A spotlight on next-gen biofuels

Executives in the biofuels sector are wary of promising an energy revolution, but they are confident what they are producing will be critical technology in the next 20 to 30 years.

After a decade of promise, advanced biofuels makers are entering a crucial make-or-break period with the first of a new generation of production facilities about to come on line.

The new facilities are designed to take biofuels beyond corn-based ethanol and begin to shift the industry to "advanced" fuels made with a lower carbon footprint derived from products that will not compete with demand for food.

Many of the companies are turning to cellulosic plant materials, animal waste and plant oils to churn out millions of gallons of ethanol, diesel, jet fuel or components for gasoline.

Driving the industry are US government targets stretching out a decade that call for fuel suppliers to blend billions of gallons of the new biofuels into the US gasoline and diesel pools, on top of the corn ethanol that already makes up about 10 per cent of the gasoline market.

The targets have helped biofuel companies develop strategies and lay out expansion plans, but they do not rely on the tax incentives or subsidies that helped the solar and wind industries.

Aside from the federal volume targets, "these guys in almost all cases are not relying on subsidies," said Rob Stone, an analyst at Cowen & Co in Boston.

But even with the growth and new investments, investors will likely have to wait for the technology to prove itself over the coming years before receiving big payoffs.

Among the most anticipated of the new production plants is KiOR Inc's Columbus, Mississippi, facility. The company expects to begin production in the second half of 2012 and turn wood products into components, or blendstocks, that can be used in gasoline and diesel fuel.

The KiOR plant will process farmed Southern Yellow Pine trees at the equivalent of about $25 per barrel of oil, or about one-quarter the price US crude oil.

Nearly 400 million gallons of new biofuels production is expected to go on line this year in the United States, according to data compiled by industry publication Biofuels Digest.

Another 1.7 billion gallons of additional capacity is forecast to start up from the beginning of 2013 through 2015, bringing total capacity to nearly 2.3 billion gallons.

Among others under construction are Altair's Washington plant, which will produce jet fuel from carmelina, an oily flowering plant; and Diamond Green's facility in Louisiana, which will convert animal fat and used cooking oil into diesel fuel under a joint venture with refiner Valero Energy Corp.

Many of the nascent biofuels companies have been working for years to develop technology that can cheaply turn cellulosic sugars or waste materials into energy and have even attracted investment from the world's top oil companies.

Those advances have come in several areas. Researchers have developed new biochemical catalysts to break down tough cellulosic material, used new techniques to turn solid materials into gas and created advanced 'hydroprocessing' refining methods to break heavy hydrocarbons into lighter, more easily burned fuels.

BP, Royal Dutch Shell, Chevron and Total have all taken stakes in companies that focus on a wide variety of fuels from traditional sugar cane ethanol to gasoline and diesel.

Still other companies, including Gevo Inc and Butamax, a joint venture of BP and Dupont, are building plants to produce biobutanol from corn starches or other agricultural products to produce 'drop-in' components for gasoline or chemicals with a higher energy content than traditional ethanol.

"I think there's room for multiple fuels to contribute to the fuel mix," Butamax CEO Paul Beckwith said in an interview.

Gevo, which is locked in a patent lawsuit with Butamax, expects to start up a converted ethanol plant next month that will produce butanol using corn cellulose as a feedstock. It expects to shift to materials such as switch grass, waste wood products or agricultural by-products such as corn cobs and stalks and sugarcane bagasse in the future.

Patient investors

Authorized under the 2007 Energy Independence and Security Act, the Environmental Protection Agency's Renewable Fuel Standard 2 calls for 21 billion gallons of advanced biofuels to be delivered annually by 2022, on top of a target of 15 billion gallons of corn-based ethanol.

The advanced biofuels target could be reduced if producers fail to bring adequate production on line and oil industry lobby group the American Petroleum Institute has already filed a lawsuit challenging the goal as unrealistically high.

Companies that are required under the EPA rules to buy biofuels to meet the target can instead purchase credits based on actual volumes produced through the Renewable Identification Number system, or RINs. While not a direct subsidy, those RINs can be worth between about $2 to $5 per gallon for biofuel producers, although the RIN market remains in its infancy.

A separate $1.01 gallon subsidy for cellulosic biofuels is set to expire at the end of this year and industry experts do not expect the U.S. Congress to extend that incentive. So far, its impact has been modest because fuels that would qualify for it have only been produced in low volumes.

With a capacity of 62.5 million gallons per year, KiOR's $222 million Columbus plant will be the largest of its kind in the United States and is expected to produce fuel at about $1.10 per gallon, well below the current NYMEX wholesale gasoline price of nearly $3 per gallon.

KiOR has already sold the planned output from the plant to Hunt Refining, FedEx Corp and Catchlight Energy, a joint venture between Chevron and forest products company Weyerhaeuser Co.

KiOR and others such as Codexis Inc, Amyris Inc, Solazyme Inc and Renewable Energy Group Inc have all successfully tapped into the public markets, although their shares have all fallen below their launch prices.

Given the diverse slate of fuels, feedstocks and company strategies in the industry, investors may need to be patient to see which companies emerge as the best in the sector.

"We're still very early from an investment perspective of picking winners," Cowen said.

Another 300 companies are trying to develop technology to break into the market, according to Mike Ritzenthaler, an analyst with Piper Jaffray in Minneapolis, with perhaps 20 of those potentially on track to seek IPOs in the next few years.

"All of these guys are looking for money," Ritzenthaler said.

Still, Canadian-based Enerkem's move to pull its planned $138 million IPO showed that Wall Street may be growing wary of pouring new money into the sector.

Investors viewed Enerkem's municipal solid waste-to-biofuels technology as too risky because it has never been shown to work in large quantities and the company forecast its losses would grow as it sought to build production plants.

"Early on, investors were willing to look out four or more years, but now they want to see positive EBITDA," Ritzenthaler said.

Enerkem said in its filings that it planned to make bioethanol at $1.50 to $1.70 per gallon, although analysts feared the company's cheap waste feedstocks could grow scarce if competitors emerged.

Still, several other companies have filed with the US Securities and Exchange Commission for public stock offerings, including Genomatica, Myriant, Mascoma Corp, Coskata, Fulcrum Bioenergy, BioAmber and Elevance Renewable Sciences Inc.

Mascoma, which has received financial backing from Valero Energy, Marathon Oil Corp and a General Motors Co investment fund, has said it was targeting operating costs of $1.77 per gallon for ethanol produced from hardwood.

Coskata, backed by France's Total, expects a commercial plant in Alabama to produce fuel-grade cellulosic ethanol from softwood at an unsubsidised operating cost of less than $1.50 per gallon.

Creating an industry with technology

Crucial to making the fuels economic is securing an ample, economic stream of feedstocks that can be cheaply turned into fuel, industry executives.

Renewable Energy Group, whose shares debuted in January, produces biodiesel from animal, plant oil and recycled restaurant oils, says feedstocks have typically been between 85 per cent to 90 per cent of the cost of producing the fuel.

The company has about 210 million gallons of capacity and has more than 100 suppliers for its feedstock.

"We are really trying to use these things that have a great carbon footprint and are messy to deal with," CEO Daniel Oh said. "What we've essentially done is create real optionality across the feedstocks."

Even with the growth expected over the next few years, many industry executives are wary of promising an energy revolution that could lead to unrealistic expectations.

"What we're doing is we're creating an industry with technology," said Kevin Weiss, CEO of Byogy Renewables, which makes jet fuel and gasoline from ethanol. "It's pioneering for the next 20 to 30 years. It's not pioneering for tomorrow."

This article was originally published by Reuters. Republished with permission.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles