1. Biofuels Industry: Minus Incentives 22 nd Annual EPAC Conference June 24-26, 2012 Billings, MT John M. Urbanchuk Technical Director - Environmental Economics Cardno ENTRIX John.Urbanchuk@cardno.com

2. Who we are  Cardno ENTRIX is a professional environmental consulting company specializing in water resources management, environmental risk management, natural resource economics, natural resources management, and facility permitting & compliance.  Our staff of more than 1,600 includes biologists, chemists, geologists, oceanographers, toxicologists, meteorologists, economists, and environmental, chemical, and civil engineers.  Headquartered in Houston, we have more than 40 offices in the U.S., Canada, Ecuador, Colombia and Peru.

3. Why Biofuels?

4. Crude oil prices remain high. 4 Source: EIA

5. Gasoline and ethanol prices are diverging. As a result price margins continue to favor blending ethanol. Source: Nebraska Ethanol Board. Updated 6/19/12

6. The biofuel policy landscape is changing. We will see if the industry can stand on its own two feet.  Biofuel critics got their wish. The principal Federal tax incentive and secondary tariff expired 12/31/11.  The RFS2 mandate remains in place but is under attack.  Recent EPA approval of E15 is favorable.  Money for flex fuel infrastructure will remain elusive.  Expect increased investment in Brazil and more exports to the U.S. after the Brazilian sugar crop recovers.

7. Fundamentals for global petroleum growth favor biofuels. Will support expansion of export market. BrazilRussiaIndiaChina Cur Pop (Mil)2011391,1571,330 2000 Pop (Mil)2231321,3261,384 GDP Per Cap$9,217$14,907$2,966$6,237 Vehicle Stock (Mil) 28382051 Per 1,0001923192548 New Vehicle Sales (5-yr) 15%3%16%25% BRIC Characteristics

8. Biggest challenge facing ethanol industry will be demand! Approval for higher blends (than E15)will be necessary to meet RFS2 mandates. Source: EIA 2012 Annual Energy Outlook

9. Biofuel feedstock prices continue to be a challenge. High sugar prices have made Brazilian ethanol unprofitable and oilseed prices are challenging biodiesel. Source: IMF Primary Commodities Database. Updated April 2012

10. Industry profitability has declined sharply reflecting loss of VEETC and large supplies. Ag Marketing Resource Center Iowa State Univ. May 2012; USDA/AMS

11. Production is outpacing domestic use. Exports are a bright area but stocks continue to build. YearProductionImports Domestic UseExports Ending Stocks 19951,3581681,5013492 20001,6221651,74954136 20053,9042124,07262234 201013,2891612,865397753 201113,94813212,8741,193767 11 U.S. Ethanol Supply & Utilization (Million Gallons)

12. Not all is bleak. Two factors working in favor of ethanol profitability are strong co-product and low natural gas prices. Ag Marketing Resource Center Iowa State Univ. May 2012; USDA/AMS

13. Profitability will remain a challenge. Expect profitability to remain under pressure until RIN values increase as inventories are drawn down. J.M. Urbanchuk projection Jan 2012

14. How will we produce the 21 billion gallons of non-corn starch biofuels needed to meet RFS2 targets by 2022?  Biofuels policy is uncertain; budget pressures are likely to continue trumping energy needs.  RFS2 is under attack in the courts and Congress  VEETC and biodiesel tax credit are gone and will not return.  Cellulosic tax credit expires on 12/31/2012.  Feedstock diversity will provide both challenges and opportunities.

15. Another major challenge will be the required rate of expansion and availability of construction infrastructure  Producing 15 billion gallons of corn starch ethanol is no problem. – Currently 212 refineries have nameplate capacity of 14.8 billion gallons with an average capacity of 70 MGY.  Capacity is in place to produce more than1 billion gallons of biomass biodiesel.  Assuming a 50 MGY capacity, as many as 400 new plants will be needed to be built by 2022 to meet RFS2 target at a capital cost of nearly $90 billion!

16. More challenges...  Commercially successful conversion technology is uncertain and will require consistent R&D investments. Options include:  Biochemical (enzyme fermentation)  Chemical (acid hydrolysis)  Thermochemical gassification or pyrolysis  Algae  Capital availability and financing are uncertain. Money is available but lending standards have tightened significantly.  Permitting and sustainability will be issues for new biorefineries

17. In conclusion …  Biofuels production will expand both in the U.S. and globally but significant challenges remain.  Threats to RFS2  Feedstock and technology choices  Financing and capital availability  Permitting and sustainability  Rate of expansion and availability of resources  Biofuels are a shining star within a declining U.S. manufacturing sector and will continue to provide significant economic, environmental, and energy security benefits.

18. Questions?