After having invested heavily in alternative energy sources like wind power and solar energy, First Reserve, the leading private equity firm in the world's energy industry, has announced a whopping $300 million investment in alternative fuel. It announced on 6th May that it intends to invest the sum in equity in Osage Bio Energy to fund construction of four ethanol and protein feed production plants in the Southeast.
Osage Bio Energy is headquartered in Glen Allen, Virginia, and was founded in January 2007 by Earle Spruill and Craig Shealy to pursue the development of the United States' first major barley to ethanol production facilities. Osage Bio Energy is the sister company of Osage, Inc., the largest independent distributor of motor-fuel grade ethanol in the Southeast, with current throughput of approximately 100 million gallons per year.
This deal will focus on ethanol produced from barley, instead of the staple corn that yields the major portion of the 9 billion gallons of renewable fuel that the US produces in a year. By 2022, state policy dictates that production must increase to 36 billion gallons annually, but only 15 billion gallons from corn.
Over the past couple of years, First Reserve has avoided opportunities to invest in ethanol produced from corn as the feedstock's rising price has lowered margins at many plants. Corn costs around $5.90 per bushel, while a bushel of barley runs about $2.50. "Barley is cheaper than corn," said Glenn Payne, a director at the equity firm, citing that as the main reason why First Reserve ventured so late in this field.
This is the first biofuel deal for First Reserve, which originally set out to invest roughly 15 per cent of its current $7.8 billion fund in alternative energy, and comes close to a major acquisition of Spain's Gamesa Solar and an undisclosed investment in Kenersys, a new wind energy business in India that will make and sell turbines in Europe and Asia-Pacific. "We're already there," Payne said of the 15 per cent investment target in alternative energy.
"We are extremely excited about this milestone and our partnership with First Reserve. Their commitment confirms the validity of Osage Bio Energy's unique business model and provides us the financial resources, as well as industry expertise, to make our plans a reality," said Craig Shealy, President & CEO of Osage Bio Energy. "First Reserve has unparalleled depth, breadth and experience in the energy industry."
Payne said that this deal ''offers First Reserve the opportunity to build on its existing knowledge and background in the alternative energy sector'' and ''competitive pricing position derived from using a barley-fed plant combined with the lack of ethanol supply to the Southeast, makes Osage Bio Energy an attractive investment''.
The benefits of using barley as raw material are many. First, the lower costs involved owing to cheaper inputs. Second, maize is environmentally superior to corn because it requires less fertilization and prevents nutrient runoff in winter months. Third, the logistics involved are more favorable towards maize. Barley is a winter crop and does not compete for land for food production. It can be grown in the approximately five million acres that remain fallow per year in the Mid-Atlantic and Southeast during the winter months. Also, the use of barley reduces the transportation requirements of moving Midwestern corn and enhances the yield of locally grown summer crops, especially soybeans.
For Osage Bio Energy, using locally grown barley would cut down on costs versus getting corn shipped in from the Midwest. "You're better off producing in the market - you're avoiding transportation costs. You're better off with a lower cost input," said Payne. "And we have a distribution network."
The ethanol producer plans to contract out to grow the barley and use its sister company for distribution. As for the technical difficulties of making ethanol from barley, Osage has negotiated an exclusive agreement with KATZEN International, Inc., one of the leading and oldest privately held process design and technology company in the biofuels industry. The arrangement allows for exclusive use of KATZEN technology capable of producing ethanol from barley within a 200-mile radius of each plant site.
Payne said construction on the first two plants is set to begin over the summer. All four plants, each pumping out 50 to 60 million gallons of ethanol per year, are expected to come online over the next 18 to 24 months. The first of them is to be built at Hopewell, Virginia.