Biofuels Archives


September 23, 2016

The Year Of Living Disingenuously: KiOR

The Inside True Story of a Company Gone Wrong, Part 4

by Jim Lane

In 2011, KiOR raised $150 million in its June IPO, claiming that it was generating yields of 67 gallons per ton in its Demo unit operations. But it was miles short of that.

In our previous installments, we have charted how KiOR moved from a promising early-stage technology to a public company with serious technological flaws that could have been fixed, but were ignored in what a senior team member speaking for the record, Dennis Stamires, characterized as a “reckless rush to commercial”.

But so far, the company and its celebrity investors and directors such as former Secretary of State Condoleezza Rice and famed venture capitalist Vinod Khosla had escaped close scrutiny.

Read the previous Parts in this Series

KiOR: The inside true story of a company gone wrong, Part 1

KiOR: the inside true story of a company gone wrong, Part 2

KiOR: The inside true story of a company gone wrong. Part 3, “You’ve Cooked the Books”

The methods for keeping the truth bottled up were not pretty. According to our sources for this story, dissenters had been fired, data had been faked, and opportunities to address the impending debacle with improved technology were ignored, underfunded or shelved. Meanwhile, the Board was misled either proactively or through lack of guidance on key performance indicators. Trouble that had been looming in 2010 had boiled into outright crisis in 2011.

Some progress had been made on technology, but not enough, Not nearly enough. The critical success factor, the bio-oil yields, had been increased from “the low 30s to the low 40s,” one staffer recalled.

And, worse, the production cost was “several dollars per gallon” according to those familiar with the state of technology development. The progress achieved had stemmed from changing the Technology from the original BCC reactor design and using a new ZSM Zeolite catalyst

Fatally, the progress on yields had been made at a catastrophic increase in the catalyst cost. One source close to the technology at that time recalled, “it was too far away from a production cost necessary to sustain an economically feasible business without government subsidies.”

The Spreading Fear

The result? Fear inside the company’s management team. The funds needed to be able to continue operations would soon be depleted. Potential investors, said one company insider, became skeptical about the over-glorified, profitable financial picture the Management team was claiming and deceitfully presenting to the public and to investors.”

Technical staff members at the time were particularly incensed over claims that yields were increasing from 67 to 72 gallons per ton, the projection of 90+ gallon per ton yields at the proposed Natchez, Mississippi commercial-scale plant, and a claim that production costs were being reduced to “close to $2 per gallon of fuel.”

“They were scared of exposure,” former CTO and board director Paul O’Connor recalled, “and [they made] a series of reckless actions.” And small wonder, for story that was told to the public was one of steadily increasing yields and progress in major company partnerships.

As the Motley Fool observed in March 2012:

“KiOR has been successful in steadily improving yield over the last few years from 17 gallons per ton to 67 gallons per ton. Notably, it has backing of large industrial companies like Chevron…The Columbus facility is on schedule to begin production in the second half of this year with an annual production capacity of 13 million gallons of biocrude. We cannot overemphasize how important a positive outcome at Columbus is.”

Yet, the yields were lower and the Chevron relationship, as originally envisioned in the form of an offtaker of crude bio-oil, was in tatters. Chevron would only take a finished fuel.

The Motley Fool was right on the money in one respect. Columbus was key. But there were intense risk factors implicit in the company’s yield targets. With the plant’s stated capacity of 500 tons per day, even with an 82% uptime, the yields would have to reach 87 gallons per ton to reach the targeted 13 million gallons of biocrude production.

That was more than double what the company had yet achieved in the demo or pilot plants, according to staff familiar with the state of technology development at the time.

A split in the management team

By the first quarter of 2012, KiOR team members pointed to a spilt in the management team, which had previously insulated itself from the technical staff.

“The modus operandi was “Reckless rush to Commercial,” recalled Dennis Stamires.

“Khosla and Kaul made the important decisions,” Stamires added, “while Ditsch and Cannon simply executed the orders. And Ditsch, Hacskaylo, Artzer, and Cannon set the [day-to-day] policies, and communicated with the public and investors. The rest of the management team were kept in the dark. It created confusion, poor morale, fear, discord, and mismanagement. On February 20th, I resigned from KiOR Management team, and notified the CEO, Fred Cannon, that I would devote all my time and available resources to developing a new, economically feasible technology capable of meeting KiOR’s business objectives.”

Paul O’Connor agrees that there was an unhealthy organization. “There was this tactic to silence people and [prevent them from] revealing secrets. At BIOeCON we would ask our technical people to tell shareholders what issues there were. Our perspective was that, if you know what the problem is you can solve it.”

The most obvious sign of technical trouble was over work on the company’s BFCC technology.

Despite claims of higher yields in the IPO documentation and elsewhere, the demonstration unit, using the latest ZSM zeolite catalysts, was still a dud. When the oxygen content was kept below 15%, the actual bio-oil yields reached into the 30s in gallons per ton. And 15% was the technical threshold where scientists at the time that the bio-oil could be converted into a salable fuel, by anyone.

Think of it this way. KiOR projected it could acquire its feedstock, Southern yellow pine, at an average cost of $66 per ton. Even at 40 gallons per ton, that would equate to $1.65 in cost. Before paying for the conversion technology. Or the building of the plant. Or the operating of it. Or anything to pay the workers. Much less pay back the investors. Or lenders like Mississippi.

Today, on a wholesale basis, finished gasoline blendstock sells for $1.40 per gallon. A financial debacle of immense proportions loomed, unless something could be done.

But it got worse, not better. Members of the technical team believed that the BFCC conversion process was not scalable to full commercial size plants without further reducing the yields. Yet, KiOR’s R&D management insisted on continuing work on the BFCC Technology and optimization of the ZSM catalysts.

“They were beating a dead horse,” one technical team member recalled.

By the end of the first quarter of 2012, KiOR team members of the time said that the company had lost much of its original core of expertise, as “most key technical personnel had left , or were planning soon to leave”. They were fearful that the truth would come out, investors would flee, KiOR would fall, and with it would go their jobs.

The Clock Begins to Run Out

Technical staff felt that exposure would come no later than the opening of the Columbus plant, when it would start operation and not be able to meet the yields used in the financial models and presented to investors.

In January 2012, Dennis Stamires requested the formation of a task force, called “Project Team Oil Yield”, operating separately from Hacskaylo’ R&D group and reporting directly to CEO Fred Cannon, with the objective to introduce in the DEMO Unit and subsequently to the Columbus plant, “a new feasible Technology capable of meeting KiOR’ Business objectives.” At that time, Professor Vasalos had also agreed to participate. BioeCON founder and former KiOR board member Paul O’Connor was in support.

Stamires recalled that, at the time he explained to CEO Fred Cannon, “it was very important to conduct a technology review and assessment in the presence of an Independent expert. It would make the findings and conclusions more credible. It could have convinced the board, and Khosla to act swiftly. It could have saved KiOR.”

Cannon stalled in making a decision. In late January, according to Stamires, he said that “I am still considering doing that, but not sure how to do it without getting Hacskaylo pissed-off”.

But time was beginning to run out.

Meanwhile, Professor Vasalos planned a three-day visit to KiOR on January 25th, and prepared a brief to present to Cannon on the new proposed technology.

But, in the end, Cannon declined to meet with Vasalos during the entirety of his stay. And on February 22nd, Cannon contacted Stamires to say, based on what he described as “legal confidentiality concerns,” that Vasalos could not be included in any review or assessment meeting.

The Vasalos decision is a puzzle.

First, Vasalos was confidentially bound by his Consulting Agreement Contract to KiOR. Second, he had previously analyzed KiOR’ Pilot plant and the Demo unit’s raw data. Second, after consulting with Robert Bartek, together with Dr. Steve McGovern had written an “Independent Review and Analysis Report of KIOR’s Pilot Unit Data”, submitted in March 2010. Third, Vasalos had, earlier, licensed his own Reactor design to KiOR, which KIOR had incorporated into the design of the KBR Pilot Plant and in the Demo Unit, resulting in a substantial increase of bio-oil yields. They could hardly have found a more expert, independent voice more tied down in confidentiality agreements.

It is difficult to imagine how a company could have better conveyed an attitude of fear of independent review, as if there was a scam in the works and a rush to transfer ownership to duped retail investors as soon as humanly possible.

O’Connor reaches out to Khosla Ventures, and is rebuffed

According to the State of Mississippi, “on February 8, 2012, O’Connor requested that Vinod Khosla and Samir Kaul schedule a time to speak with him,” concerning the state of technology development. Kaul refused to speak with O’Connor. Mississippi alleges that Kaul’s motives were “an effort to conceal his role and the role of his boss, Vinod Khosla, in the cover-up of the actual yields being achieved in KiOR’s pilot and demonstration units.” But there is no confirming evidence of this.

The Technology Review

On March 2nd, Paul O’Connor wrote to Stamires, and said, “this is really very weird/strange”. KiOR had a draft agenda for a Technology Review scheduled to take place on March 8th. The draft had a list of speakers and invited staff. No Stamires. Only a handful of subjects to be discussed.

“It was a fiasco,” said a KiOR team member who attended. “The discussion was heavily censored and rehearsed, and it certainly did not answer any of O’Connor’s questions regarding actual bio-oil yields and related costs. it was rigged and staged, full of smoke and mirrors.”

By this time, O’Connor was on a hunt for answers, in order to report back to the Board on the actual status of the technology. During his visit to Houston for the Review, O’Connor met privately with Stamires and discussed extensively the proceedings of the meeting, and discussed the prospect of both men making a visit to Vinod Khosla in California.

Then, Stamires met with Cannon and warned him that in “dodging O’Connor’s questions and not providing him with complete truthful information about actual bio oil yields, the Management team had misled O’Connor, undermined the KiOR’ Board, and fatally hurt KiOR.”

On March 11th, Stamires provided O’Connor with a list of the most important issues of KiOR’ Technology problems to be included in his presentation to the Board.

O’Connor strikes

On the morning of March 15th, O’Connor wrote directly to Cannon.

Dear Fred

Further to my visit and our telephone conversation Monday, I would like some additional information/data to round of my feedback to the board:

1) Actual performance data from the Demo Plant. Reactor effluent oil yields (BOE or GPBD) and oxygen content (%) as a function of time since demo start-up (No info on reactor or catalyst necessary).

2) Best estimate you have today on % oil recovery to calculate the “Overall product yield” from the reactor effluent yield.

3) Your assumptions and calculation of the $ 1.80 / gallon product cost for a 1500 ton/day plant @ 67? GPBD yield

4) List of abandoned patents (~28) of which I am a co-inventor

I will contact Samir to see how he wants to discuss this at the board. I agree with you that an Oral presentation is the best.

And on March 22nd, O’Connor reported back to the KiOR board.

On March 8th at the invitation of Fred Cannon (CEO) I visited KiOR to discuss my concerns about the in my mind the limited improvements in the overall process yields obtained over the last 2 years.

My concerns were based on the scarce and conflicting information on product yields I received during the board of director meetings (BOD) in the period of 2009 up to 2011 These concerns are further amplified given the fierce, rapidly evolving and well-funded competitive technologies in this space. One example is the JV between Ensyn and UOP.

The following assessment is based on limited additional information I received during the meeting and presentations at KiOR on March 8th, and is constrained by the following limitations:

1) I requested, but did not receive the “raw” actual pilot plant and demo plant yields to be able to check the validity of the data presented to me.

2) I asked, but was not given the opportunity for private one-to-one interviews with key technical personnel, who actually perform the work.

3) I did not receive answers to several critical questions asked during and after my visit to KiOR.

4) I asked, but was not allowed assistance from the in-house expert consultant, Prof Vasalos, to analyze and validate yield performance.

5) I was not given access to detailed information regarding the properties, handling, and the suitability of the raw bio-oil to be hydro-treated for upgrading.


Notwithstanding the foregoing it is still possible for me to make the following observations:

1) The KiOR management team has made excellent progress in building the organization and scaling up the BCC process from the Pilot to the Demo phase and now also the commercial phase (Columbus plant) in a record time of less than 5 years, considered impossible in the process industry.

2) The KiOR management and technical personnel feel confident that they can start-up the Columbus plant in 2012 and produce good quality salable products (Gasoline, Diesel, Low S Heavy Fuel Oil).

3) As can be expected, the major effort of R&D has been and still is in the scaling-up of the process and the catalyst and hence only limited effort has been spent on searching for the next breakthroughs. In fact the catalyst and reactor concepts presently being developed were already conceived in 2009.

4) The way in which product yields are being reported (e.g. to the BOD) by R&D management is incomplete and misleading and does not correspond with the actual goal of improving overall yield of sale-able liquid products.

5) The present overall yield of sale-able liquid products, estimated from the information received falls short of the targets set for 2012…and has not improved considerably over the last two years .

6) In my opinion it is still possible to reach the target…and possibly even also the long term target…but this will require a drastically different approach, than presently being pursued by R&D.

On March 21st, O’Connor sent back to Stamires his first draft of a report to be presented to the Board during its March 23rd meeting,“Technology Assessment-March 2012”, asking for his further comments. , which Stamires reviewed. Ultimately, O’COnnor would address emails to Cannon on March 23rd, April 21st, and April 23rd asking for response on these items.

No Eeyores at KiOR

Yet, by April 2012, management still expressed a stubborn belief that the Natchez commercial-scale plant would produce 80 gallon per ton yields. That month, CEO Fred Cannon wrote to staff announcing promotion of Ed Smith’, acknowledging of his accomplishments in building the pilot plants and the Columbus commercial plant on time and under budget.

In the memo, he could have not spelled out the proposed yields more clearly.

“Smith will oversee the construction of KiOR’ next commercial plan of 1,500 ton/120,000 gallon/day facility planned for Natchez.“ 120,000 gallons from 1500 tons of biomass: that’s an 80 gallon per ton yield. Yet yields in the Demo plant were no higher than the mid-30s, and technical staff feared that they would sink even lower in the commercial-scale plant at Columbus.

“It was the oil recovery,” O’Connor told The Digest. “The whole problem was there. Although some may speculate that the KiOR team were including water content in calculating oil yields, there’s no firm evidence for that. But some oil is so emulsified, that you can’t recover it, it goes out with the water when you separate. I believe that’s why the yields were low in actuality compared to what was being reported, They reported the oil content, not the oil they were capable of recovering. You only have to look at the trouble KiOR was getting into for the water that was being discharged by the plant. It was so full of oil that regulators were complaining.”

But, here, there is an ongoing disagreement between O’Connor and other members of the staff research team who spoke with The Digest, They contended that the real issue was that the bio-oil yields observed in the Pilot Plant and DEMO Unit, where the oil separation from water was very good, were about half of the required amount to be an economical and feasible process.

New technical reports confirm the low yields and are suppressed

In March 2012, Dr. Peter Loezos and Liang Chen wrote a report describing the operations and analyzing the results of the Demo unit’s test results, including bio-oil yields. Loezos was a chemical engineer formerly working for ExxonMobil, and was at this time the Technical supervisor of the Demo unit. He reported to John Hacskaylo. And Loezos and Chen wrote another report in June 2012. Both confirmed that the yields were far lower than the 67 gallons per ton claimed in public documents.

According to a team member familiar with the reports, “they were not allowed by Hacskaylo to publish or discuss their reports and conclusions, even within their own R&D group and their colleagues.”

O’Connor’s Second Strike

On April 21st, Paul O’Connor wrote an update for the Board. His concerns about not receiving raw data were not new, but were revived. But he levels charges at management of preventing him, as a board member, the assistance of an independent expert to review the state of technology advancement. But for the first time, he refers to misleading statements by R&D management. And he called for the hiring of a strong CTO — a position he had himself filled in the distant past.

Most importantly, there is a clear theme in his note of calling for experts and Board actions independent of management. Although he did not directly attack the overall management of KiOR, or Cannon himself, there is a clear sense of wariness in his missive.

He wrote:

As one of the few directors of KiOR with a technical background I feel I have a special responsibility to critically review the progress being made at KiOR in the fields of Technology and Research & Development. Overall the information we have been receiving in the area of Technology and R&D as directors of the board has been very limited and very superficial.

In December last I expressed concerns about the limited improvements made in R&D related to the overall process yields. My concerns were based on scarce and conflicting data received during the board meeting in December. At the invitation of Fred Cannon (CEO) I visited KiOR early March to discuss these concerns, while after the BOD meeting of March 23rd the R&D Manager gave a very limited R&D overview to the directors present, which confirmed my opinion that the metrics presently being used to monitor R&D progress are inadequate.

The following assessment is based on limited information received during the meeting and presentations at KiOR on March 8th, and the presentation of the R&D Manager on March 23rd and is constrained by the following limitations:

1) I did not receive the “raw” actual BCC and BCC HT oil hydro-treater pilot plant and demo plant yields.

2) I was not given the opportunity for private one-to-one interviews with key technical personnel.

3) I did not receive answers to several critical follow-up questions asked during and after my visit.

4) I was not allowed assistance from an expert consultant, to analyze and validate the BCC and BCC HT process performance in depth.

5) I was not given any information on the bio-oil/water separation.

6) I was not given access to detailed information regarding the properties, handling, and the suitability of the raw BCC bio-oil to be hydro-treated for upgrading into saleable products.

Therefore this review and assessment is very preliminary and should definitely not be considered as a full in depth technology audit. Notwithstanding these limitations is still possible for me to report some key observations and recommendations.


1) KiOR management team has made excellent progress in building the organization and scaling up the BCC process from the Pilot to the Demo phase and now also to the commercial phase (Columbus plant) in a record time of less than 5 years, considered impossible in the process industry.

2) KiOR management feels confident that they can start up the Columbus plant in 2012 and produce good quality saleable products (Gasoline, Diesel, Low S Heavy Fuel Oil).

3) As can be expected, the major effort of R&D has been and still is in the scaling-up of the process and the catalyst and hence only limited effort has been spent on searching for the next breakthroughs. In fact the catalyst and reactor concepts presently being developed were already conceived in 2009.

4) The way in which overall product yields are being reported by R&D management is incomplete, inadequate and misleading and does not correspond with the actual business goal of improving the overall yield of saleable liquid products.

5) The present overall yield of saleable liquid products, roughly estimated from the information received falls short of the targets set for 2012…and has not improved significantly over the last two years.

6) It is possible to reach the target of and possibly even also the long term target…but this will require a drastically different approach, than presently being pursued by R&D.

Recommendations to the CEO

1. Appoint a strong and knowledgeable CTO to effectively lead the important development efforts still required by R&D and Technology.

2. Review and adapt the performance metrics being used by R&D to correspond with the actual business goal of improving the overall yield of saleable liquid products

3. Replace the existing R&D Director . His lack of relevant knowledge is exemplified by his poor reporting of inadequate and even misleading metrics. He has demonstrated not to have the right competences and skills to ensure R&D progress over the last 1-2 years.

4. Establish a separate Discovery Team with dedicated resources, staffed with scientists and engineers with experience in the field and managed by an established, well respected expert reporting directly to the CEO and/or CTO.

To the Board of Directors (BOD)

1. Appoint a knowledgeable independent team reporting to the BOD to perform a true in-depth technology review , without the limitations that constrained my present assessment.

2. Establish a Board Technology Committee (similar to the existing Audit committee) to review the technological progress on a regular basis.

3. Establish a Technical Advisory Board (TAB) consisting of world recognized experts and specialists to advise and assist the CEO, CTO and Board Technology Committee with its tasks (e.g. technology auditing)

Cannon admits a problem

On the afternoon May 18th, Stamires met with Cannon at his office, and recalled that “Cannon admitted that there were indeed certain serious problems and he was thinking to hire a new senior person with management experience reporting directly to him, to help him specifically address the problems.”

“By this time, KIOR practically had no funds left to keep its doors open,” Stamires told The Digest, “and after four years of intensive R&D work, KiOR did not have a scalable and economically feasible technology. Knowing the real test results, management should have stopped lying to the public and investors, changed the technology and re-designed the Columbus plant.”

By July, three groups had access to the Demo data and analyzed it. Loezos and Chen, Charlie Zhang and Dennis Stamires, and Professor Vasalos from CPERI. All three teams came to the same conclusion: the yields were far below the 67 gallons per ton that management was claiming in the IPO documentation.

Zhang and Dydak delve into the yield crisis

Agnes Dydak and Charlie Zhang were KiOR chemical Engineers who had worked at the Demo Unit and also at the Columbus Plant. Zhang did the original development work of Bio oil Upgrading / Hydrotreating for producing the Diesel and Gasoline fuels at the PARK Lab in Pittsburg, and worked on the development of processes to separate more efficiently the oil from the water phase coming out from the Reactor. Zhang also had for a period been night shift process supervisor at the Columbus Plant’ production of Bio oil.

Dydak was a Senior Process Engineer analyzing the DEMO Plant’ data. Using a process simulation modeling program, she was forecasting what will be the bio-oil yield at the Columbus Commercial plant when in operation. This was critical since the reactor was 50 times larger at Columbus.

Her forecasts were devastating.

The model predicted that the production would drop from an average yield of 37 gallons per ton at the Demo plant to a range of 17-21 gallons per ton at Columbus. She reported her finding to her supervisors. A team member familiar with the response said that Hacskaylo and Loescher directed her not to publish the results of her Computer process simulation and yield prediction results of the Columbus plant, and not discuss them with anybody else.

Dydak became ‘extremely concerned’ about KiOR’s future and her job security. Also, her daughter was working at KiOR as an IT specialist. She agreed to meet confidentially with Stamires and, outside of normal working hours, contribute towards the development of an alternative technology, to replace the BFCC process which was used at the Demo unit and also planned for use at Columbus.

Further, the frustrations and concerns of Agnes became much more exasperated when she informed her Management Superiors about the results of the computer process simulation study, indicating that the bio oil yield at the Columbus Plant will be much smaller than the actual yield measured at the Demo Plant, and that her superiors told her not to publish her report or discuss the results with anybody else.

O’Connor’s Third Strike at the Board level

Meanwhile, on April 30th, Paul O’Connor reported again to the Board, in a memo entitled “Towards a prosperous future for KiOR.” For the first time, the fast-dropping KiOR stock price was invoked.

But there was more. Catalyst costs were far above predictions, trashing the expected profit margins. Problems in bringing the Columbus plant on-line were noted. The tone of O’Connor’s note moved from deep concerns in some areas, to a general sense of alarm about a connected series of shortfalls that could have a ruinous impact, if unchecked.

O’Connor wrote:

I would like to repeat myself by starting to congratulate Fred Cannon and the KiOR team, in particular Ed Smith for the timely and on budget completion of the first cellulosic biomass conversion plant in Columbus.

During my time at Akzo Nobel Fred and Ed delivered similar achievements in construction and commissioning of chemical plants, amongst other in Houston with the completion of the “CRUSADE” (Cost Reduction USA Damn Exciting) project, which saved Akzo’s FCC catalyst business in the USA. So once again: Congratulations!

Up to the completion of Columbus KiOR has been on time and budget with the delivery of her milestones, however unfortunately since then the success ratio has not been so dramatic, resulting in the following delays and shifts in performance targets:

A. The Columbus plant is not yet on-stream, and the suggestion is that it may take up to nine-months before the plant is completely on-stream and ramped up to its capacity…and product yields.

B. The product yields are not at the Gallons per bone dry wood [level] as estimated at the IPO, and in fact the suggestion is that the GPBD will only be reached in the larger (and modified?) Natchez plant.

C. The catalyst being used at Columbus is based on large quantities of an expensive…(apparently public knowledge!) and the rumor is that no substantial costs reductions are to be expected.

E. Based on A, B and C the overall economics and cash flow of KiOR will be substantially less positive than estimated at the IPO etc. While KiOR management is holding the info on A, B and C confidential, the overall financial result is and will become more clearly visible.

D. Because of A, financing of Natchez plant has been delayed and so also start-up of Natchez has been shifted at least one quarter from 4Q 2014 to 1Q 2015.

The result of the foregoing has been a dramatic drop in the KiOR share value, hurting the interests of all it’s shareholders.

While I still fully believe in the benefits and the potentials of further development of KiOR’s technology, I am very concerned about the way the technology is being implemented. My strong impression is that KiOR’s management although very competent and successful in the construction and commissioning phase, lacks the people with experience, vision and leadership to move forward with necessary improvements of the technology (yield improvement and catalyst cost reduction) and operations (capacity, ramp-up and time on stream). This is hurting KiOR now and could in worst case even turn a potential success into a failure if no appropriate corrective action is taken.

Suppressing a discovery

According to a KiOR team member, at this time R&D manager John Hacskaylo concealed invention disclosures that showed promise in improving bio-oil yields, lowering production costs and replacing the BFCC Technology.

His motive? It is alleged that “such an event would in the eyes of the public and investors indicate that the BCC/BFCC Technology was not really working, and that past claims of 67 gallon yields, projected 80+ gallon yields, and $1.80 per gallon costs were false claims.

Ditsch departs

In April, a signature event occurred for those who had theorized that a “troika” was running every aspect of KiOR, when one of the troika, Andre Ditsch, resigned. A bitter KiOR staffer recalled, “The head-fraudster…made his millions by badly screwing KiOR.”

Meanwhile, a stealthy effort, described as “outside regular office hours , weekends and vacations,” principally involving Zhang, Dydak and Stamires but also with the unpaid support of Vasalos and Lappas, was underway to develop an alternative technology, as the summer unfolded.

The stock in free-fall

The stock had hit $20.74 in September 2011, and then drifted downwards to $10.18 by December 30th. The stock recovered to a 2012 high of $13.37 by March 30th, and then went into abject free-fall. By June 8th, the stock was selling for $6.82, more than 50% off the IPO price of a year before.

Investors were worried. And the stock would rise and fall in fits and starts but would close out the year at less than $7 per share.

O’Connor bails on the stock

Following the failure of his numerous strikes at salvaging KiOR’s technology, frustrated with what the State of Mississippi alleged to be “obstacles to his technology audit, ”co-founder and director Paul O’Connor started to bail. He resigned as a director in May 2012, and started to unload shares. Fast.

Although other directors and officers were selling shares in 2012, no single KiOR insider besides directors Ralph Alexander or O’Connor sold more than 20,000 shares during the year. Alexander unloaded more than 50,000 shares, hauling in more than $400,000. O’Connor, who held 12 million shares with a market cap of more than $100 million at the beginning of the year, started to sell in large chunks. Nothing before he attempted to rouse the KiOR management and board on three occasions. But he unloaded more than 834,554 shares at $8.84 on May 23rd, and 430,000 more shares before the end of the year, at least, in a $5.92 to $7.08 range.

He may have sold far more. In a May 23rd filing he reported holding more than 12 million shares, but in his October 31 filing, he reported holding 1.958 million. There’s no direct report of a further sale.

“Recklessness and misleading conclusions”

In August 2012, the state of Mississippi alleged recklessness in the financial modeling. The state said, in its lawsuit against KiOR:

“Max Kricorian emailed the corporate financial model to the Company’s executive leadership team and asked that they sign off on the [assumptions] within it. The recipients included John Kasbaum, John Hacskaylo, Ed Smith, John Karnes, Chris Artzer and Fred Cannon. The entire executive leadership team signed off on the key assumptions, despite the recklessness and misleading conclusions to which they led.”

The Sunny Q2 earnings statement

On August 14th, Kior announced a $23 million net loss for the quarter, but Cannon stated:

“We are proceeding on schedule with the commissioning of our Columbus facility and are on track to start the facility up next month. With startup in September, we anticipate that the Columbus facility will be providing America’s first truly sustainable cellulosic gasoline and diesel for American vehicles in the fourth quarter. Also, we expect that the final construction costs for the Columbus facility will be about four percent under our latest cost estimate.”

“In addition to the progress at the Columbus facility, our research and development efforts have generated major advances to our proprietary biomass-to-fuels technology. Once implemented, we believe that these improvements should allow us to increase our nameplate capacity up to 20 percent and significantly decrease the capital intensity of our facilities.”

“Don’t Sell Shares”

In August 2012, O’Connor and Stamires were notified by Samir Kaul not to sell KiOR shares. The rationale? Despite the healthy IPO in 2011, KIOR would soon running out of funds to keep operating, and was in the process of talking to different potential investors. According to Dennis Stamires, Kaul warned that sales of shares, especially by O’Connor and Stamires as co-founders of BIOeCON, would raise strong negative warning signals to the stock market and to the potential investors, adversely affecting KiOR’s future funding negotiations.

Stamires did not sell shares, and O’Connor suspended selling activity until October 31st.

Smith, the Hero of Columbus, loses confidence

Earlier in the year, Vice President of Engineering and Construction Ed Smith has been commended by management for his work in bringing in the construction of the demo unit and the first commercial plant at Columbus on time and under budget. Praise also had been offered by O’Connor.

But the State of Mississippi alleges that, by no later than October 7th, Smith had lost confidence in KiOR, as well. The proximate cause? A series of runs conducted in its Pasadena, Texas pilot plant, according to Mississippi, which based its allegation on an email Smith penned to KiOR employee Arnold Korenek.

The Stealth Team Reports

The Stealth team within KiOR, working nights, weekends and vacations, had not given up. On October 25th, Dennis Stamires delivered to Cannon a detailed Technical Report entitled: “Proposal for Commercial Use of an Efficient, Cost-effective Integrated Process for the Conversion of Biomass to Liquid Fuels.”

Cannon’s Public Response, and Private Non-Response

While the Stealth team awaited a response from Cannon, the CEO went on a PR offensive regarding the company’s bullish prospects. In the Q3 2012 earnings call on November 8th, Cannon stated:

“Based on our experience at our pilot plant and demonstration scale facilities here in Houston , we expect that our technology on implementing the unit at our full-scale commercial plant, in Natchez, would achieve a yield of 72 gallons per bone dry ton of biomass. We believe that the progress generated by R&D investments to date, reflect a steady march to our target yield of 92 gallons per bone dry ton.”

