“The first cut is the deepest” goes the old saw — no more so
than in first commercial, first-of-kind advanced biofuels projects
– especially when they are undertaken by newly-public companies
under extraordinary scrutiny.
In short, the KiOR (KIOR)
story. And, as allegations fly, we look at the data on the ground
and find that things are not always as they seem.
Earlier this year, Phil New, the always interesting CEO of BP
Biofuels, gave a rather extraordinary address in which he
suggested that the extraordinary days of technological innovation
were behind the advanced biofuels revolution, and what lay ahead
were the “hard yards” of commercialization — primarily, the
pursuit of operational excellence.
New’s speech came to mind this week as KiOR has been struggling
with a certain amount of panic on the part of biofuels observers
and investors — who had handed out an extraordinary punishment to
the stock this summer when the company missed (substantially, and
suddenly) a 300,000-500,000 gallon production forecast for the
Though Raymond James energy analyst Pavel Molchanov observed
that the company was roughly 4-5 months behind its production
ramp-up schedule and that “we can think of plenty of liquefied
natural gas (LNG) plants and offshore oilfields that had delays
much worse than this.”” — nevertheless, the stock dropped by well
above 50%, and the plunge in equity has alarmed shareholders, made
future financings more difficult, and in general spooked the
advanced biofuels sector, which has frankly been on tenterhooks
anyway give the delays and difficulties seen at Gevo, Amyris,
Range Fuels and the like.
The Seeking Alpha controversy
A online discussion on the KiOR situation, at the popular
investor site SeekingAlpha.com, attracted the following
The SeekingAlpha update itself was relatively benign, noting
“KiOR +1.7% premarket after providing Columbus facility update…As
of Aug. 31, Columbus has shipped ~199K gallons of fuel YTD, with
about half (~99K gal.) shipped in July and August, and the company
expects to continue shipping fuel produced in July and August
during September…In July and August, Columbus produced ~172K
gallons of fuel, bringing YTD production to 357.5K gal. through
The response from a SeekingAlpha.com reader, Mark Henry, writing
in the comment box, set alight a wave of web traffic with a series
of stunning allegations.
I worked on the maintenance, and these numbers have to be
incorrect. During July and August the plant was on a shutdown and
never ran anywhere near capacity. They have 2 systems (a train and
B train) B train never ran the whole time. They had a PR stunt and
had a tanker come in for the video…the tanker was empty coming in
and it was EMPTY going out. The plant was buying few logs during
the shutdown and the log yard was only about half full. They did
start chipping logs near the end of august and began producing
fuel, but on my last day the last tank that the product goes
through before going to the tank farm was discovered to be full of
tar like substance that should not be there at this stage of
production. Also the plant manager has his wife working there
making a 6 figure income and she does nothing. If you want to find
out how much they know about the production ask them how many
BTU’s of energy does it take to produce a BTU of product. They
don’t know, so without government money this plant will lose money
so take your money and RUN!”
Let’s parse this into separate allegations.
1. During July and August the plant was on a
shutdown and never ran anywhere near capacity.
2. “They had a PR stunt and had a tanker come in
for the video…the tanker was empty coming in and it was EMPTY
3. The last tank that the product goes through
before going to the tank farm was discovered to be full of tar
like substance that should not be there at this stage of
4. Also the plant manager has his wife working
there making a 6 figure income and she does nothing.
5. A provocative bu unspecific allegation
relating to the BTUs.
So, let’s go through them one by one.
We did confirm that, indeed, Mark Henry was onsite this summer
working for one of the KiOR’s contractors. But, what about these
allegations? Particularly the saga of the empty truck.
1. Spiking the numbers? On the production side,
“The BFCC (our core technology) produces oil; we then move that
to the hydrotreater which produces our fuel. Or, we can hold the
oil in on-site storage and process into fuel at a later date. The
BFCC and the hydrotreater are capable of running separately from
each other and often do particularly during our on-going start-up
Ironically, we issued the September 19 release to help external
stakeholders have more of our data and not create confusion. Since
the EPA reports shipments and not production, we wanted it to be
clear that KiOR had in fact been producing even though the EPA
report would not reflect activity.
“So, for the September 19 release (copy attached), we used detail
contained in our production/shipment that is part of our normal
business recordkeeping. In the release, we focused on total fuel
production which is what we base our guidance on, and includes all
three of our products – gasoline, diesel and fuel oil.
This is different than what EPA reports on a monthly basis
through EMTS for two reasons: first, the reports do not reflect
any of KiOR’s fuel oil shipments, as that product is not a RIN
generating product under RFS2 (although we do sell it to
customers); and second, EPA reports volumes and RINs generated in
their EMTS, which for us at KiOR does not occur until the product
is actually shipped from the facility, even if it is in our
product tanks ready for shipment.
