ORTEM Re-Engineering the Oil Supply Chain to Make Biodiesel © 5 April 2005 Copyright © 2005 by Josh Hinerfeld. All rights reserved.

2 What Is Biodiesel? Fatty acid alkyl esters Clean-burning fuel that is derived from renewable energy sources Can use in any diesel engine while leveraging existing petroleum storage and distribution infrastructure Potential to be lowest cost alternative fuel over life cycle of vehicle

3 What Is Biodiesel? Similar engine performance to petroleum diesel Highest BTU content among alternative fuels High cetane and high lubricity Safest fuel to store and handle (non-toxic, high flash point)

4 Biodiesel: A Clean Fuel B100B20 Sulfur Dioxide-100%-20% Air Toxins-60% to -90%-12% to -20% Mutagenicity-80% to -90%-20% Hydrocarbons-56%-11% Particulate Matter-55%-18% Nitrogen Oxides+5.8 %+1.2 % Source: US DOE National Renewable Energy Laboratory Emissions: Biodiesel compared to petroleum diesel

5 How is Biodiesel Produced? Vegetable Oils Methanol + KOH Glycerin Transesterification Crude Glycerin Glycerin Refining Crude Biodiesel (Methyl Ester) Biodiesel Washing Biodiesel MethanolRecovery

6 U.S. Diesel Fuel Market (2003) Total 2003 consumption = 63.9 billion gallons Source: Department of Energy

7 Biodiesel Market ORTEM 2001 Estimate USDA data Three year delay in implementing biodiesel tax incentives stalled market development

8 U.S. #2 Diesel Average Retail Price (Ex-Tax) Source: U.S. DOE 167% increase in retail price since 1994

9 U.S. Glycerin Market Total consumption = 1.5B lbs. Primary markets (1995): Pharm, toothpaste 24% Cosmetics, personal care 19% Food, beverage 17% Tobacco 14%

10 ORTEM’s Strategy Exploit restructuring underway in cooking oil supply chain – get access to lowest cost feedstock Reduce landed cost of finished products by producing close to consumers Partner with bulk oil supplier / collector Co-locate to eliminate re-handling Sell via petroleum distributors

11 Financials: Key Economic Drivers Landed cost of feedstocks – particularly vegetable oil Market price for biodiesel and glycerin Product demand within short (200-mile) radius of plant Government and incentives: availability and caps Capital requirements: fixed and working capital

12 Processing Technology: Key Decision Factors Produce biodiesel to ASTM specification – consistently Produce glycerin that contains <10% moisture and impurities Closed loop system; generate no toxic waste Minimize up front capital cost and ongoing unit operating costs

13 Processing Technology Review Considered three design options: Design Type+’s-’s Small, modular production units Less up front capital Flexible Speed to market ASTM spec biodiesel? Saleable glycerin? Batch biodiesel production Proven technology Product meets spec High capital cost Higher OPEX Not closed-loop Self-contained, continuous flow facility Feedstock flexibility Saleable biodiesel, glycerin and fertilizer Lower OPEX Long lead-time Unproven in USA High capital cost

14 Financials: Key Take-Aways 3 million gallon-a-year facility too small Capital costs too great Not feasible without captive supply of cheap WVO 10 million gallon-a-year facility may be feasible $.50 - $ 1.00/ gallon excise tax credit critical Access to large volumes of WVO feedstock also critical Continuation of USDA subsidy program helpful but not critical Top-10 major metropolitan market will be ideal location to site biodiesel facility once tax credits are implemented

15 Sourcing Strategy Typical McDonald’s restaurant generates roughly 14,560 pounds of waste vegetable oil (“WVO”) a year A MN-based company developed a proprietary system to deliver cooking oil in bulk form to restaurants Company is disintermediating both distributors and rendering companies in the oil supply chain However, the company is not fully exploiting the value of the waste oil it collects How maximize value of this byproduct?

16 Sourcing Strategy $1.28 $.71 $ % %

17 Opportunities and Risks Biodiesel tax incentive effective 1/1/05 $.01 per 1% of biodiesel in a fuel blend using virgin oil $.005 per 1% of biodiesel in a fuel blend using waste oil Big oilseed processors may flood market with biodiesel Petrol prices plummet Soybean oil prices increase Market does not materialize for biodiesel

18 Conclusion Managers must continually evaluate the supply chain for opportunities In “Clock Speed”, Charles Fine suggested asking the following questions: “Which resources in the chain will be in the shortest supply?” Where in the chain will the lion’s share of the money be made in the months and years ahead?” ORETM viewed raw material sourcing as a “strategic weapon” What do you think?