. Several analysts surprisingly (to me) reiterated ratings of “Overweight” or “Outperform” on the company in response to the results, seemingly oblivious to the company’s sensitivity to higher natural gas prices. Even more surprising is that one analyst — Pavel Molchanov from Raymond James – reiterated the “Outperform” rating that he first made on August 15, 2011. How well has KiOR “outperformed” since he made this initial recommendation? The share price has fallen over 60%, and yet he reiterated his “Outperform” rating.

In my opinion many of the analysts covering these advanced biofuel companies don’t have a firm enough grasp on the technology or the risk factors involved. As a result, their clients end up with steep losses.


Thus, if you believe that natural gas prices will retain strength in the coming months, the companies at most risk are chemical companies (including fertilizer manufacturers) and biofuel companies — particularly advanced biofuel companies engaged in hydrotreating.

Link to Original Article: Who Loses from Rising Natural Gas Prices?

By Robert Rapier. You can find me on TwitterLinkedIn, or Facebook.

  1. By thomas398 on May 21, 2013 at 3:41 pm


  2. By Cl1ffClav3n on May 21, 2013 at 8:03 pm

    This article does a service by finally pointing out how questionable are the claims that biofouels (better named “agrifuels”) are “clean,” “green,” and “renewable,” when they depend upon clearly non-renewable inputs such as fossil fuel energy, ammonia fertilizer, and phosphate and potash nutrient minerals. According to current active federal law (16 CFR 260.15), producers claiming a “renewable” product have to disclose the actual fraction of their product that is made with truly renewable inputs, or they must purchase RECs to cover any non-renewable inputs before being legally able to claim their fuels are fully renewable. Why is the EPA not holding biofuels to the law? Why are they not only getting a pass on the law, but getting full credit for RINs instead of only in proportion to their demonstrated renewable fractions?

    • By TimC on May 22, 2013 at 11:26 am

      The U.S. imports about 50% of the anhydrous ammonia, and about 70% of the urea, that we use in agriculture. And yet our politicians tell us that biofuels can break our dependence on foreign oil. I would rather be dependent on imported oil than imported nitrogen. No one in the U.S. wants a new fertilizer plant built in their back yard, so increased production of biofuels will mean increased nitrogen imports.

  3. By ben on May 22, 2013 at 5:09 pm

    These are all relevant and defensible points. In contrast, let’s take a quick look at what the srcibes at Biofuels Digest have to offer on this:

    “KiOR’s unforgivable market sin? Producing drop-in renewable fuels succesfully in it’s new first commercial facility for the first tim ein Q4, as proposed.” Fascinating. I dare say that we may need a new definition of “successful,” if we are to embrace BD’s logic. Then again, some of this may have a lot less to do with logic and much more to do with advocacy. Yes, that might be the unspoken dynamic here, advocacy trying to pass as objectivity. The editor is awfully charitable with his observations.

    I recall an April 22nd article in BD by Malchanov from Raymond James (a firm we know via senior exec at Morgan Keegan & Co.) offering insights on the future of advanced biofuels. Ah, yes, when you’re being wined and dined at member-sponsored conferences over at the Gaylord Resort & Conference Center promoting the industry, it’s only natural for those participating in such events to view things in shall we say a very collegial way. If the analysis turns out a bit “Overweight,” well, that’s attributable to a little too much wine, dinner and dessert. Hey, it’s only business, right.

    KiOR will need the cooperation of the global price of oil and gas to achieve it’s business model. That may be asking a bit much especially in light of the points made by the editor. There is also the issue of government incentives that plays into the calculus in a major way. Sequestration promises to add a good deal to the plot especially given some emerging crosscurrents in the heartland.

    Thanks for keeping it real, RR. That’s a helleva lot more than I can say for the cheerleaders out there masquerading as objective-minded bioenergy observers. The transparency of motives in all this makes such pretensions nearly laughable. Come to think of it, “nearly” is probably a bit too charitable:)


  4. By Donald Campbell on May 23, 2013 at 10:51 am

    It is absurd that natural gas, like that produced from oil fields, would be classified as a renewable. It is no less a CO2-producing carbon-based fuel than ordinary petroleum and is therefore a major contributor to CO2 in our atmosphere and consequently climate change. A recommended means of slowing the rate of atmospheric warming is to place an annually increasing fee on the potential CO2 at the well head, be it oil or gas. A fee can be placed on coal production also. Increased tariffs on fossil-fuel imports would be placed on suppliers who do not take steps to lessen the disastrous effects of climate change (port rebuilding, for example).

    The fee is collected and returned to each household in the nation, thus it is revenue neutral and should not be termed a tax. Legislation has been introduced by U. S. Senators Sanders and Boxer. By making fossil fuels more expensive, alternative sources of power (solar, wind, and water) become more competitive. If we are to lessen the acceleration of climate change, we must take these steps, or face the profoundly dire consequences of a very unbalanced Nature.

  5. By Cl1ffClav3n on May 23, 2013 at 12:17 pm

    @Donald, I agree that NGTL with a bio process fig leaf is still NGTL. Tell that to Coskata, Primus Green Energy, Calysta, and the EPA. (I predict KiOR will soon be looking to retool to NGTL to survive past this summer.) However, if we are going to tax greenhouse gases, then the intellectually honest and effectual thing to do is to tax them all and in direct proportion to their contributions to global warming. Using the IPCC 2007 global warming potentials for long-lived GHGs at their 100-yr values per PAS 2050 and ISO 14067(draft), we should tax a ton of methane at 25 times the rate of CO2, and a ton of nitrous oxide at 298 times the rate of CO2. These two gases today comprise 26% of the global warming contribution and their fraction is growing compared to CO2. Considering that 40% of the methane and 80% of the nitrous oxide are produced by farming, we should expect some dramatic consequences from this policy (especially from the ag lobby). A recent study from MIT just released this month shows that the methane and nitrous oxide increases associated with shifting to agriculture based fuels more than offset the CO2 emission reductions. This study just confirms what seven preceding studies have also found. Unless we are willing to go nuclear in a big way, GHG emissions are going to rise inexorably. Just to stop the 3% annual rise in global GHG emissions would require converting 500 GW of energy a year (half the US electric power plant fleet) to emissionless nuclear power, and to do it with a magic wand that allows no CO2 to be released in the conversion.

  6. By takchess on May 30, 2013 at 5:04 pm
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