“We said that Columbus produced 172,398 gallons of fuels in July
and August. In his note, mhenry stated that “during July and
August the plant was on a shutdown and never ran anywhere near
capacity.” I think part of the erroneous information revolves
around the fact that this individual, in his role as contractor,
may not have an understanding of the independent operations in
various parts of the facility, and, as such, has assumed
(incorrectly) that if any part of the facility is not in
operations, then fuel cannot be produced. As I mentioned above,
the BFCC does not have to run for us to produce our fuel, but it
had to run at some point to produce the oil which we processed in
the hydrotreater. So, the plant was producing fuel at the volumes
reflected in the press release – period.
“With respect to shipments, through the end of August, we had
shipped 199,071 gallons of fuel; that compares to the 141,569
reflected in the EPA report for D3’s and D7’s for the year. We are
fairly certain that all or most of those D3’s and D7’s are from
KiOR and the main difference can be attributed to the fact that we
also shipped un-RINable fuel oil which would not appear in the EPA
The Digest adds: Some of the confusion may
clear up shortly, with the EPA’s new heating oil rule released
The new definition of heating oil adds a category to include
all fuel oils that are used to generate heat to warm buildings
or other facilities where people live, work, recreate, or
conduct other activities. All fuels previously included in the
original definition of heating oil continue to be included in
the expanded definition. Fuel oils in the new category of the
expanded definition that are used to generate process heat,
power, or other functions are not approved for RIN generation.
Mike McAdams, president of the Advanced Biofuels Association,
“The Advanced Biofuels Association applauds EPA for expanding
the definition of heating oil to include renewable fuel oil used
to warm buildings or other facilities where people live, work or
recreate. This newly expanded definition will help sustain
growing renewable fuel production, particularly of advanced or
cellulosic biofuels, in the heating oil market. This rule will
allow actual gallons of advanced and cellulosic heating oil to
be delivered this year to the market. The change also
underscores EPA’s continued leadership administering the
Renewable Fuel Standard (RFS) program.”
2. The video shoot. According to KiOR, “the
video shoot was not a “stunt” but merely an opportunity to obtain
b-roll footage of the plant. Obviously, we had to pay to bring a
truck in for the day to be able to show the fueling section of the
plant, but this was the safest route to take for these purposes.
We had a local firm do the video for us on July 30, and there
wasn’t anyone else on the grounds besides employees and
A note to readers: b-roll, that’s the
generic kind of footage that is routinely provided to television
stations to assist them in their news coverage. Virtually every
major company in the world has a hopper full of b-roll.
3. The “tar-like substance”. We regard this — at
this stage — as a indicative of normal start-up processes and
particularly before steady-state operations are achieved. Let’s
all keep in mind that this is a first-in-kind facility — even a
mature facility might have excessive heavy oils during the
start-up year. One to keep a sharp eye on, though – those
incidents are supposed to fade away in time.
4. There’s the allegation about the padded payroll. True
enough, according to KiOR, the “plant manager’s wife does indeed
work for KiOR, but she works in a corporate function and reports
to Pasadena. This individual is the Director of Health, Safety
& Environment and Quality, and has also been leading our
Continuous Improvement process. I can assure you that with a
degree in Chemical Engineering, and leadership roles in plant
management, quality management and business program management
that she came highly qualified to the role and she is a real asset
A further note to readers: the need for a
“baseline level of staffing consisting of process engineering,
monitoring staff, testing personnel, health safety and
environmental personnel” is routinely disclosed and discussed in
KiOR’s 10-Q SEC forms.
5. The BTUs allegation. Here in Digestville,
we’d generally steer readers away from a focus on energy returns
and focus on economic returns. Why? First of all, fuels need to
compete on economics. Few would pay more for a gallon of fuel
because it is more energy-efficient. At the same time, we make a
distinction between useful energy and useless energy. For example,
using flared natural gas is an attractive option in terms of the
economics, if you can capture it. A process could have a low
energy return but have a positive and attractive economic return
because of the problem of — and opportunities with — residues or
feedstocks that have low value in their natural state.
The bottom line
It’s always important — with early-stage companies — to put
informal crowd-sourced commentary from well-meaning (or perhgaps
not) amateur reporters into context. Take for example the b-roll
footage. It’s like alleging that United Airlines doesn’t carry
passengers because they shoot some generic take-off- and landing
footage using a plane not carrying any passengers.
At the same time, it’s important to keep a close eye on all
early-stage companies — particularly those who have gone public
and are raising equity from investors with less access to the kind
of data — and the means to understand it — that sophisticated
early-stage investors like venture capitalists generally have.
So, it’s probably a good thing that all these questions and
allegations arise, so that we all have an opportunity to get a
little more “in the weeds” of start-up operations that, in looking
at pilot and lab-level operations, we generally do.
As Phil New cautions, these are the hard yards. And with those,
along come the Monday Morning Quarterbacks who seem to have all
Jim Lane is editor and
publisher of Biofuels Digest where this
was originally published.
Biofuels Digest is the most widely read Biofuels daily read
by 14,000+ organizations. Subscribe