The Navy Biofuel Initiative Under the Defense Production Act
Released: 2012-06-22T00:00:00

Introduction

During the spring of 2011, the Secretaries of Energy, Agriculture, and the Navy entered into a Memorandum of Understanding (MOU) to "assist the development and support of a sustainable commercial biofuels industry." The objective is the "construction or retrofit of multiple domestic commercial or pre-commercial scale advanced drop-in biofuel plants and refineries." The refineries would have the capability to produce advanced biofuels as "drop-in" replacements for petroleum-based fuels. Drop-in fuels would be able to substitute for standard petroleum products without alteration to ship or aircraft engines, meet military specifications at a price competitive with petroleum, be readily accessible at geographically diverse locations, and have no significant impact on the supply of agricultural commodities for the production of food. Through this and other undertakings, the Navy intends to demonstrate that it can reduce its dependence on petroleum-based fuels. In accordance with the MOU, the Navy proposes to use some of the authorities of the Defense Production Act (DPA) of 1950 (50 U.S.C. Appx §2061 et seq.), as amended, to develop a domestic industrial capacity and supply of biofuel.

The Navy plans a feasibility demonstration of drop-in biofuels with a "Green Strike Group" fleet exercise by the end of 2012 composed of nuclear vessels and ships powered in part by biofuel, followed by a 2016 "Great Green Fleet" exercise composed of nuclear ships, and surface combatants and aircraft powered in part by biofuel.

The DPA grants various authorities to the President—subsequently delegated to certain Cabinet Secretaries —that they may use to support the domestic production of alternative energy sources. Congressional actions on the budget requests for MOU funding would help define the parameters by which agencies acting under the DPA may support the domestic development of alternative energy sources as well as how the Navy's support of such sources will evolve.

The current debate in Congress regarding DPA is whether its authority should extend to developing an industrial capacity for biofuel.

To better the understanding of the potential benefits and drawbacks to the Navy the following discussion provides a background on the Navy's fleet, fuel requirements, and fuel spending. The Navy, and later DOD, have undertaken a number of past initiatives for securing its fuel supply, some under the authority of DPA. The Navy successfully transitioned from exclusive reliance on petroleum in 1955 when it commissioned the USS Nautilus , the world's first nuclear-powered submarine. In past hearings on renewing the DPA, interest in the viability of nuclear-powered Navy and a nuclear power industry were part of the debate.

Background on Naval Fuel Supply and Procurement

The Navy currently lists 395 ships in its inventory—36 nuclear powered warships, 50 conventional warships, and the remaining consisting of various auxiliary and civilian operated Military Sealift Command (MSC) ships (of which 14 are oil tankers—"oilers"). Conventional ships consume diesel fuel marine (DFM or NATO equivalent F-76, also referred to as ship's bunker fuel) which has been used in all shipboard propulsion plants (diesel, gas turbine, and steam boiler) since 1975. Naval aircraft consume primarily JP-5 jet fuel (MIL-DTL-5624 U or NATO code F-44) developed for use in military aircraft stationed aboard aircraft carriers where the risk of fire is a great concern, particularly in the confined spaces of the hanger deck. The fuel is kerosene-based, and has a relatively higher flash point (140 "F) than other aviation turbine fuels (commercial Jet A and or military JP-8). JP-5 is also suitable for use as ship turbine fuel.

To date, the Navy has certified the F-18 Super Hornet, the F-18 legacy Hornet, the MV-22 Osprey, and the MH-60S Seahawk to operate on HRJ-5, a 50/50 blend of hydrotreated renewable fuel (HRJ) and conventional JP-5. Hydrotreated refers to the process of cracking vegetable or animal oil through the addition of hydrogen into kerosene-range jet fuel. The process is similar to refining processes for upgrading petroleum.

Department of Defense (DOD) fuel consumption varies from year to year in response to changes in mission and the tempo of operations. In FY2011, DOD consumed 124.3 million barrels of refined petroleum products domestically, and another 96.6 million barrels overseas. In contrast, the United States consumed slightly more than 6 billion barrels of refined petroleum products during calendar year 2011, of which DOD domestic consumption represented roughly 2%. DOD overseas spending on ships' bunker fuel exceeded domestic spending—$2.7 billion for 7.5 million barrels from 73 ports in 50 countries, versus $239 million for 2.4 million barrels from 67 domestic ports.

The Defense Logistics Agency–Energy (DLA-E) purchases fuel for all of DOD's services and agencies, both in the continental United States (CONUS) and outside (OCONUS). In practice, DLA-E typically awards fuel contracts based on the lowest cost to the point of delivery, typically for lengths of one year in a one-step process under the Defense Working Capital Fund (DWCF). It internally transfers (sells) the fuel to its DOD customers with a small markup to cover its operational costs. DOD customers in turn pay DLA-E through their annual appropriations for Operation and Maintenance (O&M). The DWCF permits DLA-E to take advantage of price breaks for large quantity purchases, and in most years provide DOD customers a stabilized price for all products during that fiscal year. DOD has the capability to meet contingency fuel needs through the petroleum war-reserve stock that DLA-E maintains at its Defense Fuel Supply Points throughout the United States, as well as abroad. DOD relies on both NATO partners and alliances with regional partners to supply fuel for overseas operations.

