A Dialogue with Thomas Hicks,Deputy Assistant Secretary of the Navy for Energy

INDUSTRIAL BIOTECHNOLOGY: The US Navy recently organized an Industry Roundtable to discuss advanced drop-in biofuels efforts from the points-of-view of the Departments of Agriculture (USDA), Energy (DOE), Navy (DON), and Transportation, and the Environmental Protection Agency (EPA) and Air Force. Can you please highlight some of the main topics discussed and conclusions that arose from those discussions?

TOM HICKS: The Industry Roundtable that took place on May 18^th, focusing on the Advanced Drop-in Biofuels Initiative, was an effort primarily between the USDA, DOE, and the DON in recognition of the Memorandum of Understanding that our service secretary signed in June 2011 seeking to work together to accelerate the advanced alternative fuels market in this country. The Roundtable provided an opportunity for a dialogue among representatives of the entire value chain, for a substantive conversation about the activities taking place in the government and the challenges faced by industry in meeting those objectives, and to bring together the experts in industry to discuss those topics.

More than 300 people signed up to participate, and we had a very good dialogue. USDA contributed its perspectives on feedstock, and DOE talked about technology maturity and some of its own feedstock analysis studies. We also heard from the people that run the Defense Production Act program—under which the three agencies aim to direct their efforts—with a general overview of how that process works. This is not a process generally familiar to this industry. Whereas it has been used in many other industries, whether for producing steel, aluminum, titanium, or radio-hardened electronics, for example, it is a relatively new application for an industry that may be more familiar with more typical types of grants and loan guarantees. This program offers a completely different approach and can have a big impact on alternative fuels in this country.

We also heard some very timely information from the EPA related to its Renewable Fuel Standards 2 (RFS2), and from the DOD [Department of Defense], and in particular the Navy and the Air Force testing and certification programs. It is important for the industry to understand what we have tested and certified to date in terms of alternative fuels and what plans we have going forward. Additionally, we heard from the Department of Transportation, and specifically the Federal Aviation Administration (FAA), which is leading an effort to create a compliance path for meeting the Energy Independence and Security Act Section 526, which deals with the greenhouse gas emissions (GHGs) associated with alternative fuels.

IND BIOTECH: Were there clearly defined areas of consensus as well as points on which the participants differed in their viewpoints with regard to the current status and future directions for drop-in biofuels R&D, testing, and deployment?

TOM HICKS: In terms of areas of consensus, we definitely heard a need for long-term contracting. Whether that would be for 5, 10, or 15 years was an area of some debate. But, as we have heard from industry over the past 18 months, industry needs long-term contracts with the federal government, and specifically the DOD, because these would give them a bankable project with a credible partner. They would then be better positioned to acquire the financing and terms that they need to get the projects developed.

We specifically asked the question of what industry considers to be commercial scale in terms of production, because that is the area we are looking to support. Is commercial scale considered to be 2 million gallons/year, 20 million gallons/year, or somewhere in between? That is a very valid and open question and there was little consensus. There was a range of opinions that seemed to vary depending on the capabilities of each company. We can now use that information as we create a request for proposals that will go out to industry.

In the sidebar discussions I felt that there was a great deal of appreciation expressed for the government bringing together the various parties for this discussion–the feedstock expertise that resides within the USDA, the technology expertise that resides in DOE, along with the Navy as the customer–and doing so in a way that was not linked to a grant or loan guarantee. This was seen as the way forward to help begin the development of the commercial scale advanced drop-in biofuels market in the United States.

IND BIOTECH: Were current gaps and challenges identified and suggestions proposed as to how to overcome them?

TOM HICKS: There was interest in evaluating as many of the different feedstocks and processes as quickly as we can. Although both the Navy and the Air Force have some fiscal and physical constraints that limit our ability to conduct those tests, we have a plan going forward to test different types of feedstocks and processes. The Navy, for example, will be looking at alcohol to jet fuel, and maybe pyrolysis oils after that, doing all of the appropriate testing and certification. This mirrors what is taking place with the testing procedures within ASTM [American Society for Testing and Materials] International, which will be necessary for those fuels to meet military specifications (MIL-SPEC) so we can begin use. We are not satisfied with looking only at the fuels we have studied to date and are committed to looking at a full range of fuels. Support for this continued commitment is one of the things that came out of the Roundtable discussions.

IND BIOTECH: Are you pursuing increasing collaboration with the aviation industry in the development and testing of advanced biofuels, or do the requirements for military versus commercial jet fuels differ too greatly for that to be useful?

TOM HICKS: The fuel requirements are somewhat different, especially for the Navy and particularly with the F-76 that we use for the ships. In terms of aviation fuel, we use JP-5,and the closest analog that the DOD purchases is JP-8. The Navy uses a little bit of JP-8, but the main difference for the Navy is that we have to be able to use these fuels aboard a carrier, which has two main implications. First, the fuel has to have a high degree of insolubility with water because we use the fuel along with seawater as ballast in the carrier; and second, the fuel has to have a higher flashpoint to minimize its flammability.