It was the alternative technology which the Stealth Team had been pursuing and which a consensus of technical team members said KiOR needed to close the gap between public projections and actual results.

Cannon thanked Stamires for the Proposal and told him that he will study it and would come back to him.

The report did not directly credit Dydak and Zhang, who were afraid of retribution from Hacskaylo and Loescher. However, Stamires was able to indicate to Cannon only that the Report also represented the work of others, but with names withheld.

In many ways it was a sign of KiOR’s progress from a collaborative group of technologists to a group on fearful employees working in silos.

In the report, Stamires stated the fact that KiOR’s yield gains were essentially stalled at not much more than half of the yields communicated to shareholders. And that only the Pilot Plant was showing even these results, and all of this involved a cost of “several dollars per gallon.”

The concern at the time, was not just about shareholder backlash, but competition. The report contended in its opening that “KiOR was not able to compete with Ensyn/UOP, who were said to producing Bio oil with yields of 80+ gallons per dry ton of Biomass, at a cost of less than $2 per gallon.” In short, the very yields that KiOR hoped to achieve.

The New Technology

The new technology was described as “entirely novel and should be patentable.” There was other good news, specifically that the catalysts and heat carriers, to be used in the new technology would replace the ruinously expensive ZSM Zeolite catalyst. They had been already made by former KiOR staffer Mike Brady and tested by Robert Bartek at the pilot plant in 2009. Their chemical compositions, the proposal outlined, could be further optimized, as well.

At the heart of the technology? A new family of materials exhibiting “Dual-Functionalities”, proprietary to KiOR. They were described as “Metal-Doped Clay-based Spinels”. The proposed new Biomass overall Conversion process, contained certain key individual process steps which had been tested and commercially evaluated, as published in prior art, led Stamires to report that it “ensured that the overall process was scalable up to large commercial size Plants, and Bio oil yields of 80+ gallons per dry ton of Biomass with acceptable quality, and low production cost, will be obtainable.”

Curiously, the IP became somewhat mangled, according to Stamires. “It turned out that some of the new materials and catalysts, invented and developed by Brady and Bartek, had been patented by Paul O’Connor, on Dec. 28th, 2011 and assigned to BIOeCON.”

KiOR hires a fixer

Despite the rosy chat with shareholders and the world, towards the end of 2012, Cannon hired Bill Parker who had worked under Cannon at AkzoNobel as a production and start-up manager, and also at Albemarle, where he was a project manager. Albemarle was located just across the street from KiOR. He came to KiOR having earned a reputation as “a decent, very professional guy, and a person with high integrity,” according to one KiOR staffer. Hopes were high that he would help the company recognize the troubles with its current technology.

A Mystery Next-Gen Catalyst

In a press release released November 8th, concurrently with the earnings call, Cannon went into further detail regarding the state of KiOR’s technology.

“I am pleased to announce that we have commenced operations at the Columbus facility and have produced a high quality oil that is in line with our specifications for upgrading into cellulosic gasoline and diesel. More importantly, we believe the high quality of the oil from the Columbus facility validates KiOR’s proprietary biomass fluid catalytic cracking, or BFCC, technology at commercial scale. The facility’s performance to date not only meets our expectations based on our experience at our pilot and demonstration scale facilities, but also gives me confidence that we remain on track to upgrade our oil in order to ship America’s first truly sustainable cellulosic gasoline and diesel for American vehicles.”

The statement is more than a little disingenuous. Cannon is specifically limiting himself to noting that the oil that was being produced was upgradable into cellulosic gasoline and diesel, without referencing the cost of same.

To be perfectly frank, so long as oil is being produced with less than 15% oxygen content, virtually any pyrolysis oil can be upgraded successfully to cellulosic gasoline and diesel, so long as an appropriate technology is used, so long as cost is not a consideration. The statement by Cannon astutely avoids any discussion of catalyst cost, regeneration, coking and poisoning — factors which routinely frustrated efforts to upgrade bio-oil at an affordable cost, as the Pacific Northwest National Lab noted here.

Was the catalyst being regenerated while retaining activity? Was the process able to run for significant lengths of time on a single catalyst charge? Was the water/oil problem solved so that significant amounts of oil were not leaving the plant via the effluent stream? The Cannon statement sidesteps the issues with a bland statement of confidence that KiOR could produce an in-spec fuel. Something that has been done for decades, successfully. KiOR’s technology wasn’t about making cellulosic fuels. It was about making them cost-effectively.

Cannon looked ahead when he looked at yields. In the press release, he added:

“Furthermore, our research and development efforts continue to make progress increasing our yields and reducing our capital intensity. Our work continues on our next generation catalyst platform, which we believe can produce a yield of 72 gallons per bone dry ton of biomass when implemented at our full scale commercial facility in Natchez. Moreover, we believe that this catalyst platform will reduce the amount of coke made in our process by up to 25 percent, which would enhance the capital efficiency of our commercial facilities by giving us the ability to process up to 25 percent more feedstock without significant additional capital.”

Cannon did not indicate where the next generation catalyst was coming from. Or when it would be ready. Since Cannon had not responded to the Stealth Team, we can presume it wasn’t coming from them. Yet, no KiOR staff member of the era we communicated with on or off the record had any other firm recollection of any catalyst under development at the time which would create yields in this rage, reduce the coking by the suggested amount, and allow the company to “process up to 25 percent more feedstock without significant additional capital.”

But it was more than that. Processing more feedstock didn’t improve the low yields, or the high variable costs associated, for example, with ruinous catalyst costs. Rather, these fixes addressed capital costs — the process technology remained as damaged as ever.

Was there another stealth technology? One supposes in a company as wrapped in mystery as KiOR, perhaps there’s another breakthrough technology in the wings that would deliver on the promised results for Columbus and Natchez.

The Year of Living Disingenuously

Former GE CEO Jack Welch once said, “an organization’s ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage.” He added that “The essence of competitiveness is liberated when we make people believe that what they think and do is important – and then get out of their way while they do it.”

Would KiOR pass the Welch test? For sure, numerous KiOR staffers of the time believed that the company had a management problem more than a technology problem. No matter how dire the technological challenges seemed.

As Paul O’Connor observed, “no one [in power] analyzed the pilot plant data. Andre [Ditsch] would say ‘oh, go out and hire MIT PhDs.’ But they are not the ones who are going to scale up a process. Fred let Andre go his way, and they hired too many people from Albemarle across the street. Catalysts are important; you need a few people. But you need a lot of process people, and that balance went wrong.”

Other staffers point to a highly competent technical team that had been assembled. “KiOR forced them out or fired them or they left because of the poor professional working environment,” said one team member of the time.

The balance was precarious, as 2012 dawned. Everything was riding on the performance in the first commercial plant.

In our next installment, we’ll see how that next-gen catalyst platform, and KiOR’s attempt to make Columbus produce 67 gallons per ton worked out. The promoters said that it was not only possible, it was being done at the Demo unit. The skeptics said that the Demo unit was producing 60% as much as was claimed. That Columbus would produce around half that, again. And then there was the Stealth Team, proposing a radical new technology capable, they believed, of reaching something like 80 gallons per ton. And then there was the “next-gen catalyst” platform that Cannon was referring to and “a steady march to our target yield of 92 gallons per bone dry ton.”

If 2012 was another year of private failure and public bravado, a year of living disingenuously, 2013 would be the year in which the multiple streams of fiction and non-fiction would merge into a river of raw data that would make the truth clear. The company had reached scale, but was still in the slow process of commissioning, so there was still room for doubt, or hope.

Skeptics, promoters, innovators — who would be proven right? We continue the story in the next part of our series.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

September 12, 2016

Gevo To Supply Lufhansa With Renewable Jet Fuel

Jim Lane
In Colorado, Gevo (GEVO) has entered into a heads of agreement with Lufthansa to supply Gevo’s alcohol-to-jet fuel from its first commercial hydrocarbon facility, intended to be built in Luverne, MN. The terms of the agreement contemplate Lufthansa purchasing up to 8 million gallons per year of ATJ from Gevo, or up to 40 million gallons over the 5 year life of the off-take agreement.

Gevo utilized the enthusiasm generated in financial markets yesterday to raise $15.6M in cash and to convert $11M in debt to equity.

What the deal means in the short term

Here’s what it means in a practical sense. Expect Gevo to wind down ethanol production and convert the entire Luverne facility over to isobutanol, now that demand is ramping up. There will be a hydrocarbon upgrading technology added, which will give Gevo the option to produce up to 10 million gallons of hydrocarbon fuel from 13 million gallons of isobutanol.

That’s a mix of isooctene and kerosene – that mix can be dialed in to an 80/20 ratio either way, depending on market conditions. The kerosene will be blended by a third party to Lufthansa’s preferred blend. Could be a low percentage, could be high, that’s Lufthansa’s call.

About the agreement

The heads of agreement establishes a selling price that is expected to allow for an appropriate level of return on the capital required to build-out Gevo’s first commercial scale hydrocarbons facility. The heads of agreement is non-binding and is subject to completion of a binding off-take agreement and other definitive documentation between Gevo and Lufthansa, expected to be completed in the next few months.

Then comes the engineering, the financing, the construction. Stand by for 24 months. Mark fall 2018 on your calendar.

And so, Gulliver escapes from the land of the Lilliputians, formerly tied down by the Butamax litigation and the slow-to-emerge though shiningly profitable world of marine fuels. Into the big time of delivering solar fuels to hungry airlines.

Can Gevo go Big?

“We want to get to big scale,” Gevo CEO Pat Gruber told The Digest. “50 million 100 million gallons, where you really start to get economies of scale. We’re sitting here with 75,000 gallons in Silsbee, so how do we get to there from here. We’re going to do this in an intermediate step. We’re going to build out Luverne for isobutanol, we have good traction with Musket and the rest, and there’s a good value proposition based on really high performance. It’s high energy, high octane, lower carbon, lower cost. The pricing and margins are good. But it’s truly a niche not a commodity market, so it will take time to develop that niche.

“So, we have this opportunity to divert more into jet and isooctane, at the same time as Lufthansa wants to see alternatives develop.

“That’s their strategic interest. What they want is to self-regulate on carbon emissions, and avoid a patchwork of regulations everywhere they take off, land or fly over. The cost of compliance would be too great. But what none of us know is exactly what the cost of compliance will be, or the cost of oil, or the cost of alternative fuels in that long-term. So, everyone is moving cautiously although steadily.

“Meanwhile, it’s attractive to the investor community, too. They see the massive market, and they see the obvious need and the airlines actively developing. They understand there’s no electric plane any time soon, so there’s aren’t that many options, and this is one of the last sectors to be addressed in terms of lowering carbon emissions. Investors also see that some of the alternatives are more expensive, or are more expensive to scale.

The background news you can use

The agreement follows the completion of the first commercial flights using Gevo’s renewable alcohol by Alaska Airlines. The airlines used a 20 percent blend. Gevo said at the time that it “believes that its renewable ATJ has the potential to offer the most optimized operating cost, capital cost, feedstock availability, scalability, and translation across geographies.”

Gevo’s alcohol to jet synthetic paraffinic kerosene process turns its bio-based isobutanol into jet fuel that meets the requirements of the recently revised ASTM D7566 (Standard Specification for Aviation Turbine Fuel Containing Synthesized Hydrocarbons) for up to a 30 percent fuel blend.

In March, we reported that ASTM International Committee D02 on Petroleum Products, Liquid Fuels, and Lubricants and Subcommittee D02.J on Aviation Fuel passed a concurrent ballot approving the revision of ASTM D7566 (Standard Specification for Aviation Turbine Fuel Containing Synthesized Hydrocarbons) to include alcohol to jet synthetic paraffinic kerosene derived from renewable isobutanol. That’s now done, done and done.

So, now there are 4 approved alternative fuel specs. F/T fuels, which no one is making. Farnesene, up to a 10% blend, which TOTAL-Amyris makes but is expensive at the moment based on sugar and jet fuel prices. There’s HEFA, which is in wide use but also has waste oil / jet fuel price issues at the moment that have limited the production. Now, there’s the isobutanol-to-jet fuel pathway, which essentially is all Gevo’s right now.

Why would anyone make jet fuel from alcohol, anyway?

So, here’s the critique of jet fuels made from alcohol. Aside from the technical hurdles, why would anyone convert $3.50 corn into $1.20 aviation fuel when the yields are something like 1.3 gallons of hydrocarbon fuel per bushel? Isn’t that $1.56 worth of fuel from $3.50 in feedstock?

Well, yes and no.

First, Gevo is producing its own distillers grains, worth roughly $1.15 per bushel in normal market conditions. And, we believe the fuel will qualify for the biomass-based diesel tax credit of $1.01 per gallon, relying on this from

Biomass-based diesel is defined as a renewable transportation fuel, transportation fuel additive, heating oil, or jet fuel, such as biodiesel or non-ester renewable diesel, and achieves a 50% GHG emissions reduction.

And there’s roughly $1.00 in RIN value.

So, putting that together, you have $4.72 in value from that $3.50 corn. That’s before considering the fact that the Lufthansa deal is “expected to allow for an appropriate level of return on the capital required to build-out Gevo’s first commercial scale hydrocarbons facility.”

So that’s why you can make money making jet fuels from alcohols.

A Big Deal?

Yes, big. Monster.

Why? Combination of two factors. One, it’s Lufthansa stepping up, big time, despite the low-price oil environment. Second, it’s a multi-year offtake deal with a credit worthy partner. The kind that can get a plant built, as Gevo continues to foster an escape from near-certain death that wouldn’t be out of place in outtakes from Deliverance.

Lufthansa’s progress

In February, we reported that low fuel prices aren’t deterring Lufthansa from continuing to develop aviation biofuels, some it describes as a long-term strategy and not one that is swayed but a tough year or two. The company began looking for fuel alternatives in 2011 and has launched a number of trial flights and commercial flights with different blends of aviation biofuel with fossil jet fuel.

The relationship between Lufthansa and Gevo dates to spring 2014, as we reported here.

Back in 2012, the airlines said that believed that A1 jet fuel will remain the main aviation fuel for the next 20 years but expected renewable jet fuel to replace up to 5% of the market by 2019. With the European economic climate no longer interesting for investors, the airline believes that agricultural investments—for feedstock for aviation biofuel, for example—is an area not yet fully exploited.

Jim Lane is editor and publisher  of Biofuels Digest where  this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

August 28, 2016

Why Only Ethanol?

Where are butanol and other substitutes for gasoline?

Jim Lane

A reader writes:

I’d hoped that the biofuels crowd would have gotten beyond ethanol by now.

The industry has made progress creating all kinds of specialty chemicals from renewable sources and more or less successfully brought them to market. There’s jet and diesel in commercial use whether or not they’re yet profitable.

However they have made zero commercial progress on anything other than ethanol for gasoline. All the major advances have involved better and better ways to crank out ethanol. I don’t see the auto industry co-operating by switching to E85 or E100 technologies, particularly when we’re in the midst of a very long term bear market for oil.

Is there some fundamental reason that the automotive biofuels people haven’t shifted to butanol or iso-butanol or some other compound that would be more compatible with gasoline and the present highly evolved gasoline engines? Is there some fundamental thermodynamic barrier that makes conversion of biomass to butanol impossible?

So, what happened?

For sure, the quick answer is “new fuels are on the way” — Gevo is producing in small quantities, but it is producing at a commercial-scale facility and selling fuels. Butamax has been less visible in terms of timelines, but they also produce isobutanol from corn sugars. And Global Bioenergies is making progress with a renewable gasoline made from isobutene.

Why so few technologies, why so little commercial progress on gasoline substitution, excepting ethanol?

The chemistry of value

The answer lies to some extent in what we might term “the chemistry of value”. Theoretical yields for making isobutanol from sugars, for example, hover in the 41 percent range, while theoretical ethanol yields are in the 51 percent range. Yields for making isoalkanes and aromatics from sugar— typical components of gasoline — are in the low 40s, too.

Right now, the September ethanol contract at CBOT is pricing at $1.46 while the RBOB gasoline price is pricing at $1.49.

So, there’s a 2 percent gain in the price to compensate for a 20 percent drop in the yield.

Now, you probably at this stage would mention the higher RIN values associated with advanced biofuels. Right now, D5 advanced biofuel RINs are selling for roughly the same price as D6 corn ethanol RINs. Absolutely, you get 1.3 RINs for a gallon if isobutanol vs 1.0 RINs for a gallon of ethanol, because of the higher energy density of butanol, but it washes out when you take into account the lower yield in gallons.

So, right now, the market is not rewarding isobutanol makers with a premium price in the road transport market. Sadly, not in the jet fuel market, either.

The two bright spots

Areas of opportunity?

One is the cellulosic fuel market. There is a substantial set of premiums relating to carbon incentives available for cellulosic feedstocks. But, the processes to produce substitutes for gasoline, besides ethanol, from cellulose are still in the R&D phase.

Another is the marine market. There, boat owners, for a variety of reasons generally going back to boat construction materials, prefer an ethanol-free product. In this case, isobutanol is not competing against E10 ethanol-gasoline blends. Rather, they are competing against straight gasoline.

The marine opportunity for isobutanol

We have direct evidence that isobutanol is selling in 12.5 percent blends for a “more than 50% premium” compared to E10 fuel (we reported on this here).

Right now, that’s around $3.23 per gallon.

Now, one of the attractive uses of an isobutanol fuel in the marine sector is that marinas are not obligated parties under the Renewable Fuel Standard, but isobutanol is a qualifying fuel. Hence, a marina owner can blend a gallon of renewable fuel and detach the RIN that comes with every gallon of renewable fuel, and sell it into the marketplace.

Those RINs are selling today at $0.89 each, and you get 1.3 of them for every gallon, as we mentioned above. That’s another $1.16 in value.

Total value created, $4.39 per gallon. That’s excluding value created from a bushel of corn with the distiller’s grains — that’s just the fuel fraction.

Gevo’s production price?

Gevo (GEVO) recently affirmed that they remain on track to reach a production cost of $3.00-$3.50 per gallon for isobutanol by the end of the year — as long as corn doesn’t get more expensive.

How much of that retail value goes to the producer?

Now, remember that the ExpressLube value we mentioned is the retail value, and the retailer gets that RIN, as well, although its value contributes to the price a wholesaler will pay for the product. Gevo says that it a net market price of $3.50-$4.00 per gallon for isobutanol, so long as distiller’s grains do not lose value.

The Bottom Line

The marine market is where its at, for isobutanol, in the near-term. The economics on road transport furls have to improve a bit before we are going to see more substitutes for gasoline, besides ethanol.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

August 12, 2016

Gevo: Clever Escape Or Watery Grave

Jim Lane
This week, Gevo (GEVO) reported its Q2 financial results, reaffirmed its guidance on production cost targets, lengthened out the timing on its production targets, and placed all the near-term chips on marine biofuels.

Market reaction was generally pretty hateful, with the stock dropping 33% today. Investors seem to have translating Gevo’s messaging thus:

Gevo says: We’re staking our near-term prospects on marine biofuels.
Investors hear: We’re underwater.

Gevo says: Timing delay in our isobutanol gallonage, took longer to get the fixes implemented, we’ll make up on the back side. May need more equipment.
Investors hear: Dilutive cap raise coming. Women and children into the lifeboats.

Seriously, 33%? You’d think that Gevo had announced that they burnt the Luverne plant to the ground.

Is Gevo rising from Davy Jones’ locker, or wrapped in fiscal chains and headed down inexorably into a watery grave. Let’s take the news, in order.

The financial results

This week, the Colorado-based firm reported a Q2 operational loss of $5.5M on revenues of $8.1M, compared to a $6.5M loss on sales of $8.89 for Q2 2015. Revenues dropped primarily with falling ethanol and distillers grains prices. Hydrocarbon revenues were $700K for the quarter, representing sales of jet fuel, isooctane and isooctene made at its plant in Silsbee, Texas.

Cost targets

Perhaps most importantly, Gevo affirmed that they remain on track to reach a production cost of $3.00-$3.50 per gallon for isobutanol by the end of the year — aso long as corn doesn’t get more expensive. They expect to have a net market price of $3.50-$4.00 per gallon for isobutanol, so long as distiller’s grains do not lose value.

Bottom line there, isobutanol production will be somewhere between breakeven and a 33% margin by year-end.

The workload has been time-consuming to get there, this year.Additional distillation system equipment that was ordered after the March 2016 re-start, has pushed back the production ramp-up. And, the company still needs to optimize further and will continue those efforts into 2017.

Production rate, titre and yield

Good news for those who follow fermentation rate, titre and yield. Gevo says that the fermentation process is working well, and it has surpassed, on at least one production run, it’s 18,000-20,000 gallons per batch target, hitting just north of 20K gallons.

Production ramp-up

With the delayed ramp-up, Gevo says it will be able to produce 500K-650K gallons of isobutanol this year, and produced 80K gallons in Q2. Based on run-rate, the company expects to get a production capacity of 1.5 million gallons per year — but said actual production levels will be lower until they have reached cost targets.

Interestingly, the company is signaling a shift of attention from “everything is about optimization” to “optimization plus capacity expansion.”

Let’s review that. Generally speaking, experts tell The Digest that an isobutanol plant should be able to yield about 80% of what an ethanol plant yields, in gallons. With one production train out of four at the 19M gallon Luverne facility devoted to isobutanol, the capacity for isobutanol, at a theoretical level, would be somewhere in the 3.5M gallon range, per year. If the industry’s math is right, there’s good room for optimization and expansion, still.

Some of that will depend on Gevo finding good markets for its fuels. Let’s move to that.

Gevo’s markets

Alcohol-to-jet. The market that attracts the most attention right now is alcohol-to-jet,. When Alaska Airlines successfull demonstrated Gevo’s fuels in June with two flights originating in Seattle and flying to San Francisco International Airport and Ronald Reagan Washington National Airport, respectively — Gevo’s stock shot up so quickly that the company was able to raise quite a bit of capital and cushion its cash position. The two Alaska Airlines flights utilized a 20 percent ATJ fuel blend.

With a cost of $3.00-$3.50 per gallon, however, Gevo’s ATJ is going to be purchased in very small quantities as a feedstock for hydrocarbon jet fuel production. It’ll be a showcase fuel, for the most part, we’re told. Producing from cellulosic sources will add something like $2.00 per gallon or more to the target price, because of credits available under the Renewable Fuel Standard. So, it’s significant that Gevo is working closely with the Northwest Advanced Renewables Alliance to produce isobutanol from cellulosic feedstocks, such as wood waste.

But as we have pointed out on that front here, the ATJ jet fuel market is going to be strangled by policies that offer two RINs for two gallons of ethanol but only one RIN for a resulting gallon of jet fuel. The path from isobutanol to jet doesn’t reduce the gallonage quite so drastically, but it’s still a factor.

Marine markets. Based strictly on costs and margin, the best bet for Gevo in the near-term, we’re told, are the marine markets. So it was big news in June that Gevo announced an agreement with Musket Corporation a fuel distribution division of Love’s and a conduit to the marine and off-road markets in the Southwest. Musket has taken delivery of its first railcar of isobutanol and is moving it through their distribution system.

Bottom line, boaters are not big fans of E10 ethanol blends because, for one, they can cause problems with fiberglass-based components found in older boats. Isobutanol blends offer compliance for the fuel blender with the Renewable Fuel Standard, and happier customers. We looked at the economics of this market and saw a potential value of $4.75 per gallon in this market, here.

The chemicals options

Let’s not forget that Gevo also produces ethanol — in fact, 95% of its production in Q2 was that molecule. The biggest news there is an agreement with Clariant Corp to develop catalysts to enable Gevo’s Ethanol-To-Olefins technology.

This would be a path to tailored mixes of propylene, isobutylene and hydrogen, which are valuable as standalone molecules, or as feedstocks to produce downstream derivative products such as diesel fuel, chemical intermediates, and polymers. It’s early days — the key will be the catalyst, but certainly thee are premium markets.

Gevo’s liquidity

We’ve saved perhaps the best news for last. Gevo’s shored up its cash position, mightily. Five months ago, it was mooting a sale of the company owing to liquidity concerns.

Now, it’s been raising money by diluting shareholders, essentially, which is sub-optimal for the shareholders but a lifesaver for the company,. One industry expert told us that, had Gevo not gone public and given itself the opportunity to raise cash through dilution, it would have gone out of business or been sold. The company raised $9.5M in s share offering in June, $10.8M from exercise of warrants, $3.5M in a share offering in April and has $22M in the bank.

It’s burn rate target by year-end is $3.5-$4.5 million. Leaving Gevo with roughly 15 months of runway, based on its cash position today. Much, much better.

The Bottom Line

Gevo has to hit its targets, and there are a bunch of them. Rate, titre, yield, production cost, production volume, market price, burn rate. So, it’ll be busy in Boulder, Silsbee and Luverne this year, all right. But 2017 is shaping up to be a much prettier year for Gevo than perhaps any since 2012.

$1 per gallon margins on isobutanol production — those take the company to breakeven on an EBITDA basis with roughly 14M gallons of production. Sooner, if the company picks up an R&D contract or two. That’s not entirely far down the track.

Jim Lane is editor and publisher  of Biofuels Digest where  this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

August 04, 2016

KiOR: "You've Cooked The Books"

by Jim Lane

Note. This is Part 3 of our series on the inside true story of KiOR.

In part 1 of our series here, and part 2 here.

BD TS 080416 KiOR3 smOur story so far

KiOR was hanging by a thread as the summer of 2010 commenced. In a few days, the first recorded visitors to Pasadena demo unit, representatives of the Mississippi Development Authority, were expecting to see the demonstration unit in action.

The company was beginning to hurtle towards an IPO. But the fuel yields were low; the fuel was not usable by their initial chosen downstream partner; the catalyst they were using to get even down to this unsatisfactory product, ZSM zeolite, was in the $7,000 per ton range. Catalyst stability would be challenged, everyone knew, with the water that is contained in wood chips. Steam can be highly problematic for zeolite.

More than that, the company was facing a potential problem with the metal content in the biomass feed that accelerated the deactivation rate of the catalyst, which resulted in excessive amount of daily catalyst replacement, according to one KiOR scientist.

There were reactor design issues. The pilot reactor that was working wasn’t used for the demo unit.

There was a rush to commercial-scale of the NASA type. Management issues, communications issues can be seen. Disclosure issues, “truth in data” issues. And, a series of statements to the state of Mississippi that would be impossible to live up to without major improvement in yield. Capital needs were going to be tremendous, and beyond an IPO there was a loan guarantee process and the state of Mississippi loan application to be successfully navigated.

Why the rush to scale? All venture-backed companies rush. But was there a special rush on with Khosla-backed companies, and did that rush apply successfully to industrial technology? The State of Mississippi quoted this passage from the Harvard Business School case study, Khosla Ventures: Biofuels Gain Liquidity:

Khosla played an active role in helping his portfolio companies determine appropriate milestones in the process of moving from a pilot to a commercial operation. He encouraged his companies to focus on 15-month or 15-day or 15-hour innovation cycles, unlike the 15-year cycles of innovation in the nuclear business, in order to “test, modify, allow lots of mistakes and still succeed.”

The goal was to test ideas in 10% of the time that it would take a large company. Once that was achieved he often challenged the team to reach another 10x reduction in cycle time. month or 15-day or 15-hour innovation cycles, unlike the 15-year cycles of innovation in the nuclear business, in order to “test, modify, allow lots of mistakes and still succeed.”

Everyone was counting on everything to improve in the demo unit, and in 2011. As sometimes happens. And, with design corrections, fingers crossed this could be translated to a commercial scale unit. It’s been known to happen, yields improving as scale increases and design improves. Not always, not often, but sometimes. Could KiOR pull it off?

Maybe, just maybe.

We’ll see how all those concerns worked out in the next part of our series, as KiOR launched its demonstration unit, geared up for more financing and an IPO, and hurtled towards commercial-scale.

Back to square one

2011 started with bad news. Robert Bartek resigned. He had been described by a member of KiOR’s staff as “the most knowledgeable chemical process engineer expert in pilot plant design and operation. Also, Bartek was “one of the main contributors to the development of a new improved technology that had replaced the failed BCC Technology and catalyst,” as one observer put it.

It widely regarded as a huge loss to KiOR.

A former KiOR staffer recalled. “He was unfairly punished because he did not agree and participate in the manipulation of pilot plant data, and because of his statements that the BCC Technology was useless to KiOR, and urging the Management to change it.”

“Hacskaylo and Ditsch were concocting false information about Bio-oil yields and related costs, and feeding them to the KiOR Board, to Khosla and to the public. Bartek [had been] isolated from the team. He was kept in the dark.”

Meanwhile, there was good news and bad news on the technology front.

The Good News? By replacing the BCC Technology and its HTC Catalyst with zeolite catalysts , the Bio oil yields were more than doubled, with a less coke and char, and with less than 15% oxygen in the oil.

However, these improved oil yields still needed to be doubled again to reach the level of 80-90 gallons per ton yields that would be required to support a commercially viable KiOR.

But it was more than the loss of a technical leader. It was a cautionary tale for many of the staff.

The Wrong Design

Bartek’s isolation from the R&D team while working on the design of the demonstration unit, caused additional damages to KIOR.

The delivered and installed Biomass Convertor/Reactor had the original Pilot plant design, which was inefficient, and produced much lower bio oil yields. Bartek had replaced it with a higher efficiency Convertor/reactor based on a design KiOR had licensed from CPERI.

The damages included, costs of disconnecting/reconnecting, and modifying the already installed inefficient Reactor, plus months of delay in starting the operation of the demonstration unit .

“Management’s policies and actions were to promote deception to the public and investors and punish correctness,” commented Dennis Stamires. “It led to a  loss of trust and caused a serious demoralizing effect on most employees, and so, as is the usual case under such circumstances, the most qualified and experienced Scientists and Engineers have more job opportunities and leave first.”