DLA-E authority to procure fuel extends from authority originally granted to the Navy. Under 10 U.S.C. §7229 (Purchase of Fuel), "... the Secretary of the Navy may, in any manner he considers proper, buy the kind of fuel that is best adapted to the purpose for which it is to be used." Section 7229 superseded 34 U.S.C. §580 which had been interpreted as authorizing the Armed Services Petroleum Purchasing Agency to negotiate contracts for the purchase of fuel, not only when acting as a procuring activity for the Navy, but also when filling the consolidated fuel requirements of the armed forces. However, DLA-E now relies on the general procurement authority under 10 U.S.C. §2304 (Contract: competition requirement), since this gives DOD the authority to buy almost any kind of supply or service.

DOD projects that its budget authority and outlay for fuel will decline 3% from the FY2013 base year and remain essentially level through FY2017. For the period FY2008 through FY2010, the Navy consumed about 10.9 million barrels of JP-5 annually. However, over the same FY2008-FY2010 period, Navy fuel spending declined from $4.75 billion to $3.73 billion. In FY2011, DLA-E spent $1.57 billion to purchase 12.6 million barrels of (Navy) JP-5 jet fuel. In 2011, the U.S. government purchases of F-76 military-grade diesel ranged from $2.19 to $2.75 per gallon, and JP-5 jet propellant ranged from $1.55 to $2.87 per gallon. In 2009, DLA awarded small contracts for hydrotreated renewable fuel (HRJ-5 jet fuel) that ranged in price from $66 to $149 per gallon. In late 2011, the Navy was able to purchase biofuel for roughly $26 per gallon in a bulk procurement of 450,000 gallons.

Previous Defense-Related Fuel Programs

Congress has previously found it in the interest of national defense preparedness for the federal government to assure some level of industrial capacity to produce both conventional and synthetic fuels. In the early 20 th century, Congress set aside the (now depleted) Naval Oil Reserves and Oil Shale Reserves. World War II and Korean War concerns over fuel shortages led to congressionally authorized programs for developing synthetic fuels that lead up to authorizing a Synthetic Fuels Corporation during the 1970s Arab oil embargoes. In more recent legislation, Congress has directed DOD to develop a program to accelerate the commercial development of strategic unconventional fuels (from coal, oil shale or tars sands), examine the military utility of alternative and synthetic fuels, and study how to reduce their life-cycle emissions.

Naval Petroleum and Oil Reserves Set Aside

In the Pickett Act of 1910, Congress initially withdrew potential oil-bearing public lands in California and Wyoming as petroleum sources for the use of the Navy. Executive orders later created three Naval Petroleum and Oil Shale Reserves between 1912 and 1927 by setting aside federal lands believed to contain oil as an emergency reserve. In a 1920 naval appropriation bill, Congress gave the Secretary of the Navy the power "to conserve, develop, use and operate the same in his discretion, directly or by contract, lease, or otherwise, and to use, store, exchange, or sell the oil and gas products thereof, and those from all royalty oil from lands in the naval reserves, for the benefit of the United States."

Petroleum Reserve No. 3 in central Wyoming, the site of the infamous Teapot Dome, embroiled the Navy and Interior Department Secretaries in a 1920s scandal over a noncompetitive lease agreement made with an influential oil company executive. The Teapot Dome scandal ended with the indictment of federal officials involved and, more significantly, transformed federal leasing into a process based on open competitive bids. As the national defense needs changed, Congress opened the oil reserves to private production and eventually sold them. Management of the Naval Petroleum Reserves transferred to the Department of Energy (DOE) and of the Naval Oil Shale Reserves to the Department of the Interior (10 U.S.C. §§7420-7439).

Synthetic Liquid Fuels Development

Congress began promoting alternative fuel from coal through the U.S. Synthetic Liquid Fuels Act of 1944. The act intended to aid the execution of World War II and conserve and increase national oil resources by authorizing the Secretary of the Interior to construct, maintain, and operate plants producing synthetic liquid fuel from coal, oil shale, and agricultural and forestry products. The Bureau of Mines received funding for an 11-year demonstration plant program that ended in 1955. During the Korean War, Section 303 of the Defense Production Act of 1950 (Chap. 932, 64 Stat. 978) authorized the President to have liquid fuels processed and refined for government use or resale, and to make improvements to government- or privately-owned facilities engaged in processing and refining liquid fuels when it would aid the national defense.