We are continuing to increase our collaboration with industry; for example, we are serving as an advisor to the recently announced Midwest Aviation Sustainable Biofuels initiative (MASBI), which includes a number of airlines. The USDA has its Farm-to-Fly Initiative; and DLA [Defense Logistics Agency] Energy, through whom we buy all of our fuel, has an ongoing partnership with Airlines for America (A4A), the aviation industry group that includes sharing of information. To the extent that we share common engines on occasion, for example, we share information with the manufacturers so they can share it with their other commercial platforms.

IND BIOTECH: Last month, the White House released President Obama's "National Bioeconomy Blueprint" that articulates the importance of advanced biotechnology for securing the country's energy and economic future. How is the US Navy's biofuels deployment effort synergistic with the Blueprint?

TOM HICKS: The Advanced Drop-in Biofuels Initiative was developed in response to the federal government's earlier “Blueprint for a Secure Energy Future,” which was announced in March 2011 by the President. While the partnership between the USDA, DOE, and the Navy was a direct result of that initial Blueprint, it is also a shining example of the way that federal agencies can come together to drive the development of, in this case, advanced biofuels, and also a perfect example of an effort that is synergistic with the objectives of the “National Bioeconomy Blueprint.”

IND BIOTECH: The US Navy has sought to expand domestic production of high-performance biofuels by intervening in the market through fuel procurement. This "market pull" is important for getting bricks and steel in place for commercial development, but do you expect this to spur technological innovation for advanced biofuels?

TOM HICKS: I think our emphasis on procurement, testing, and certification will certainly spur technological innovation, as well as scale. By providing that demand signal; bringing the credibility of the DOD, and specifically the Navy; and by showing our interest and capability for using these fuels, we can really help spur scale within the industry. With regard to technological innovation, the industry sees that the DOD is interested in these fuels, and this has and will continue to bring a lot of attention into this space. I think we will see a lot of innovation across the value chain. This innovation will encompass increased yields through improvements to the processes used in production. The combination of innovation of the feedstocks and in technologies used in processing would be highly exportable and valuable, and highly sought after not just in the US but also throughout the world. That is good news for a globally deployed fleet. It could give us the flexibility to purchase alternative fuels wherever our fleets might be, at the scale needed and at a competitive price, without any concerns of sacrifice to our mission or our performance.

If we can drive many of the feedstock process combinations that are out there today to commercial scale, we will begin to see the economic factors work themselves out. From the Navy's perspective, we have been able to purchase testing and certification quantities that have been relatively small. However, because we have not yet completed all of the testing and certification, we have had to use a temporary redundant infrastructure— storage tanks or storage trucks, for example. Going forward, these ready-for-use, drop-in fuels will fit into our existing infrastructure. When we can get to that scale, we are convinced that we can get to a competitive price point that will allow us to purchase those alternative fuel blends wherever and whenever they are available.

IND BIOTECH: Some assessments of the country's current and near-term energy scenarios suggest that the US is in a renaissance period in oil and gas production that is likely to stabilize our domestic energy future for the next 25 years. Given this situation, is there still a need for the US Navy to intervene in the development and deployment of next generation biofuels?

TOM HICKS: In a very broad perspective, the Navy has been at the forefront of the energy revolution for the past 230+ years, whether going from sail to coal, or coal to oil, and then adding nuclear. We think alternative fuels represent the next step. When you boil it down, this is all about choices and being able to provide the combatant commanders and the Navy and Marine Corps with choices that will be competitively priced, available in the quantities needed, and meet the MIL-SPECS to power fleets. We think there are advantages, including national security benefits, to being able to procure our fuel from within the United States and from our allies around the world.

As it relates to our domestic production of oil or gas, there is no question that global demand for fuel is increasing. While US demand for petroleum over the past 30 years has been relatively flat—with only a very slight increase—if you look at other locations, notably the two fastest growing economies in the world, China and India, you will see that their demand has increased dramatically over the past 30 years, and there is no indication that it is leveling off. This suggests that the price for fuel will be tied to this continuing increase in global demand.

Another factor that may be less appreciated is last year's Arab Spring and its implications for global fuel prices. We know many of the oil-producing countries saw the unrest that took place and put various measures in place, including initiating a wide range of new social programs and expanding existing ones. We heard, for example, from the Saudi Arabian minister, who said that $100/barrel was a fair price for oil. That was an interesting signal from a major OPEC [Organization of the Petroleum Exporting Countries] producer, indicating that this was a price level with which they would be comfortable. There is still a lot of sorting out to take place, but I think there will be a lot of pressure in those countries to keep prices high so these types of social programs can continue. Those costs will have to be borne by all of the consumers in the petroleum market.

Lastly, although we can produce a lot more fuel in the US than we currently do, the impact of increased production on fuel price will be negligible to nil. Fuel is a global commodity and its price is set on a global market, and no one change here or there will have a great impact. Additionally, a lot of the petroleum we are able to find in the US at present is only valuable at a certain price point because it is more difficult to access. Accessing these fuel reserves will require new technologies and have additional cost implications. It is not likely that we will find new underground reserves that are easy to access. Alternative fuels provide an option.

Part of what is getting lost in some of the discussions on Capitol Hill is that our energy efforts are only about advancing an environmental agenda. This is not about an environmental agenda, but about the Navy's efforts to enhance our combat capabilities, energy security, and national security. Many of the blends we have seen have GHG emissions that are 50% lower than their conventional petroleum-based counterparts. That is great, but we still need the fuels to be at the right price points and quantities, and that is our focus.

IND BIOTECH: The Senate Armed Services Committee recently voted to impose severe restrictions on the use of DOD funds for biofuels. In leading this effort, Senators McCain and Inhofe stated that the Navy should be building planes and ships, not investing in biofuels. What is the Navy's perspective on this?

TOM HICKS: We see alternative fuels as being key to our future energy and national security. It is early in the legislative process. We have a lot of strong supporters in Congress that understand that all of the energy initiatives that the Navy and DOD are pursuing are intended to increase our war-fighting capability and our energy security.

IND BIOTECH: How does the Armed Services Committee's action affect the Navy's plans for biofuels?

TOM HICKS: In terms of the potential impact, they should not affect the Rim of the Pacific (RIMPAC) events that include a two-day exercise in which a strike group will operate on alternative fuels. Those events will send a signal both internally and externally. The internal signal is that we are comfortable, capable, and able to use these alternative fuels in all of our platforms and have 100% confidence that we can do so with no challenges, in the same way we have seen in our more controlled testing to date. The RIMPAC exercises will be the first time we will be testing these fuels and these platforms in something other than a very controlled environment and, moreover, in an environment as important as RIMPAC, which involves 22 nations.

Externally, the signal is about demonstrating our interest and capabilities both to the marketplace—which we hope will heed this and move ahead to get the financing it needs to pursue the innovations and business plans required to produce these fuels in the quantities and at the price points we need—and to the rest of the world that we are serious about alternative fuels.

The longer-term impact will depend on how the current events play out. We need to keep the discussion focused on energy security, what we will gain from these efforts, and what the challenges are to the status quo. One example of this last point relates to the fuel volatility we have seen this past year, which had to do with the whims of the market and global political unrest and resulted in a billion-dollar bill to all of the Armed Services at the beginning of fiscal-year 2012. We pay for that in several ways: we fly less, steam less, train less, move needed programs to future years, sustain our facilities less, and make other difficult choices. Those are examples of what maintaining the status quo can cost. In an era in which the demand for petroleum is increasing among the world's two fastest growing economies, it is likely that the volatility we have seen will continue to increase, on top of an increase in fuel prices. Those factors taken together will provide many challenges to the US Armed Services.

IND BIOTECH: Other critics have questioned the Navy's investment given the cost of military biofuels today. What is the Navy's perspective on these arguments?

TOM HICKS: It is interesting to note that the one thing critics want to protect is fuels for testing and certification, and those are the very fuels that by their nature are more cost-prohibitive than conventional fuels. Because we are buying them in small quantities, and because forgoing the benefits of the economics of scale we require redundant infrastructure in terms of storage tanks, fuels for testing and certification necessarily cost more. But to be very clear, our intent is that these fuels will ultimately be cost-competitive with petroleum when we buy them in operational quantities. That is what we are working toward and that is what this cooperative effort with the USDA, DOE, and the Navy is all about—driving the market there as quickly as we can so we have access to competitively priced drop-in fuels in the US and around the world.

It is short-sighted to focus only on fuels used for testing and certification. We feel the market is poised to go to commercial scale. We do not need to continue to do R&D on these fuels. We are at the cusp of commercialization; now is the time for action, and to prepare to purchase these fuels when they are competitively priced.

IND BIOTECH: A recent report from the RAND Corporation was critical of the Navy's role in promoting the development of alternative fuels. How would you respond to the overall conclusions presented in the report?

TOM HICKS: The RAND report contains little new information and mostly references older analyses done by the author as it relates to alternative fuels. In particular, one of the underlying premises suggests that the military should become involved in partnerships—partnerships that could very well lead to military entanglements with some countries that are among the most dangerous places in the world today—as a way to procure more conventional sources of petroleum. The idea of spending more DOD resources, more fuel, and putting more sailors and Marines at risk to gain access to fuel from countries that have ongoing or the high potential for political unrest or have expressed outright hostility toward the US government seems like a challenging position to put forward and one we do not agree with.

IND BIOTECH: How can the "Industrial Biotechnology" community help the US Navy achieve its goals relative to advanced biofuels development?

TOM HICKS: We would encourage the industrial biotechnology community to continue to do what they are doing to innovate, develop these projects, and believe that what they are doing is the right thing. We are convinced that we need these choices. Additionally, they can continue to make their voices heard whenever possible. The Navy is not in a position to talk about the value of exporting technology or jobs, but to the extent that there is positive value in these and related issues, it is incumbent on the industry to talk about them in credible and meaningful ways. That information can have an important impact on the Hill and in other areas, especially if presented as what the industry is capable of delivering as a whole and the value of that contribution, not only on a company-by-company basis. The DOD can then talk about the implications of that activity as it relates to energy security and national security.