And on technical grounds, the company was still at what Stamires, in a burst of frustration, expressed as “back at square one” in a January 31st note to Dr. Angelos Lappas, Professor Vasalos and Mike Brady.

“As you have heard thousand times,” he wrote, “we are still looking for a suitable catalyst, hopefully without containing ZSM, or at least a small portion. You can see how frustrated I am , after two or three years and all the work we have done, millions of dollars spent , we are now stuck in a Hole with the ZSM.”

Big News from DOE

But in management circles, there wasn’t a corresponding sense of gloom. In fact, there was a celebration going. KiOR had received a Loan Guarantee term sheet for a $1 Billion project, from the US Department of Energy, on January 3rd.

In the complex world of loan guarantees, a term sheet is a first step. Ultimately loans are made by banks, and guarantees are applied to them. And they never guarantee the entire loan, only a portion of it, typically around 60 percent. This is the government’s way of ensuring fiscal discipline. They need the bank to have skin in the game to avoid funding improbable loans. So, KiOR would likely have to persuade a bank, and equity partners, to should up to $400 million in risk on a loan for a first-of-kind technology. The company, for that reason, was a long ways from a financing event.

And, there was a bomb hidden in the news.

The project, as described in a note to staff written by CEO Fred Cannon, was expected to produce more than 11 million gallons of fuel per year.

Why was that a problem?

What was worrying at the Columbus plant was less the amount of fuel coming out as much as the amount of feedstock going in. The plant had a nameplate capacity of 500 tons of dry biomass per day.

Staff could do quick calculations and realize that, assuming an optimistic 85% up-time for the plant, the bio-oil yields would have to be 73 gallons per ton of biomass.

With that, staff realized for the first time that the company was representing yields to the Department of Energy that were materially above what the technology was achieving.

In his note to staff, Cannon thanked the team and singled out one individual for the loan guarantee milestone.

It was Andre Ditsch, author of what KiOR colleagues said were grossly inflated yields.

Changing the yields

In its lawsuit against KiOR, the state of Mississippi alleges that Andre Ditsch’s work on what might be termed “synthetic yield improvement” was not complete.

“On January 31, 2011, three weeks after [a] strategy session with Vinod Khosla was conducted,” the state alleges, “Andre Ditsch notified Yuan Wang, a KiOR employee under Ditsch’s direction, that the current yield in the Company’s financial model had changed…Ditsch made this change in the financial model in order that KiOR would appear to potential investors to be commercially viable without RIN and tax credits.” The state added that “Ditsch did so at Khosla’s direction,” the first indication, if true, that Vinod Khosla may himself have become entangled in the faking of yields.

Cherry-picking the data

In February 2011, John Hacskaylo published an internal R&D Update Report at KiOR, which now can be revealed. In it, he showed dramatic improvement in bio-oil yields produced at the Demonstration Unit. Allowing for a responsible level of oxygen content, sufficiently low for the product to be upgraded to a finished fuel, the data showed a 67 per gallon output. Hacskaylo extrapolated to 84 gallons per ton as a target for the future.

But there was a problem.

According to KiOR staff members of that time, the data was cherry-picked; the most optimistic data was being used. Favorable bursts based on a handful of moments in time.

In fact, when the Demo plant was lined up and operating in steady-state condition at least for a few days, what were described by KiOR staffers familiar with the data as the actual “measurable, recoverable and reproducible bio-oil yields with oxygen content of less than 15%” (the maximum for a refinery to handle), were in the range of 34-38 gallons per ton.  Substantially much lower that the bio-oil yields that Hacskaylo was reporting.

But it was worse than that.  The yields were lower than the Bio oil yields produced with same catalyst and process conditions at KiOR Pilot plant.

It was a dagger in KiOR’s path to commercial viability — because yields were supposed to go up, in the demonstration, which was intended to be an improved design based on pilot plant data. Not down. Not with the same process conditions and catalyst. Something was very wrong with the demo design. Something that was concerning Stamires and Charlie Zhang who were monitoring and analyzing the raw DEMO data and comparing them to those obtained from the KCR Pilot plant . But no one on the commercial management team would know about it for quite some time.

Worse, if this trend-line was valid, and could be extrapolated to larger size plants, then it was possible that Bio oil yields at the commercial-scale Columbus plant, when operational and using the same catalyst and process variables would be even smaller than the Demo.

The drag from pilot yields to demo yields was around 25%, so it was possible that commercial-scale yields would drop into the 20s. Well below financial viability under any foreseeable combination of circumstances.

“No one would take our stuff”

In February John Karnes joined KiOR as the new CFO replacing Kevin Denicola who had resigned. It was a critical moment. As an early-stage company, KiOR was cash-hungry. One of the most important sources for funds to build out the company’s projects was the loan from the Mississippi Development Authority.

KiOR hired Dennis Cuneo, a business executive with established ties to Mississippi state officials, as its representative.

As the state of Mississippi alleges:

“Faced with the realization that no oil company would agree to offtake and refine the Company’s oil, Khosla explained KiOR’s situation to Dennis Cuneo and asked him to present the blendstock agreement to the MDA as having satisfied the terms of the MOU. On or about February 20, 2011, Cuneo notified Governor Barbour that KiOR had entered into an offtake agreement with Hunt. Cuneo requested that Governor Barbour direct the MDA to release funds. Governor Barbour called the MDA’s CFO, Kathy Gelston, after communicating with Cuneo. Governor Barbour notified Gelston that she would soon receive a communication from Cuneo in which Cuneo would request a release of funds. Governor Barbour instructed Gelston to release funds upon Cuneo’s request.”

The problem? The offtake agreement with Hunt did not supply them with a bio-oil for Hunt to upgrade using refinery-based hydrotreating technology. Rather, Hunt agreed to offtake finished blendstock, upgraded by KiOR.

“It was the alkali content, said former KiOR staffer Larry Bauer. “we had found quickly that no one could take our stuff.”

Meanwhile, ExxonMobil was having problems of its own. It wasn’t a question of being able to upgrade the fuel.

On February 28, according to the state of Mississippi:

ExxonMobil Corporation Vice-President of Corporate Strategic Planning, William M. Colton, notified Cannon and Khosla of problems Exxon was having making KiOR’s numbers work.

Busy in the Big Dark

But the KiOR could hardly spare a moment to think about the consequences of bad news from Exxon. During the first quarter of 2011, the company was a beehive of activity on multiple fronts.

As one KiOR insider told The Digest, “there were several main projects going on, including the negotiations with DOE for the loan guarantee preparation for the S1 and filing, fuel registration, road show preparation, continuing discussions with Chevron/Catchlight for some kind of offtake agreement and preparations for the opening ceremonies in April for the first Commercial Bio Fuels Plant in Columbus.

As March came to a close, attention shifted sharply to the DOE loan guarantee. It was a substantial sum – $1 billion, that’s billion with a “b”. And there was a big problem.

The catalyst was rapidly and severely de-activating. The company’s forecasts were based on the performance of a fresh, activated catalyst.

On March 28, 2011, the state of Mississippi claimed that “Andre Ditsch sent an email to KiOR’s Vice-President of Research and Development, John Hacskaylo, and others that discussed the Company’s dealings with Shaw Consultants International, Inc. an engineering firm the DOE had retained to conduct technological due diligence in conjunction with KiOR’s $1 billion loan application for Project Alpha.”

The fear was that Shaw’s engineers would turn up the problem, and scuttle a loan guarantee until KiOR came up with a new catalyst. But that would take time and there was no guarantee that a new catalyst could be developed — or that it would perform as well as projected in the forecast.

Matters came to a head on April 8th. According to the state of Mississippi:

Instead of revealing these facts to Shaw and/or the DOE, Cannon and Ditsch concealed these matters and doubled down on their hope that their new catalyst, KC2, would achieve commercial scale yields and economics while used in steady state operations.

Shaw’s engineers reported to DOE, according to the State of Mississippi, that they could not support a 67 gallon per ton yield based on the performance of the demonstration unit. And Shaw’s figures, which were derived from reports and not from direct independent measurement, The Digest learned, did not take into account the catalyst de-activation problem, and did not subtract water content from the overall yield.

When all else fails, IPO

With catastrophe on the horizon relating to the catalyst performance and the yields at Columbus, on April 11, 2011 KiOR filed for an IPO with the SEC, and claimed in the prospectus:

Our proprietary catalyst systems, reactor design and refining processes have achieved yields of renewable fuel products of approximately 67 gallons per bone dry ton of biomass, or BDT, in our demonstration unit that we believe would allow us to produce gasoline and diesel blendstocks today at a per unit unsubsidized production cost below $1.80 per gallon, if produced in a standard commercial production facility with a feedstock processing capacity of 1,500 BDT per day.

The state of Mississippi vehemently disagreed. They alleged that, in addition to the failure of the KC1 catalyst:

KC2 never generated commercially viable yields and neither did any of KiOR’s later generations of catalysts.

It was the first appearance of the inflated yields in a document that would be relied upon by the retail investor.

A KiOR staff member at the time recalled: “Contrary to the findings of the three above mentioned workers, Hacskaylo’s grossly inflated data showed almost double the Bio oil Yields, compared to actual, measurable/recoverable and reproducible Bio oil Yields listed in the spread sheets of the raw DEMO data produced at the same period. However, Hacskaylo’s Bio-Oil Yields were consisted with the Yield numbers used by Ditsch and others in the S1.”

Problems erupt with KiOR’s intellectual property portfolio

By May, the troubles at KiOR expanded to include the handling of processing of patent applications and the securing of the company’s intellectual property.

On May 15th, Dennis Stamires fired off a letter to CEO Cannon, notifying him that he would handle certain high value patent Applications directly with Jennifer Camacho, separately and outside Hacskaylo’s IP team.

One issue? As Stamires recalled for The Digest, “Hacskaylo’s name appeared, as a co-inventor, on patent applications on which he had not made any intellectual contribution.”

From the point of view of the KiOR shareholder, this represented a potential disaster of the first magnitude. The inclusion of a co-inventor on a patent, who has made no intellectual contribution to the invention, is serious business in the world of patents. The practice represents grounds, in and of itself, to invalidate a patent.

Putting some of KiOR’s intellectual property, potentially, right into the public domain. Damaging to the other co-inventors — and ultimately for the company to whom the patent rights are routinely assigned.

The Loan Guarantee withdrawal

Meanwhile, the company’s efforts to obtain a loan guarantee were failing, as became clear to financier Vinod Khosla after a telephone discussion on May 6th with Jonathan Silver, Executive Director of the DOE’s loan guarantee program.

The primary issue? Data to support the assertion that the company’s yields were commercially feasible.

The State of Mississippi stated:

Ditsch’s concerns about KiOR’s ability to prove the commercial viability of its technology to the DOE loomed large over the Company’s decision to press forward with its loan guarantee program application. KiOR’s executive leadership team and Khosla chose to withdraw the Company’s application, but not before Khosla considered pressuring Ray Mabus to call Jonathan Silver and/or the United States Secretary of Energy, Steven Chu.

The biocrude offtake agreement that wasn’t

Meanwhile, the company was scrambling to obtain an offtake agreement that would satisfy the requirements of the company’s loan from Mississippi.

In the first half of May, according to the state of Mississippi, Dennis Cuneo notified Governor Barbour that “Kior will announce on Tuesday that it has an offtake agreement with the Chevron/Weyerhaeuser joint venture – Catchlight.”

A biocrude offtake agreement is what had originally been intended by KiOR. But this wasn’t a biocrude offtake agreement at all. Rather, it was a gasoline and diesel offtake deal. KiOR’s Columbus plant would ship upgraded gasoline and diesel blendstocks to Chevron’s Pascagoula refinery, where it would be blended into the fuel supply.

It’s a significant switch. The original plan had been to ship biocrude and let Chevron and others hydrotreat the biocrude to remove excess oxygen, and then blend the upgraded fuel. But Catchlight, as we reported, had not been able to make the biocrude work in Chevron’s refinery. So, KiOR would have to build a hydrotreating unit at Columbus, and a hydrogen plant.

At Columbus alone, it would add $90 million to the project cost.

The state of Mississippi alleges that KiOR concealed the true reason for the switch.

After a question from the governor, Cuneo explained the Catchlight deal: Kior decided to integrate forward into diesel and gasoline to take advantage of the renewable fuel credits (which otherwise would have gone to Chevron.) As a result of the forward integration – the investment in Columbus is larger than originally anticipated.

Cuneo’s explanation prompted Governor Barbour to ask, “Will Hunt refine biocrude from Kior or also take gasoline and diesel?” Cuneo responded as follows: The Hunt deal is also for gasoline and diesel. Kior can make a nice additional margin by making gas and diesel – plus they get to keep the renewable fuel credits – which are gravy. That’s why they decided to upgrade their facilities beyond the crude oil stage. This means the investment at Columbus, which was originally targeted at $100 million is now $190 million. Their large scale facilities will be in the $200 to $250 million range for each facility – which means that the total investment in Mississippi will easily exceed $600 million (vs. $500 million in the MOU.)

What Mississippi described as a “bait and switch” — the failure to secure an offtake agreement for biocrude, presented as an “opportunity to sell gasoline and diesel” would become a key point in the state’s lawsuit against KiOR.

Courts will rule on this point eventually, but it is difficult to imagine that, so long as KiOR was able to supply fuel to Catchlight that was suitable for blending — no matter what equipment was used on site to produce the blendstock — that KiOR owed a duty to disclose changes in technology it was utilizing to produce a fuel. So long as KiOR disclosed that its financials had materially changed with any particular change in process, which it did.

What’s a blendstock, anyway?

There are as many as 100 different molecules that might show up in a gallon of gasoline — gasoline is a fuel specification rather than a single molecule — and ultimately all “raw feeds” into gasoline refining are “blendstocks”, because refiners are blending different feeds to make the highest margin they can while remaining in spec. So, whether KiOR was supplying product from a reactor that was dewatered into biocrude, or biocrude that was further processed through hydrotreating into a “gasoline blendstock”, they are both blendstocks, although they would have different paths in a petroleum refinery to the ultimate gasoline or diesel stream.

A scientist approaches KiOR’s General Counsel

In June, Dennis Stamires met with KiOR’s General Counsel Chris Artzer. He told The Digest:

“I showed him the actual raw (unmassaged) demo plant oil yield data and also the raw actual Oil Yields produced by the KCR Pilot Plant. I pointed out in detail the large discrepancies between the low yields KiOR was producing and the much larger inflated ones which KiOR was disclosing to the public. Also, I provided him with pertinent documents on Hacskaylo’s mishandling of the IP and certain patent applications. I gave him copies of the data, and he promised to study them.”

What happened?

Stamires told The Digest, “I kept going back to Artzer’s office to discuss those issues, several times in 2011. I tried hard to convince him that he must take action. Artzer told me he was still studying his documents. I never heard back from him on these issues.”

“You’ve cooked the books”

On June 6th, Bill Coates arrived, as KiOR’s new Chief Operating Officer.

A KiOR staffer recalls: “I thought he was a highly intelligent person with extensive operational experience in high level management positions in the Oil Industry. I was very impressed with his knowledge and his plans to make KiOR move forward. I though he was the right person and had a chance to save KiOR.”

Coates had a quick and rough indoctrination.

On June 24th, KiOR filed an amended Form S-1/A and Form 424(b)(4) in conjunction with KiOR’s 10 million share IPO. In a meeting with Dennis Stamires in June, he was advised that the biocrude yields in reality were much lower than the 67 gallons per ton, as stated in the IPO filing .

The State of Mississippi alleges:

Coates immediately began investigating the accuracy of the yield data and cost estimates. On June 27, 2011, Coates received a slide presentation for KiOR’s Vice President of R&D, John Hacskaylo, which outlined several basic differences between the Company’s financial model and actual operations…The Company’s financial model assumed a catalyst cost of $3000 per ton when the Company actually believed it would pay as little as $6000 per ton and had received a quote for as high as $30,000 per ton. Moreover, whereas the Company’s financial model assumed a catalyst addition rate of 0.83% per day based on the total weight of Catalyst inventory in the Unit, whereas the actual catalyst addition rate was nearly 9% per day.

Subsequently, Coates also reviewed the operations and results with raw data of the Pilot plant and the Demo unit, the report by Vasalos and McGovern on maximum yields. He also looked at the technology of Dynamotive, based on the public information. He brought in Max Kricorian, KiOR’s Finance Director, who discussed KiOR’s business and financial Model, and financial projections and forecasts which KiOR’ Management was disclosing to the public.”

Kricorian reviewed the business models based on input from the science team, and concluded that the actual costs were much higher than $2 per gallon of fuel, and substantially different from the costs the management team had projected.

According to KiOR staffers from this period, Coates concluded that there were large, unjustifiable discrepancies in the yields claimed and those achieved.

He would write on July 15th to a KiOR scientific staffer: “We have a difficult but not an impossible mountain to climb. Let me think about this for a few hours, as I have been thinking along the same lines, lets discuss further tomorrow morning at 10 at my office.” Coates also set a meeting for July 18th to arrange the testing of the new materials in the demonstration unit.

In fact, Coates had determined to form a Task Force aimed at to changing the technology to a new one that could meet the Technical performance, in particular the bio-oil Yield and related production costs as disclosed in the S-1. He directed that the Task Force be composed from experts coming from KiOR and from outside.

An internal technical proposal was his guide. In it was proposed a new technology capable of increasing substantially the Bio oil Yields, scalable to commercial size Plants, and dramatically reducing the production costs. It involved the use of a new family of catalysts/heat carriers with dual functionalities discovered by Brady, Bartek and Stamires in 2009 and pending patent application. These were based on low cost clay, metal doped Spinel’s. These would have reduced catalyst cost by an order of magnitude.

Meanwhile, Coates met with Fred Cannon, CFO John Karnes and Chris Artzer on July 15th. According to a staffer who spoke with Coates, “He confronted them with the problems involving the inflated yields, under valued production costs and bogus financial projections. They rejected his claims. The State of Mississippi, which placed the meeting in August, stated:

During the course of this meeting, the State of Mississippi alleges that Coates told Cannon and Karnes that they had “cooked the books” and informed them that he was not “going to be a part of this scam.”

The meeting set for the 18th never happened. According to Stamires, Cannon and Artzer met with Coates in his office prior to 10 o’clock and fired him.

But there was still a hope that his work had not been in vain. Prior to being fired, Coates also, according to the state of Mississippi, “reported the results of his investigation to the Chairman of the Audit Committee of the Board of Directors, Gary Whitlock.”

Whitlock undertook a review, interviewing Fred Cannon, Andre Ditsch, John Hacskaylo and Chris Artzer, declined to hire third party experts, and concluded his investigation on July 22nd without further action.

As the state of Mississippi observed:

No member of the Audit Committee or the Board of Directors requested that outside counsel and/or independent technologists be consulted to examine the substance of Coates’ concerns. In contrast, when the SEC notified KiOR in 2014 that it was the subject of a formal securities fraud investigation, KiOR hired Special Investigative Counsel and an independent engineering firm to investigate the veracity of matters at issue. The matters brought to light by Coates were identical to those investigated by the SEC over three years later.

The reach-out to the CFO

By the end of July, members of the science team had become aware of the Whitlock investigation, and its closure.

Dennis Stamires recalled: “I reached out to John Karnes, the CFO, and I met with him on August 3rd and 4th, I showed him the data and asked Karnes to convince Cannon to stop disclosing false information to the public and to work with a Task Force to change the technology. Karnes promised me that he would do his best. I thought he Karnes was in a better position, as CFO, to convince Cannon to do something about it. I had presented him with information, but all I got was the same lip-service.”

For the science team, the urgency was not just an impending IPO, but a loss of morale and personnel. Jacques De Deken, Kevin Denicola, Robert Bartek and now Bill Coates had left. Catalyst expert Mike Brady was excluded from participating in the R&D meeting and from receiving technical information and resigned that month. Dr. Conrad Zhang, an expert on Biomass and bio-oil chemistry was re-assigned to teaching chemistry to some university students, and he later resigned.

One investor looks deeper

On September 17th, Samir Kaul of Khosla Ventures became the first investor to request supporting data. According to the state of Mississippi, “Kaul requested that Cannon provide him with the supporting data of the yields set forth in the graphs. He also asked that Cannon arrange a conference call for Cannon, Kaul and Ditsch to discuss the information.”

Outreach again to the CEO

Internally, nothing came of the outreach to Karnes, and Stamires attempted again in mid-September, this time meeting with CEO Fred Cannon. The meeting took place on September 20th, and Cannon was warned specifically that:

1. The R&D group under the leadership of Hacskaylo were “working in the wrong area of research, not capable of producing yields close to 84 gallons per dried ton of Biomass with reasonable quality, and production costs close to $2 per gallon of fuel.”

2. To date only minor improvements had been made on the zeolite catalyst, and it was able to reach actual and reproducible Bio oil yields no higher than 46-50 gallons per ton 15% or less oxygen content, at the KiOR’ Pilot plant with new more efficient Reactor licensed from CPERI.

3. The yields were far less from the those needed to sustain a profitable business, and substantially less than the 67 gallons per ton stated in the S-1 for the IPO.

Cannon received a follow-up email on October 10th repeating the same points. And on October 30th, Cannon received another email on this subject, urging him to form “a Task Force“ called “Project Team Oil Yield”, reporting directly to Cannon, composed of experts in the Field, to solve the present problems with the very low Bio oil yields and extreme high costs for producing the fuels.

Cannon did not reply.

Another investor gets nervous

On October 5th, John Schneider of Artis Capital Management, L.P. (a principal investor in KiOR) notified Cannon that Artis, as the state of Mississippi alleged in its lawsuit, “suspected that KiOR had not been honest in its public filings.”

A Climate of Fear

A KiOR insider from this period described it as a “fearful working atmosphere” by the end of 2011. For employees to “to survive and keep their jobs , and not being isolate or fired, they had to remain silent and accept the “party-line” involving the fraudulent and deceiving information fed to the public and investors.”

Paul O’Connor resurfaces

On November 29th, Paul O’Connor called Dennis Stamires and told him straight out that he had concerns about the authenticity of the data on yields and related costs which Hacskaylo has been reporting to the Board. In particular, O’Connor analyzed and compared the data the Board was receiving from Hacskaylo and noted several discrepancies.

The state of Mississippi in its lawsuit stated:

John Hacskaylo made a power point presentation to the Board of Directors in December 2011 that included a graph that plotted projected yields of 63 [gallons of] biocrude per bone-dry ton. Paul O’Connor compared the graph in the [latest] presentation to one that had been presented in February 2011 and concluded that the presentations were inconsistent.

Stamires and O’Connor agreed to work together to convince the board to launch an independent technology audit, but not to reveal their misgivings to the public just yet. Rather, they decided to focus on the Board or, alternatively, a direct approach to Vinod Khosla.

O’Connor recalls: “I was trying to be careful, because I had seen the tactic from some of the people, to silence people from revealing secrets. But I felt if you know what the problem is, you can solve it.”

The two also agreed to try to engage Professor Vasalos in the Audit . He was an expert on biomass conversion to fuels and had reviewed KiOR’s technology and data from the pilot and demo units. Also, he had spoken to Cannon about changing the KiOR’s technology to improve yield. They agreed he was in an excellent position to conduct an unbiased diligent assessment of the status of KiOR’ technology, and O’Connor agreed to meet with Vasalos in Amsterdam.

The state of Mississippi said:

O’Connor emailed Samir Kaul on December 14, 2011 to notify him…having received no response, O’Connor sent another email to Kaul on December 17, 2011 that further elaborated his concerns.

Meanwhile, Stamires reached out to Jennifer Camacho, an Attorney from Greenberg Traurig in Boston, who did patent and freedom to operate work for KiOR. Stamires knew that Camacho had a long good relationship with Samir Kaul, having worked together at another company before KiOR, and he knew that Camacho had frequent discussions with Kaul regarding KiOR’s activities.

Stamires recalls: “By now I had a real sense of urgency, and I asked Jennifer to brief Samir about Hacskaylo’s manipulation and falsification of the data, and the highly inflated yields. I told her that incorrect data may not only adversely affect the financials of KiOR’s business, but also may compromise the legal validity of patents based on false data.”

On December 12th, Camacho replied to Stamires, writing: “Thanks for your note. I will reach out to Samir tomorrow.

A company falling into the abyss

By the end of 2011, the company had filed for its IPO, and what have been described as “false data”, “overstated yields” and “unrealistic financial projections” are in the public domain. The COO came and went. Top science people had resigned. Investors were showing signs of nervousness. The first commercial’s project cost had ballooned $90 million. Representations to the state of Mississippi would be later characterized by the state as “fraudulent.”

The root cause: the low yields and oxygen-replete product. Which go back to ineffective catalyst; the only ones working much at all are said to be ruinously expensive.Pleas to revise the technology ‘before it is too late’ were going unheard.

Truly, KiOR is beginning to slip over the precipice and down into the abyss. But some remain hopeful that KiOR can be saved, that a better science result will save the company. Differing voices express differing ideas on how to achieve that.

Could the catalyst finally work? Would it work in the design for the first commercial, which is well on the way to being finalized. KiOR may be failing as 2011 gave way to 2012, but perhaps the staff could catch a branch and stabilize before tumbling into the darkness.

Maybe, just maybe…

We’ll see how all those hopes worked out in the next part of our series, as KiOR readied for its commercial unit and sailed towards a date with NASDAQ and its IPO.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

May 19, 2016

KiOR: The Inside Story Of A Company Gone Wrong, Part 2

by Jim Lane

Note. This is Part 2 of our series on the inside true story of KiOR.

In part 1 of our series, here, we explored: the formation of BIOeCON and KiOR, the problem of too much oxygen and coke, the entry of Khosla Ventures, and the loss of a CEO. Also, “a recipe for technical failure”, disastrous pilot scale results, culture clashes, catalyst development, reactor design trouble and the departure of a key scientist.

Two KiOR scientific wings emerge

No one was more emphatic about the pilot plant results than scientist Robert Bartek, who sent an email ‘More Math on BCC’ on December 7th, stating:

“We are in a period of denial. We must forget that our original conceptions of BCC are not right and must do something radically different to save the Project”.

By the end of 2008, it is clear from discussions with multiple KiOR sources that the KiOR scientific staff had divided into two groups. One group believed that the BCC Technology had been sufficiently tested, was not working, had no value to KiOR’s business and should be immediately stopped.

The other group, which was headed by O’Connor, focused on improving the BCC Technology, and on support of the three European Labs doing so. The controversy over the R&D Plan for 2009/2010 — to the extent that it exacerbated a growing rift between O’Connor and Ditsch — would have far-reaching consequences as 2009 unfolded.

Paul O’Connor confirmed that cultural problems were rife at KiOR at this point.

“Part of this was my problem because I wasn’t there full time in Houston,” O’Connor told The Digest. “Basically I was the CTO, and André [Ditsch] had no experience in FCC biomass or hydrotreating, but he had it in his head that he was second in command to Fred. When I was away he would push it in another direction. Because people considered him Samir’s boy [Samir Kaul, a partner in Khosla Ventures], and no one dared to criticize him much. I did, and that became a problems.

“Partly, that was the Houston culture. In The Netherlands as in places like San Francisco and New York, everyone tells you exactly what they think of you even in the management meeting, we fight like crazy but we resolve issues and make up. In Houston, people don’t often want to talk about the problem. It’s a case of everything is fine, everything is great, and Fred was very good at that.

“But there were problems to be solved, and there would be all these in-fights between myself and Ditsch, and with so many new people. Everyone wants to invent their own process and thinks they have the right ideas. Fred never really took a stand, he always stayed out of it.”

No team, no stable technology

“One problem that hurt KiOR,” O’Connor recalls, “was we just had too many people from Albemarle. Catalysis is important, but what we needed also were process engineers, and people with experience in hydrotreating and operations. The balance went wrong.

“And then there was this entirely different idea, coming I suppose from the Khosla approach to business, and André himself in some ways represented this approach, which was to go out and hire a whole bunch of MIT PhDs. But you need time to train them and they are not the ones who are going to scale up a process.

“And so it became a struggle to unite all these people into one team, and in that struggle I began to struggle with Fred, and it became a case of Fred and André on one side, and although I stayed around until the end of 2009 my influence was minimized.”

By all accounts, at the beginning of 2009, as one source familiar with the state of technology development described it, “KiOR had no Technology that was sustainable, competitive, cost-effective, and economically/technologically feasible, and the operating funds were practically depleted.”

By all accounts, at the beginning of 2009, as one source familiar with the state of technology development described it, “KiOR had no Technology that was sustainable, competitive, cost-effective, and economically/technologically feasible, and the operating funds were practically depleted.”

The fateful Columbus first commercial-scale plant

The fateful Columbus first commercial-scale plant

A Stealth Team forms

Amongst the loosely-associated group of staff that felt the BCC technology as designed was hopeless, a “save the company” effort launched on a stealth basis.

Their goal? Reliable, data showing increased bio-oil yields of reasonable quality using less costly catalysts and processes. The new data, demonstrating a feasible technology, could be used by KIOR in business development, and to convince new investors in funding efforts.

The timing? Those who were aware or active in this effort took the view that time was critical, not only because KiOR, as a company in development, was shortly going to be starved for funds if results were not forthcoming; they were also concerned that the plans and design of the demonstration-scale Unit (a 10 ton/day biomass processing capacity) needed to be formulated, firmed and contracted out for fabrication. And any new technology would need to be developed before that.

Out of a wider group, catalyst expert Mike Brady, FCC unit expert Robert Bartek, solid state chemistry expert Dennis Stamires, and Drs. Vasalos and Lappas of CPERI in Greece would be the most visible. Their concern was not only the development of a technology that could save KiOR from disaster, but doing so in a way and in a time frame that would not cost them their own jobs.

