Tyson ConocoPhillips Venture in Jeopardy
Last updated Friday, September 26, 2008 4:59 PM CDT in Business
By Kim Souza
THE MORNING NEWS
SPRINGDALE -- Meat giant Tyson Foods Inc. and energy giant ConocoPhillips saw their renewable diesel venture go up in smoke this week as the U.S. Senate approved legislation that cuts the fuel tax credit in half, putting the project in jeopardy.
"The most recent version of the legislation we've seen reduces the tax credit to 50 cents from $1. We believe such a measure will only serve to limit the expansion and availability of alternative fuels and will hurt the ability of livestock farmers and ranchers to participate in the renewable energy business," Tyson Foods spokesman Gary Mickelson, said in an e-mail.
Tyson said without the current $1-per-gallon credit the venture won't be economically viable.
The unlikely partners teamed up in April 2007 to use the ConocoPhillips' existing refineries to produce renewable diesel fuel from beef tallow -- animal fat -- provided by Tyson Foods.
At the time the venture was announced both players were adamant that the $1-per-gallon federal tax credit allowable for blended renewable diesel was crucial for the venture going forward.
Both sides lobbied hard to ensure the credit stayed in place last year, according to Farha Aslam, analyst with Stephens Inc. She lauded Tyson Foods for establishing a road map other food processors might want to follow. (Stephens Inc. conducts investment banking services for Tyson Foods and is compensated accordingly.)
In April 2007, J.P. Morgan analysts said the venture would likely benefit Tyson Foods' stock by $2 per share by fiscal 2009, if fully operational. At that time Tyson stock was trading at $20.70 per share. On Friday, Tyson shares traded roughly 38 percent lower than when the deal was announced. Shares of Tyson Foods (NYSE:TSN) closed at $12.69, down 41 cents on the day.
Analysts said the deal was especially beneficial to Tyson Foods, because it was asked to put up very little in terms of capital, while ConocoPhillips pledged to spend $100 million over 5 years.
The venture began production last December. Beef tallow from Tyson's beef processing plant in Amarillo, Texas, is sent to the ConocoPhillips refinery in nearby Borger, Texas, where it is converted into renewable diesel. The initiative is currently producing 300 to 500 barrels per day, Mickelson said.
This year the venture has produced 4 million gallons of diesel fuel. The plan was to ramp up to about 175 million gallons annually if the credits stayed in place, Tyson Foods said.
The venture was criticized from the beginning by certain farm interests who claimed the tax credit should not go to major oil companies such as ConocoPhillips.
The latest opposition was raised by soap makers, who claim that government subsidies for biofuels has helped to drive up the price of beef tallow by more than 140 percent since 2006. Beef tallow is a key ingredient used to make soap.
Tyson Foods is no stranger to rising commodity prices, as the company expects to spend an additional $500 million this year for corn and soybeans, which is used in animal feed. Here the company blames federal subsidies supporting the ethanol mandate largely for commodity inflation.
"The nation needs a diverse base of new energy sources. That's why it makes sense for the government to give emerging energy technologies and processes equal treatment," Mickelson said.
Tyson Foods also argues that the renewable diesel it's producing burns cleaner than conventional diesel and is helping supplement the nation's traditional diesel supply. Another major benefit is that it can be transported directly through existing pipelines to distribution terminals.
Currently, biodiesel must be trucked to its distribution point. In addition, unlike other biofuels such as biodiesel or ethanol, the renewable diesel doesn't use a food-based source.
As lawmakers work through revisions on the pending legislation, unless the $1 credit is extended, it will expire at year-end, possibly snuffing out the Tyson-ConocoPhillips venture.
Tyson Foods' renewable fuel venture with Tulsa-based Syntroleum Corporation is not in jeopardy of losing its federal tax credit under the pending legislation. The company plans to break ground on its first facility in Geismar, La., in the next couple of weeks.
Reader Comments (No comments posted.)
The following comments are provided by readers and are the sole responsibility of their authors. The Morning News does not review comments before their publication, nor do we guarantee their accuracy. By publishing a comment here you agree to abide by our comment policy. If you see a comment that violates our policy, please notify the web editor.
Not already registered?
