Biofuel Plant Simulation (presentation overview) - SARK7 more

Cellulosic Bioethanol Plant Simulator: Managing Uncertainty in Complex Business Environments Thursday April 15th, 2010 14:15 – 15:00 The Waterloo Scott Mongeau Founder & Lead Consultant Biomatica BV Erasmus Rotterdam School of Management (RSM) - Masters of Financial Management (MFM) alumni - Global Executive OneMBA Mobile: +31 (0)6 42 353 427 E-mail: scott@biomatica.com Web: www.biomatica.com 4/20/2010 TNT Explosion Group! Orientation • Scope – – – – – – Orientation Model composition & logistics Demonstration & analysis Real Options Analysis Next steps Questions / comments • Background – Biomatica BV => Biotech: IT / Finance / RISK Mgmt / Bus Dev – Erasmus RSM Finance internship: European materials conglomerate – Biofuel project: Decision Making via Real Options & simulation Slide 1 Biomatica BV Sustainability: Biofuel Industry • Long standing • Tight margins • New technologies (rapidly changing) • Complex engineering • Intertwined private and public aspect • High risk investment • Management of uncertainty • i.e. ‘extreme’ oil industry projects • ‘Doing good’?! Slide 2 ©2009 USA Today Biomatica BV Cellulosic BioEthanol (CEtOH) • Cellulose – Cell structural component in green plants & algae – Approx 33% of all plant matter – Most common existing organic compound – Indigestible by humans • Ethanol (EtOH) – Blended into petrol (most autos can run on 10% blend) – 5.4% ethanol in global gasoline (2008) – 90% produced between US & Brazil – Increasingly target of mandates & subsidies – Trading market forming – Process similar to beer brewing Slide 3 Biomatica BV CEtOH Production Process Processing/transformation of cellulosic-rich feedstock (i.e.: switchgrass, wood pulp, algae) into simple sugars suitable for subsequent fermentation Slide 4 Biomatica BV Operating Biofuel Plant Context Slide 5 Biomatica BV Managing Uncertainty Uncertainties Categorized 1. Target process(es) to employ • Associated costs? Analysis Process Process Defined 1. NPV analysis – Three processes – Product strategies 2. Product strategy • Associated revenues? 2. Volatility simulation – Monte-Carlo simulation 3. Revenue forecasting • Competition, economic factors? 3. Real Options Analysis – Use range of NPV end-points – Add volatility (probability) – Add key decision points 4. Process cost analysis • Productivity variability? 5. R&D planning / decision making • What decisions, made when? Biomatica BV ViBeS: Virtual Bioethanol Simulator • US NREL research • U of Oklahoma – CEtOH calculator • Iterative development working with industry experts Slide 7 Biomatica BV ViBeS: Virtual Bioethanol-plant Simulator • NPV • Revenues • Expenses (OPEX) Slide 8 • Scale • Transport • PPE (CAPEX) • Depreciation • Financing • Econometrics Biomatica BV ViBeS: Virtual Bioethanol Simulator – Key Figures • PPE cost basis • Nameplate (CAPEX $/gal output) • Feedstock conversion factor (gal/mt) • Feedstock cost • Enzyme and yeast pricing • EtOH market price • Byproduct / subsidy • 90 distributions • 10 year project • Terminal & nonterminal values • Normal, triangle & trend distributions Slide 9 Biomatica BV ViBeS: Virtual Bioethanol Simulator END-TO-END OPTIMIZATION (OPEX & CAPEX) - How do innovations effect process and plant productivity across PPE, efficiency, material / processing costs? -What risk assurance value adds can be wrapped? - What is ‘educated basis’ for investment? Slide 10 Biomatica BV Model Development Process • Interviews of scientists & engineers • Reductive, appreciate complexity & ‘completeness’ • Iterative development (cycles of ‘review and revise’) • Education concerning model mechanics • Tendency to speculate concerning econometrics • Organizational considerations: – Risk appetite – Available corporate functionality (i.e.: advanced hedging) Slide 11 Biomatica BV Monte-Carlo Analysis Example Slide 12 Values x 10^-10 -0.7986 -0.1350 0.5287 1.1923 1.8559 2.5196 Biomatica BV Simulation: Regression Coefficients - Identifying NPV Key Drivers • • • • • Higher EtOH Price: 98% Higher feedstock price: -15% Total production per year (gallons) Euro/$ exchange rate (earlier version) OPEX costs (enzymes, yeasts) to productivity factor -0.2 0.0 0.2 0.4 0.6 0.8 1.0 Biomatica BV Real Options Analysis • Thesis project RSM MFM: ‘Decision Support via Real Options Analysis’ • 95% solid valuation / Monte Carlo • ROA as a decision making process – Management buy-in/trust factor crucial – Requires ‘optionality’ paradigm understanding – Transparency – Agency factors • R&D project management Slide 14 Biomatica BV Example: Biofuel Plant Decision Tree 1. Add management decision points, investments required, and probabilities NPV valuation of each node in scenarios (DCF) Work backwards to probabilistic ‘inherent value’ of management option to expand/contract at each step Choose for highest NPV value at each decision point Revise as probabilities, decisions, and values as time progresses 2. 3. 4. 5. Slide 15 Biomatica BV Precision Tree Implementation Slide 16 Biomatica BV Take-Aways • Clarify ‘known unknowns’ – Between CAPEX & OPEX – Overall profitability – Key CAPEX & OPEX reduction technical targets – Productivity – Value of co-product , subsidy, and recovery • Useful for focusing discussions – Internal decision making – Partnership discussions – Investment analysis – Market dynamics Slide 17 Biomatica BV Conclusions • CEtOH production not clearly profitable yet – Technology developing… – Sensitive to subsidies and mandates – Need to keep major stakeholders ‘dancing’ • Outsized concerns – Oil (EtOH) & feedstock costs – ForEx, interest rate (CoC), inflation – Susceptible to hedging and focused control • Scale – – – – Slide 18 Assumes proportional scalar CAPEX and OPEX… Observable profitability benefit to scale (to 200 mgy) Additional benefits of regional scale: feedstock/EtOH market-making Anecdotal supporting evidence in brewery industry Biomatica BV Recommendations • Where are we today? – Sustainability & ‘shareholder’ business model legacy • Difficulty bootstrapping sustainability projects – Marginal profits – Catch 22: Subsidy  R&D  Investment – Complex relation: CAPEX, OPEX, financing, dep… • Advice – – – – – Credit crisis: insight into systemic risks… Sustainability: reverse engineer & manage systemic risk Bring systemic conversations together Bring agency interests together (megaproject risk mgmt) Organizational need for actionable risk management (RR) Slide 19 Biomatica BV Possible Future Simulation Development • Fermentation • Extended market competition simulation • Real Options Analysis process – R&D project decision making process – Project risk management • Partnership & co-investment analysis • Deeper economic & econometric analysis Slide 20 Biomatica BV Example: Fermentation Simulation Slide 21 Biomatica BV Example: Market Competition Simulation Source: US Department of Energy: http://www1.eere.energy.gov/biomass/integrated_biorefineries.html Biomatica BV Slide 22 References • Dr. Michael Rees, Palisade’s Global Director of Training and Consulting ‘Financial Modelling in Practice’ (John Wiley & Sons, 2008) • Aden, Ruth, Ibsen, Jechura, Neeves, Sheehan, Wallace, Montague, Slayton,&Lukas ‘Lignocellulosic Biomass to Ethanol Process Design and Economics Utilizing Co-Current Dilute Acid Prehydrolysis and Enzymatic Hydrolysis for Corn Stover’ (NREL, 2002) Slide 23 Biomatica BV Slide 24 Biomatica BV