In February 2009, Stamires wrote to a scientific team composed of Bartek, Yanik, Loezos, Cordle, and Brady, proposing that, at the KiOR Pilot Plant, test runs to duplicate published test data obtained from other similar Pilots using the same biomass feed and sand as a heat transferring medium. This was the baselining project which had been specifically ruled out for the KBR pilot.

Paramount the need to ascertain why the CPERI FCC Pilot Plant produced higher bio-oil yields than the KiOR pilot. The Stealth Team decided to conduct a “Round-Robin” testing program where both Pilot Plants would use the same biomass feed, sand/catalyst and process conditions.

The idea?

Stamires reasoned that, if Prof. Vasalos and Dr. Lappas at CPERI , who had a similar FCC Pilot plant in operation, could pyrolyze the same kind of biomass with sand, under the same process conditions, the team could confirm that new KiOR pilot was working correctly. If the CPERI FCC Reactor design was responsible for the higher Bio-oil yields, then the design could be introduced into the KiOR Pilot.

On the same day, Bartek replied: “I agree! I am hoping we can do significant alterations to the process to assure some chance at victory in the next two months, so we do not purchase the wrong DEMO“.

After baselining the pilot plant, the expectation was that new catalysts could be tested aimed at improving bio-oil yields. Specifically, Bartek speculated that it was “Time for some Z?”

Meaning “ZSM-5 catalyst”. A commercial grade, high-priced catalyst, well established in the market place, being used by most oil refineries worldwide, containing the ZSM type of Zeolite. Papers had been published by Dr. Paul Williams at Leeds University in 1995 indicating that zeolite catalysts would not produce a high bio oil yield, but could produce, as one observer put it, “a reasonable amount with a substantially improved quality containing a lesser amount of oxygen, easier and less costly to be upgraded to gasoline and diesel fuels.”

Whose technology is this, anyways?

The other team? In a March 5th memo to the KiOR community, a R&D review of the BCC Technology, specified the continuation of the R&D work on BCC Technology in all four Labs.

As O’Connor confirmed to The Digest, “one of my biggest frustrations was that the technology that was moving forward was never actually the BIOeCON technology. What we were doing in Valencia was not what we did later in Houston. If you look at the first patents and so on, you see that the basic trick was to have an interaction between the biomass and the catalyst before it enters into the reactor. We called it mechano-chemistry. When I compared the data between Houston and Greece, Greece was better, and that was because in Houston, they never pre-treated the biomass.

“That created more conflict with Ditsch. He had a ‘make it simpler, don’t do that’ attitude towards it. And you could sort of get away with it in the pilot plant because you could mill the biomass very fine. But when you get to demo scale, much less commercial, you can’t mill the biomass like that. For one, it can get sticky. It can even catch fire in the plant, which happened.

“But if you are feeding [larger] wood particles of 1-3 MM instead of this finer sort, it takes quite a long time before the particles heat up, and the outside can get charred while nothing happens to the inside.”

So you coke up and lose yield.

Cannon sidelined by heart problems, and “who’s in charge?” chaos ensues

But the week of March 8th would prove even more fateful for KiOR, as CEO Fred Cannon was hospitalized with a heart problem and was sidelined for some weeks, in hospital or at home, while recuperating.

And so, a leadership crisis erupted.

By March 19th, O’Connor emailed the staff, “In the absence of Fred, I have assumed his responsibilities to assure a smooth continuation of our business.” Most staff at the time took that to mean that, as soon as Cannon returned to the office, O’Connor would assume his former duties.

But more than that was going on.

Cannon had received a memo from O’Connor, expressing concern about the leadership of KiOR, the direction KiOR was taking, and a lack of team effort and communications between groups. O’Connor expressed the view that, if matters continued as they were, key personnel would leave the company.

Some discussions took place over a potential revision of management duties and structure, which failed, not the least because as Cannon explained, even if he really wanted to re-divide CEO responsibilities and authority, he could not do that without a resolution and approval by the KiOR Board.

A degree of chaos ensued, and morale dropped. In Cannon’s absence, VP for Strategy Andre Ditsch also stepped forward to assume more commercial responsibility, and it became at times unclear to staff who was in charge.

One observer recalls, “[Ditsch and O’Connor] were calling their own regular staff meetings at the same time, and starting to re-organize and re-assigning responsibilities and projects to the staff.”

The controversy over the research program boiled over. Those familiar with this period at KIOR said that Ditsch “accused O’Connor of grabbing for Cannon’s job”, and having failed to develop a feasible technology, despite two years of investment in R&D.

The battle reached the KiOR board in March 2009. The board confirmed Cannon as President and CEO of KiOR, Ditsch remained VP for Strategy; in May 2009 O’Connor was re-assigned from the CTO role, although he continued to work for KiOR until November 2009 when his contract expired.

Observers of KiOR during this period stress that, although Cannon returned to the office by the end of March, Andre Ditsch assumed some extra managerial functions and, according to one observer, “was communicating frequently directly with Samir Kaul (a KiOR Board member, representing Khosla).”

Dead Man Walking

While the management crisis was unfolding, the Stealth Team had outlined new catalysts and had made the request to test these, and to calibrate the KiOR pilot plant with sand. The request ultimately would have to be made to Ron Cordle, the Pilot Plant supervisor, as a confidential, weekend test. The backup plan was to have CPERI run the tests in their pilot in Greece.

“It was like the blind leading the blind,” Stamires recalled. “The KiOR pilot plant reactor was deficient and underperforming and not capable of producing optimum bio-oil yields. Adding to this structural Reactor problem, and [later] the additional problem of the data manipulation of John Hacskaylo. The combination of these problems resulted in a general situation where nobody knew what we were actually doing, what oil yield numbers to believe.”

As Robert Bartek would express in a March 28th memo:

“You had already been hounding me to get sand in the Unit. At that time the three of us started on this, I had already accepted the fact that I was a “Dead Man Walking” in Fred’s organization and my time at KiOR would be short. So why not one final act of defiance? If you are going to be let go, let’s do it for a noble project reason rather than politics. May be we could rescue this thing and snatch victory out of defeat we [are] heading into.”

Ultimately, the sand test was carried out, using sand obtained from CPERI, and confirmed that higher oil yield was produced at the Pilot Plant at CPERI in Greece. That finding prompted Bartek and Stamires with further discussions with Lappas and Vasalos, to arrange a meeting with Cannon and Vasalos in Houston. And an agreement was made with Cannon that CPERI would license the design of their Reactor to KIOR

With this, the Reactor at KiOR’s Pilot was replaced with a new Reactor constructed according to the design of the CPERI Pilot Plant. With some process variables optimizations, the KiOR Pilot Plant was able to produce higher Bio Oil yields.

Work on catalysts also continued. The Stealth Team was convinced by that time that the BCC Catalyst (the synthetic clay) was a very poor heat conductor, and incapable of transferring a sufficient amount of heat to the Biomass fast enough. They thought that a new material with high bulk density, low porosity microspheres, with a low catalytic activity, would be much more suitable.

By March 9th, the Stealth Team had obtained, via “a friend at BASF”, 5 gallons of high temperature calcined clay microspheres, which were tested secretly at the KiOR Pilot Plant. In a memo on March 27th, Bartek reported to O’Connor, Yanik and Stamires an overall substantially improved performance over the BCC Technology and its Catalyst. Oil yields were higher, there was less coke, and a reasonably low oxygen content in the oil. The Stealth Team began to make arrangements to purchase a Spray Drier and a Calciner to be able to make calcined clay microspheres.

Meanwhile, a March 13th 2009 report from Peter Loezos entitled Mass Balance Data “validated again that BCC technology was not working for KiOR,” an observer reported. Dennis Stamires added, “It was mainly due to the very low bio-oil yields.”

Stamires also pointed The Digest to an independent validation of the performance of the HTC catalyst (i.e. the Hydrotalcite, HTC), published in 2013 in the Defect and Diffusion Forum by F. L. Mendes, A.R. Pinho, and M.A.G Figueiredo. That report concluded:

“The use of either the FCC catalyst or hydrotalcite are not suitable for intermediate pyrolysis reactors, generating a product with high water content and low content of organic compounds in bio-oil and produce more coke. None of the materials tested produced bio-oils with considerable hydrocarbons yields and presented high amounts of phenolic compounds. In general, silica had the best results in terms of yield and quality of bio-oil.”

Both Mendes and Pinho were working for Petrobras in Brazil, and during this period it has been asserted to The Digest that KiOR was involved in negotiations with Petrobras, regarding forming a joint venture, or licensing KiOR’s BCC Technology. Suggesting though not proving that the journal results reported were related to KiOR story.

The Tipping Point

By April 2009, Cannon had returned to his desk at KiOR, but according to an observer, for some time after Cannon returned, “In reality, it was Ditsch and [Kaul] who were managing KiOR, and Cannon seemed to be a bystander, and sometimes their spokesman.”

One notable change in the company’s management style? “Most of the important and crucial issues were only discussed in the new mini-Management Team of Ditsch and Cannon, in communication with Samir,” one team member recalled. “Not in the weekly general management team meetings as was done before.”

The problems facing KiOR at the time were substantial, but not unheard of for a young company in the advanced bioeconomy. They were summed up internally at this time as:

*Finding new investors to provide further funding as KiOR was soon running out of monies.

*Having not yet developed and demonstrated a feasible, sustainable and profitable technology, it was difficult to convince new investors to provide funds for KiOR’ operation.

*Soon running out of monies, will be difficult to keep the R&D function going on, which was needed to develop new sustainable technology.”

*The large processing capacity Demonstration Pilot Plant Unit (DEMO Unit ) was being designed and will require several millions of dollars to be constructed and installed at the Houston KiOR site.

*Negotiations were going on with Chevron / Weyerhaeuser/Catchlight Energy, involving the formation of a joint venture, in which KiOR will provide the technology to convert waste wood to liquid fuels. However at that time, KiOR did not have technology that was sustainable and commercially feasible and profitable.

*KiOR was in a great need to have a feasible demonstrated technology which can be commercialized and be economically sustainable and profitable, for use in the discussions and application to the DOE for getting a loan guarantee of a $1 billion, for use in building commercial Plants.

*KiOR was in need to have, at pilot plant / DEMO Unit scale, its Technology demonstrated and validated that was feasible, economically sustainable and profitable, while discussing with the Mississippi Development Authority a $75 million loan.

*Morale of KiOR’s employees was very poor with a fragmented Management leading in different directions, while key technical personnel, either had left or were looking for new jobs outside KiOR.”

*KiOR’s competitors Ensyn and Dynamotive were fast developing and improving their technologies, and preparing for commercialization.”

65 gallons per ton, but not really

It was this latter point — the progress of Dynamotive, that perhaps formed a tipping point in the story of KiOR.

For, coincidentally or otherwise, we see the first appearance of 60+ gallons per ton yields, a level of yield that would eventually feature prominently in KiOR’s 2011 IPO, in an analysis written by Andre Ditch — not of KiOR’s results, but of Dynamotive’s.

Ditsch was juggling — at haste — data from Dynamotive and results from a UOP/PNNL project as reported in the September 2008 issue of Hydrocarbon Processing, written by a team led by Jennifer Holmgren (nowadays, CEO of LanzaTech), then GM of UOP’s Renewables unit, entitled “Consider Upgrading Pyrolysis Oils into Renewable Fuels”. He notes that he is “running out of daylight for report, but a few comments”.

Later, he comments “IF (big if) we assume the UBA oil and our Kaolin oil are similar (without more data, a stretch)…”. Later still, he added that “all this is written in great haste, so feel free to add and pressure test numbers.” All indicative of a memo written in back-of-envelope calculations.

Overall, Ditsch projected a break-even for KiOR at a yield of 65 gallons per ton of biomass, or a 22.5% yield of bio-oil from the biomass.

From this point forward until the end of 2013, it will be impossible to find a commercial projection or communication based on less than 60 gallon per ton yields, or a scientific set of data from any KiOR pilot, demonstration or commercial unit that has a yield of 50 gallons per ton or higher (even at an oxygen content of 17% that would be very difficult to upgrade).

Exotic yields get mentioned like "business as
usual" scenario baselines in this KiOR slide

Exotic yields get mentioned like “business as usual” scenario baselines in this KiOR slide presentation.

“We need 2X”

By June 2009, the Stealth Team, working with zeolite catalysts in the Pilot Plant, were showing enhanced yields and bio-oil quality. At the same time, literature searches turned up projects from the 1980s and 1990s demonstrating that the same type of Zeolite (ZSM) had been used before in Catalytic Pyrolysis.

But with the improvement, KiOR yields approached a maximum of 40 gallons per ton with reasonable quality. “Higher yields would have been simply contained more oxygen, that would have needed to be removed to convert the bio-oil to transportation fuel,” Stamires told The Digest.

A progress update was held on June 3rd with Khosla, Samir, Cannon, Ditsch, O’Connor and others, Bartek reported the figures.

Khosla’s response was to request of the R&D team that they double the yields over the next 6-8 months. The improvements were not from outer space. They were the kind of yields that would have made the overall process economically sustainable and profitable, without government subsidy, in commercial-scale plants. A participant in the meeting reported to The Digest that certain milestones for monthly incremental increases were established to reach the target.

Possible? Yes. With the existing BCC technology. In the view of one wing of KiOR’s staff, no. Given management’s reluctance to change the R&D plan, add a reactor to the process, hire scientists who could accomplish these goals, numerous members of the scientific team were pessimistic both in terms of the target and the timeline.

Concerns were high, as commercial discussions with Chevron and Weyerhaeuser (as the JV Catchlight Energy) were well underway. As one team member put it, “if Chevron finds out, they will run away from KiOR and essentially seal KiOR’s fate from any future partnerships with Big Oil, and Khosla would pull his funding.”

The race for 2X gets underway

The search for catalysts was underway at a rapid pace.

Cannon approved the request of Brady, Bartek and Stamires to start making KiOR’s own calcined clay microspheres using the spray dryer. The main objective of this work was to develop clay-based microspheres which exhibited acted both as efficient heat carriers, and catalysts with controlled selective activity.

Having then optimized the Physical properties of the calcined microspheres with respect to Bio-oil yield and quality, Brady, Bartek and Stamires proceeded to optimize the chemical/catalytic properties of the calcined microspheres. Then Brady proceeded to prepare clay microspheres with different amounts of catalytically active metal salts — magnesium, calcium, potassium, sodium, and aluminum among others.

In addition, Professor Iaocovos Vasalos re-appeared as a consultant by September 2009. Subsequently, Prof. Vasalos confirmed to Cannon that in order to achieve reproducible Bio oil Yields close to Khosla’s 2X target, with a reasonable quality, certain “radical changes must be made in the design of the pilot plant and to the process.”

The urgency was not only the usual pace of s start-up hungry for milestones that would encourage investments, there was Catchlight Energy relationship looming. In an email from Dan Strope, VP Technology, sent Aug. 11 2009 to the staff, it was revealed that Andre Ditsch was officially heading the negotiations with Chevron, and Ditsch was asking for technology data to prepare an economic forecast for a commercial size plant.

Yields improve, but trouble looms

In an email to Fred Cannon and Andre Ditsch on September 23rd, Bartek reported pilot plant data confirming that the ZSM catalysts produced much higher hydrocarbon yields, as the BCC Catalyst (HTC ) was converting them to gas and coke. The oxygen was in the range of 10 to 15%, but the yields were still stuck in the low 40s. With these results, the decision was taken in late 2009 to suspend work on the BCC technology at the three European Labs as well at KiOR’ Lab in Houston.

Paul O’Connor, still on the KiOR board at this time, blasted the decision to use ZSM-5 catalyst.

“It was the worst decision ever made, ZSM-5. We all knew that to make this process economic we needed a cheap catalyst. ZSM-5 is one of the most expensive around. Plus, you are dealing with a biomass with calcium and many other things in it, and with ZSM 5 you kill the catalyst. It’s so strange they went in that direction.”

But yields at least were up. A 20-30% jump in yields, but catalyst performance, the science team concluded, would not improve anywhere as fast as the 2X target required. In a memo dated Sept. 6, 2009, Stamires proposed a radically different Biomass Conversion system, comprising two Reactors in series or in parallel, with a new catalyst.

The approach? The Biomass in the first Reactor would be thermally Liquefied in a fluidized bed using a high-efficiency heat transferring medium which has a high heat capacity (such as sand ). The Bio oil vapors generated in the first Reactor would then be reacted with a medium activity catalyst in the Second Rector. The invention was subsequently patented by KiOR .

Meanwhile, Ditsch was pressing hard. In emails of Sept. 16 and 17, 2009, he was asking for information to be used in his presentation and “KiOR Update” to Khosla on the 17th .

From that update, Khosla agreed to relax the timeline for process improvement, but not sacrifice the yield target, which would have been in the 80s and into the 90 gallons per ton range. The 2X milestone target was set for Q4 2010. But the scientific team — at least one wing — didn’t believe that anything like those yields could be achieved with anything like the technology that KiOR was readying for commercial-scale.

Stuck in the 40s Doldrums

New catalyst materials were tested in KiOR’s Pilot KCR plant in October and November 2009 Bartek and reported by Patrick Steed in a January 7, 2010 email confirmed the improvement in catalytic activity, while retaining their good heat-transferring properties.

But, the good results came with a ceiling. In their own way, they confirmed to members of the science team, as sources told The Digest, that KiOR was likely to become stuck in a range which would never get much out of the 40s, expressed in gallons per ton.

2010 dawns, with a design input issue

In January 2010, though, focus was on a potential 20% bio-oil yield improvement possible by employing CPERI’s reactor design, compared to the yields obtained by the present design of the KCR Pilot plant (a FCC type).

The Pilot Plant was remodeled with the CPERI design, but to the surprise of the team, the Demonstration Unit design was not changed. According to those familiar with the timelines, the Demo Reactor was already fabricated and was soon to be delivered to KiOR for installation, based on the old, obsolete original KiOR Pilot Plant Reactor design.

Eventually, the large Reactor of the Demo Unit, with a 10 ton per day capacity, would have to be dismantled and be replaced by the new Frustum Reactor licensed from CPERI. Resolution of the problem would lead to sensational additional costs and delays in the operation of the Demo Unit.

How could this have happened? As it turns out, Robert Bartek, described by one team member as “the expert who had supervised the Pilot plant testing work at the KBR Pilot Plant after De Deken had left, who had managed the design and operation of KiOR’ KCR Pilot Plant and who had worked closely with Prof. Vasalos and Dr. Lappas in transferring their Reactor design to KiOR,” was left almost completely out of the loop.

According to KiOR team members of the time, Bartek “was intentionally kept in the dark and out of the design work of the Demo Unit until almost to the end of the project.”

Why? Perhaps because Bartek was openly and clearly criticizing the BCC Technology and its Catalyst for being “a failure and useless to KiOR”.

“Suggestions and disagreements were considered to be politically incorrect, and rather blasphemies against the party-line prevailing in 2009, supporting and promoting exclusively the BCC Technology and its Catalyst,” remarked Dennis Stamires, when asked about the crisis. More than one KiOR team member contended that the decision to exclude Bartek from the Demo design process, among other consequences, convinced Bartek to resign.

About NASA syndrome

There are some classic management set-ups that lead to failure, one of which is NASA syndrome. The type of management failures that were prominently on display in the Challenger and Columbia disasters. As the Columbia Accident investigation Board reported:

The organizational causes of this accident are rooted in the space shuttle programs history and culture, including the original compromises that were required to gain approval for the shuttle, subsequent years of resource constraints, fluctuating priorities, schedule pressures, mischaracterization of the shuttle as operational rather than developmental, and lack of an agreed national vision for human space flight. Cultural traits and organizational practices detrimental to safety were allowed to develop, including: reliance on past success as a substitute for sound engineering practices (such as testing to understand why systems were not performing in accordance with requirements); organizational barriers that prevented effective communication of critical safety information and stifled professional differences of opinion; lack of integrated management across program elements; and the evolution of an informal chain of command and decision-making processes that operated outside the organizations rules.

Finally, the Board noted:

The pressure of maintaining the flight schedule created a management atmosphere that increasingly accepted less-than-specification performance of various components and systems, on the grounds that such deviations had not interfered with the success of previous flights.

The NASA cautionary tale is instructive; there are correlations between KiOR and Columbia.

Specifically, reluctance to test to understand why systems were not performing in accordance with requirements, organizational barriers that prevented effective communication of critical information and stifled professional differences of opinion; lack of integrated management across program elements; and the evolution of an informal chain of command and decision-making processes that operated outside the organization’s rules.

KiOR was on a fast-paced commercialization track, as it
highlighted in this company slide presentation.

KiOR was on a fast-paced commercialization track, as it highlighted in this company slide presentation.

Never commercially viable?

The technology’s progress was under close scrutiny by February 2010, when it was decided to form a Diligence Team consisting of Prof. Vasalos and Dr. Stephen McGovern, a hydroprocessing expert. The review included data and related information derived from KiOR’s R&D work, as well from literature including patents, and data from the CPERI Pilot plant.

By this time, concerns about the data stream from the pilot also became an issue within the company. Stamires himself recalls six such meetings with CEO Fred Cannon, on February 10, March 13, March 26, April 28, May 7, and May 12. What was Stamires bothered about? Specifically, “manipulation and inflation of the pilot plant Bio oil yield data.”

The results of this comprehensive and in-depth Technology Assessment Review Study by Vasalos and McGovern were published in April 2010. Flat out, the report contained the most dismal news possible. The assessment concluded that the maximum yield, based on the pilot plant, was in the low 40s with 15% oxygen content, using ZSM catalysts.

Recommendations were made for improvement. According to one familiar with the report, by and large, these recommendations “were ignored by the Management Team, and not implemented.”

The Impending Public Statement on the Technology

Meanwhile, there was pressure on the company to make disclosures regarding the company’s progress towards scale, and the yields it was achieving, Specifically, there was pressure on regarding a statement describing KiOR’s technology that could be placed at the KiOR Website and also to be given to the public and potential investors.

Dennis Stamires confirmed that there was a controversy. He himself sent an April 5th memo to CEO Fred Cannon and VP Technology Dan Strope, calling for only “Credible” information only to be released. "The message in the event of being Legally challenged, it should be defendable.” He did not receive a response, he said.

On April 10th, a draft Technology Statement to be posted on the KiOR Website, prepared by Matt Hargarten of Dig Communications, was circulated by Andre Ditsch. It would not reach some members of the scientific team until as late as May 11th.

An uproar ensued regarding the draft statement. Bottom line, there were heavy complaints about false claims, misleading information and fake terms like “KiOR’s Proprietary Magic Catalyst“. CFO Kevin Denicola indicated to team members that he too had serious concerns about the truthfulness of the proposed Technology Statement.

Inflated Numbers: The July 2010 Report

In May 2010, John Hacskaylo joined KiOR as VP R&D. With Cannon and Ditsch, they formed what was described to The Digest as “The Troika, [which] manages all the important issues and business items of KIOR”.

The issues? These would grow to include:

The negotiations with the Mississippi Authority regarding a loan of $75 million; negotiations with Chevron / Catchlight regarding the formation of a joint venture; the Technology Review/ Assessment by R.W. Beck; the Application to DOE for a $1 billion Loan guarantee; the preparation of the KiOR S-1 Prospectus for a NASDAQ IPO; negotiations with potential investors, and updates on KiOR’ s technological progress.

One team member wrote of this time:

The formation of “The Troika” caused a deep division and disputes among KiOR’s managers, which later on dripped down to lower levels of operations, and prevented normal working business communications among employees. Hacskaylo created and highly promoted this culture. R&D personnel were told to whom they can talk and to whom should not talk about their work. Co-operation, trust and willingness to communicate fast disappeared, and a spirit of fear of being punished and fired prevailed in the organization.”

In a July 2010 Report, entitled “Yield Improvement Efforts”, according to those familiar with the report, Hacskaylo replotted the previous Pilot plant data to show a steady substantial oil yield increase in the period of 2009 – 2010, claiming that the Pilot was 50% ahead of the Vasalos report’s findings, in gallons per dried ton of Biomass feed and projecting an 80% increase in yield from the upcoming Demo Plant, or 72 gallons per ton.

The yields, according to key members of the science team, were simply not true, and incredibly inflated. The results were inflated from the latest pilot data. Further, the Demo plant as designed at this time did not incorporate improvements that KiOR had deployed at the pilot.

As one observer noted, “Hacskaylo’s new, much greater inflated oil yields, generously met and even exceeded the milestones which earlier Ditsch, Kaul, and Khosla had set forth to be accomplished quarterly for the year 2010, by the R&D group. Hacskaylo managed to accomplish (on paper only) the [required] milestones of increased Bio-oil yields”, without the bother of actually improving the process, so went the theory.

It is not known whether financial motives, data confusion, or honest mistakes went into the July report or into the criticism thereof. It can be noted that executives of KiOR were rewarded with stock options for meeting milestones and accomplishing goals, but there’s no direct evidence that data was changed for monetary gain. It is clear however that the new data was not supported by those familiar with the raw data coming from the pilot plant. The Digest has obtained and carefully reviewed original data from the pilot from this period and the July 2010 report, and can confirm that the raw data and the July 2010 report do not agree.

Another report was made to Khosla in November 2010, and again team members say that the data was “corrected” and the yields “improved” from actual KiOR data. We are all left to guess exactly why.

At this stage, Denicola is reported to have attempted “professionally…to correct this problem and give the public and investors a truthful and representative account of the actual status of KiOR’s technology at that time,” according to one team member familiar with his efforts, but he was unsuccessful. Denicola subsequently resigned.

Bleak refinery upgrading report and a “see ya later” from Catchlight

In May 2010, samples that had been provided from the KiOR Pilot were the subject of a report from Catchlight Energy, the Chevron /Weyerhaeuser Joint Venture. Catchlight reported on two samples, one containing 11% oxygen content and one containing 17%. Their conclusion: they couldn’t effectively process either sample. O’Connor told The Digest that Exxon also reported trouble.

They did indicate that they believed that, with time, a process could be found that would tolerate the 11% oxygen content sample, though it would require alternative equipment that Catchlight was not in a position to finance. They further indicated that the 17% oxygen content bio-oil could not be processed by any existing refinery plant hydroprocessing equipment, and that new technology would have to be developed from the ground up, for that.

Either way, the idea of delivering a bio-oil to Catchlight was out. Catchlight indicated that, going forward, they would only be interested in handling a finished fuel blendstock that had been hydroprocessed by KiOR. Whether that meant using standard or modified equipment, or developing a new technology, would be up to KiOR and at KiOR’s expense.

KiOR does not disclose Catchlight Energy's deep
reservations in this slide deck overview given in 2013.

KiOR does not disclose Catchlight Energy’s deep reservations in this slide deck overview given in 2013.

Selling it to Mississippi

“By mid-June 2010,” as the state of Mississippi recounts in its lawsuit, “Khosla Ventures had retained Dennis Cuneo to assist KiOR in obtaining a favorable state economic development package. Cuneo is a former Toyota executive who enjoyed valuable relationships with Governors of southern states. Cuneo quickly arranged meetings for KiOR and Khosla with the governors of Arkansas, Louisiana and Mississippi. The first executive level meeting between the State of Mississippi and KiOR occurred on July 1, 2010 at the office of Governor Haley Barbour. Three entities were present at the meeting: KiOR, Khosla Ventures and the State. KiOR was represented by Fred Cannon, Mike McCollum (KiOR’s Vice President of Supply) and Andre Ditsch. Khosla Ventures was represented by Vinod Khosla, Samir Kaul and David Mann. Also present for Khosla Ventures was Dennis Cuneo. The State was represented by Governor Barbour and two MDA officials, Adam Murray (MDA Project Manager) and Justyn Dixon.”

Among the documents providing support for the meeting’s agenda was “An Overview of KiOR in Mississippi” white paper, provided to the Mississippi Development Authority, which made the following claims:

1. “Existing refining infrastructure can easily upgrade the oil into transportation fuels, making KiOR’s oil a direct substitute for imported crude oil without changing the refining to automobiles supply chain and infrastructure.”

2. “Our product is a high quality crude oil that can be converted into on-spec gasoline, diesel and jet fuel with standard equipment in operation in every US refinery.”

3. “Our process is already competitive with oil at $50/barrel with existing subsidies, and will be competitive with $50/barrel oil without tax credits in 2-3 years with catalyst tuning and process development, allowing economical access to nearly all available feedstock.”

The state of Mississippi alleges that the financial information provided to the state “did not account for the construction and operation of a hydrotreater and hydrogen plant at the Columbus facility.”

At the time, KiOR may have well held out hopes that a hydrogen plant could be built in partnership with a vendor, who would pay for construction and operation and charge a hydrogen delivery fee to the project. However, given the July 2010 date of the initial Mississippi meeting, there is no doubt on the Catchlight score. At best, KiOR may have believed that other refiners would be able to process its bio-oil.

Did KIOR include water in its bio-oil yield claims?

KiOR’s assertion that the technology “is already competitive with oil at $50/barrel with existing subsidies” seems remarkably similar to the speculative analysis completed by Andre Ditsch at the time of the UOP/PNNL paper, based on 65 gallon per ton yields. There is no documentation that The Digest has been able to uncover, nor any scientist we have interviewed familiar with the actual data out of the pilot plant, that supports KIOR yields at breakeven points.

A KiOR staffer relates a tale about André Ditsch. “Suppose you had a restaurant that seated 200 people,” Ditsch is reported to have told a KIOR team member, when questioned about the reporting of the KiOR numbers. “And, you only seated 10 today, but you were going to seat all 200 in the future. If you say that you are at 100% occupancy, that’s not misleading, because you are going to be at 100% eventually.”

The truth may well be that the KiOR yield claims were based around liquids, rather than bio-oil, coming out of the process.

The state of Mississippi alleges just that. Specifically, that:

“Ditsch’s failure to accurately adjust for losses to water and other waste products also rendered the representations to Mississippi officials false. When the BCC reactor was operated at high oxygen levels (greater than 10%), a substantial percentage – more than 30% – of the biocrude produced by the BCC reactor was lost to water.

