A Montana refinery that has been pumping out fossil fuels for years announced this week it has started making a much cleaner product that could become the fastest-growing fuel in the country.
The owner,
Calumet Specialty Products
(ticker: CLMT), says its Montana operation makes it the largest producer of sustainable aviation fuel in North America—a milestone that says more about how small the industry is.
“We’re at the infantile stage of what we think is going to be an explosive growth story,” said Calumet CEO Todd Borgmann in an interview. Calumet says it has a contract to sell 30 million gallons of sustainable jet fuel a year to an unnamed customer.
Investors seem optimistic about the company’s plans, valuing the stock at a significant premium to the average refiner. The stock trades at 16 times its expected 2023 earnings, versus a multiple of 5 times for
Valero
(VLO) and 6 times for
Marathon Petroleum
(MPC).
Calumet uses oils gathered from animal fats and plants and processes them in such a way they become essentially indistinguishable from jet fuel derived from crude oil. Airplanes have flown safely on 100% renewable fuels, though the average flight uses a minuscule amount today, if it uses any at all. The renewable stuff is mixed with fossil fuels at airports.
Sustainable aviation fuel is the avenue that holds the most promise to decarbonize aviation, according to Rhodium Group, an energy research firm. Aviation is responsible for more than 2% of energy-related greenhouse gas emissions, according to the International Energy Agency.
But the cleaner jet fuel made up just 0.1% of aviation fuels in 2021, and has barely improved from that level today. The IEA says it needs to increase to about 10% of aviation fuel by 2030 to reach the agency’s net zero target and avoid some of the more extreme effects of climate change.
New funding and rules should accelerate the industry. The U.S. Inflation Reduction Act subsidizes producers of sustainable aviation fuel with a per-gallon credit. And companies including
United Airlines
(UAL) and
Boeing
(BA) recently launched a $100 million venture capital fund to jump-start the industry. Europe is planning to make airlines use a fuel mix that is made up of 2% biofuels by 2025 and 70% by 2050.
Getting to those levels will take an effort on the scale of the space program. Calumet now makes about 1,000 barrels a day, a tiny drop in the seven million barrel a day global jet fuel market. It expects to get to between 2,000 and 4,000 barrels a day by the summer, and potentially grow sevenfold in the next couple of years. Other companies making sustainable aviation fuel include privately held
World Energy,
which has a plant in Los Angeles, and
Neste
(NTOIY), a Finnish company.
Sustainable fuel also costs much more to make than traditional fuel and airlines are unlikely to be willing to pay extra for it.
“With the airlines, everybody is fuel-price sensitive,” said Megan Boutwell, president of fuel consultant Stillwater Associates. “They don’t want to pay any more, or pass costs onto consumers.”
Federal and state credits can make up the difference, although the value of some of those credits fluctuates in ways that can be hard to predict. Low carbon fuel credits in California, for instance, are down 60% from their 2020 highs. The California credits have been a key incentive for various kinds of renewable fuels, and the decline has forced some producers to rein in expansion plans.
Calumet executives say they are confident they can amass enough credits to earn strong margins from all their renewable products—the company also makes renewable diesel for trucks at the plant. It says it can earn $1.25 to $1.45 per gallon before interest, taxes, depreciation, and amortization.
The refinery is just 100 miles from the Canadian border, and Canada is set to launch a low carbon credit program in July. British Columbia already has one. And in the U.S., Oregon and Washington state have joined California in creating a low carbon credit system. Some states, including Illinois, have their own clean aviation fuel tax breaks.
Calumet also says its location gives it another advantage, because it has access to cheap local sources of animal fats and corn and canola oil that will be the feedstocks for its fuels. Although numerous other players will soon enter the sustainable aviation market, Calumet executives are confident their advantages will make them one of the most profitable producers.
“The geography just sets us apart from everyone else,” Borgmann said. “We sit on top of a boatload of feedstock.”
The meaning of “feedstock” for jet fuel is starting to change. One day, it may have more to do with soybeans and cows than crude.
Write to Avi Salzman at avi.salzman@barrons.com
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