Industry Overview

Biodiesel is a domestic, renewable fuel for use in diesel engines that is derived from natural vegetable oils and animal fats.  Biodiesel contains no petroleum, but it can be used in any concentration with petroleum-based diesel fuel in existing diesel engines with no major modification to the engines.  Biodiesel is produced by a simple process called transesterification, which removes glycerin from the vegetable oil or animal fat.  The process leaves two products – methyl esters (the chemical used for biodiesel) and glycerin.  The primary product that Momentum intends to produce is pure biodiesel, also known as B-100.

Used in conventional diesel engines, studies have shown biodiesel to reduce emissions of total unburned hydrocarbons by as much as 70% and total carbon monoxide and other particulate matter by almost 50%.  The use of biodiesel essentially eliminates sulfur emissions altogether.  The use of biodiesel also significantly reduces health risks associated with petroleum diesel.  The EPA has surveyed the large body of biodiesel emissions studies published over the past several years and averaged the health effects testing results.  Their findings show biodiesel emissions exhibit dramatically decreased levels of polycyclic aromatic hydrocarbons (“PAH”) and nitrated polycyclic aromatic hydrocarbons (“nPAH”), which have been identified as potential cancer causing compounds.  In the health effects testing, PAH compounds were reduced by 75% to 85%, and targeted nPAH compounds were reduced by 90% to 99%.  These reductions in the carcinogens are also realized in blends as low as B-20 (a mixture of 20% biodiesel and 80% petroleum diesel.)  In May 2000, biodiesel became the only alternative fuel in the country that successfully completed the Tier I and Tier II Health Effects testing required under the Clean Air Act. These results clearly demonstrate the significant reductions in most currently regulated emissions that can be achieved by using biodiesel, as well as biodiesel’s non-toxic effect on health.

Biodiesel has several advantages over traditional petroleum-based diesel other than the fact that it is cleaner burning.  Biodiesel has an extremely high flash point, making it safer to transport than petroleum diesel because it takes a higher temperature to flame.  Biodiesel is also easier on diesel engines; increasing engine life with its usage, as well as reducing the odor that petroleum-based diesel produces.  Biodiesel delivers similar torque, horsepower and miles-per-gallon as petroleum-based diesel, with no need to make engine modifications or changes in the fuel handling or delivery system.

The market for biodiesel and alternative fuels is growing at a rapid pace due to continuing increases in petroleum prices, the availability of government subsidies and federal regulations.  In 2002, approximately 15 million gallons of biodiesel were produced in the United States.  Production increased from 25 million gallons in 2003 to 200 million gallons in 2006.  The National Biodiesel Board (“NBB”) has estimated that the number of consumer biodiesel stations rose nearly 50% last year to 200.  The Company believes that biodiesel will be further integrated into the existing petroleum-delivery infrastructure as more terminals begin to carry it.  Terminals currently carrying biodiesel are located in Kansas, Texas, Alabama, Georgia, Minnesota, Indiana, Wisconsin and Iowa.  Recently a major pipeline company announced that it is investing $100 million in a biodiesel storage facility in close proximity to our La Porte plant which reaffirms our views of increasing demand for product in our region

The U.S. Department of Energy (“DOE”) has identified biodiesel as the fastest growing segment of the alternative fuel market.  The DOE has estimated that biodiesel sales could reach approximately $2 billion annually through the use of government incentives; this represents approximately 8% of conventional highway diesel fuel consumption.  Based on current rates of petroleum consumption, the DOE also predicts that demand for petroleum products will outstrip supply around 2037.  The need for the United States to reduce its dependence on petroleum provides unique opportunities for makers of alternative fuels, such as biodiesel.

The biodiesel industry is part of the broader alternative fuel industry.  Alternative fuel is any fuel that can be substituted for traditional gasoline or diesel fuels.  Compressed natural gas, methanol, ethanol, propane, electricity, biodiesel and hydrogen are all federally recognized alternative fuel sources.  While there are vehicles that are currently designed to run on such alternative fuels, biodiesel has the advantage of working with unmodified diesel engines eliminating modification costs that would ultimately be passed on to consumers.

Federal, state, and local governments that operate fleets of diesel trucks continue to be a driver of demand for the biodiesel industry.  The Energy Policy Act requires these fleets to earn alternative fuel vehicle credits, which can be accomplished by purchasing biodiesel.  The NBB estimated that federal fleets have increased usage of biodiesel from approximately 500,000 gallons in 2000 to around 30 million gallons in 2004.  According to the NBB, by May 2004, there were more than 400 major government fleets using biodiesel, including all branches of the United States military, Yellowstone National Park, NASA, several state departments of transportation, major public utility fleets, cities such as Berkeley, California and more than 50 school districts.

The extent of biodiesel’s penetration in these markets is largely a result of the requirements of the Energy Policy Act.  Passed in 1992, that Act requires federal, state and some local fleets to phase in partial use of alternative fuel vehicles by 2006.  Government vehicles can meet the requirements of the Act by using B-20 in their existing diesel engines.  Because B-20 does not require fleets to purchase new equipment, it is the cheapest way to comply with the Act.  An NBB-sponsored survey of operators of 53 fleets representing more than 50,000 diesel-powered vehicles found that 91% of respondents were in favor of using biodiesel.  Forty-five percent of the operators surveyed were currently using biodiesel and among them, B-20 was the fuel of choice.  On March 21, 2007, Cummins, Inc., a major manufacturer of diesel engines approved the use of B-20, a twenty percent biodiesel blend, in their 2002 and later emissions compliant engines.  Management believes these types of endorsement will help drive the demand for Momentum Products.

The Company believes that new “clean diesel” rules promulgated by the Environmental Protection Agency (“EPA”) also have the potential to increase demand for biodiesel.  Starting in 2006, the EPA requires diesel refiners to reduce nitrogen oxide emissions by removing up to 99% of the sulfur content in the fuel.  Reducing sulfur in petroleum-based diesel reduces the fuel’s lubricity.  Biodiesel produced from soybean oil, however, has no sulfur and serves as a good lubricator.  This provides a solution to refiners seeking compliance with the regulations.  In May 2004, the EPA announced that these same rules would apply to diesel for “off-road” diesel vehicles, such as farm and construction equipment, starting in 2007.  Industries affected by the change will include agriculture, construction and mining, all of which rely heavily on larger diesel machinery.