“Ditsch’s failure to make an appropriate reduction for losses to water served to substantially inflate his yield estimate; and, as a consequence, the Company’s financial projections misleadingly made the Company appear commercially viable. Neither KiOR nor Khosla nor Cuneo notified Mississippi officials that the Company’s financial projections were grossly inflated to overstated yields.”

Paul O’Connor, as a member of the KiOR board, has a similar theory.

“Hacskaylo, what a disaster area. The 67 gallon figure, that is where I became suspicious. The board hardly saw technical information, as you can imagine people like Condoleezza Rice were not going to be very familiar with technical detail. They were showing us graphs with yields of 68-72 gallons per ton out of the pilot, and they aid that the demo plant was even better. Now my initial reaction was — you’ve got 100 people working in R&D, you’ve got all the best equipment in the world, you’ve figured it out, that’s great.

“But one day I noticed the R&D director, John Hacskaylo fiddling around with the axis, and in his comments to us, he was talking about top of the reactor yield.

“Top of the reactor? That’s the yield coming out of the pyrolysis unit, but that is not the yield coming out of the plant. You have to condense, and you have to recover oil from water, and you lose in the hydrotreater, because for one thing you have to take out oxygen. It’s not a real yield coming out of the plant.

Top of the reactor yields, in the context of transportation fuels, is like counting scotch and water as pure scotch whiskey. Or including the weight of the orange peel in a projection of orange juice yields.

“If you’re saying 68 at the top of the reactor, at best you are making 55 in the plant. At best. So that’s when I insisted on a technology audit,” O’Connor told The Digest. “It was definitely not at 68-72. There were some points where you could get above 60 but only momentarily, under ideal conditions, for instance with very fresh catalyst. And only in the pilot.” O’Connor confirmed that the demo plant was generating yields in the 30s or low 40s at most.

“Who did the analysis? Were they just stupid or crooks?” O’Connor asked. “It’s not for me to say.”

A company on the brink

The company was speeding towards a 2011 IPO. But the fuel yields were low; the fuel was not usable by their initial chosen downstream partner; the catalyst they were using to get even down to this unsatisfactory product, ZSM zeolite, was in the $7,000 per ton range. Catalyst stability would be challenged, everyone knew, with the water that is contained in wood chips. Steam can be highly problematic for zeolite.

More than that, the company was facing a potential problem with the metal content in the biomass feed that accelerated the deactivation rate of the catalyst, which resulted in excessive amount of daily catalyst replacement, according to one KiOR scientist.

There were reactor design issues. The pilot reactor that was working wasn’t used for the demo unit.

There was a rush to commercial-scale of the NASA type. Management issues, communications issues can be seen. Disclosure issues, “truth in data” issues. And, a series of statements to the state of Mississippi that would be impossible to live up to without major improvement in yield. Capital needs were going to be tremendous, and beyond an IPO there was a loan guarantee process and the state of Mississippi loan application to be successfully navigated.

Why the rush to scale? All venture-backed companies rush. But was there a special rush on with Khosla-backed companies, and did that rush apply successfully to industrial technology? The State of Mississippi quoted this passage from the Harvard Business School case study, Khosla Ventures: Biofuels Gain Liquidity:

“Khosla played an active role in helping his portfolio companies determine appropriate milestones in the process of moving from a pilot to a commercial operation. He encouraged his companies to focus on 15-month or 15-day or 15-hour innovation cycles, unlike the 15-year cycles of innovation in the nuclear business, in order to “test, modify, allow lots of mistakes and still succeed.”

The goal was to test ideas in 10% of the time that it would take a large company. Once that was achieved he often challenged the team to reach another 10x reduction in cycle time. month or 15-day or 15-hour innovation cycles, unlike the 15-year cycles of innovation in the nuclear business, in order to “test, modify, allow lots of mistakes and still succeed.”

Everyone was counting on everything to improve in the demo unit, and in 2011. As sometimes happens. And, with design corrections, fingers crossed this could be translated to a commercial-scale unit. It’s been known to happen, yields improving as scale increases and design improves. Not always, not often, but sometimes. Could KiOR pull it off?

Maybe, just maybe.

KiOR was hanging by a thread as the summer of 2010 commenced. In a few days, the first recorded visitors to Pasadena demo unit, representatives of the Mississippi Development Authority, were expecting to see the demonstration unit in action.

We’ll see how all those concerns worked out in the next part of our series, as KiOR launched its demonstration unit, geared up for more financing and an IPO, and hurtled towards commercial-scale.

Further reading.

The O’Connor resignation letter
The March 15 2012 O’Connor email memo
The March 22 2012 O’Connor technology assessment
The April 21 2012 O’Connor technology assessment
The April 30 2012 O’Connor memo
The Spring 2013 O’Connor note

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

May 18, 2016

KiOR: The Inside Story Of A Company Gone Wrong

Jim Lane

Not long ago, KiOR quietly re-named itself Inaeris Technologies and launched a modest website which discussed the technology and management in little detail, but focused to an extraordinary extent on a declaration of values.

Empowerment, honesty, fairness, “lessons learned from our collective experience” and so on. Warm, kindly Hallmark Card sentiments, universally popular, admired and vague.

Not the bold, We-Are-Black-Swans, detailed descriptions of yields, costs, downstream partners, brand-name board members and timelines to commercial scale that had been the style of the Old KiOR.

Old KiOR was exciting, dramatic, and fast, and the headlines it produced between 2008 and 2011 were candy for a renewables-hungry world.

A Breakthrough in Catalytic Pyrolysis to make cost-competitive, drop-in renewable fuels. A “Magic Catalyst”. The backing of a celebrity investor in Vinod Khosla. An impending venture with Chevron and Weyerhaeuser. A star-studded board featuring former Secretary of State Condoleezza Rice. A massive loan from Mississippi. A celebrated IPO. Reports of high yields. Construction at full-scale. 13 million gallons to start, multiple projects on the way.

Real Fuels Today

A slide presented by KiOR in 2013, prior to the bankruptcy filing.

And then the shortfalls started. KiOR fell further and further behind on its production goals throughout 2013, and ran out of cash and tumbled into bankruptcy in 2014. Ultimately, the state of Mississippi filed a lawsuit alleging that the KiOR technology hadn’t been ready for scale, its management knew that fact, that the company had faked technical data, and overstated commercial progress to lenders to secure financial support.

Scandal erupts


Paul O’Connor

That there was a turbulent KiOR story to be uncovered was of little doubt. In late 2014, The Digest published a string of correspondence from co-founder Paul O’Connor to the KiOR board, alleging a wide range of scientific mis-steps and warnings unheeded on the technology’s viability.

In part, O’Connor wrote:

“It is obvious for all of us today that KiOR is going through some difficult times, and may even not survive as a company. The reason for this, in my opinion, is not because of the failure of the technology itself, but because of several wrong choices made during the development and commercialization of the technology. Over the years there have been several warning signals (internal & external), one of which as I mentioned in the foregoing has been my own technology audit report in March/April of 2011. Notwithstanding these warnings KiOR’s MT continued on their set course. In mean time everyone else hoped for the best.

“The real proof-of-the-pudding however would be a successful start-up and operation of Columbus in 2013…[but] it became clear however that the product yields were in fact much lower than projected [**], while the on-stream times were also way too low [**]….My observation was that the low yields and on-stream times at Columbus were reasonably in line with the results and experience in the DEMO plant in Houston. This means that the main problems at Columbus are already discernible in the DEMO operations and are therefore structural and not “just” operational issues.

“I am of the opinion that KiOR’s [management team] professionally has not performed in evolving the KiOR technology to a commercial success; furthermore the MT in my opinion has not provided the board of directors of KiOR with the adequate, right and relevant information to do their job. I therefore am of the opinion that the MT needs to resign and to be replaced in order to improve the chances of success of KiOR and/or any other potential new ventures based on KiOR technology in the future.

The complete O’Connor resignation letter is here.

And a friend wrote to The Digest during this period, stating:

There might be more to the Kior bankruptcy…..seems the equity player/majority shareholder was stripping the cash, there might have been some issues shall I say with Mississippi development authority and if I were a betting man I’d say that both sides are examining the validity of the reps and warranties in their agreements.

In Fall 2014, I received a note from Paul O’Connor, proposing a presentation for ABLC 2015 entitled “Biomass conversion: On learning from past mistakes” (= Is there life after KiOR?)”.

Was I interested? O’Connor wanted to know. You bet I was. We discussed it by email and subsequently in person on Key Biscayne in February 2015. But lawyers intervened and the presentation never materialized.

By then, O’Connor was traveling with Alex Major, best known for his “Can We Still Fly Jets & Save the Planet?” presentation given at a number of industry conferences. Major had a plan to acquire the on-site assets at Columbus and produce jet fuel and green power. In mid-February, Major wrote:

The KiOR legal case is a complete bag of worms that if John Grisham got a hold of it would make a fabulous legal thriller and an interesting movie!! Regardless of whether Paul is going to speak or not, I would like to attend the ABLC. Hopefully we will have a chance to chat over a tea or a glass of wine at some point so that we can discuss the KiOR lawsuit.

And then, the Freak Show

For others, the freak flags were flying.

In a Motion filed in the United States Bankruptcy Court for the District of Delaware on February 12th, Robert C. Dalton, CTO for ESTEC Technology Works objected to a motion by Mississippi Development Authority to convert KiOR’s Chapter 11 re-organization to a Chapter 7 dissolution. ESTEC had made an offer for KiOR’s assets.

In part, Dalton wrote:

The Grand Wizard of Magic Catalysts, Robert C. Dalton and his “Magic Kingdom”, ESTEC Technology Works LLC, are in possession of a collection of volumes of secret books that contain spells (formulation of materials and processes) for energy applications, chemical synthesis, environmental applications, food processing and biotechnology as well as now [sic] search for Daltonite, a quasi-mineral, that is in our Solar Systems and most likely is found throughout the Galaxy.

ESTEC Technology Works, LLC will soon be announcing the formation of their new “Solar Systems Exploration Division Incorporated” and ESTEC/Dalton will be searching areas at, near or around Mars, Neptune and Jupiter to locate one or more facilities to search for Daltonite and to develop and launch technology to supply energy, oxygen, habitat and infrastructure for the expansion of the reach of humans and their colonization beyond Earth and Low Earth Orbit”.

Now the story can be told

For two years, the KiOR story been one part circus, one part asset grab, and one part “What the heck happened”? But now the smoke is clearing.

Looking towards the future, Inaeris Technologies is the emerging remnant, described by its President Chris Artzer as, in essence, a Series A venture-backed company, at pilot stage, aiming to demonstrate the technology it believes will be robust and which it aims to demonstrate in time. In the case of Inaeris, as Artzer adds, it has the benefit of being at pilot stage but having produced a million gallons of in-spec, drop-in renewable fuels.

What of the past? Since last winter, we have visited with multiple parties intimately familiar with KiOR’s science and commercial progress dating back to its formation, and we have reviewed dozens of documents relating to technology development, yields, and commercial claims from 2007 — that tell the true story of KiOR.

The pressing question is, exactly how and why did the yields and costs promised in the IPO, 67 gallons per ton of biomass with an eventual target of 90 and at a cost of $1.80 per gallon, fail to be realized in the first commercial plant at Columbus?

The road to the 67 gallons per ton claim

In 2006, renewables were in the air.

In mid-June, VeraSun Energy went public selling 18.25 million shares at $23 per, raising $425 million. Shares of the already-public Pacific Ethanol (PEIX) doubled by late spring, despite the company not opening its first plant until the end of the year. Hawkeye and Aventine went public at sky-high prices. Congress was planning a vastly expanded Renewable Fuel Standard.

By late June, Khosla Ventures entered into biofuels in a big way, forming a venture called Cilion to operate modular 55 million gallon ethanol plants, aiming to build 8 by 2008, the first three in California.

Several months prior, in the Netherlands, Paul O’Connor had taken note of the trends as well. He had been serving as a Business Development Manager at Albemarle Catalysts after Albemarle bought the catalyst business from AkzoNobel. This, on top of 20 years at Akzo, culminating in work as the worldwide development manager for FCC catalysts.

The key here is the FCC unit — a fluidized catalytic cracker. It’s a standard unit at more than 400 oil refineries worldwide; one-third of the world’s crude oil is processed in a FCC reactor.

The use of synthetic zeolites and their modified forms, as FCC and hydrocracking catalysts, has revolutionized the petroleum refining business. The use of zeolite-based FCC catalysts has made possible to achieve substantially higher conversion yields of gasoline and diesel fuel from each barrel of crude oil refined.

As Wikipedia explains:

Fluid catalytic cracking is widely used to convert the high-boiling, high-molecular weight hydrocarbon fractions of petroleum crude oils to more valuable gasoline, olefinic gases, and other products. Oil refineries use fluid catalytic cracking to correct the imbalance between the market demand for gasoline and the excess of heavy, high boiling range products resulting from the distillation of crude oil.

With the popularity of biomass-related ventures in 2006, the question had become, as former KiOR process engineer Lorenz Bauer explained to The Digest, “Could you send [biomass] up real fast with a catalyst into a FCC reactor?” But he adds, “Anyone who thinks it’s simple is kidding.”

There were five basic scientific questions.

1. Could the biomass be sufficiently pretreated, and how, to become FCC-compatible?

2. Could a catalyst be designed to work with biomass and achieve similar results to catalysts working on petroleum hydrocarbons?

3. What would the reactor look like?

4. Would any resulting bio-oil contain too much oxygen to be refined into a fuel using standard refinery equipment?

5. Could all of the above be achieved by a design that was economical?

What was the goal of the process and the catalysts, anyway?

Simply put, the chosen route was catalytic pyrolysis. In this approach, the goal is to crack the biomass molecules arriving at the front end of the reactor (composed of hydrogen, carbon and oxygen) under the right combination of pressure and temperature. To give an everyday example, cooking food is a high-temperature, ambient pressure form of pyrolysis.

Using sufficiently active, selective and robust catalysts, the hope is to produce at the end of the reaction a high yield of hydrocarbons that can be upgraded into transportation fuels.

Here’s the good and bad news. Good? Biomass pyrolysis has been known for a long time to produce gas, coke, char and some bio-oil. Bad? As of 2007 — however, not enough oil, and of insufficient quality to be economically upgraded into transport fuel.

The purpose of KiOR’s technology was to shift the balance radically towards bio-oil and away from gas, coke and char, and to bring down the levels of oxygen in the bio-oil.

The state of Mississippi summarized the goals in their lawsuit:

Pyrolysis oil retains approximately the same amount of oxygen content as the biomass used to create it. This amount is typically in the 40-45% range, which is far too high to be refined within the existing infrastructure of today’s oil refineries. The primary and essential goal of KiOR’s catalytic process was to reduce the oxygen and acid content of its biocrude to a level that could be successfully refined by oil companies in their existing infrastructure, while still maintaining biocrude yields that were high enough to render the Company profitable.

Biomass to fuel process

The KiOR process, from a industry presentation in 2013.

The formation of BioECON

To explore the use of biomass in a FCC reactor, among other concepts, Paul O’Connor founded BIOeCON BV in the Netherlands and Dutch Antilles. O’Connor was President and Technical Director, Armand Rosheuvel was Financial Director, Rob van der Meij was Commercial Development Director, and scientist Dennis Stamires was retained as Scientific Advisor and Consultant.

It was a world-class team. Stamires had been conducting R&D work in the area of Heterogeneous Catalysis using natural, synthetic and modified forms of Clays and Zeolites since 1955. He was a member of the team working at Linde, a division of Union Carbide, which in 1960 first announced these mind-bending zeolite catalysts at the International Congress of Catalysis in Paris. And O’Connor was already working at AKZO NOBEL’s Catalyst Division on a project involving the conversion of Biomass to liquid transportation fuels, using a Hydrothermal process and a synthetic clay (Hydrotalcite) type catalyst. Stamires and O’Connor had worked closely together at what had become Albemarle.

Their cooperation resulted in several new inventions; one focused on new anonic clay catalysts for use in the transformation of biomass to Bio-oil, as filed with the US Patent Office in April 2005, as “Process for Producing Liquid Hydrocarbons from Biomass”.

In the end, sources told The Digest that Rosheuvel arranged for the original funds to operate the Company, which were reported in Harvard Business Review in 2009 to have totaled €1 million.

A modified FCC reactor design and a catalyst suitable to biomass — these were the primary needs.

Too much oxygen, too much coke

Here was the good news. Researchers such Dr. Iacovos Vasalos and Dr. Angelos Lappas at CPERI in Greece had shown that catalytically inert inorganic materials, such as sand and refractory alumina, could deliver the amount of heat needed to pyrolyze biomass.

But most catalysts had a biomass flaw, we learned from experts. The bio-oil they produced was very acidic, corrosive and unstable. That is, too much oxygen. Hydrocarbon fuels don’t have any Os, and the presence of excessive oxygen can compromise fuel stability and engine performance.

Some catalysts could produce bio-oils which contained much less oxygen. They were in the right range on acid and stability. But there was too much darn gas and coke, scientists told The Digest — when it comes to making fuels, coke is not it. Coke isn’t worth much, and neither is gas. The solids and gases had to be minimized.

Kior process

So too did the costs. The better catalysts are cost whales. As much as $6-$8,000 per metric ton for ZSM-5 catalysts. An average FCC catalyst would cost close to $2,000 to $3,000 per metric ton.

But there was an opportunity. Why not use the same anionic Clays (known as HTCs) which are effective in removing Sulphur containing molecules from gaseous streams and liquid Hydrocarbons? They might be also effective in removing oxygen from the bio-oils.

The fatal flaw would only turn up later. Experts told The Digest that combining de-oxygenation and pyrolysis in the same reactor just doesn’t work well enough. They would need to be done separately to eliminate the oxygen without producing too much gas and coke. But that would not be uncovered until 2010.

ITQ is retained

One of the new ideas to be explored involved bringing a catalyst or simple chemicals like an acid, base or a salt into close contact, or inserting such chemicals inside the biomass particles, for the purpose of lowering the liquefaction temperature and increasing catalytic activity/selectivity.

To explore that concept, the Instituto de Technologia Quimica (ITQ) of Univesidad Politecnica de Valencia in Spain was contracted to conduct experimental work.

Khosla Ventures enters the picture

Vinod Khosla

Vinod Khosla

BIOeCON needed additional funds to operate and to support the outside contractual R&D work, and was also looking to find investors. Alex Stamires, who was working with Khosla Ventures on an unrelated project and whose father was consulting for BIOeCON, contacted Khosla executive assistant Cyndi Jung in the first week of October 2006. Jung managed the “catch-all” email inbox for venture ideas and was a logical first stopping point for making an introduction. Calls followed, and a write-up summary of BIOeCON‘s background and business interests, a telephone pitch, an in-person meeting, and several months of due diligence.

“The due diligence was no small thing,” O’Connor told Harvard Business Review. “They hired four specialists to look at our technology, and this went on in a very intensive way for three or four months. In the end, their conclusion was that it was very interesting but at an early stage. We needed to do a pilot.”

Khosla Ventures offered a term sheet in the second half of 2007; an agreement was reached to form a joint venture, KiOR, which was incorporated in Delaware on Nov. 1, 2007. It received a Series A investment which totaled $1.436M on November 15, 2007 and $2.916M on July 14, 2008. A Series A-1 investment of $9.999 million was also made in July 2008. All investments were made by Khosla Ventures II, LP.

Rob van der Meij was appointed President and CEO, and Paul O’Connor became CTO and was a KiOR Board member.

The end of the honeymoon, and a change of CEO

The honeymoon ended almost immediately. It was clear that the newly-minted KiOR would be moving to America. Khosla’s request to the company was to hire talented, highly experienced and creative technical personnel, and the US bench was the deepest. But, where?

Strong disagreements ensued. At first, the company set up shop temporarily in Houston. The company consisted of Rob van der Meij (President and CEO), Paul O’Connor (CTO and KiOR Board member), Jacques De Deken (Director), Hans Heinerman (Director), Robert Bartek (Applications Manager), Steve Yanik and Mike Brady. Dennis Stamires was appointed Senior Fellow Scientist, on a consulting contract.

Denver and Houston were the Headquarters finalists. The pro-Denver contingent preferred to be close to the National Renewable Energy Laboratory in Golden, the University of Colorado and the Colorado School of Mines. It was an area, where, as one member of the team put it, “a lot of highly educated persons were living. R&D work was going on at NREL on renewable fuels and the NREL management had expressed interest in collaborating with KiOR.” Papers putting the case for Denver were circulated amongst management on March 19, 2008 and June 1, 2008.

So, why was Houston chosen?

Ultimately, three factors came into play. One, the company was already there. Second, Houston afforded access to expertise in catalysts and in FCC unit development and operation.

The third Houston advantage was more problematic but ultimately decisive. By April 2008, in the April/May 2008 period, arguments and disagreements emerged between Rob Van der Meij and Paul O’Connor. The issue regarded, as one person familiar with the problems remembered it,“ primarily, Van der Meij’s style of management and the direction KiOR was going.” Not long afterwards, Samir Kaul, representing Khosla Ventures on the KiOR board, was called in, and ultimately Rob van der Meij departed in May.

Fred Cannon

Fred Cannon

Among the candidates to replace van der Meij was Fred Cannon, an executive formerly the head of AkzoNobel’s (and later Albemarle’s) catalyst business. He had worked with O’Connor in the past. As the Harvard Business Review outlined:

O’Connor had a hunch that the still-nascent technology to convert Biomass into Liquid Fuels (BTL) would make significant advances over the next decade. “In 2004, BTL was still virgin territory in terms of patents and processes,” recalled O’Connor. “I believed that if we went into this now, we would be leaders.” O’Connor took his idea to Fred Cannon, then Houston-based vice president for Albemarle’s Alternative Fuels division. Cannon was excited by this idea, and the two presented it to the president of Albemarle. However, the president declined to invest in BTL.

Cannon had a successful interview with Khosla and was hired as the new President of KiOR in June 2008. Management then decided to locate the KiOR lab and office facilities in Houston where Cannon was living.

KiOR consultant Dennis Stamires remembered:

“By locating in Houston, there was a very limited number of qualified technical personnel with the type of expertise needed by KiOR available to be hired, or willing to move to Houston to work for KiOR. Therefore, a lot personnel was hired who had no experience in the area of KiOR’s business or qualified for the job. Some were friends or ex-colleagues to Cannon and O’Connor.”

“Not even close to what other people had done”

Just as the company was experiencing its spring 2008 management crisis, the results began to come in from the lab work in Valencia. The results were disappointing.

The pyrolysis testing results of the pretreated biomass samples were based on what has been described as “expensive catalyst (an inorganic synthetic material, and a proprietary to BIOeCON).”

Among the problems? ITQ’s data showed excessive amounts of water, coke, gas and char and a relatively small amount of bio-oil that had a low acidity. But there was more. KiOR technical personnel began to voice concerns about scaling up the process, and extra costs in removing the impregnated metals on the biomass, and associated environmental problems/costs to dispose waste byproducts, and contaminated water.

ITQ Valencia was reporting:

51% liquids — in all, 21.8% water and 29% organic liquids — 21% gas and 27% coke and char.

Results at this level are discouraging, scientists told The Digest, because of the high char, the high coke levels. Also, the oil content was low. The water content was described as “very high”, and in all, the results did not indicate “an economic process, and not even close to what other people had done.” Moreover, the organic liquids were expected to contain high oxygen levels, so that the actual fuel content would be much lower.

“A Recipe for Technical Failure”

In the summer of 2008, Dr. Jacques De Deken, a Technology Director, who had flagged the problem of the bad ITQ results to key scientific team members, raised a red flag to management. He indicated his view that the KiOR BCC Technology was not on track to produce at commercially viable qualities or yields, and that KiOR must make a drastic change both of the process and the catalyst.

According to sources familiar with the company’s activities at the time, Cannon and O’Connor agreed to discount De Deken’s findings, and reject his recommendation to change the process and the catalyst.

There are two versions of De Deken’s departure from KiOR. In the state of Mississippi’s lawsuit against KiOR, the state contends that De Deken was a KiOR consultant, who resigned from the Company in September 2008. The state contends that “Vinod Khosla discussed with De Deken the reasons for his departure and requested that De Deken provide a written memorandum…Khosla forwarded DeDeken’s critique to Cannon on October 13, 2008.”

However, the letter of resignation has subsequently come to light. In fact, De Deken was a KiOR employee rather than a consultant, and his last day in the office was August 11, 2008. On that day, De Deken provided directly to O’Connor and Cannon a detail of his objections. In part, scientific. But in another aspect, cultural.

“I was hired by KiOR as its Director of Technology,” De Deken wrote, “with the understanding of being responsible for all of KiOR’s process development and engineering activities.” De Deken protested that after 5 months of employment, “KiOR is in breach of our agreement”.

He stated that “the strategy in rushing towards demonstrating the BCC technology at a multi-barrel-per-day scale without corroborating experimental data, under the pretense of self-deception of ‘creating value’, is a recipe for technical failure. Indeed, I do not believe that we currently have the experimental results, catalyst(s) or science base to justify the rush and expense of an LPBCC unit or demonstration in the Ivanhoe facility at this time.”

Culture Clash

But De Deken was not finished. He aimed his next comment squarely at the management culture of KiOR.

“What is even more worrisome is that genuine efforts to establish a dialog about relevant technical issues have been met with systematic attempts to downplay or dismiss virtually every issue as soon as it is brought up. Clearly, the creation of lasting value is not possible without also developing credible, sound and robust technology. KiOR’s obvious lack of commitment to building a strong and much-needed R&D effort to make this possible is a further indication that KiOR is not really serious about developing successful technology.”

Sources familiar with the company’s operations and internal communications have confirmed to The Digest that although the company did not disclose internally the reasons for De Deken’s resignation, “most persons involved knew the real reasons, since Jacques was also strongly objecting the plans under discussion at that time, to use the same BCC Technology as described in the ITQ report, at the FCC Pilot Plant of KBR Corporation in Houston, as he was expecting it to be a waste of monies and valuable time of KiOR.”

The move to the KBR pilot plant for testing

One reason why De Deken’s resignation came at a difficult moment was that he was closely involved in negotiating and making all the technical arrangements to test the BCC Technology at pilot scale, and the company had expected to start the testing in mid-September 2008. As the state of Mississippi summarized in its lawsuit:

The first technical step to commercializing the technology would be to develop a pilot project, for which KiOR needed a suitable laboratory space. The pilot scale unit would produce several liters of biocrude a day, less than a barrel. A second step, which would need to follow quickly on the first, was the development of a smaller, laboratory-scale unit, producing in one employee’s words “a few cubic centimeters per run, with many runs a day that will allow us to look at a lot of variables” in terms of feedstocks, catalysts, and pretreatment techniques. This unit would pre-screen catalysts and feedstocks before these entered the pilot lab in larger quantities. Once the pilot unit was up and running, KiOR would move toward the development of a demonstration project, producing between 10 and 100 barrels of biocrude per day.

KBR, a major oil refining engineering concern, maintained a FCC pilot unit that was located very close to KiOR’s offices in Houston, and their unit was selected for KiOR process and catalyst testing, scheduled for September 2008.

A crisis of design

By this stage, and independent of any testing that would take place with the KBR-designed pilot unit, a quiet war of ideas had erupted within KiOR regarding the design of KiOR’s reactor. Specifically, hope was fading among technical staff and consultants that a “one-pot reactor” would work as originally hoped.

A fundamental concept that Paul O’Connor and Dennis Stamires formed was combining the two reactions of pyrolysis and catalysis in one reactor, occurring simultaneously. Consolidated bioprocessing had been described as “the Holy Grail of biofuels” by Dartmouth’s Lee Lynd, and “one-pot reactors” were very much in vogue at the time.

On the fermentation side, companies like Mascoma and Qteros were developing bugs that could accomplish extract sugars from cellulose and ferment them, simultaneously.

It was rare but not unheard of. Combining pyrolysis and catalysis had been explored as early as 1998 by a research team led by Vasalos and reported in the Journal of Applied Catalysis, where a typical FCC Pilot Plant and a commercial FCC catalyst was used.


Proving the soundness of the technology was critical to KiOR’s pathway to success.

Needed: a new catalyst and heat-transfer material

The BIOeCON concept, which became the proposed KiOR reactor technology, was to employ a new (non-FCC Catalyst), a synthetic inorganic clay-like material, which exhibited certain deoxygenating activity for producing low oxygen-containing Bio-oils. The regular FCC Catalyst used by Vasalos was used widely in oil refineries to crack petroleum feedstocks to light hydrocarbons and make gasoline. But the regular FCC catalyst would leave too much oxygen in the bio-oil, making it unsuitable for upgrading.

The material in question? Hydrotalcite, or HTC.

It was an anionic synthetic clay of the mineral class of double-layered hydroxides. Both O’Connor and Stamires had, and in many cases, together with Prof. William Jones from Cambridge University in UK, and with many others at AKZO NOBEL and subsequently at Albemarle, done extensive R&D work using LDHs as catalysts or sorbents in several types of oils upgrading and conversion, and commercial oil refining and upgrading applications.

Here was the weakness of the concept, which would turn up in testing.

“By combining in one-pot reactor these two distinctly different reactions,” Stamires would later recall, “the thermolysis (a heat transfer/physical reaction) with the deoxygenation/decarboxylation (a chemical reaction), the efficiencies and selectivities of both reactions would be highly compromised and distorted. It produced more water, gases, coke and char.”

As Stamires would tell The Digest:

“To achieve a high efficiency liquefaction of biomass, these small particles must receive a high heat flux in a short time, following with a quick efficient quenching of the Bio-oil vapors. To accomplish this, we needed to use a material which has a high heat capacity and also high heat transferring properties, a good heat conductor. As was ascertained later on, the anionic type of clays, such as the Hydrotalcite, has a very low heat capacity and heat conducting properties. That’s because of its highly porous crystal structure, and low bulk density.”

