Pacific Ethanol's Troubles Signal More Bankruptcies to Come

Pacific Ethanol joined last week a growing list of biofuel producers hurt by the trifecta of low gasoline prices, higher corn and energy costs and the global credit crunch.

The Sacramento-based company announced it had run out of cash, defaulted on $250 million of loans and faces bankruptcy if it can’t renegotiate or find more additional financing. The maker of corn-based ethanol essentially has three weeks to make something happen. So, chances are Pacific Ethanol, which has already closed three of its five plants, will file for bankruptcy.

That follows on the heels of biodiesel refiner Nova Biosource Fuels, which filed for bankruptcy March 30. There are dozens more that have delayed construction, closed plants or filed for bankruptcy in the past year including high-profile VeraSun Energy, the ethanol maker that lost huge amounts of money when it hedged corn prices. For a full list, go to Earth2Tech’s nifty biofuels deathwatch map that tracks plant closures across the country.

The negative momentum for ethanol producers has been picking up speed as of late, what with the continued economic recession, low gas prices and recently released studies critical of corn-based ethanol. So, who will be next to shutter its plants and file for bankruptcy?

Aventine Renewable Energy is the most likely candidate to falter. The Pekin, Ill.-based ethanol producer warned last month it will have to file for bankruptcy if it can’t raise enough cash quickly. The company reported a loss of $47.1 million in 2008, down from a profit of $33.8 million in 2007 - even though it sold a record amount of ethanol. Aventine also closed two plants in the fourth quarter of 2008.

Even with body count piling higher in biofuels industry - especially the corn-based ethanol producers - don’t expect it to die altogether.

For one, there is considerable political will to keep the biofuels’ bus moving along. The Federal Renewable Fuels Standard mandates the transportation fuel industry to produce 36 billion gallons of renewable fueld by 2012. This year, producers will make 11 billion gallons, according to the Renewable Fuels Association.

I expect corn-based ethanol plants, considered a first generation biofuel, to be bought at discount by oil refiners and producers. I’ve wrote about the increasing investment by Big Oil before. Oil refiner Valero has shown other energy giants what bargains are out there. Valero bought seven ethanol plants for $477 million from bankrupt VeraSun, about 30 percent of what it would cost to build from scratch.

Even as first generation biofuels struggle, venture capital is continuing to flow, albeit slower than before, to second-generation biofuel companies. The credit crunch has hurt second-gens a bit, but there is evidence that money — about $96 million in the first quarter — is reaching companies trying to develop advanced biofuels.

And Obama recently nominated Steven Koonin, chief scientist at BP, to the undersecretary of science position. The nomination of Koonin, a physicist who has focused on alternative energy research recently, is a sign of support for cellulosic ethanol.

Of course, it should be noted that cellulosic ethanol is not considered commercially viable yet. As the federal mandate’s deadline approaches oil refiners and producers that have snapped up ethanol plants on the cheap will be well poised to corner the market. So far, Valero is in the best position. The oil refiner bought up VeraSun’s plants for a bargain and will now operate them at “full throttle.” Valero has to meet federal ethanol blend requirements, and this helps them do it more cost effectively. The company also bought plants that can be switched over to cellulosic ethanol production, which will be particularly helpful if it ever becomes cheap enough to produce.