During the 1970s, DOE directed a synthetic fuels program toward commercializing coal liquefaction, coal gasification, and oil shale technologies. In 1980, Congress amended Section 305 of the Defense Production Act ( P.L. 96-294 , Energy Security Act) to authorize the President's purchase of synthetic fuels for national defense. President Carter then directed the Secretary of Defense to determine the quantity and quality of synthetic fuel needed to meet national defense needs. Congress further amended the Defense Production Act to offer financial assistance in producing synthetic fuel from coal, oil shale, tar sands, and heavy oils by establishing the U.S. Synthetic Fuels Corporation ( P.L. 96-294 , the United States Synthetic Fuels Corporation Act of 1980). The stated goal of the act was reaching a daily synthetic fuels production capacity of 500,000 barrels of oil-equivalent by 1987 and 2 million barrels by 1992.

DOD had become interested in oil shale as an alternative resource for producing quality jet fuel as early as 1951. The Navy and the Naval Petroleum and Oil Shale Reserves Office (NPSRO) started large-scale evaluations of oil shale's suitability for military fuels in the early 1970s, and conducted extensive tests of oil-shale distillates processed into gasoline, JP-4 (a highly volatile military jet fuel reserved for cold weather operations), JP-5 jet fuel, DFM/F-76, and a heavy fuel oil used in military and commercial equipment.

In the late 1970s, the Air Force became interested in evaluating oil shale's suitability for producing JP-4 jet fuel and awarded contracts to develop technology for producing oil shale-derived JP-4 jet fuel. Air Force research may have demonstrated oil shale's unsuitability for making JP-4. At best, oil shale produces mostly middle-range petroleum distillates suitable for upgrading to kerosene and diesel fuel, while JP-4 is closer to lighter, gasoline-naphtha. The Air Force generally phased out JP-4 in the early 1990s in favor of kerosene-based JP-8.

By the mid-1980s, the House began considering a bill to abolish the Synthetic Fuels Corporation with the Synthetic Fuels Fiscal Responsibility Act of 1985 ( H.R. 935 ). In the debate of the bill (H.Rept. 99-196), the Energy and Commerce Committee linked abolishing the Corporation to reducing the federal deficit and viewed purchasing oil for the Strategic Petroleum Reserve as a far more cost effective defense against another oil embargo than subsidizing synthetic fuels. Congressional criticism also focused on conflicts of interest among the Corporation board members, high salaries for staff, lack of interest on the part of private industry, and the possibility of huge subsidies going to profitable oil companies. The minority view noted that as late as 1983, the DOD had certified that it needed synthetic fuel to meet national defense needs. Language rescinding most of the Synthetic Fuels Corporation funding was included in the FY1986 continuing appropriations resolution ( H.J.Res. 465 , P.L. 99-190 ).

Strategic Unconventional Fuels Commercial Development

The Energy Policy Act of 2005 ( P.L. 109-58 , Section 369, Oil Shale, Tar Sand and Other Strategic Unconventional Fuels) directed the Secretary of Energy, in cooperation with the Secretaries of the Interior and Defense, to jointly develop a program to accelerate the commercial development of strategic unconventional fuels, including but not limited to oil shale and tar sands resources within the United States. The act amended Chapter 141 of Title 10, United States Code, by inserting Section 2398a (Procurement of Fuel Derived from Coal, Oil Shale) directing the Secretary of Defense to develop a strategy to use fuel produced, in whole or in part, from coal, oil shale, and tar sands in meeting the fuel requirements of the DOD when the Secretary determines that it is in the national interest. While DOD did not pursue oil shale, it did pursue development of coal-to-liquids technology. This pursuit ended when Congress enacted the Energy Independence and Security Act of 2007 ( P.L. 110-140 ), in which Section 526 (Procurement and Acquisition of Alternative Fuels) effectively proscribed any federal effort to purchase alternative or synthetic fuels with lifecycle greenhouse emissions that exceeded emissions of fuels derived from conventional petroleum; a proscription likely to exclude coal-derived and other unconventional resource-derived fuels from facilities that do not capture and sequester carbon emissions. The provision did permit DOD to procure limited quantities of coal and gas-to-liquids fuels for certification testing.

Alternative Fuels Development

The Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 ( P.L. 110-417 , Section 334, Study on Alternative and Synthetic Fuels) required the Secretary of Defense to conduct a study on alternative fuels to reduce the life cycle emissions of alternative and synthetic fuels (including coal-to-liquids fuels), and in particular, examine the military utility of domestically produced alternative and synthetic fuels for military operations and for use by expeditionary forces. In response, the Secretary directed the RAND Corporation to study and submit a report to Congress. Generally, RAND found "that a domestic alternative fuel industry could yield large economic profits within the United States. By reducing demand for conventional petroleum, alternative fuel production would also lower world oil prices, countering efforts of certain foreign oil suppliers to control prices by restraining their production." However, RAND further concluded, "There is no direct benefit to the Department of Defense or the services from using alternative fuels rather than petroleum-derived fuels." With regard to hydrotreated renewable oils, RAND found "insufficient evidence that appreciable quantities of hydrotreated renewable oils can be affordably produced in the United States in a manner that does not increase lifecycle greenhouse gas emissions. Oil production from crops, even if they are not food crops, raises important land-use issues. Oil production from meat and poultry processing is inherently limited by the amount of available wastes." RAND considered the prospects for affordably producing fuel from algae in a climate-friendly manner to remain extremely uncertain.