From the start, then, hydrotalcite was the wrong material to use, The Digest was told.

But testing would turn up another problem. Hydrotalcite is a very active catalyst, used primarily for promoting oil gasification type reactions; the surface gets quickly coated with heavy tar like carbonaceous materials, which further reduce its heat conducting properties when present in a one-pot biomass liquefaction reactor.

But that wasn’t all.

Hydrotalcite was found to have a very high gasification catalytic activity and very efficiently converted most of the biomass oxygen and carbon to carbon monoxide and carbon dioxide gases, and water. Leaving only a small portion of the biomass carbon and hydrogen to form liquid hydrocarbon bio-oils. So, yields with HTC were doomed to be low — in addition to the tarring problem and the heat conduction issue.

A new material is developed

The KiOR R&D team, though stymied by the troubles with HTC, developed a novel theory that the HTC material might be modified to address these shortcomings.

Stamires, working with KiOR R&D manager Mike Brady, a catalyst technology expert, asked CPERI chief Dr. Lappas to calcine (or heat treat) to at high temperature a sample of HTC, for sufficient time to completely destroy the crystalline structure and porosity.

Stamires recalls:

“This high temperature treatment transformed the original crystalline Hydrotalcite to a new material of the Spinel class, which exhibited very low pore volume and surface area, high bulk density, and low catalytic activity, and it was a totally different material to the original Hydrotalcite. When tested in the KCR Pilot Plant, as a heat transfer medium and also as a catalyst for biomass liquefaction to produce Bio-oil, this new material having the Spinel crystal structure, produced much more Bio-oil, with a reasonable low oxygen content, than it’s precursor Hydrotalcite.

“This material, with Spinel–like structure, exhibiting bi-functional properties, specifically, as a heat conductor and as a catalyst that proved to be a useful material for use by itself or in combinations with other materials in biomass thermo-liquefaction process.”

The switch to a two-pot reactor that didn’t happen

The R&D team were beginning to see a fatal problem emerging with the one-pot design, in test results obtained at the ITQ Valencia Lab, as well as later on by the tests done at KBR’s Pilot Plant in Houston and subsequently at KiOR’s own KCR Pilot Plant.

The two distinct reactions taking place at the same time (i.e., the physical/Thermolysis and the chemical/decarboxylation/cracking), as it turns out, require individual customized process variables optimizations, and are different for each reaction. So, there’s what one source familiar with KiOR’s process described as “a gross compromise of the individual efficiencies of these two different processes, resulting in a very poor liquefaction and Bio-oil and Bio-oil yield, while a substantial amount of carbon and hydrogen are converted to carbon oxides and water.”

An inflection point

At this stage, these are lab discoveries. Certain results had been disappointing. And, there was disappointment in the efficacy of a single reactor to conduct both reactions simultaneously. It’s not surprising given the novelty of running biomass through a FCC reactor, modified or otherwise. Complicated physical and chemical reactions are taking place simultaneously, with side and cross reactions. It’s the nature of science to explore these puzzles and solve problems.

It was a bleak but not fatal outlook. Better results were obtained with a modified HTC. A new “Two-pot” system, having individual reactors for thermolysis and for cracking, could have been pursued aggressively at this inflection point. In fact, Brady, Cordle, Stamires and Loezos filed a patent application on such a KiOR technology, which was granted in 2012. More on that here.

Prior to the IPO, these steps were not taken in a systematic way, The Digest was told.

Starting up at the KBR Pilot Plant

A dispute erupted within the KiOR community in September 2008 over the testing program for the FCC Pilot Plant at the KBR facility in Houston. Issues included the biomass feed, which included the pretreated biomass feeds, catalysts and process conditions.

Some emphatically stated that before any new materials be tested under different process conditions, and with other process variables, a systematic calibration of the equipment and processing scheme should be first done to establish a reference base-line.

“Especially since this FCC Pilot Plant had not be used before for pyrolyzing biomass in the presence of a catalyst,” as one KiOR staffer would recall later.

It was not a difficult test series to mount. Well known process parameters were available from many similar tests and equipment used before, and there was research papers published regarding optimum process conditions for maximizing bio-oil yields, using sand as a heat carrier, in the absence of a catalyst. Ensyn, for example, had been using sand for years as a heat carrier in a pyrolysis reaction.

The purpose? An equipment check and standardization test, including the duplication of published similar test results, would have given information to confirm that the equipment was working as intended, and given a baseline of performance for this FCC pilot unit, compared to pyrolyzing biomass in different reactor designs, under same process conditions and with the same heat transferring medium. In short, setting a starting point where the impact of a new KiOR reactor design and a new catalyst could be measured.

In a memo to staff dated September 18, 2008 and addressed to all KiOR personnel, entitled ‘KBR Plan’, CTO Paul O’Connor objected doing any calibration to establish a baseline, and the use of sand in the KBR FCC Pilot Plant equipment, and requested to take out from the 2008-09 Experimental plan the use of sand and equipment calibration. The reasoning is not clear. Possibly the costs and the timelines, based on KiOR’s timelines to scale and available cash. Perhaps other factors.

For sure, by the first week of October 2008, the FCC Pilot Plant at the KBR facility was ready to start testing KiOR’s BCC Process and Technology. The pretreated biomass feed and the catalyst were the same ones that were used in the tests performed at ITQ in Valencia earlier that year. The same set-up that hd led to the discouraging results were reported to KiOR the previous spring by ITQ.

Funds run low

By Q4 2008, a staffer recalls that “available funds to operate KiOR were practically depleted, and a considerable amount of the available funds were consumed in R&D funding of the four Labs conducting projects for KiOR’s business mission and objectives, and this difficult situation became a serious concern and aggravation to certain KiOR Managers.”

By this time, work was underway at ITQ (Valencia, Spain); Twenty Universit (The Netherlands); CPERI (Greece); and KiOR’s own lab in Houston.

And, the BCC one-pot reactor and the previous catalyst were not discarded, either — work proceeded exclusively on these systems “for over one more year,” according to one staffer, “while delaying KiOR for another year in starting to develop a new feasible Technology.”

An Internal War Rages

In October 2008, KiOR’s VP for Strategy, Andre Ditsch, “who also was looking to raise funds urgently needed for KiOR to operate,” as one observer put it, issued an internal challenge to the cost and results associated with the work with the outside labs. Cost was one issue, but usable information was another.

“Ditsch concluded that KiOR was not getting any useable and valuable information from these four KiOR sponsored R&D projects. Also it was holding back the KiOR R&D work from being able to develop new technology that could have been able to meet the KiOR business objective,” recalled Dennis Stamires.

In October 14th and October 18th emails to CEO Fred Cannon and CTO Paul O’Connor, Ditsch questioned the value of sponsoring such outside R&D work, and proposed to terminate all the three outside contracts. As an alternative, he proposed to use the funds to hire qualified technical personnel to do the work at KIOR’s own laboratory facilities.

The result? In the short-term, discord and friction between Ditsch and O’Connor, which staffers described as becoming more serious and disruptive to KiOR’s business in the following months.

But Ditsch was far from alone in questioning the value of the work. More than one year later, Robert Bartek, writing on Nov. 30, 2009, said “From my point of view, the value of the work done at Valencia is essentially useless“. With the departure of Jacques De Deken, Bartek had assumed the direct responsibility of Catalyst Development and Pilot Plant testing work, reporting to the CTO.

However, the work was not stopped or fundamentally re-scoped, as the timing of Bartek’s email outburst confirms. The reasons are unclear.

Disastrous results from the FCC pilot test

With De Deken gone, the Pilot Plant testing work at KBR was supervised by Peter Loezos and Robert Bartek, and testing started the first week of October. The results of the tests were reported on Nov. 20, 2008 by Peter Loezos in an email entitled ‘KBR Mass Balances’.

“Overall, the oil yields in the KBR results were much lower than those reported in the ITQ Report from the Valencia R&D group,” a staffer recalled, “where they used in their tests the same biomass and pretreated biomass, as well as the same catalyst.”

An analysis and report of the tests at KBR was issued on Nov. 20, 2008 by KiOR Science Director Dr. Conrad Zhang confirmed the low yields in a report entitled ‘Summary of analytical results from test results reported on November 3rd, 11th, and 14th. The yields have been described as “never above 30 gallons per bone dry ton of biomass” in terms of gallons per ton by those familiar with the results.

The story continues

We’ll explore what happened with KiOR and those “never above 30 gallons’ yields, in the next part of our story, tomorrow.

Further reading

The O’Connor resignation letter

The March 15 2012 O’Connor email memo

The March 22 2012 O’Connor technology assessment

The April 21 2012 O’Connor technology assessment

The April 30 2012 O’Connor memo

The Spring 2013 O’Connor note

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

May 06, 2016

The BioEconomy Earnings Season Roundup: REGI, GPRE, BIOA, ADM

Jim Lane

Q1 earnings season for the advanced bioeconomy kicked off this week, with reporting from Green Plains, ADM, REG, and BioAmber. That’s an ag giant, an ethanol monster, a biomass-based diesel dominator and a fast-upcoming renewable chemicals maker. Between the four, we have a good opportunity to check the sector’s health.

Overall, markets were unhappy today, knocking down BioAmber 10 percent, while Green Plans took a 6 percent tumble, and REG and ADM were both down, though by lesser amounts. The oil price environment, not pretty today, provided most of that shareholder joy.

The Digest’s Take

Ethanol, challenging times. Biodiesel is looking strong with gallons up, prices not far off and margins improving. Renewable chemicals look good in terms of pricing, production is ramping up at BioAmber and sales jumped 31% QonQ.

Green Plains (GPRE): Ethanol margins weak, cash position strong, 2016 looking better.

Green Plains reported a net loss of $24.1 million, compared with net loss of $3.3 million for Q1 2015 — this, on revenues of $749.2 million for Q1 2016 compared with $738.4 million for Q1 2015.

Production. Green Plains produced 247.0 million gallons of ethanol compared with 232.5 million gallons for Q1 2015.

EBITDA: Q1 earnings before interest, income taxes, depreciation and amortization for Q1 was 2016 was -$5.8 million compared to $19.2 million for Q1 2015.

Cash and debt: As of March 31, Green Plains had $400.7 million in cash and cash equivalents, and $146.6 million available under revolving credit agreements. Total debt outstanding was $776.6 million.

Crush margin. The consolidated ethanol crush margin was $0.5 million, or $0.00 per gallon, for Q1 2016 compared with $14.9 million, or $0.06 per gallon, for Q1 2015. The consolidated ethanol crush margin is the ethanol production segment’s operating income before depreciation and amortization, which includes corn oil production, plus inter-company storage, transportation and other fees.

Navigating rough waters. “The margin environment remained weak, providing little opportunity to generate a profit in the first quarter,” said Green Plains CEO Todd Becker. “We focused on maintaining our strong liquidity position to remain well-positioned, not only during this cyclical downturn, but also for future growth opportunities within our supply chain.

Marketing & distribution guidance remains intact. Green Plains noted: “Our marketing and distribution segment reported an operating loss for the quarter which was primarily related to the valuation of inventories held for forward business that is fully hedged. We anticipate the profits on these positions will be realized over the remainder of this year and operating income for the marketing and distribution segment will remain in the $25 to $30 million range for fiscal 2016.”

2016 environment improving. “The forward ethanol margin environment has improved since the beginning of the second quarter and we have hedged a portion of our future production,” said Becker. “We believe the ongoing growth in global and domestic ethanol blending will continue to drive better market fundamentals for the industry and are optimistic the margin environment will improve during the balance of 2016.”

Over at Green Plains Partners, “Our business model, which includes minimum volume commitments, insulated the partnership from challenging market conditions and provided cash flow stability that enabled us to increase our distributions for the second consecutive quarter,” said Becker. “We expect a recovery in volumes during the remainder of the year as our sponsor continues to ramp production back up at its ethanol plants.”

GPP income and cash. First quarter 2016 net income for GPP was $12.2 million on adjusted EBITDA of $13.9 million and distributable cash flow of $13.3 million. GPP had $5.6 million in cash and cash equivalents, and $49.0 million available under the partnership’s revolving credit facility. On January 1, 2016, the partnership acquired certain ethanol storage and leased railcar assets located in Hereford, Texas and Hopewell, Virginia from Green Plains Inc. for $62.3 million. The transaction was financed using the partnership’s revolving credit facility and cash on hand.

ADM (ADM): “Challenging market conditions,” sees “opportunities in 2nd Half”

In Illinois, Archer Daniels Midland reported operating profit was $573 million, down 36 percent from $892 million for Q1 2015. Net earnings for the quarter were $230 million.

Agricultural Services decreased $118 million compared to a strong quarter last year amid lower North American export volumes and margins, fewer global merchandising and transportation opportunities, as well as unfavorable Global Trade Desk merchandising positions.

Corn Processing increased $2 million as strong results for sweeteners and starches were offset by weaker lysine results and lower ethanol margins. Sweeteners and starches results improved $56 million to $141 million as the business continued to perform well, with an improved cost environment driven by strong capacity utilization. Bioproducts results were down from $42 million to a loss of $12 million, due primarily to the continued challenging conditions in the global lysine market. In addition, ethanol margins continue to be impacted by high industry production levels that caused inventories to build throughout the quarter.

Oilseeds Processing decreased $231 million compared to a very strong year-ago period, as higher Argentine crush run rates weakened global margins. Crushing and origination operating profit of $120 million declined $214 million from last year’s high levels. Global soybean crush and origination results were down significantly due to lower global margins resulting from increased Argentine soy meal exports and significantly reduced U.S. meal exports. In addition, lower softseed crush volumes and weaker Brazilian commercialization, which slowed throughout the quarter, negatively impacted results.

WILD Flavors and Specialty Ingredients earned $70 million on solid performance from WILD Flavors and higher results from specialty ingredients.

South America on the mend? ““Challenging market conditions continued in the first quarter, particularly affecting Ag Services. The first half of the year continues to present a challenging environment,” said CEO Juan Luciano. “However, we are cautiously optimistic that reduced South American soybean and corn production could bring improved soybean crush margins and merchandising opportunities in the second half of the year.”

Acquisitions. ADM acquired a controlling stake in Harvest Innovations — enhancing ADM’s plant protein, gluten-free ingredient portfolio. The company also purchased a corn wet mill in Morocco to expand the global sweeteners footprint.

Divestments. ADM reached an agreement to sell our Brazilian sugarcane ethanol operations.

BioAmber (BIOA): “February problem” now overcome; 31% QonQ uptick in sales, and “ASP unchanged despite lower oil prices.”

In Canada, BioAmber announced Q1 revenues of $1.5 million, an increase of 297% over Q1 2015 and up 31% over Q4 2015. The increase in revenue was driven by volume growth in product sales. Gross loss for the quarter ended March 31, 2016 was $1.6 million , compared to a gross profit of $57,000 for the same period last year. The loss was due to higher cost of goods sold resulting from Sarnia fixed costs and off-spec product reprocessing costs that were allocated to the cost of goods sold.

The Company recorded a net Q1 loss of $10.9 million compared to a net Q4 2015 loss of $8.4 million.

Production. Plant up-time averaging 70% in the last three weeks of the quarter; fermentation continued to meet targets for productivity, sugar yield and final concentration. The company disclosed “a production problem in February,” but said that “plant uptime and percentage of off-spec product improved significantly, reaching target levels in recent weeks”.

Pricing. The average selling price was unchanged from the previous quarter, despite lower oil prices.

Cash picture. Cash on hand was $14.1 million as of March 31, 2016 ;

Reaction from Fortress BioAmber: “We are making steady progress in ramping up Sarnia , from both a production and a sales perspective. Our transition to an operating company is complete and we are focused on reaching full production capacity and selling the output of the plant,” said CEO Jean-Francois Huc. “As we ramp up, the macro environment in which we operate is beginning to improve and higher oil prices could lead to greater demand for biobased products in the second half of the year,” he added.

REG (REGI): “Significant increase” in gallons sold, “better margin environment,” and “a more stable regulatory environment.”

In Iowa, Renewable Energy Group announced Q1 revenues of $305.6M on 98.0 million gallons of fuel sold, a gain of 63.7% in gallons sold compared to Q1 2015. Adjusted EBITDA for the quarter was $9.9 million compared to negative $30.2 million in the prior year period, without any adjustments for the 2015 Biodiesel Mixture Excise Tax Credit (BTC). Adjusted EBITDA for the first quarter of 2015, after giving effect to the retroactive reinstatement of the BTC, was negative $14.5 million.

Profits: The increase in gross profit was due to the significant increase in gallons sold along with a better margin environment. Gross profit was $25.1 million, or 8.2% of revenues, compared to gross Q1 2015 loss of $16.2 million, or 7.0% of revenues.

Production: REG produced 86.2 million gallons of biomass-based diesel during the quarter, a 42.1% increase.

Prices: The average price per gallon sold of biomass-based diesel decreased by 7.9% to $2.92 which was due to lower heating oil and RIN prices.

Cash: At March 31, 2016, REG had cash and cash equivalents of $164.1 million, an increase of $117.0 million from the prior quarter end. This increase was largely the result of collections related to the retroactive reinstatement for 2015 of the biodiesel mixture excise tax credit.

Reaction from Fortress REG: ”The REG team delivered solid execution in the quarter. We continued optimizing our fleet of plants while integrating our newest biorefinery in DeForest, Wisconsin and bringing REG Geismar back online,” said REG President and CEO Daniel J. Oh. “A more stable regulatory environment in the U.S. enabled us to focus on growing our business.”

Upcoming earnings seasons highlights

Pacific Ethanol, May 4
TerraVia, May 4
Codexis, May 9
Amyris, May 10
Biox, May 10
Dyadic, May 12
Evogene, May 19

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

March 21, 2016

Three Renewables Companies: No Pain, No Gain

Jim Lane

In California and Canada this week, BioAmber (BIOA), Pacific Ethanol (PEIX) and the former Solazyme (SZYM) reported their Q4 and year-end results, providing between them a fascinating look at the evolution in the fuels, renewable chemicals, specialty products and nutrition that make up the advanced bioeconomy.

In advanced nutrition

The most spectacular news of the week belonged to TerraVia (formerly SolaZyme), which landed a 5-year, $200 million “baseload” offtake deal with Unilever, which provides a huge lift for investors and validates the economics and performance of the company’s first commercial plant, which it operates in a Bunge JV in Moema, Brazil. “Importantly, this agreement was structured at variable cost-plus pricing,” noted Cowen & Company equity analyst Jeffrey Osborne, “enabling this deal to be cash flow positive at the plant level. We expect more deals such as this to be signed in the coming quarters, potentially offering greater visibility for TerraVia’s future vol. production.

The company stunned the market also last week with news of new investors and a re-branding of the company as TerraVia, to emphasize its decision to focus on nutrition and personal care, leaving “industrials” to be spun off at a later date. The Unilever deal, which has been five years or so in the making, which provide wind in the sails for the company, which hasn’t yet announced a fate for its Algenist health & beauty products business but otherwise has clarified its focus going forward around products such as AlgaVia whole flour and its pure food oils opportunities.

As we tipped in our coverage earlier this week of the name change, the company’s progress in industrials had stalled the face of low oil prices, and Q4 revenue was $10.4M compared with $14.5M in Q4 2014. The company has narrowed its net loss to $26.1M in Q4 vs $35.5M in Q4 2014, but the company had expected to be further along in industrial by now, and investors had wearied, with stock prices dropping below $2.

Cowen & Company’s Jeffrey Osborne wrote: “Algae is the next wave in protein ingredients and Solazyme, through is new TerraVia branding, is positioning itself to take advantage of higher margin and more stable applications. The company will predominantly focus on four main areas; food ingredients through its AlgaVia and AlgaWises brands, consumer foods through Thrive, specialty through personal care products with brands like AlgaPur, and through a yet unannounced animal nutrition product. Consequently, Solazyme will be de-emphasizing Encapso, fuels, and lubricants, which comprise the industrial segment of the business.

“We are very constructive on Solazyme’s strategic focus on high value applications of algae strains. However, given the de-emphasis on industrials and concentration on food, nutrients, and specialty ingredients we still see 2016 as a transitional year. The agreement with Unilever provides a meaningful volume baseload for its Moema JV facility with Bunge. As capacity and yields at this facility improve, it could accelerate milestones and allow for JV revenue to be recognized earlier than anticipated. While the exact timing of this event is inherently difficult to time we believe it could serve as a very material catalyst for shares of Solazyme.”

Over in renewable chemicals

For some time, investors and industry experts have pointed to succinic acid as a new intermediate for chemicals and an area where green renewable chemicals can shine. Succinic, say chemical experts, offers new options to make novel, high-performing chemicals that are not as easy or as affordable to maker from the traditional platform chemicals of the petrochemical refinery: Ethylene, Propylene, Butadiene, Benzene, Xylene, Toluene, Methanol.

The biobased advantage in this case? Organics acids like succinic acid contain oxygen, which biomass also contains but petroleum does not. It’s an extra processing step to oxygenate a petroleum-based molecule. So, though biomass starts at a disadvantage in making hydrocarbons, it has an advantage in organic acids — where biology can give us one-step methods of making a target molecule from sugar or plant oils.

Leading the succinic charge has been BioAmber, which concluded a successful IPO and is making and shipping succinic acid out of Sarnia, Ontario. To date, sales have been at the “emerging company level”, reaching $1.1M for Q4 , including initial shipments to PTTMCC Biochem, an important off-taker requiring high purity succinic acid to make bioplastic. However, more than 100 companies tested and qualified the bio-succinic acid produced in Sarnia, and in recent weeks Mitsui & Co. invested $CDN25 million in the Sarnia joint venture, increasing its equity stake from 30% to 40% and committing to play a bigger role in commercialization.

Investors have been encouraged by an average selling price for Q4 2015 above the $2,000 / MT guidance, despite low oil prices. Overall, 2015 revenues were up to $2.2M from $1.5M in 2014, and net loss for the year narrowed to $37.2M from $48.5M in 2014. R&D costs have increased to $20.3 million from $15.2 million in 2015, driven primarily by an increase in expenses related to the commissioning and start-up of the Sarnia plant.

The company’s first commercial plant opened in August at a cost of $141.5M, and volumes specified in signed take-or-pay and sales agreements exceed annual production capacity. Should the company be able to maintain a $2,000 per ton price and reach nameplate capacity of 30,000 tons at Sarnia — well, it’s not hard to get out a calculator and reach $60M in annual revenues. 2016 could well be a mighty year as the company begins to ramp up production.

In conventional biofuels, Pacific Ethanol

In Oregon, Pacific Ethanol reported Q4 revenues of $376.8 million for the fourth quarter of 2015, an increase of 47% when compared to $256.2 million for Q4 2014, and operating income for the Q4 2015 of $0.5 million, compared to $13.6 million for Q4 2014. Net loss for Q4 was $1.1 million compared to $11.9 million for Q4 2014. Cash and cash equivalents were $52.7 million at December 31, 2015, compared to $62.1 million at December 31, 2014. For 2015 as a whole, the company reported a net loss of $20.1M compared to $19.4M for 2014.

Neil Koehler, president and CEO, stated: “In 2015, we made significant progress in positioning the company for long-term growth. We completed our acquisition of Aventine in July, more than doubling our production capacity. Our expanded footprint is demonstrating operating benefits. The diversification of geography, technology, feedstocks and products strengthens our performance across margin cycles and provides a strong platform for growth.

Look for less production in Q1 2016.

Koehler notes, “we are moderating production levels to match supply and demand. While the demand for ethanol continues to grow, current industry ethanol inventories remain high. We are confident that the fundamentals of ethanol as a valuable source of octane and carbon reductions will support continued growth in demand and improved production margins.”

Cowen & Co’s Jeffrey Osborne wrote: Pacific Ethanol reported revenue below estimates but beat on earnings. The oversupply theme of 2015 continues to remain the biggest concern going forward. While management is hopeful that the end is near due to growing demand, they are planning for the trend to continue in the near to mid term by reducing capacity..our implied equity value reflects a price target of $10.00 per share.”

What do these three companies share, and where do they differ?

The search for volume is a connecting point.

In the case of Pacific Ethanol, they’re producing at scale but moderating production — as we expect other first-gen producers may do — to shore up the fuel price. Demand has grown for ethanol with rising vehicle miles and small upticks in Renewable Fuel Standard volumes and growing exports, but not as fast as supply has grown. Bottom line, lots of established customers, and more of a case of right-sizing the production for the margins.

In the case of BioAmber, it’s a matter up ramp-up on production without sacrificing price — as the $2000 per metric ton price is a good sign but the volumes have been scanty to date and the company is now at commercial-scale and poised to grow, fast. So, lots of potential customers — a matter of scaling up production at effective yields.

In the case of TerraVia, a more complex task. There’s a focusing going on in the customer base at the same time as the company is ramping production.

One of the more interesting points of comparison, though — is the contrast between the search for focus and the search for diversity. BioAmber finds itself keeping a focus on its single molecule and process, and diversifying the customer and investor base. Making its molecule multi-functional, that’s a key — new things you can do with succinic acid, in short. TerraVia, is also diversifying investors and customers, but continues to aim at diversifying its range of molecules. In short, new applications through new oils. Yet, a single technology, in this case algae fermentation.

Pacific Ethanol, that’s the outlier here.

It’s diversifying in all directions, as are all conventional, or “first generation” companies. They’re acquired Aventine to achieve economies of scale; they’re diversifying the customer base through exports. They’re diversifying the product line — adding corn oil extraction which has opened up new customers for them. In partnership with Edeniq, they’ve added cellulosic production which they get out of the cellulosic material in the corn kernel. And, they remain heavily invested in the nutrition space, through the animal protein business of the dried distillers grains (DDGs).

Some of their peers have also explored adding CO2 liquefaction to turn that CO2 gas into an asset. Call it a gasset. And, others in the first gen space have experimented with renewable natural gas and sorghum as a feedstock to qualify for advanced biofuels RINs.

Diversification vs focus

Bottom line — all pursuing growth but PEIX is approaching through diversification of feedstocks and technology, as opposed to focusing the technology and diversifying the customer base through new applications.

Experts differ on the merits of focus vs diversification almost as much as they differ on whether companies should be organized around customer sets, product lines, or regions. It’s the age-old debate, and it’s now invading the renewables space.

Diversification means risk-spreading, and that’s a good thing. Focus means putting resources onto the most important opportunities, and that’s a good thing.

Here in Digestville, we see diversification as a stronger strategy — though resources are hard to come by and the investors who provide them are known to have epic issues with attention-deficit disorder when the results come in more slowly than expected, and costs rise.

The reason is this. Aside from a handful of experts, some profiled recently in The Big Short, who correctly called the timing on the Great Recession of 2008-10. Who foresaw the problems with weapons of mass destruction repiuted to be in Iraq? Who called the timing well on the rise of fracking, or the 2014-16 crash in commodity prices?

We live in a world of global macro — macroeconomic events that shift the microeconomic landscape that renewables compete in, like seismic waves rolling through the San Andreas Fault. The world of $80 oil was expected to begat cellulosic ethanol — instead, we saw driving miles drop, fracking take off, and interest in electrics soaring. Meanwhile, fuels producers began to chase chemicals, which welcomed new sources in a world of high commodity prices. But now, chemicals find challenges and though fuels protected by the Renewable Fuel Standard are doing fine so long as there is not over-production — many technology developers are targeting protein, and nutrition as a whole.

The Summer of Fish Meal

It’ll be the summer of Fish Meal, perhaps. But where will the next set of trends take us? Hard to say, because we live in a macro world — to some extent influenced by global interest rate policy, or social factors that influence cartels such as OPEC.

How do renewables companies find strength through diversification when the resources that diversity demands can drain a treasury. The secret lies in partnership based on the search for an alternative to economic, social or climate pain.

No pain, no gain

Renewables, they’re a therapeutic for what ails us, and the natural first customer for an experimental therapeutic is the patient at the greatest risk, feeling the greatest pain. It’s pain that drives companies to complete tasks — groups driven by perceived opportunity have been known to be fickle — dirfiting to the next glowing target like moths to a flame.

Pain focuses, clarifies, and makes change inevitable and drives us to the finish line. If there’s pain the sector, there’s no gain without it.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

March 10, 2016

Fly The Ecofriendly Skies

United Launches 50% Biofuel Flights On LAX-SFO Route

Jim Lane

In California, United Airlines (UA) will be using jet biofuels produced by AltAir using Honeywell (HON) UOP technology on up to 150 flights a day out of Los Angeles, the Digest has learned. March 11.

A two week, 14-day Los Angeles to San Francisco service will launch United’s jet biofuels plan. After the first two weeks, “pretty much all flights out of LAX will have a component of biofuel,” said a person familiar with the United plan. Flights are expected to begin almost immediately.

Depending on the feedstock used, Honeywell Green Jet Fuel can offer a 65 to 85% reduction in greenhouse gas emissions compared with petroleum-based jet fuel, which helps refiners meet EPA mandates for renewable transportation fuel content. It’s also being delivered at a price comparable to petroleum fuel, marking a major milestone towards the widespread use of renewables fuel.

United will purchase up to 15 million gallons of sustainable aviation biofuel from AltAir over a three-year period, with the option to purchase more.

The AltAir project

In 2013, AltAir and United announced the 15 million gallon deal, saying at the time that they expected to be operating flights in 2014. AltAir Fuels said that it planned to retrofit the idled portions of its Paramount petroleum refinery to produce renewable jet fuel and other products from non-edible oils and agricultural waste. The opening of the AltAir refinery created 150 jobs in Paramount, California. The biofuel is mixed with traditional jet fuel at a 30/70 blend ratio.

