December 5, 2011

Taking the Fuel Out of Biofuels

Unable to compete with petroleum products, biofuel companies have found replacement products to sell

As advanced biofuel companies work toward creating an economically viable alternative to petroleum, some have found an alternative place to sell their product in the meantime: the specialty-chemicals market.

These companies produce oil from algae, wood scraps and other nonfood sources, bypassing the food-versus-fuel debate that has engulfed makers of corn-based ethanol. But the technology isn't cheap, and increasing production to the point where biofuel would be cost-competitive with petroleum products has proved slower and more expensive than anticipated.

So companies like Solazyme Inc., Blue Fire Renewables Inc. and Gevo Inc. are using their technology to create personal-care products and raw materials for chemical companies, betting that the best way to obtain the millions of dollars in capital needed to ramp up fuel production is by entering the higher-margin—but also highly fragmented—specialty-chemicals business.

Some say the strategy isn't without risk. While algae oil and other renewable substances typically command a higher price in the chemicals market, the deals tend to involve small batches of product tailored for specific buyers. The fuel market, by contrast, is a potentially much larger business, as the U.S. is requiring that 5.5 billion gallons of advanced biofuel be blended into the nation's fuel supply by 2015.

The fear, says Andrew Soare of Boston-based Lux Research, is that in seeking out a quick revenue fix, biofuel producers could get trapped in low-growth markets. "They're putting fuels on the back burner, pushing [large-scale production] back five years or so," he says.

Aware of Trade-Offs

Solazyme, which grows genetically modified algae that secrete oil, is looking to make money from its technology any way it can, says Jonathan Wolfson, the San Francisco-based company's co-founder and chief executive.

"Some people think biochemicals are a crutch on the way to fuels," Mr. Wolfson says. "We haven't thought about it that way in many, many years."

[BIOFUEL] Solazyme Inc.

NO BURN Solazyme has branched into skin care and other markets.

A few years after its 2003 start-up, Solazyme realized that some of its algae oils could replace the ingredients found in skin-care products, food supplements and industrial chemicals. The company aggressively markets its oils for nonfuel use, though it is fully aware of the trade-off involved, says Mr. Wolfson.

"If you make ingredients for cosmetics, it will be low volume but high margin," Mr. Wolfson says. "With fuels, if you can meet specs and meet cost, you'll sell as much as you can make."

Solazyme has agreements to sell its algae-based skin-care projects in J.C. Penney Co. department stores and to supply Unilever with oils to turn into soaps and nutritional products. Solazyme also agreed to sell up to 500 million gallons of algae oil to Dow Chemical Co. to be processed into heat-transfer liquids for industrial usage.

The company declined to say how much the contracts were worth, but said its oils can fetch up to $14 a gallon in the specialty-chemicals market—more than three times the price of its algae-based fuel.

Eye on Fuel

Blue Fire Renewables, meanwhile, also is undergoing a growth-induced identity crisis. The company, which has a pilot-scale refinery in Anaheim, Calif., converts waste material into sugars that can then be processed into fuel.

From its beginnings in the mid-1990s, Blue Fire sold some of its sugars to chemical companies as a raw material for their own end products. Demand was slow at first but picked up by mid-2009, says Blue Fire CEO Arnie Klann.

"We got request after request for sugar," says Mr. Klann, adding that the business became so lucrative that the companyfinally changed its name from Blue Fire Ethanol in late 2009 to reflect its growth in the nonfuel market.

Revenue from specialty-chemical sales helped Blue Fire make the case for a commercial-scale 20 million-gallon-a-year refinery in Fulton, Miss., that investors initially were wary of funding, says Mr. Klann. In October, a unit of China Huadian Corp. agreed to invest in the Fulton plant and possibly bankroll additional plants in the U.S. and China.

"When you have a higher revenue stream, you can justify the risk with investors into putting equity into these facilities," Mr. Klann says.

Gevo, of Englewood, Colo., uses specially designed yeast to convert sugars into isobutanol, a type of solvent that can replace gasoline and jet fuel. Gevo has yet to sell the product as a fuel, but estimates it could get $3 a gallon by doing so, compared with $4.50 a gallon in the chemicals market.

Gevo says specialty chemicals helped it raise $100 million, part of which will finance a $28 million retrofit of an old ethanol plant in Luverne, Minn., into a commercial-scale site capable of producing 18 million gallons of isobutanol annually.

"The renewables companies who have the advantage are those who can sell into chemical markets, grow the capability and then grow into fuels," says Pat Gruber, Gevo's chief executive officer.

Original post available here.

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