The Defense Production Act and Energy

The Defense Production Act of 1950 (DPA), as amended, provides the President an "array of authorities to shape national defense preparedness programs and to take appropriate steps to maintain and enhance the domestic industrial base" [italics added]. As defined, "national defense" establishes the scope of all DPA authorities, and the use of any authority under the DPA must inherently be interpreted to "promote, support, or otherwise be deemed needed or essential for the national defense." "National defense" as defined by statute means:

programs for military and energy production or construction, military or critical infrastructure assistance to any foreign nation, homeland security, stockpiling, space, and any directly related activity. Such term includes emergency preparedness activities conducted pursuant to title VI of The Robert T. Stafford Disaster Relief and Emergency Assistance Act [42 U.S.C. §5195 et seq.] and critical infrastructure protection and restoration.

Therefore, the purpose of the DPA authorities extends beyond shaping the U.S. military preparedness and capabilities, as the authorities may be used to enhance and support domestic preparedness, response, and recovery from natural hazards, terrorist attacks, and other national emergencies, among other issues. The full purpose of the DPA is discussed in the "Declaration of Policy" issued as part of the statute.

The DPA has been amended and reauthorized numerous times since its original enactment because the statute includes a sunset provision that has required periodic reauthorization and offered the opportunity for amendment. Congress passed the DPA in 1950 and has thus far reauthorized it 17 times, in 1951, 1952, 1953, 1955, 1974, 1975, 1977, 1980, 1984, 1986, 1991, 1992, 1995, 2001, 2003, 2008, and 2009. The authorities provided in the DPA, with few exceptions, are set to expire on September 30, 2014.

How the DPA Applies to Energy

With regard to energy and national defense, the declaration of policy that accompanies the DPA states that "in order to ensure national defense preparedness, it is necessary and appropriate to assure the availability of domestic energy supplies for national defense needs," and "to further assure the adequate maintenance of the domestic industrial base, to the maximum extent possible, domestic energy supplies should be augmented through reliance on renewable energy sources (including solar, geothermal, wind, and biomass sources), more efficient energy storage and distribution technologies, and energy conservation measures."

In Executive Order 13603 on "National Defense Resources Preparedness," which delegates DPA authorities, the general term "energy" is defined for the purposes of DPA authorities as "all forms of energy including petroleum, gas (both natural and manufactured), electricity, solid fuels (including all forms of coal, coke, coal chemicals, coal liquefaction, and coal gasification), solar, wind, other types of renewable energy, atomic energy, and the production, conservation, use, control, and distribution (including pipelines) of all of these forms of energy."

In other words, under the DPA's declaration of policy, Congress has found that it is in the interest of national defense preparedness that the government assures that some level of capacity exists in the domestic industrial base to produce and provide both traditional and renewable energy sources, including from biomass sources.

Authorities Under Title III (Expansion of Productive Capacity and Supply)

Authorities in Title III of the DPA deal with the expansion of national defense productive capacity and supply. The various sections authorize the President to provide or guarantee loans to industry in order to expedite deliveries or expand discovery and production of essential materials, develop technological processes, purchase industrial items or technologies for installation in government or private industrial facilities, make purchases of materials for government use or resale, and provide for the increased use of emerging technologies.

Using Title III authorities, the President may also provide appropriate incentives to develop, maintain, modernize, restore, and expand the productive capacities of domestic sources for critical components, critical technology items, materials and industrial resources essential for the execution of the national security strategy of the United States. Further, the DPA authorizes the President to take appropriate actions to assure that critical components, critical technology items, essential materials, and industrial resources are available from reliable sources when needed to meet defense requirements during peacetime, graduated mobilization, and national emergency.

The DPA statute designates "energy" as one such "strategic and critical" material. However, prior to the DPA being amended and reauthorized in the Defense Production Act Reauthorization of 2009 (Reauthorization of 2009), this designation contained a restriction that the DPA did not grant any new direct or indirect authority to the President to "engage in the production of energy in any manner whatsoever (such as oil and gas exploration and development, or any energy facility construction), except as expressly provided in Sections 305 and 306 [50 U.S.C. Appx. §2095 and 2096] for synthetic fuel production." This restriction to the use of DPA authority for energy was removed in Section 5 of the Reauthorization of 2009.

In addition, the Reauthorization Act of 2009 removed the sections of the DPA relating specifically to the production of synthetic fuels (formerly Sections 305, 306, 307, and 308 of the DPA; 50 U.S.C. Appx. §2095 to §2098). Congress no longer considered these provisions necessary, as they served to exempt the synthetic fuels from the restriction on how the DPA could be used for energy production.