AltAir can produce enough sustainable bio-jet fuel to power the equivalent of more than 40,000 flights from Los Angeles to San Francisco over the next three years — at its historic 40 million gallons plant.

The Visual Story

Sustainable aviation biofuel: The Digest’s 2016 8-Slide Guide to United Airlines

Merging refinery tech with biofuels: The Digest’s 2016 8-Slide Guide to Honeywell’s UOP

Honeywell’s UOP Renewable Jet Fuel Process

This is third launch we’ve seen using Honeywell Green Fuel.

Last summer, the Disney Transportation bus fleet became one of the first in the country to run on R50, a cleaner renewable diesel (RD) made from used cooking oil and non-consumable food waste. Then, in January the US Navy’s Great Green Fleet sailed on its 2016 mission, using green marine diesel. Now, United takes off with renewable jet fuel — all made using the same technology.

“These very public users highlight the fact they the fuels are commercially available, and to have three different modes of jet, marine and road sends a positive message about the technology,” Honeywell UOP renewables czarina Veronica May told The Digest.

It’s been a long road, we note. But not as long as, for example, the path to getting lead out of fuels, May noted.

“Anyone who’s been in the business knows that changes in fuels take years and decades. When you look back, it took 30 years to remove lead. There was the Clean Air Act in 1970 which set the target, but it wasn’t until 1986 that we had all of the lead removed for road transport, and 1990 for all vehicles, and Europe took another 10 years to get the lead out. We’re 10 years into the Renewable Fuel Standard. and obviously the low oil price is rocking the financial market, but these projects are years in the making, and a blip in the price will slow but not stop the momentum.”

May emphasized having the capital and the portfolio of technologies to meet customer needs throughout the commodity price cycle.

“One thing that UOP brings to renewable fuels, is that we are able to continue investment year after year. A lot of groups have great ideas but don’t have the funding, so when gasoline prices are high you get a flurry of activity but they can’t can’t sustain it. Renewables are one part of UOP, and the rest helps to support renewables.”

We asked May about the low price environment and the era of high oil prices. Noting that in the era of high prices that we saw so much diversion of capital and consumer interest to electrics, natural gas vehicles, and reducing drive miles. Is there a pricing sweet spot, we wondered?

“Actually, what you don;t want to see is a lot of volatility. If it would just stay in one range, that would help, because a lot of feedstock prices track the oil price. Another thing that helps is feedstock diversity. Right now we have waste oils, but when camelina and others come along, purpose—grown oilseeds crops, there you start getting a foundation, for real expansion.”

“And, it would help if EPA could put out volumes not for a year or two, but for five years, because it takes 3 years to build a project from scratch.”

The Alt Air refinery

AltAir Paramount is using Honeywell’s UOP Renewable Jet Fuel Process to convert a variety of sustainable feedstocks into Honeywell Green Jet Fuel at the world’s first dedicated commercial-scale renewable jet fuel production facility. The plant, located near the Los Angeles International Airport, has also produced Honeywell Green Diesel, a drop-in replacement for diesel made from petroleum, using the same process technology.

AltAir is the second U.S. fuel producer using Honeywell UOP technology to produce renewable fuels, joining Diamond Green Diesel, which is producing renewable diesel in Louisiana

The Renewable Jet Fuel Process makes Honeywell Green Jet Fuel as well as Honeywell Green Diesel from a range of sustainable feedstocks such as used cooking oil, inedible corn oil, tallow, camelina, jatropha and algae. The process is compatible with existing hydroprocessing equipment commonly used in today’s refineries, making it ideal for plants that can be converted to produce renewable fuels.

Honeywell Green Diesel offers up to an 80 percent reduction in greenhouse gas emissions versus diesel from petroleum. Chemically identical to petroleum diesel, Honeywell Green Diesel can be used in any proportion in existing fuel tanks without infrastructure changes. Unlike biodiesel, Honeywell Green Diesel is a drop-in replacement for traditional diesel.

In aircraft, Honeywell Green Jet Fuel can replace as much as 50 percent of the petroleum jet fuel used in flight, without any changes to the aircraft technology, while meeting the current ASTM jet fuel specifications for flight. Depending on the feedstock, Honeywell Green Jet Fuel can offer a 65 to 85 percent reduction in greenhouse gas emissions compared with petroleum-based jet fuel.

“Production by AltAir and Diamond Green Diesel demonstrates that the vision of producing real fuels from sustainable feedstocks has taken the crucial step from technology demonstration to commercial-scale production,” said Veronica May, vice president and general manager of Honeywell UOP’s Renewable Energy and Chemicals business. “Honeywell UOP is committed to continuing to advance its technology to give fuel producers options to use sustainable feedstocks.”

AltAir’s Green Fleet contract

Earlier this year, the U.S. Navy’s Great Green Fleet, a carrier strike fleet of ships and aircraft, began using renewable fuel on regular deployments as part of the Navy’s efforts to demonstrate and deploy alternative sources of fuel, reduce energy consumption, decrease reliance on imported oil and significantly increase use of alternative energy. The ships are being powered by a blend of renewable marine diesel from AltAir – made from domestic sources of inedible waste, fats, oils and greases – and petroleum-based marine diesel. For the initial delivery in January 2016, AltAir prepared 1.34 million gallons of F-76 type Naval Distillate Fuel containing 10 percent HRD and 90 percent petroleum-based fuel.

The United-Fulcrum partnership

In addition to the AltAir partnership utilizing Honeywell UOP technology — last June, United Airlines announced a $30 million direct investment in advanced biofuels developer Fulcrum BioEnergy, obtained an option to invest in five future commercial-scale aviation biofuels plants, and signed offtake agreements for up 90 million gallons of biofuels per year. The offtake contracts are worth an estimated $1.58 billion over the 10-year offtake span, based on the current jet fuel price of $1.76 per gallon, according to Digest calculations.

The shift in United’s fuel purchasing represents 3% of its annual fuel consumption, reported by the airline at 3.2 billion gallons in 2013, and comes after Cathay Pacific invested in Fulcrum BioEnergy in 2014 and signed offtake agreements from the company’s first commercial facility, now under development near Reno, Nevada. The five new plants are expected to range in size between 30 and 60 million gallons.

US Renewables Group, Waste Management and Rustic Canyon, among others, have also previously invested in Fulcrum BioEnergy, which converts municipal solid waste diverted away from landfills into diesel and jet fuel. Fulcrum’s first commercial facility is expected to open before the end of 2017.

Visualizing the Fulcrum technology

Waste Makes Haste: The Digest’s 2015 8-Slide Guide to Fulcrum BioEnergy

The Tesoro partnerships

Where is the petroleum coming from for that portion of the blend? Tesoro, which in January unveiled its own plan to foster the development of biocrude made from renewable biomass, which can be co-processed in its existing refineries, along with traditional crude oil. T he company has identified three new partners in the process:

Fulcrum BioEnergy, Inc.: Fulcrum plans to supply biocrude produced from municipal solid waste to Tesoro to process as a feedstock at its Martinez, California Refinery. An estimated 800 barrels of biocrude per day will be produced at Fulcrum’s Sierra BioFuels Plant in Reno, Nevada, which is expected to be operational in early 2018.

Virent, Inc.: Tesoro and Virent are working to establish a strategic relationship to support scale-up and commercialization of Virent’s BioForming technology which produces low-carbon, biofuel and chemicals.

Ensyn Corporation: Ensyn has applied for a pathway with the California Air Resources Board to co-process its biocrude, produced from tree residue – called Renewable Fuel Oil – in Tesoro’s California refineries.

The Bottom Line

We’ve said it before. These are the golden days of renewable diesel. Offtakers have the interest. The technology works. More feedstock and more capacity, that’s what’s needed. And some of that starts with policy certainty.

So, all eyes on Washington DC and other capitals. Even while we sneak a peek at the California coast where the activity is humming.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

February 26, 2016

Abengoa Bioenergy files for Chapter 11

In Missouri, Abengoa (ABY) Bioenergy US Holding, LLC filed for Chapter 11 bankruptcy relief in the US Bankruptcy Court for the Eastern District of Missouri on behalf of itself and 5 of its US bioenergy subsidiaries. The companies involved in the filings include the US holding company; companies that own and operate four of Abengoa Bioenergy’s six US starch ethanol plants; as well as various support/service companies for Abengoa’s US bioenergy operations.

This action follows the filing of two separate involuntary bankruptcy proceedings in Nebraska and Kansas earlier this month concerning the company’s starch ethanol facilities located in Ravenna and York, NE; in Colwich, KS; and in Portales, NM, and motions have been filed in the Nebraska and Kansas courts to transfer those involuntary filings to St. Louis for consolidated administration.

The filings do not include the company’s starch ethanol plants in Mt. Vernon, IN and Madison, IL, nor do they include the new cellulosic ethanol facility in Hugoton, or certain other subsidiary companies of Abengoa Bioenergy, which continue to operate in the ordinary course. Antonio Vallespir, President and Chief Executive Officer of Abengoa Bioenergy, said,

“Abengoa Bioenergy believes that this action is in the best interests of the company, the plant employees, and the creditors of each of the affected companies. Filing and consolidating the cases in St. Louis will provide for a more efficient and less costly administration of these cases in one location, and gives our companies the potential to resume operations and generate revenues at the more profitable of these facilities. It also provides the opportunity for a coordinated and supervised reorganization or sale process, while still allowing each involved debtor company substantial control over its own costs, debts and assets. Abengoa S.A. is currently in the process of negotiating a viability plan for the global organization of the company and aims to maintain business activity in all areas. Under Spanish law, Abengoa is in the process of restructuring its debt through a process that protects the company from claims from creditors.

The company said that the changes are expected to streamline operations and maximize resources.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

January 15, 2016

Pushmi-Pullyu: Biofuel Incentives Come Together In A Strange Creature

Jim Lane

BD TS 011216 pushmi smSometimes, the set-up of the transition from fossil fuels is as pretty and impractical as Dr. Doolittle’s Pushmi-Pullyu. The Digest investigates.

As you may have noticed in the stories around the launch of the Great Green Fleet, it is a complex maze of relationships when it comes to a technology benefitting from mandates like the Renewable Fuel Standard and the California’s Low Carbon Fuel Standard and various carbon taxes and tax credits.

For example, a renewable fuel does not qualify under the Renewable Fuel Standard if it is to be used in an ocean-going vessel, but it can qualify under the California Low Carbon Fuel Standard if it is loaded on ships in California. And, it qualifies for the federal renewable diesel tax credit even though it does not qualify for RINs.

Conversely, jet fuel from the same biorefinery can qualify for the Renewable Fuel Standard, but does not qualify under the California Low Carbon Fuel Standard. It does not qualify for the renewable diesel tax credit though it does qualify for RINs.

To make matters more complicated, consider the problem of feedstocks. A jet fuel made from eucalyptus oils by the same California biorefinery would not yet qualify for anything — not the RFS, not the LCFS and not the renewable diesel tax credit.

Yet, were you to take old branches from eucalyptus trees, grown in Burundi, ship them back to California and convert them into ethanol, you would qualify the fuel under the Renewable Fuel Standard and the California LCFS. Alas, no renewable diesel tax credit.

So, by now we should all be completely confused. One might argue that so long as a renewable fuel reduces CO2 emissions and is used within a given jurisdiction, it should qualify as a renewable fuel. Doesn’t work that way.

Weird, huh?

In the perfect world we don’t live in

As originally conceived, a mandate, and a tax on the incumbent (or a tax credit for the new entrant) should work well together.

First, the mandate should ensure that there is a market available, taking into account that incumbents directly or indirectly control fuel supply (through direct ownership of fueling outlets, or franchising agreements, or the inability of dispensers to handle a new product.

The mandating regime can assist the transition away from that old system of ownership and control via incentives or regulations (e.g. the installation of blender pumps, the manufacture of flex-fuel vehicles, or banning agreements that limit fuel selection at any location), or not. In the US, there are limited blender pump incentives, flex-fuel manufacturing incentives that are on the verge of expiring, and that’s about it.

That takes care of availability. Initially, renewable volumes are small compared to fossil fuels — yet they are requires to both meet the same ASTM fuel performance spec, and there is limited opportunity for the kind of early-stage performance differentiation that assists the launch of anything from electric cars to iPhones.

So, the small refinery has to make essentially the same fuel as the large refinery, and unless there are huge disparities between feedstock costs, the small refinery’s fuel will cost more.

Production credits, investment credits and carbon credits, what they are and how they work

We generally attack the resulting production cost problem with tax credits, of which there are three kinds, production credits, investment credits and carbon credits.

Production credits are the easiest to understand. You produce a qualifying fuel, you receive a tax credit. The taxing regime gets to decide if it will award the credit to the producer of the fuel, or the marketer that blends and distributes the fuel (known as the Producer’s Credit or the Blender’s Credit) — this past year, the US considered switching from a blender’s credit to a producer’s credit when it comes to biodiesel or renewable diesel. A blender’s credit can benefit, for example, an off-shore producer, while a producer’s credit might narrow the benefit to domestic producers.

Then, there are investment tax credits, These always incentivize local producers, who are paid out when they install new production capacity. It’s a lot faster than the production credit, and helps with the capital stack by which these facilities are financed. Investors tend to prefer investment credits for new capacity, because there’s more certainty that they will truly be available. On the other hand, the taxing regime has less certainty that the capacity will be utilized.

Carbon credits are the most murky. A federal credit under the Renewable Fuel Standard comes in two flavors. One is a RIN and one is a cellulosic waiver credit. Each obligated party under the RFS has to submit a given number of RINs each year, a mandated percentage of their overall production, for each mandated fuel. Each gallon of renewable fuel comes with a RIN, or a Renewable information Number. The simplest way to comply is to buy the wet gallon, blend it into the fuel supply, and submit the RIN.

But obligated parties can also buy RINs on the open market. Sometimes, refiners have excess RINs, so they sell them to obligated parties who are short. The resulting price of the RIN indirectly assists the renewable fuel producer — setting a floor price for a fuel.

For example, if gasoline costs $2.00 and a RIN costs $0.75, you can sell a renewable fuel to an obligated party for $2.70, and they’d be delighted to lock in some extra margin.

The cellulosic waiver credit works in a similar way. An obligated party can buy a cellulosic waiver credit from the EPA for a given price that is set each year, in lieu of buying or blending a gallon of cellulosic biofuels. In the same way as the RIN example, if gasoline costs $2.00 and a CWC costs $0.75, you can sell a cellulosic fuel to an obligated party for $2.70, and they could lock in some savings compared to distributing gasoline and buying a CWC.

The problem of performance differentiation in fuels

So, the theory is sound. There is a mechanism to address the absence of an open market in fuels at the consumer level, and there is a mechanism to address the lask of performance differentiation in fuels that we generally see in new market entires like iPhones.

You see, the real performance differentiations between renewable fuels and fossil fuels lie in emissions, energy security and economic development that renewables achieve when they are deployed, by reducing imports and reducing CO2. These are social benefits enjoyed by society as a whole, they do not accrue to the investor in the project, because investment and return in measured in dollars instead of social benefit.

The carbon credits internalize the benefits inside the project, monetizing a social benefit such as cleaner air or less dependence on fuels made by unfriendly regimes.

Why are the various regimes so contradictory and confusing?

Tax credits generally are fuel-specific, for one — so you might have one for ethanol but not biodiesel, or one for biodiesel and renewable diesel but not ethanol. The latter is the case in the US right now.

Second, each carbon scheme is based on the idea of pathways. One example would be using a Midwestern dry mill ethanol refinery that uses coal for process energy, and makes ethanol from corn starch. From California’s point of view, a local refinery would have a lower carbon footprint because of the reduced carbon of transporting fuel from the Midwest, Or, a facility that switched to natural gas for process energy would do better on carbon. Better still, biogas. Or, the refinery could switch over to lower-still biomass sorghum. Each of these represents a pathway and they have to be individually and painstakingly approved by the mandating authority.

In many cases, California and the US government are simply able to approve pathways at a much slower pace than the pace of innovation, so they fall behind as new feedstocks, technologies and end-uses pop up. For example, algae was not originally included as a feedstock under the RFS.

Another thing. Originally, these schemes were designed for road transport. So, marine fuels, jet fuels and the use of molecules to make renewable chemicals were outside of the system of credits. Slowly, the mandating authorities are working through the possibilities.

But California has not yet embraced jet fuel for the LCFS, while the US government has not yet embraced marine fuels for the RFS. Chemicals are not yet approved uses, even thought they reduce carbon, and sometimes offer much longer carbon sequestration in a durable good, such as a chair.

To give an example, you can qualify for a RIN by making isobutanol and blending it into the fuel supply to be combusted in ICU engines. But, if you sell isobutanol as a blendstock for a renewable chemical, in which case the carbon might be sequestered for a hundred years, you don’t get the credit.

On the one hand that makes perfect sense — after all, a durable good is not a renewable fuel and fitting it into the Renewable Fuel Standard is a sketchy proposition. Yet it provides the same (or more) carbon benefit based on the same feedstock, possibly made at the same refinery, such as Butamax or Gevo. And, the producer gets a higher price, generally, for the chemical, which provides more margin and more incentive to build more refineries and reduce carbon faster.

So, these are some of the dilemmas that regulators are working through.

Ways to improve

One way to improve is to shift the way we approve pathways. Right now, we place to burden in EPA to approve a pathway before it can be used. If they get backlogged, innovation stalls and innovative producers can go to the wall.

Another way to go forward is to allow producers to use a novel pathway, so long as it meets a basic “first glance” standard based on the producer’s data submissions, subject to EPA review. The EPA review, then, would only be able to shut down a pathway if the data proved to be falsified. Producers could get into the market as fast as they galvanize their own resources to build a data set.

Another way to improve is through the use of “pathway” treaties. For example, the US could, by treaty, recognize a California-approved pathway as a US-approved pathway. Or, vice-versa. Saves filing in two regimes for a novel pathway, and prevents cases as with AltAir where the producer is incentivized towards a given pathway not because of reducing more carbon or getting a better margin, but because of differences in the regulatory regimes.

Another way to improve is to allow the use of fuels as renewable chemicals, and allow refineries to produce chemicals and qualify them under LCFS and RFS. At the end of the day, both use cases reduce carbon footprints and reduce imports equally. It seems counter-productive and overly complicated that, for example, Gevo could sell isobutanol to an obligated party, and the refiner can sell the RIN if it is used as a fuel blendstock but must retire the RIN if it is used as a chemical feedstock.

One final improvement. The EPA decided that RINs would be calculated on energy content and no other factor. Yet, molecules have downstream pathways just as they do upstream pathways. It would be generally acknowledged that higher-ethanol blends incentivize more use of renewable fuels and do more towards achieving aggressive Congressional targets, yet E15 blends (based on a $0.70 RIN) provide no more than a 3.5 cent incentive to the blender compared to E10 blends. That’s not the kind of incentive that breaks through the E10 saturation problem. If higher blends received higher RIN values based on their value in incentivizing a distribution system that could achieve Congressional targets, they would be serving the Congressional purpose.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

December 02, 2015

EPA increases US Renewable Fuel Standard Volumes, But Only Slightly

Jim Lane

EPA-RFS-120115-cover-smIn Washington, the U.S. Environmental Protection Agency announced final volume requirements under the Renewable Fuel Standard program today for the years 2014, 2015 and 2016, and final volume requirements for biomass-based diesel for 2014 to 2017. This rule finalizes higher volumes of renewable fuel than the levels EPA proposed in June, boosting renewable production and providing support for robust, achievable growth of the biofuels industry.


“The biofuel industry is an incredible American success story, and the RFS program has been an important driver of that success—cutting carbon pollution, reducing our dependence on foreign oil, and sparking rural economic development,” said Janet McCabe, the acting assistant administrator for EPA’s Office of Air and Radiation. “With today’s final rule, and as Congress intended, EPA is establishing volumes that go beyond historic levels and grow the amount of biofuel in the market over time. Our standards provide for ambitious, achievable growth.”

The final 2016 standard for cellulosic biofuel — the fuel with the lowest carbon emissions — is nearly 200 million gallons, or 7 times more, than the market produced in 2014. The final 2016 standard for advanced biofuel is nearly 1 billion gallons, or 35 percent, higher than the actual 2014 volumes; the total renewable standard requires growth from 2014 to 2016 of more than 1.8 billion gallons of biofuel, which is 11 percent higher than 2014 actual volumes. Biodiesel standards grow steadily over the next several years, increasing every year to reach 2 billion gallons by 2017.

The RFS, established by Congress, requires EPA to set annual volume requirements for four categories of biofuels. The final rule considered more than 670,000 public comments, and relied on the latest, most accurate data available. EPA finalized 2014 and 2015 standards at levels that reflect the actual amount of domestic biofuel used in those years, and standards for 2016 (and 2017 for biodiesel) that represent significant growth over historical levels.

EPA-120115-3 EPA-120115-2 EPA-120115-1


Well, you might think to yourself, why is the EPA finalizing a mandate for 2014 and 2015 n November 2015. Well, they were two years late on the 2014 mandate and a year late for 2015. But they are on time for 2016. Let’s celebrate.

What’s next?

Likely, someone is going to sue the EPA. Possibly a coalition of biofuels trade groups, who will focus on getting court rulling that the EPA does not have the authority to create a distribution waiver by redefining a waiver authority basded on shortfalls in the “supply of renewable fuels” to mean “supply of renewable fuels OR gas pumps to deliver fuels to consumers.”

What the numbers mean

First of all, the EPA increased the volumes from the spring 2015 proposal, after receivging 670,000 comments. However, much of that stems from correcting an accounting error in the original proposal, and because rising gasoline consumptino increases the available pool for E10 ethanol blends.

Bottom line, the EPA has embraced an implied “distribiution waiver”, something that was proposed in the House version of the original EISA Act, not included by the Senate, and eliminated in the final bill. Congress feared at the time that the oil & gas industry would use its effective monopoly of infrastructure to strangle growth of biofuels past an E10 saturation point, which essentially happened. Critics say the EPA and Obama Administration have caved in to Big Oil on this one.

Reaction from Stakeholders

Chip Bowling, president, National Corn Growers Association

“America’s corn farmers are proud to grow a cleaner burning, renewable fuel source for America and the world. In July, we asked the Environmental Protection Agency to restore the 2014-16 corn ethanol renewable volume obligation to comply with the Renewable Fuel Standard as passed by Congress and signed into law.

“While we are pleased to see the EPA take a step forward and revise its original proposal, the fact remains that any reduction in the statutory amount will have a negative impact on our economy, our energy security, and the environment. It is unfortunate that Big Oil’s campaign of misinformation continues to carry weight in the court of public opinion, and in this decision. The Renewable Fuel Standard has been one of America’s most successful energy policies ever. Because of it, our economy is stronger, we are more energy independent, and our air is cleaner. We should be strengthening our commitment to renewable fuels, not backing down.

“In light of the EPA’s decision, we are evaluating our options. We will fight to protect the rights of farmers and consumers and hold the EPA accountable.”

Joe Jobe, CEO, National Biodiesel Board

“This decision means we will displace billions of gallons of petroleum diesel in the coming years with clean-burning biodiesel. That means less pollution, more American jobs, and more competition that is sorely lacking in the fuels market,” said NBB CEO Joe Jobe. “It is a good rule. It may not be all we had hoped for but it will go a long way toward getting the U.S. biodiesel industry growing again and reducing our dangerous dependence on fossil fuels.”

“I want to thank President Obama, Administrator McCarthy and Secretary Vilsack for supporting growth in the program and for their commitment to biodiesel,” Jobe added. “We have seen three years of damaging delays, but the Administration took a strong step forward today that should put biodiesel and the RFS on a more stable course in the years to come.”

“We will continue working with the Administration toward stronger standards moving forward that drive innovation and productivity. We certainly think the biodiesel and overall Advanced Biofuel standards could and should have been higher. The production capacity is there, and we have surplus fats and oils that can be put to good use.”

Brent Erickson, Executive Vice President of BIO’s Industrial & Environmental Section

“Today’s rule is a severe blow to American consumers and the biofuels industry. To date, BIO member companies have invested billions of dollars to develop first-of-a-kind advanced and cellulosic biofuel production facilities. EPA’s two-year delay in finalizing the rule created untenable uncertainty and shook investor confidence in the RFS program. BIO estimates that investment in the advanced biofuel sector has experienced a $13.7 billion shortfall due to EPA’s delays and proposed changes. Unfortunately, this final rule exacerbates the problem.

“As EPA has acknowledged, its delay allowed obligated parties to act as though the law did not exist. The delay increased U.S. carbon emissions by millions of tons over the past two years, compared to what could have been achieved with required use of biofuels. As the United States enters negotiations with the rest of the world to limit greenhouse gas emissions, EPA is putting in place an RFS rule that will sacrifice achievable reductions of emissions in the transportation sector.

“Moreover, EPA has violated the law. As BIO explained in its formal comments on the proposed rule, EPA has misconstrued Congressional intent, and its attempt to change the plain meaning of the RFS law regarding waivers is a needless and impermissible departure from EPA’s successful implementation of the RFS program through 2013. EPA’s action will undoubtedly trigger Court challenges that prolong and aggravate uncertainty about this program. BIO, its members and allied groups are now considering their available legal options to remedy EPA’s violation of the Clean Air Act.

“EPA’s decision increases carbon emissions from the transportation sector above achievable levels. This backsliding on transportation emissions – which account for 30 percent of all U.S. carbon emissions – unnecessarily and regrettably undermines America’s credibility at the Paris Climate Change Conference, which starts next week.”

Tom Buis, chairman, Growth Energy

“Growth Energy and its members are pleased to see that the President and the Environmental Protection Agency have recognized the need to move the renewable fuel industry past the so-called blend wall for the sake of America’s climate, energy security and rural economy. While this rule still relies on a flawed methodology that sets renewable fuel volumes below the statutory levels enacted by Congress, it is an important improvement from the proposed rule, and moves us closer to getting America’s most effective climate policy back on track and providing certainty for biofuels in the marketplace.

“Specifically, we are pleased that the RVOs have been finalized after such a long delay and that the levels have increased from the original proposal. This final rule makes it possible to drive the growth of higher ethanol blends through the so-called blend wall, giving consumers choices at the pump, such as low-cost E15. Additionally, the numbers for 2016 represent a final rule closer to the statutory levels established by Congress, avoid the “reset” and indicate a more certain future for renewable fuels.

“However, we remain concerned that the final rule continues to rely on the “distribution waiver” that redefines supply as demand and was rejected by Congress when the RFS was enacted into law. Of particular concern is that by using such a waiver, the oil industry is being rewarded for its unwillingness to follow the law and invest in infrastructure to move toward cleaner, renewable fuel, which sets a dangerous precedent for the future of the program. The uncertainty this waiver will create risks sending investment in the next generation of renewable fuel overseas just as this new, homegrown industry is taking off.

“We appreciate Administrator McCarthy’s stated commitment to return to statutory levels, and our industry is committed to working with her to ensure the final rule announced today is the first step toward fulfilling that commitment.”

RFA President and CEO Bob Dinneen

“EPA’s decision today turns our nation’s most successful energy policy on its head. When EPA released its proposed RFS rule in May, the agency claimed it was attempting to get the program back on track. Today’s decision, however, fails to do that. It will deepen uncertainty in the marketplace and thus chill investment in second-generation biofuels. Unlike Big Oil, the ethanol industry does not receive billions in tax subsidies and the RFS is our only means of accessing a marketplace that is overwhelmingly and unfairly dominated by the petroleum industry. Today’s decision will severely cripple the program’s ability to incentivize infrastructure investments that are crucial to break through the so-called blend wall and create a larger market for all biofuels.

“There is simply no reason for EPA to adopt API’s blend wall narrative. Data shows that EPA, in its initial RFS proposal, understated the likely market for E85 and non-ethanol conventional biofuels in 2016 by at least 440 million gallons. The data suggests there will be at least 14.7 billion gallons of undifferentiated renewable fuel blended next year. With approximately 2 billion surplus RIN credits already available for refiners to use for compliance in 2016, and with another 900 million RINs potentially becoming available from 2015 over-compliance, the EPA’s decision to lower the 2016 RVO below the statutorily imposed level of 15 billion gallons is simply unnecessary.

“What makes today’s decision even more perplexing is that it continues to reflect the administration’s conflicting views regarding ethanol. The Department of Agriculture continues to fight for ethanol, working hard to secure necessary infrastructure, promoting exports, correcting food versus fuel myths, investing in new technologies and new feedstocks and advocating for ethanol’s positive climate change benefits. The Department of Energy, too, works hard to complete biofuel research on higher ethanol blends and infrastructure that is moving this industry forward. Why is EPA so out of step?

“Today’s decision by EPA furthers that conflict and, sadly, significantly undercuts President Obama’s credibility as he prepares to take the world stage to address climate change at the COP21 talks in Paris. RFA recently commissioned a study which concluded that biofuels consumed under the RFS have reduced U.S. greenhouse gas (GHG) emissions by 354 million metric tons of carbon dioxide-equivalent since 2008. For context, that is the equivalent of avoiding carbon dioxide emissions from 74 million passenger cars. How can the president speak credibly about the need to address climate change on a global stage when his EPA is failing to fully implement the most potent and proven weapon to combat climate change in his own backyard?”

“This final rule directly contravenes the statute and places the potential growth for biofuels like ethanol in the hands of the oil companies. It will have the unfortunate consequence of increasing Big Oil’s ability to thwart consumer choice at the pump without even a scintilla of fear that EPA will enforce the statute. With no consequences for Big Oil’s bad behavior, consumers will be denied greater access to the lowest cost liquid transportation fuel and number one source of octane on the planet.”

POET CEO Jeff Broin

“The EPA volumes announced today are a move in the right direction, and they correctly call the oil industry’s bluff about our ability to surpass 10 percent ethanol use in the U.S.

