By Matt Daily
May 18 (Reuters) – 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 U.S. government targets stretching
out a decade that call for fuel suppliers to blend billions of
gallons of the new biofuels into the U.S. gasoline and diesel
pools, on top of the corn ethanol that already makes up about 10
percent 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 U.S. 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 Plc, Royal Dutch Shell, Chevron Corp
and Total SA 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 Plc 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.
INVESTORS MAY NEED TO BE PATIENT
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 U.S.
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 unsubsidized 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
percent to 90 percent 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.”
(Reporting By Matt Daily in New York; Editing by Patricia Kranz
and Andre Grenon)