Appropriations for Title III of the DPA

Funding for all provisions and purposes of the DPA are authorized in statute. Title III of the DPA also creates a Treasury account named the Defense Production Act Fund (the Fund) that is used to carry out all of the provisions and purposes of Title III. The money in the Fund is available for obligation until expended. The Fund is also used to collect all appropriated funds and proceeds from DPA activities under Title III. However, at the end of any fiscal year, the balance in the Fund cannot exceed $750 million, excluding moneys appropriated that fiscal year or obligated amounts. Table 1 provides the appropriations to the DPA Fund since FY2010.

Use of Title III Authorities of the DPA for Energy

According to the Defense Production Act Committee, an interagency body created in the Reauthorization of 2009 to coordinate the use of the DPA, the federal government has not used the loan guarantee authority provided in Section 301 of Title III in more than 30 years. Current projects are initiated under Section 303 of Title III. Section 303 grants the President an array of authorities to create, maintain, protect, expand, or restore domestic industrial base capabilities essential to the national defense. These authorities include, but are not limited to purchasing or making purchase commitments of industrial resources; encouraging the exploration, development, and mining of critical and strategic materials; and installing and purchasing equipment for industrial facilities to expand their productive capacity. Because "energy" is designated as a "critical material," Section 303 of Title III may therefore authorize the President to make provision for the development of different types of energy that are essential for the national defense.

As with most other authorities the DPA grants to the President, Section 303 of E.O. 13603 delegates authority to the "head of each agency engaged in procurement for national defense." The Secretary of Energy is one such "head of an agency," as defined specifically by E.O. 13603. Though multiple agencies are delegated Title III authorities, DOD was the only agency with an active Title III program as of August of 2011. However, other Departments, including Energy and Homeland Security, have worked with DOD on projects of mutual interest in the past. There are two current Title III projects funded through the DPA Fund and DOD that directly relate to energy. They are a "Lithium Ion Space Battery Production Initiative" and a "Thermal Battery Production" initiative.

Biofuels Memorandum of Understanding

On March 30, 2011, President Obama directed the Secretaries of Agriculture, Energy and the Navy to "investigate how they can work together to speed the development of "drop-in" biofuels substitutes for diesel and jet fuel" as one part of a broader plan to develop and secure the United States' energy resources. Three months after the challenge was issued, the Department of the Navy (Navy), the Department of Energy (DOE), and the Department of Agriculture (USDA) issued a Memorandum of Understanding (MOU) to, in part, "assist the development and support of a sustainable commercial biofuels industry." All three federal agencies have entered into similar MOUs before, with each other and/or with other nations, to spur the development of biofuels.

This MOU is unique in that it focuses solely on commercial-scale development of advanced biofuels and brings in the primary federal agencies involved in the advanced biofuel pathway. An advanced biofuel is essentially any type of biofuel that is non-corn starch ethanol (e.g., algae-based biofuel, biomass-based diesel, cellulosic ethanol). There are three principal federal agencies involved with advanced biofuel research, development, and production. Typically, Congress views USDA as the federal agency that provides resources and support for biofuel feedstock development and feedstock supply (e.g., Biomass Crop Assistance Program). Typically, DOE is viewed as the federal agency that provides resources and support for biofuel conversion technologies (e.g., loan guarantees). For this MOU, the Navy is the customer for the advanced biofuel.

The objective of the MOU is the construction or retrofit of multiple domestic commercial or pre-commercial scale advanced drop-in biofuel plants and refineries. The refineries should have the capability to produce ready drop-in replacement advanced biofuels that meet military specifications at a price competitive with petroleum, be at geographically diverse locations with ready market access, and have no significant impact on the supply of agricultural commodities for the production of food. USDA, DOE, and the Navy are expected to fund this initiative at an aggregate of $510 million over three years, with that aggregate amount divided equally among them ( Table 2 ). The MOU notes that the timelines and means of contributing to the initiative are subject to change.

MOU Status Update

Within the first three months of the agreement, USDA, DOE, and the Navy issued a formal announcement of their intent to collaborate with the private sector to help produce drop-in advanced biofuels for military and commercial applications. In a separate parallel action, the Navy and USDA announced soon after the MOU announcement that DLA-E would purchase 450,000 gallons of advanced drop-in biofuel from a blend of non-food waste and algae. According to USDA, this is the single largest purchase of biofuel in government history. Additionally, there are plans to direct federal dollars to the development of a pilot or commercial-scale facility that will produce military-grade drop-in biofuels. The Navy intends to use the drop-in advanced fuel in a demonstration of a Green Strike Group in 2012 during the Rim of the Pacific Exercise.

USDA committed to $170 million in the MOU, and requested $171 million in the FY2013 President's budget request. The funding is being requested under the CCC Charter Act authority granted to USDA to subsidize the production of bio-based jet fuel. USDA reports that there is no existing viable commercial source for the large-scale production of such fuel, and as such, the CCC has entered into an agreement with DOE and the Navy to assist in the development of this product. The current farm bill debate could influence the amount of support USDA gives to the MOU. The 2008 farm bill (Food, Conservation, and Energy Act of 2008, P.L. 110-246 ) contains an energy title with roughly a dozen bioenergy programs, all of which expire at the end of FY2012. Because of extreme budget uncertainty, it is difficult to anticipate what the funding levels for these programs within this title will be. Any uncertainty about federal funding could also be a disincentive for the private sector to support the advanced biofuels industry. The current economic climate could preclude significant funding for both energy title programs and USDA funding for the MOU.

