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July 8, 2008

What I like and don't like about the "second generation" biofuel companies that were funded in Q2

Ok I am a big fan of biofuels. I spent the last four years and substantial personal resources building Imperium Renewables and the largest biodiesel processing plant currently operating in the US at over 100M gallons per year. Lots of people ask me what I think of the "next generation" crop of companies being sold to investors today. Here are a couple general comments then some specific company comments.

General:
- the primary problem of biofuels today is oversupply relative to RFS mandates causing refined biofuel prices to significantly lag refined petroleum products. More biofuels actually makes the problem worse.
- Political will supporting biofuels has weakened measurably over the last year.
- Liquid fuel distribution infrastructure has remained largely stangnant for over 30 years. Most mid and downstream assets are owned by companies with capital structures optimized for cash dividends as opposed to investment for growth. High blends of ethanol requires new distribution infrastructure all the way up and down the chain.
- Debt markets remain closed and skeptical of new technologies.

Company specific:

Range Fuels: Triple the capital cost of first generation. While multiple feedstocks may be technically possible, actual availability of feedstock and transportation logistics will likely significantly change economics once plant is built. While Khosla likes to pay lip service to investing in technologies that are economic w/o government incentives, cellulosic ethanol generally through the 2.5x RFS credits, and Range Fuels specifically through large DOE grants have been showered with government money. If the plant eventually does get up and running

Sapphire Energy: Inventing an algae bug that will produce a crude oil substance compatable with today's light sweet crude refineries is not that hard. The Aquatic Species program of the DOE found thousands of them over a decade ago. The probelm is building the algae farm and cultivation system at a cost per acre that pays an acceptable ROI. I like the strategy to skip the big oil controled refined products channel and go direct to independent crude oil refiners, but the devil is in the details. What will be the actual yield? How will the refined products perform? Will customers accept the products? While the company announced significant funding, it has yet to enter pilot testing and hopes to one day produce "up to 10,000 barrels per day" of algae crude. Ok, that would be 0.011834 % of US daily crude requirements TODAY. Despite the many challenges and my reservations, Sapphire Energy is my favorite biofuel company funded last quarter.

EdeniQ: Actually the smoking dusty remains of the Altra train wreck "still in formation stage". While at Imperium I reviewed and dismissed as non-economic the Port of Morrow site they hope to develop. Maybe I missed something. On technology side they use all the right buzzwords about low capital costs, ellimination of catalyst and additives. All I can say is "show me".

Mascoma: Again, more non-specific "non-grain biomass" as feedstock. GM invested, that hasn't seemed to help their stock price. More government hand-outs (over $60M) and sky high capital costs. Show me the money.

Aurora BioFuels: $20M ain't nuthing when measured against their plans. Their mission statement lays out too much wood to chop in my opinion and not enough focus. It is not at all clear from public information what Aurora is planning to do new, different and proprietary from anyone else. See Sapphiire: Algae in the lab is easy. Making a million barrels a day (about 1% of US needs) is HARD.

Gevo: While the company is "working on an alternative jet fuel for Virgin Airways", Imperium actually supplied Virgin with such a fuel and flew Richard Branson around in the plane back in January. The company's "advanced" fuels like isobutanol and butanol face many distribution, field test, engine warranty and other implementation issues already overcome by first generation refined biofuels. This one is going to be a LONG burn.

Fulcrum Bioenergy: Waste seems like a good source of fuel. Unfortunately the energy balance has never worked for anything but sucking methane off garbage piles. Again the ethanol oversupply problem, the US is already long corn ethanol through at least 2012. From press releases the company seems more like a build own and operate project developer rather than a technology company. While this is a fine model, I am not sure it garners venture capital returns. Permitting of the first facility in collaboration with Casella Waste Systems is supposed to "start" in next 12 months. If the plant is running by 2010, I will give you $100.

Greenline Industries: No comment (too many NDA's).

GreenFuel Technologies: The long struggling Greenfuel may have finally found their stride. They arguably know more about the implementation details of growing algae for biofuels than any other company and have the scars to prove it. Their first pilot grew algae so fast they couldn't harvest it. Not much good. I like the strategy of co-locating algae farms with carbon emitters for multiple revenue streams. I like the folks at GreenFuel and wish them well. They still face the massive problem of getting the cost per acre of the algae farm down to an acceptable ROI. After 5 years, problem still not solved.

Amyris Biotechnologies: Originally founded with quite a different mission, these opportune scientists are marketing their lab skills to the fuel markets these days. More fancy bugs that look good under a microscope and are years away from any scale. If they suceed in making more than 100 gallons of anything by 2010 I will give you $100.

Posted by Martin at July 8, 2008 9:16 PM

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