Energy transition is creating M&A opportunities in green fuels and lubricants. Margins can be captured upgrading waste streams to reuse, supplemented by a range of environmental and tax credits to be harvested or traded. Rollup and consolidation opportunities are appearing, but logistics and commodity prices remain headwinds.

“The waste-to-value environmental services sector is open to capital deployment or M&A,” says Effram Kaplan, head of the infrastructure and environmental practice at Brown Gibbons Lang. “There is broad interest in monetizing waste streams.”

Significant demand is forecast for biodiesel and sustainable aviation fuel (SAF), made from waste fats and oils. Domestic SAF production volume was small until two big public refiners added capacity last year. Another PE-backed development is diverting used motor oil from the power and ship-fuel market to re-refine and reuse.

“The new administration will have an effect that might not be obvious,” suggests Kaplan. “Given the view of subsidies in general, there will be challenges for some forms of alternative energy, but others are very viable without subsidies. For example, cement kilns and asphalt plants are buyers of any high-BTU (British Thermal Units) fuels. So certain green fuels will do well.”

Kaplan notes that waste processors — including GFL Environmental; VLS Environmental, owned by I Squared Capital; and Reworld, owned by EQT Group — blend waste oils and fats with high-BTU solid waste, such as from construction and demolition.

“There are evolving opportunities to protect volumes and monetize waste streams,” he adds, “starting with the expansion of services and collection, and deploying processing technologies. That enhances both conservation and margins. Once you sort the stream into hazardous and non-hazardous, solids and liquids, the opportunities become abundant to pursue M&A and consolidation.”

Early in January GFL struck an $8 billion deal to sell its environmental services business to Apollo (NYSE: APO). BGL was among several advisors on the complex transaction.

Specific to biofuels, there is increasing interest, says JP Hanson, global head of oil and gas at Houlihan Lokey (NYSE: HLI), but so far it is still early in terms of ability to demonstrate scale. “We’ve been hit up with proposals to raise capital for brownfield-into-green-fuels developments at about 30 refineries globally, but economic margins and timeframe to generate consistent cash flows still don’t compete with traditional crude refining margins so as to justify full-scale conversion.”

Of all the green fuels and lubricants, SAF has the most promise for broad application and cashflow generation. “It’s still a relatively small scale, fragmented sub-industry but is a growing market with real demand,” says Hanson. “Jet-A production is limited, so the most meaningful way to meet that increase in demand will be with SAF. Ultimately, SAF could end up being as much as 60 percent of aviation fuel volume.”

Hanson notes that strategics “are not getting out of the traditional refining sector, so we do not foresee a big wave of existing refineries to convert or otherwise repurpose to biofuels. In my experience, the backers of biofuel projects that are getting support to scale up are smart engineers, but so far those opportunities are mostly bespoke situations.”

The global demand for Jet-A, the most common type of aviation fuel, is expected to double, roughly from about 330 millions gallons (8 million barrels) per day today to about 630 million gallons a day (15 million barrels) by 2050.

According to the U.S. Energy Information Administration, there were only two small SAF producers this time last year, World Energy in Paramount, Calif. and Montana Renewables in Great Falls.

Last June Phillips 66 (NYSE: PSX) completed the reconfiguration of its Rodeo complex in the San Francisco Bay Area to produce biodiesel and SAF. Valero Energy (NYSE: VLO) and Darling Ingredients (NYSE: DAR) reached completion on new SAF production last October at their Diamond Green Diesel joint-venture in Port Arthur, Texas. Aemetis received a $200 million federal investment last March for its SAF, renewable natural gas, and carbon sequestration projects.

Separately, the Braya Renewable Fuels, backed by Cresta Fund Management, reached 18,000 b/d of biodiesel production at its reconfigured refinery in Newfoundland, Canada. Plans call for an expansion to 40,000 b/d of biodiesel and SAF.

In a public-private collaboration, Blue Tide Environmental recycles used motor oil (UMO) to produce high-quality base oils at its Baytown, Texas facility. It is in the process of starting its hydrotreater starting with an initial capacity of 5,000 barrels a day. Blue Tide is a portfolio company of Tailwater Capital, and is partly owned by Pennzoil Quaker State, a subsidiary of Shell (NYSE: SHEL).

“Our ability to deploy this process internationally is one of the reasons Shell was excited about the platform,” says David Cecere, partner of Tailwater, and board member of Blue Tide. “It is an all-new facility on a brownfield site. Re-refining has been around for many years, and there are well-established processes for collecting UMO and using a hydrotreater to recycle base oils, so there is not any significant technology risk.”

The key, Cecere adds, “is finding a location where there is a large volume of UMO, as well as access to water transportation and storage assets. We have all those at Cedar Bayou, which connects us to the Houston Ship Channel.”

Looking ahead to replicating the Blue Tide model, Cecere says that land and logistics are paramount. “We are looking at where there are large volumes of high-quality UMO being burned, where there is a logistics network, and where there is demand for base oils. It is a low-risk model with attractive economics.”

Some of the attractive economics is due to the low cost of raw materials. The conventional market for UMO has been fuel for ships or power plants, which has high carbon emissions. “That is a terrible outcome for the environment,” says Cecere. “The marginal demand for UMO continues to be for BTU value, so the key for us is to create additional profit margin by detaching UMO from the energy market in favor of the value-added lubricants market, which has the added benefit of reducing carbon emissions by up to 80 percent.”

In addition to that demand pull, there is also a supply push making raw materials more available. “UMO is high in sulfur,” Cecere explains, “and as a result of the International Maritime Organization’s 2020 rules strictly limiting sulfur in marine fuels, demand for UMO and high-sulfur fuel oil has declined so there is excess supply.”