FY2013 President's Budget Request

In the FY2013 President's budget request, DOE stated it will support this agreement by taking the technical expertise developed in FY2012 and moving to pilot-scale demonstration projects in FY2013. Up to $40 million may be spent on the pilot-scale demonstration projects to support DOE's ongoing technology maturation program and eventually lead to larger-scale production to support the Navy. The pilot-scale demonstration projects could be chosen from potential joint solicitations for defense biofuels production. In its FY2013 request, DOE seeks conditional legislative language that would allow up to $100 million in new appropriations for the Office of Energy Efficiency and Renewable Energy (EERE) to be transferred to the Defense Production Act Fund for pilot demonstrations of drop-in jet biofuels.

The Navy requested $70 million in the FY2013 President's budget request. The funding would be used to "to execute a DPA Title III project, building upon previous efforts and investments by the Navy and other agencies, with the principal objective being a government-industry partnership for the construction or retrofit of multiple domestic commercial or pre-commercial scale advanced drop-in biofuel plants and refineries." The Navy has collaborated on a regular basis with DOE and USDA.

Defense Production Act Title III Advanced Drop-In BioFuels Production Project

In March 2012, the Air Force issued a Special Notice as defined in the Federal Acquisition regulation (FAR) 5.205 (c) to notify industry that the Defense Production Act (DPA) Title III Program anticipates possible issuance of a Broad Agency Announcement which would request proposals from domestic sources to execute an Advanced Drop-In Biofuel Production Project. The DPA Title III Program would be managed within the Office of the Deputy Assistant Secretary of Defense for Manufacturing and Industrial Base Policy (MIBP) and executed by the Air Force Executive Agent Program Office, a component of the Manufacturing Technology Division (AFRL/RXM) of the Materials and Manufacturing Directorate, Air Force Research Laboratory. As the DOD Executive Agent for the DPA Title III Program, the Air Force is responsible for executing projects that ensure domestic production capability for technology items that are essential to national defense.

The stated goal of the project is establishing one or more complete value chains capable of producing the biofuels. This includes feedstock production, conversion and processing, blending, transportation, and logistics, as well as the design, retrofit, construction, operation, validation, and qualification of domestic, commercial-scale, integrated biorefineries. In the preliminary description provided by the Special Notice, the project would require domestically produced biofuel, compliance with Section 526 of the Energy Independence and Security Act of 2007 ( P.L. 110-140 ), an acceptable feedstock source, suitability for military operational use, a biorefinery with a rated capacity of at least 10 million gallons of neat biofuel per year, and a commitment of at least 50% cost sharing. The project would take a phased approach, with Phase 1 representing completion of planning and preliminary design, with contracts to be tentatively awarded in early 2013. Phase 2 represents facility construction, commissioning, and performance testing as well as delivery of the biofuels, and assumes that awardees would be under contract in early 2014.

FY2013 Authorizations and Appropriations

As of the this report's date, both the Committees on Energy and Water Development, and the Armed Forces have introduced report language regarding the Navy's biofuel initiative. The House Energy and Water Development Committee does not recommend funding, while both Senate Committees for Energy and Water Development and Armed Forces support the initiative.

FY2013 Energy and Water Development Appropriations Bill, H.Rept. 112-462 to Accompany H.R. 5325

The House report to accompany H.R. 5325 offers no funding for the proposed initiative, and it does not include the requested legislative language. Specifically, the Committee notes "the Department has not adequately justified why the Department of Energy should fund this Defense initiative, and whether the proposed investments can successfully lower costs to competitive levels in several years or will only serve to sink costs into a product that is too immature to compete without federal support. The recommendation includes no funding for the proposed initiative and does not include the requested legislative language."

FY2013 Energy and Water Development Appropriations Bill, S.Rept. 112-164 to Accompany S. 2465

The Senate report to accompany S. 2465 supports the collaboration between the Navy, Agriculture, and Energy. Specifically, the Committee "recognizes that quality and reliability of supplies will be key in acceptance of advanced drop-in biofuels into the supply chain once they are demonstrated at a convincing scale. To that end, the Committee is supportive of the collaboration between the Navy, Department of Agriculture and DOE to develop innovative technologies for jet and diesel fuels for military uses. With the Department of Defense as an early adopter of these alternative fuels, the wider marketplace will be more likely to follow."

FY2013 National Defense Authorization Act, S.Rept. 112-173 Report to Accompany S. 3254

With regard to the limitation on availability of funds for procurement of alternative fuel (Section 313), the Senate Armed Forces Committee "recommends a provision that would prohibit the use of funds authorized to be appropriated to the Department of Defense in fiscal year 2013 from being obligated or expended for the production or sole purchase of an alternative fuel if the cost exceeds the cost of traditional fossil fuels used for the same purpose, except for continued testing purposes.... The committee strongly supports initiatives undertaken by the Department of Defense to reduce the fuel demand of the operational forces through affordable new technologies that increase fuel efficiency and offer alternative sources of power. But given the pressure placed on current and future defense budgets, the committee is concerned about the use of operation and maintenance funds to pay significantly higher costs for biofuels being used for RDTE efforts. Therefore, the committee directs the Secretary of Defense to develop and promulgate guidance to the military services and defense agencies on the difference between the operational use of alternative fuels versus continued RDTE initiatives." The committee also recommends a provision (Section 2823) that would prohibit the Department of Defense from entering into a contract to plan, design, or construct a biofuel refinery or any other facility or infrastructure used to refine biofuels unless such planning, design, or construction is specifically authorized by law.

FY3101 National Defense Authorization Act, H. Rept. 112-479 Report to Accompany H.R. 4310

Section 314—Limitation on Availability of Funds for Procurement of Alternative Fuel would prohibit the use of funds for the production or purchase of any alternative fuel if the cost of producing or purchasing the alternative fuel exceeds the cost of producing or purchasing a traditional fossil fuel. This section would also provide an exception for the Secretary of Defense to purchase limited quantities of alternative fuels to complete fleet certification of 50/50 alternative fuel blends.

Policy Considerations

Industrial Viability of Advanced Biofuel

Advanced biofuels have been promoted for the past several years as promising potential players in the renewable fuels market. However, there is presently no operating domestic commercial-scale production facility for an advanced biofuel, although some are under construction. Proponents argue that advanced biofuels are the preferred renewable fuel alternative because advanced biofuel feedstocks might not compete with traditional food crops used for food and feed. However, there may still be competition for resources to cultivate the feedstock (e.g., land and water). Proponents of advanced biofuels argue that it will add to the United States' energy security. However, others assert that economic and technical barriers will prevent advanced biofuels from entering mainstream consumption for some time to come. Furthermore, the use of agricultural land for advanced biofuel production was a key sticking point as EPA considered public comment about this aspect of advanced biofuels production eligibility for the Renewable Fuels Standard. Others question whether the federal government should be involved in advanced biofuel production at all.

Some proponents who support advanced biofuels generally question the form that federal involvement should take. For example, some question whether the Navy, using Defense funding, should be the testing ground for advanced biofuels—particularly aviation biofuels—that at present cost significantly more than conventional fuels. Some analysts and government officials counter that argument by reporting that DOD is the single largest consumer of oil in the United States and therefore represents a relatively significant share of total national petroleum use, and that DOD relies "far too much on sometimes politically unstable foreign sources of fossil fuels."

The advanced biofuel industry appears to be most focused on demonstrating that the technology exists to produce advanced biofuels at commercial scale. Another important consideration for the advanced biofuel industry at this moment is the planning and development of other production factors (e.g., feedstock supply, infrastructure) which will play a role in a stable advanced biofuel market—the ultimate goal for the industry.

Biofuel as a National Defense Need

Generally, military/operational fuel supply problems present logistical challenges that may fall under the process of peacetime planning or "deliberate planning"—the process of preparing contingency plans for military action. A domestic biofuel industry, fostered through DPA authorities, would appear to address the contingency of a long-term petroleum supply disruption, assuming that North American production and resources have declined precipitously and shifted reliance to imported crude oil. At present, the United States imports 49% of its petroleum, which includes crude oil (roughly 40%) and refined products. Canada provides the United States with 25% of its imports, and could likely increase the amount depending upon the approval of the Keystone XL pipeline.

However, in the case of short-term disruptions, the United States maintains the Strategic Petroleum Reserve as part of an obligation to the International Energy Agency (IEA) agreement. The SPR's utility in meeting Department of Defense (DOD) needs is limited by volume of jet or diesel fuel a refinery can produce from a barrel of oil. On average, Gulf Coast refineries yield only 6% to 8% kerosene-jet fuel per barrel of oil. That is, a 42-gallon barrel of oil yields at most 3 to 4 gallons of jet fuel when refined. Were it not for motorists, truckers, and airlines purchasing most of the remaining products refined from a barrel of crude oil, the cost of refining jet fuel exclusively for military use would be considerably higher. (This would assume little or no value in upgrading the leftover portion of the barrel). That is, consumers, not taxpayers, effectively subsidize the military jet fuel production.

The policy question writ large is whether a biofuel industry is necessary for national defense. If the answer is yes, then the Defense Production Act may be the appropriate authority for the Navy to proceed with its MOU. Proponents of a domestic biofuel industry view it as necessary in guaranteeing a fuel supply for the needs of the Navy, presuming that the future availability of both domestic and international petroleum resources are may be uncertain. Projections of North American fossil energy supply would call the proponent's argument into question. Just a few years ago, fears of "Peak Oil" production drove policy discussions on U.S. energy security. However, domestic crude oil production has increased over the past few years, reversing a decline that began in 1986. The United States is now a net exporter of refined petroleum products. The U.S. Energy Information Administration (EIA) reports that U.S. crude oil production increased from 5.1 million barrels per day in 2007 to 5.5 million barrels per day in 2010. Over the next 10 years, EIA sees continued development of tight oil, in combination with the ongoing development of offshore resources in the Gulf of Mexico, pushing domestic crude oil production in the EIA Reference Case to 6.7 million barrels per day by 2020, a level not seen since 1994. Even with a projected decline after 2020, EIA projects that U.S. crude oil production will remain above 6.1 million barrels per day through 2035. U.S. refineries consumed just over 5.4 billion barrels of crude oil in 2011, or approximately 14.8 million barrels per day.

Biofuel proponents would also argue that spending U.S. dollars on imported crude oil supports foreign adversaries or props up corrupt regimes. However, out of all the major oil exporting nations, currently the U.S. State Department lists only Iran as a terrorist country, and the United Nations Security Council trade sanctions in place (UNSC Resolution 1929) significantly restricts Iran's oil exports.

No matter whether fuels are domestically or foreign sourced, certain logistical challenges arise with delivering or acquiring fuel in overseas operational areas. For example, during U.S. operations in Afghanistan, insurgent forces frequently attacked over-the-road fuel convoys and that caused numerous U.S. and contractor casualties as well as equipment and fuel losses. Despite the fuel convoys' vulnerability, DLA-E generally found fuel sources to be available; though the sources' alliances and loyalties may have been questionable, the transactions may have gained some regional cooperation. Refueling in foreign ports also introduces certain vulnerabilities, as tragically illustrated by the al-Qaeda attack on USS Cole at Aden, Yemen, in October of 2000; the unforeseen consequence of State Department efforts to cultivate U.S.-Yemeni ties. Relying solely on at-sea refueling for fleet units worldwide would also introduce challenges requiring a substantial increase in the number of Military Sealift Command oilers in service. For routine operations, the Navy can expect to keep only about one third of its 14-oiler force at sea at any given moment. The four or five oilers routinely deployed cannot indefinitely sustain a seagoing fleet of three to four carrier battle groups and three to four amphibious readiness groups deployed worldwide, plus a number of naval units steaming independently. Therefore, decisions on whether to refuel Navy ships at sea or in foreign ports depends on both the tactical calculus of committing scarce fleet oilers and the political calculus of "showing the flag" by sending fleet units into port. To some extent, then, this offers an opportunity for the exercise of relatively inexpensive diplomatic "soft power" by the United States in the form of contracts with local companies for the supply of marine fuel.

DOD might argue that it faces financial, operational, as well as strategic risks from its reliance on petroleum-based fuels, as detailed in the CRS Report R42558, Department of Defense Energy Initiatives: Background and Issues for Congress , by [author name scrubbed], [author name scrubbed], and [author name scrubbed]. The financial risks include rising fuel costs over the long term, and increasing price volatility in the short term. Operational risks include the diversion of resources to the task of moving fuel to the battlefield, fuel requirements restraining the mobility U.S. forces and the combat effectiveness of U.S. equipment, and the vulnerability of fuel supply lines to disruption. Strategic challenges include getting fuel to the area of operations, and DOD's role in ensuring the global free flow of oil. The Navy might argue that investing in a domestic biofuels industry would insulate the Navy from the effects of volatile crude oil prices, decrease its reliance on foreign oil exports from politically unstable or hostile regimes, as well as enhance U.S. energy independence and energy security by creating a reliable energy source. In testimony before the Senate Subcommittee on Readiness and Management Support, the Vice Chief of Naval Operations underscored the pressure on readiness accounts from increased fuel prices, adding that ''every $1 increase in the price per barrel of fuel results in approximately $31M of additional cost annually above our budgeted level.''

The Navy has a lower dependence on petroleum than other services because its aircraft carriers and submarines are nuclear-powered. In FY2010, the Navy met 59% of its overall energy needs from petroleum, 22% from nuclear-powered ships, and 19% from electricity (for shore operations). The Navy nuclear reactor program, an outcome of the Defense Production Act, not only validated nuclear power, but also paved the way for commercial nuclear power and provided the first trained reactor operators. With the exception of the Navy's nuclear power program, policies designed to replace petroleum-based fuels with fuels derived from alternative resources in the past have given way when newly discovered petroleum resources presented clear economic advantages. That risk remains even if the Biofuel MOU is funded.

Whatever advantages biofuels may convey, the Navy is not without recourse in acquiring them directly by the customary acquisition process, as limited quantity procurements have already demonstrated. At $26 per gallon, the $510 million the Navy seeks to fund the MOU would purchase 467 thousand barrels of HRJ-5. Assuming that private interests successfully developed biofuel plants under DPA funding, they would still have to submit competitive bids on future fuel contracts under current procurement rules.