“However, these numbers fall well short of our capability to provide clean, domestic ethanol to America’s drivers. Additionally, the EPA’s method for arriving at these numbers is contrary to the intent of the Renewable Fuel Standard.

“I look forward to breaking the so-called ‘blend wall’ next year and proving this country’s ability to replace more imported oil with biofuels produced within our borders. In the future, we need to see a stronger and more consistent commitment to renewable fuel from Washington if we are ever going to realize the true potential of renewable fuels, including the development of cellulosic ethanol.”

Brooke Coleman, Executive Director, Advanced Biofuels Business Council

“What we’re seeing in the RFS final rule, volumetrically at least, is continued growth in renewable fuel blending. That counts for something, predominantly in markets already inclined to offer consumers more renewable fuels. But it is frustrating that the Administration missed this opportunity to fix two waiver issues that are undercutting U.S. investment in low carbon, advanced biofuels. Waivers are absolutely critical to U.S. investment, because they define for investors when the field of play can be altered. It is confounding that the Obama Administration would side with the oil industry against Democratic members of Congress and the advanced biofuels industry in reinterpreting its waiver authority to allow for “distribution waivers,” which would permit EPA to waive the RFS if the oil industry refuses to make arrangements to distribute renewable fuel and comply with the law.

“The entire purpose of the RFS is to prohibit oil companies from using their market power to block the distribution of renewable fuels. We do not expect this reinterpretation to stand up in court; but regardless, it is the exact type of policy bait and switch that chills investor confidence in the United States. And while initial discussions with EPA have been productive, we must also move quickly to address waiver issues in the cellulosic pool, which currently allow the oil industry to buy year-end waivers to avoid buying cellulosic gallons. The Obama Administration has supported advanced biofuel development, and certainly the programs administered by the U.S. Department of Agriculture are an important part of that picture, but letting the oil industry off the hook with industry-friendly waivers is not consistent with the Administration’s position on innovation, clean energy development and climate change – especially against the backdrop of the President’s message in Paris. What’s at stake when it comes to the RFS is not whether the advanced and cellulosic biofuels industry will succeed commercially; but rather, whether it happens here in the United States. The Council will continue to work with the Administration and stakeholders to get the RFS back on track. We are not there yet with this rule, but we are confident that we can continue to improve the program in 2016.”

Mike McAdams, President, Advanced Biofuels Associstion

“The Advanced Biofuels Association applauds EPA’s support of next-generation biofuels. Today’s final rule is a step in the right direction that recognizes the importance of growing supplies of advanced and cellulosic biofuels to help provide more sustainable fuels for our future to combat climate issues. Only advanced biofuels reduce greenhouse gas emissions by more than 50% compared to today’s gasolines and diesels.

While we appreciate EPA’s efforts, we continue to believe that legislative reform is required to address ongoing hurdles facing next-generation biofuels. Congress needs to strengthen the RFS to help focus and expedite the production of advanced biofuels. Outdated definitions, cellulosic waivers, as well as overall program uncertainty have created significant barriers to entry for the advanced and cellulosic industry. That’s why ABFA will continue to work with Congress and the Administration to reform and strengthen the RFS so it can deliver on the promise of next-generation renewable fuels.”

Brian Jennings, Executive Vice President of the American Coalition for Ethanol

“When Congress enacted the Renewable Fuel Standard it voted to side with those of us who said ‘yes we can’ reduce greenhouse gas emissions from motor fuel, ‘yes we can’ allow consumer access to E15 and flex fuels, and ‘yes we can’ spark innovative ways to produce cleaner fuels,” said Jennings. “While we appreciate that the Administration made incremental improvements compared to the proposed RFS rule, unfortunately, today they are choosing to side with those who say ‘no, we can’t’. Regrettably, EPA’s final RFS rule protects the old way of doing business by obstructing consumer access to cleaner fuels, stifling competition in the marketplace, and undermining innovation. Given all the President hopes to accomplish at the international climate talks which begin in Paris today, it is inconsistent for the Administration to unravel the most effective policy at their disposal to support low carbon fuels.”

Despite the fact that the Clean Air Act calls for ethanol use to exceed ten percent of gasoline consumption, EPA’s final rule sets blending targets for 2015 and 2016 which fall short of statutory requirements and instead draw on the legally questionable E10 “blend wall” methodology put forward by oil companies who don’t want ethanol to comprise more than ten percent of fuel use in the U.S. Congress did not authorize EPA to adjust volumes based on the E10 blend wall.

“Thanks to the RFS, ACE members have made significant biofuel production advancements and we know that further innovation is just around the corner. ACE is strongly committed to ensuring consumers have access to higher blends of ethanol and we will explore all options at our disposal to achieve that goal with this Administration and the next.”

American Energy Alliance President Thomas Pyle

“EPA bureaucrats continue to prove they are incapable of managing the RFS. The agency consistently misses deadlines and sets unrealistic levels for cellulosic ethanol, which is expensive and not commercially viable. This gross mismanagement is just one more reason to scrap the entire mandate, and why anything short of full repeal would just make the RFS worse.

“The RFS was ill-conceived from the get-go. The mandate distorts markets, raises gasoline prices, and benefits a limited few at the expense of all Americans. Partial repeal would only make the mandate worse by moving it closer to a California-style Low Carbon Fuel Standard, causing Americans to pay more at the pump. Full repeal is the only option for those concerned about the interests of all Americans, and not just the self-interests of the biofuel industry and its lobbyists.”

The Urban Air Initiative President Dave VanderGriend

“EPA has made it clear it has no intention of opening the market for ethanol and other biofuels. We have been challenging EPA for years to take actions that would protect public health, lessen our dependence on petroleum, and reduce CO2 and other harmful emissions. The EPA has rejected us at every turn.”

“This is simply one program. We can move well beyond that and we will not let EPA and its faulty, inaccurate models define our value and limit our growth. EPAs action should be a message to the ethanol industry that it needs to secure its own future and recognize that ethanol’s highest value is as a clean fuel that can provide high octane to reduce the toxic compounds in gasoline while reducing a range of harmful emissions.

UAI has identified a number of steps to provide access to the market, all of which will improve fuel quality and protect public health. Specifically, UAI has called for EPA to:

  • Lift the Vapor Pressure Restriction on Higher Blends since RVP actually goes down as ethanol volumes go up above E10;
  • Enforce Section 202 (l) of the Clean Air Act to limit aromatics and open the market for ethanol as a source of clean octane;
  • Reinstate fuel economy credits (CAFE) and prorate them for mid-level blends;
  • Make 87 AKI gasoline the minimum octane for all states;
  • Revise modeling for both the life cycle analysis of biofuels and the emissions profile, notably the MOVES Model.

“The RFS has done its job up to this point in building a bridge but from here on we need to seize our future and look forward, not backward.”

Brazilian Sugarcane Growers Association

“UNICA is heartened by EPA’s recognition the RFS requirements for advanced biofuel can and should increase. Today’s decision appears to leave the door open for continued American access to sugarcane ethanol from Brazil, one of the cleanest and most commercially ready advanced biofuels available today.”

“EPA has taken another step toward a cleaner, healthier environment, and Brazilian sugarcane producers stand ready to make even higher volumes of advanced biofuel available to America. According to the latest estimates, Brazil is on track to produce nearly six percent more sugarcane ethanol this year compared to 2014 – an additional 450,000 gallons. Under the right market conditions, Brazil has the capacity to produce up to two billion additional gallons of this advanced biofuel for export according to installed capacity figures.”

“America and Brazil have built a thriving global biofuels market, creating economic growth and environmental benefits, through good policy implementation. UNICA applauds today’s decision by EPA to maintain that growth by encouraging production of clean, low-carbon fuels.”

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

September 30, 2015

Regular, Premium, Super, and Renewable SuperDuper

Jim Lane

Move over Super, here comes SuperDuper. All the high octane and performance, and the renewability too, at a price you can afford.

Biofuels are adding options for drop-in, low-carbon, super-perfornance gasoline via isooctane and isooctene, as Gevo (GEVO) announces sales of isooctene to BCD Chemie, a subsidiary of Brenntag.

In Colorado, Gevo said that it has begun selling renewable isooctene to BCD Chemie, a subsidiary of Brenntag. Initial orders in 2015 are expected to result in revenues to Gevo of over $1 million.

And you might wonder why that matters.

The performance appeal?

One, high octane, unlike gasoline but like ethanol. Two, unlimited blending via a pure hydrocarbon and no tolerance hassle, unlike ethanol but like gasoline.

The economic appeal?

Three, the value is isooctene in Europe can range up to $7.00-$10.00 per gallon for petroleum-based isooctene and isooctane, according to Gevo.

In the US, it could be worth something like $4.35 per gallon, today.

Here’s our math on that. Adding 13% renewable isooctene or isooctane to 85-octane refinery blendstock, you get an 87-octane E0 fuel which commands a 20-cent per gallon premium over 87-octane unleaded E10, and there’s roughly 13 cents in RIN value in there also, plus you start from nickel-cheaper 85-octane blendstock in making an E0 product, instead of making 87-octane. Adding $0.38 in margin with a 13% blend gives you a $4.35 per gallon value in the additive.

Plus, use of these renewable hydrocarbons enables companies to meet regulatory requirements for renewable content in fuels while satisfying the performance requirements of their customers.

The background on renewable isooctane and isooctene


We’ve been tracking the birth of this market for some time. Earlier this year, Ronan Rocle and David Gogerty of Global Bioenergies observed in June:

Isooctane is currently derived from the dimerization of isobutene followed by hydrogenation. Another method to produce isooctane would be alkylation of isobutene by isobutane. But additional [production] steps results in isooctane and alkylate products that are, on average, 25% and 15% more costly than gasoline, respectively, with the big driver in isooctane price being the requirement for isobutene as part of the production process.

This is where bio can have a large added value—bio-engineered microbes are great at producing specific products such as isobutene.

Gevo and Global Bioenergies in the lead

The isooctene in the BCD deal will be produced at Gevo’s biorefinery in Silsbee, Texas, derived from isobutanol produced at Gevo’s plant in Luverne, Minn. Gevo’s biorefinery is operated in conjunction with South Hampton Resources.

Meanwhile, direct production of isobutene by fermentation has been reported by Global Bioenergies at its pilot plant in France. Isobutene evaporates from the fermentation broth, leading to no toxicity for the microbe, and is then directly recovered as a pure product. Due to the relative simplicity of this process, renewable isobutene can be produced cost competitively compared to fossil-based pure isobutene, based on five year averages.

One could then envision the production of isobutene and the dimerization of isobutene into isooctane (via isooctene) for a 100% bio-based, renewable molecule. This could come to fruition scientifically, but the renewable industry has heard one key message loud and clear—customers only want renewable/sustainable products that are at or below fossil prices. Thus, a renewable company would find it difficult in today’s market dynamic to compete on price with gasoline when it would have to make two very pure bio-isobutene molecules and saturate the isooctene product with hydrogen to produce the isooctane.

Two routes to value

Gevo is highlighting the high price route – targeting a $7-$10 fuel molecule in the EU. But, there’s premium value in the US, too.

Conversely, Global Bioenergies has highlighted a low-cost approach. Specifically, combining a high-purity bio-isobutene monomer with the very cheap refinery product, butane, to produce an isooctane molecule that competes on cost with conventional isooctane, and 50% renewable content and RIN-qualified. thus qualifying for a pro-rated RIN price that will add additional benefits to its economic feasibility.

One more thing: The vapor pressure performance add-on

As Rocle and Gogerty noted in the Digest, customers get a second benefit beyond the high-octane molecule, they get a vapor pressure much lower than ethanol, gasoline, and even alkylate. This vapor pressure value is critical, because by adding isooctane with a vapor pressure of 1.8 psi, one can blend gasoline with cheaper butanes that have a decent octane value (92) but a difficult vapor pressure (54 psi).

For consumers at the pump

Rocle and Gogerty predict:

“We can already see some indication of what this means for consumers at the pump. They will have the opportunity to purchase a sustainable, domestically produced fuel with identical hydrocarbon qualities as gasoline and higher performance. Higher technical properties also mean that lower quantities of premium components are needed to match the same quality.”

The deal background and prospects moving forward

BCD Chemie is targeting applications in Europe with Gevo’s isooctene. This commences a relationship with BCD Chemie that may include the marketing of other hydrocarbon products, including isooctane and jet fuel, and builds on Gevo’s existing partnership with Brenntag in Canada, which is currently selling Gevo’s isobutanol as a solvent in Canada.

Reaction at BCD and Gevo

“BCD Chemie has begun purchasing continuously increasing quantities of renewable hydrocarbons from Gevo for distribution to selected customers. These customers are very excited to utilize renewable components in their products as they are green replacements for fossil hydrocarbons, which benefit the environment without any performance loss. We are looking forward to developing this market together with Gevo in Europe, as this fits our business plan of expanding sales of high performance chemicals and substances throughout Europe,” said Denis Hamann, Project Manager for BCD Chemie.

“Gevo appears to be one of the only sources of renewable isooctene and isooctane globally. As a result, the market has been very excited by these product offerings, with demand outpacing our ability to produce at our biorefinery in Silsbee. Renewable hydrocarbons are exact replacements to petroleum-derived hydrocarbons, so there is no compromise on performance. We are very pleased to be working with BCD Chemie. The European market is an ideal place to be marketing many of our specialty fuels and chemicals products,” said Gevo CEO Pat Gruber.

The Bottom Line

Here’s the renewable riddle?

Q: Why make a $2 fuel when you can make a $5 chemical?

A: When you can make a $7 fuel additive.

Which is to say, Gevo is one of those companies targeting niche fuel additive markets. Recognizing that the fuel supply is so vast that even commanding a 30% market share of a 3% fuel additive would be, globally, something like 5 billion gallons. A volume of business that would keep companies like Gevo and Global Bioenergies building capacity as fast as they could for years to come.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

September 25, 2015

The Economics of Biofuels: Crack, Crush and Fuse

Jim Lane
In oil & gas and biofuels, we hear about crack spread and crush spread. But fuse spread is a critical factor in advanced, low-carbon fuels.

Here’s the what and why and who.

The most fundamental economic in the oil & gas business has historically been the crack spread, which is the price difference between the value of crude oil and the underlying products after refined, or “cracked”. For example, Brent crude oil costs $49 a barrel right now, or $1.17 per gallon, while front month RBOB gasoline prices at $1.42 per gallon, and the New York October contract for ULS diesel is at $1.54.

Over in the world of biofuels, a similar measure is the crush spread — the differential between the underlying feedstock and the market price of the fuel. Right now the front month price for soybean oil is 25.51 cents per pound, or around $1.94 per gallon, and the September RME biodiesel contract in Rotterdam is $882 per ton, or $3.05 per gallon. Over on the ethanol side, corn is trading at $3.83 per bushel, which translates into $1.32 per gallon, while the October ethanol contract in Chicago is trading at $1.59.

About crush and crack spreads, in general

In the case of petroleum, the crack spread we’ve quoted doesn’t take into account the value of the chemical fraction, which pushes up the overall value of the barrel quite a bit. And, the soybean oil example doesn’t take into account the value of the glycerine by-product from biodiesel production. And the ethanol example doesn’t take into account the value of corn oil, CO2 or distillers grains. Or, the value of renewable fuel credits such as RINs. So, these are rough calculations relating the fuel fraction.

But they demonstrate right away some of the pressures on biofuels right now, at a time of low petroleum prices. On the ethanol side, there’s not much margin to work with for the biofuels producer. On the biodiesel side, the traditional US feedstock produces an expensive fuel.

Accordingly, ethanol producers have worked hard on diversifying the product set, notably adding corn oil in recent years, while biodiesel producers have sought out alternative feedstocks, especially tallows and other waste fats, oils and greases. Choice white grease in the Central US, for example, is trading at 21 cents per pound, or 20% less than soybean oil.

Over on the cellulosic ethanol front, the crush spread isn’t much better for agricultural residue. The most pessimistic assessment of feedstock cost right now is around $115 per ton for cellulosic biomass, or around $1.44 per gallon (at a yield of 80 gallons per ton). Should feedstock prices drop to around $80 per ton, delivered to the refinery gate — well, that’s much better, at around $1.00 per gallon.

The good news — if you have a technology that can work with municipal solid waste. MSW comes in at zero cost, right now. We don’t know how long that scenario will hold.

So, where’s the sustainable, affordable, reliable, available supply of feedstock for the industry moving forward?

There are two schools of thought.

School One. “oil prices are going up again soon enough” school, which generally subscribes to the belief that by the time cellulosic and other technologies can scale broadly around the world, oil prices will return to a $70-$80 per barrel price range, or around $1.67-$1.90 per gallon of crude, and that wholesale gasoline prices will rise to around $2.15 per gallon. Add in a 50-cent RIN for an advanced fuel, and a producer has something like $2.65 per gallon to work with, excluding the value of any co-products.

School Two. Oil prices could be low for some time, and investors don’t like rosy future scenarios based on high oil prices, anyway. So, it’s not a case of “waiting for business as usual”, but pursuing lower-cost feedstocks.

Which brings us to the fuse spread.

What’s that? The fuse spread is the difference between the underlying feedstocks fused together to make an organic molecule and ultimately produce a biofuel. Plants use carbon dioxide and water.

Water’s cheap, averaging 1.5 cents per gallon in the US.

So, it comes down to the cost of CO2, which is why the current haggling over the status of waste CO2 is of titanic importance to the planet.

If governments decree that, to mitigate climate change, waste CO2 must be geologically sequestered by regulated parties, CO2 must be obtained from the merchant market at something like $160 per ton, as we reported here.

If regulators allow carbon capture and use, costs could fall to a penny per pound of CO2.

So, here’s the underlying raw feedstock cost, per gallon of fuel, at theoretical yield:

Merchant CO2 Waste CO2
Hydrocarbon $1.55 $0.41
Ethanol $0.68 $0.10

Generally, carbon monoxide and hydrogen combinations, such as LanzaTech uses, is expected to be available for free for some time. So they have the same “it’s free!” math as MSW.

The battle over carbon capture and use and the US Renewable Fuel Standard

A glance at the chart above and the math tells us why companies like Joule and Algenol, that have microorganisms that can produce fuels from CO2 and water, are working hard on carbon capture and use, as well as supporting efforts to expand ethanol acceptance.

The hydrocarbon route using merchant CO2 is a non-starter — the feedstock is priced at more than the target fuel in today’s market, and even if oil prices improve as expected, these are complex technologies that need to build refineries, and there isn’t much help in the fuse spread. However, the match gets much better with waste CO2, where there’s some room for capex, opex and for a yield of say 85% of theoretical.

Over in the world of ethanol, it’s likely not to be workable with merchant CO2 unless then price drops into the $50 per ton range. But the math looks pretty good with waste CO2 and ethanol — one of the reasons that these technologies suggest that they can be, long-term competitive even with low-cost petroleum.

The role for the regulator: dig up the carbon, then re-bury, or just leave petroleum in the ground in the first place

The decision facing regulators, then, is very simple. Do they want low-cost, low-carbon fuels that bypass competition with food and arable land — or not? The policy path to affordable, at-scale fuels is relatively straightforward. A rising ethanol distribution combined with a policy on carbon capture and use — and the fuse spread tells us there will be robust investor interest in deploying low-carbon fuels.

Or not.

Given that there are hard limits on the geography and availability of free feedstocks such as MSW and carbon monoxide — and given that there are practical limits on the availability of traditional biofuels feedstocks such as corn, soybeans and rapeseed, and supply chains to be worked out to tap cellulosic biomass — the choice of the regulator is quite clear.

Either bury the CO2 and dig up petroleum to fuel the transportation economy, or use the CO2 that’s available and leave the petroleum in the ground. Either path sequesters the same amount of carbon. The latter path is quite a bit less costly and complex in the long-term.

 Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

September 04, 2015

Ethanol Missed The Boat; Isobutanol May Not

Jim Lane 

CaptainE0E-Zero – ethanol-free gas, has been popular with boaters, but here comes isobutanol, with Gevo leading the pack.

Are the economics a slam-dunk? Here’s the hard data.

One of the more interesting trends in recent years has been the rise of ethanol-free gasoline.

Overall, reports 9915 stations offering ethanol-free gas in the US and Canada — although it is a crowd-sourced site and may have missed stations adding or dropping E0 fuels. The site does not include stations in Alaska because “all gasoline is ethanol-free.” 314 of those are in Canada.

gevoThat’s around three times the number of stations offering high-ethanol blends such as E85, despite the inducements that emerge under the Renewable Fuel Standard for high-ethanol blends, especially as the US reaches the E10 saturation point and RIN prices rise, as they are designed to do to provide “blend-wall busting” incentives.

In many cases, customers are looking for ethanol free gasoline for a “boat, truck, RV, plane, farm equipment, snowblower, hotrod or motorcycle”, based on concerns over corrosion, engine wear, and performance of E10 in boat engines and outdoor power equipment.

Isobutanol makes a move

In that context, along comes news this week that Harbor Marina, at Lake Pomme de Terre in Missouri, has become the first U.S. marina to sell gasoline blended with Gevo’s (GEVO) renewable isobutanol at the pump. Harbor Marina owner Todd Spencer said he made the decision to offer isobutanol-blended gasoline to his recreational boating customers once he concluded that it would be a superior renewable fuel for their boats.

Oil and Octane Shop of Springfield, Missouri enabled testing of Gevo’s isobutanol by supplying test blends to major marine engine manufacturers, such as Mercury Marine. Following the success of these tests, Oil and Octane Shop has been recommending the use of isobutanol to its marina customers, including Harbor Marina.

“My fuel supplier introduced me to the idea of blending Gevo’s renewable isobutanol with the straight, ethanol-free gasoline my marina was previously offering,” Spencer said. “At Harbor Marina, we pride ourselves on providing the best in entertainment, food and beverages – and now we can add: the best-in-marine fuel.”

The move by Gevo into boating fuels follows a decision last June by the National Marine Manufacturers Association to officially endorse isobutanol as a drop-in fuel for marine and recreational boat engines. The fuel is moisture resistant, does not cause phase separation and helps reduce engine corrosion. thereby addressing concerns that many boaters have with ethanol-blended fuels.

It’s early days, but certainly there’s a market in the “ethanol-free” world, and Gevo has certainly targeted marine, outdoor equipment and off-road vehicle markets, and we’ll see how that roll-out goes.

The Deep Dive

We take you through the data in The Digest’s 2015 8-Slide Guide
to renewable marine fuels, which is right here.

Some price background: E10 vs E0

Perhaps the most fascinating stat in this growing market is the pricing. reports the national E85 price average at $1.93, E10 at $2.30, and E0 averaging $2.88. Looking at E10 and E0, we don’t know yet whether that E0 price would be available for an (ethanol-free) isobutanol blend with gasoline, but it could be a substantial premium market for isobutanol.

A price case for $5.00 per gallon isobutanol

For example, a $5.00 per gallon (wholesale) isobutanol fuel blended at 12.5 percent adds 47.8 cents to the hard cost of a gallon of fuel, compared to using $1.468 ethanol (today’s CBOT September ethanol futures contract price). At the same time, there’s a 5.6 cent gain in the RIN value in the fuel (slightly higher blend, higher RIN value for advanced biofuels and more energy density). So, you net out with a $0.42 premium in this scenario — or $2.72 for B12.5. That’s less than the $2.88 average for E0.

In a nutshell, you have the answer to the age-old question in renewables: why sell a $2 fuel when you can sell a $5 chemical? Answer, sell a $5 fuel, and be happy that you don’t have to meet the exacting green chemistry performance spec.

The two-stroke market

trufuelredThere’s ample evidence elsewhere on premium pricing available for other ethanol-free alternatives. Consider, for example, the pricing on two-stroke gas/oil mix, optimized for leaf blowers and other equipment of that type.

TruFuel is selling at for $27.95 today, per 1.5 gallon pack, or $18.63 per gallon, and ChainSawsDirect will tell you straight out the rationale: Ethanol Free, High Octane fuel. There are other benefits in lubricity, such as the blend with synthetic oil, and there’s the 2-year shelf-life from gas in a can. But we see right away in the marketing pitch that there’s a perceived advantage for ethanol-free fuel in this sector.

How big is the addressable market?

Well, that gets tricky; there doesn’t seem to be an easy-to-find stat on how much fuel is used by powerboats, much less all outdoor uses where there’s a market for ethanol-free fuel.

But we know it’s big. The 2011 Recreational Boating Survey found 10.11 million power boats in the US. 70% of them were operated in the past year, and an average of 75 hours of operation and an average of 100 horsepower in the engine. Boating Magazine advises a rule of thumb of 0.5 pounds of fuel per HP per hour, without taking into account boat drag., sea conditions and so on. Putting all those together, we came up with a 4.4 billion gallon addressable market for powerboats. We’d be guessing at fuel sales for home-based outdoor power equipment, but there’s additional market available.

Now, addressable is one thing, sales are quite another. But, there’s some heft in this sector when mapped against Gevo’s capacity and any capacity Butamax might develop. And, ample evidence of an ethanol-free premium that isobutanol, if well-positioned, might capture some of, or even all of.

Marinas, and stations near the water, that’s probably where you’ll see your friendly Gevo rep in the upcoming months.

 Jim Lane is editor and publisher of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

September 03, 2015

The Biogas Rush

Jim Lane 

51 percent? Could renewable natural gas get that big? The rationale behind the Eureka!, and some Caveats for all you Emptors.

A few years back we lived in the era of the National Energy Solution Summed Up in One Word: it was gasoline, then diesel, then ethanol, or biodiesel. Then there was the Two-Word Era: in p[art because of an Inconvenient Truth, the craze was on for cellulosic ethanol, algae biofuels, aviation biofuels, and there was the Hydrogen Economy or the Glucose Economy, depending on who you were talking to.

We seem to have reached the Three-Word Era.

Seems like every day we hear the drums beating for Renewable natural gas and low cost methane. And there’s been a steady newsflow in new natural gas project and technology announcements, posted cellulosic RINs, a surge in investor enthusiasm, and increasing stakeholder acceptance.

In a remarkable presentation at the Infocast Methane Bioengineering Summit in San Diego this week (and earlier at the Advanced Bioeconomy Feedstocks Conference in New Orleans, in June), Farmatic CEO Michael Schuppenhauer said that the US could replace up to 51% of its fossil transportation fuel through biogas, and that from crop residues and waste streams alone, 33 states could generate more than 10 percent of their transportation fuel.

You can see an 8-Slide Guide digest of that presentation, right here.


Building that low carbon fuel economy, Schuppenhauer said, would create 2.5 million jobs and create $240 billion in investment in the communities that adopted this pathway.

Heady stuff, the kind of wild west, gold rush enthusiasm not seen in this sector since the ethanol heyday of the mid 2000s.

Real reasons for enthusiasm

Part of the enthusiasm stems from low-carbon enthusiasts, who see reductions in carbon intensity of up to 85% for “Landfill gas cleaned up to pipeline quality NG; compressed in CA,” according to California’s Air Resources Board.

But the prices look good too, with Farmatics’s projected fuel costs ranging from $2.39 (per gasoline equivalent gallon) to negative $1.00 per GGE. Yes, negative cost fuel — that’s CNG made from food waste. From energy crops and residues, the costs come in around $1.52-$1.71 per GGE, Schuppenhauer said.


Now, even in these days of unbelievably low oil prices — hanging around in the mid $40s for West Texas Intermediate — those are incredibly attractive opportunities for investors, regardless of how they feel about the environment. Not to mention, the potential to register cellulosic fuel RINs under the Renewable Fuel Standard.

For all those reasons, we’ve reported on the substantial increase in cellulosic renewable fuels via the EPA’s registration service, almost all of it coming from renewable natural gas. In all, 61 million of the 62 million RINs issued for cellulosic fuels have come from renewable compressed or liquified natural gas — 98% in all.

So, that’s the good news.

Here are the Caveats for all you Emptors

1. Vehicle and pump infrastructure.

OK, there are roughly 150,000 natgas powered vehicles in the United States, according to the DOE’s Alternative Fuels Data Center. GE and the CNG Now group disagree, putting the number at 250,000, incouding conversions.

No matter, either way, it’s a major limiting factor. With low gas prices, that’s bound to change — but the availability of vehicles and refueling infrastructure is a major dampening factor, until more vehicles hit the road. For now, think city bus fleets, where refueling can be done in the fuel yard. Also, Utah. where there is a $3,000 state tax incentive credit for CNG vehicles.

2. Residue supply chain.

According to Farmatic, the availability of waste is a limiting factor. The Coalition for Renewable Natural Gas puts the upper limit of waste availability at around 7 billion gallons of gasoline equivalence. That’s about 3 percent of US fuel usage.

The solution, according to Farmatic, is crop waste, and they point out that the energy derived — in miles per acre — is here for CNG than ethanol. But, we run into the problem that those residue supply chains haven’t been built yet — for any type of cellulosic fuels.

Also, Birgitte Ahring, a professor at Washington State University, warns that anaerobic digester organisms need to be improved before gas conversion is made as efficient as it needs to be — they face the same barriers of recalcitrance that we see on the cellulosic ethanol side. Not insurmountable, but a barrier, nonetheless.

We also note that converting 350 million tons of crop residue biomass into CNG will leave us with 120 million tons of lignin, leftover. And that will need a market.

3. Energy crop development.

The biggest source that Farmatic sees is in energy crops — and the Billion Ton Study and Son of Billion Tons give considerable encouragement here — 385 million ton potential, 60% Miscanthus and 40% Sorghum.

The problems here? It’s a collection of Not Quite Yets. First, we don’t have that much seed, we don’t have the growers contracted, we don’t have the supply sheds set up including transport to the miniplants for conversion. We probably don’t even have enough baling equipment in the midwestern United States — or anywhere that energy crops would grow.

It’s something that the country will grow into. The good news here — you don’t need to wait for a cellulosic liquid biofuels plant to grow biomass sorghum. CNG will do just fine.

4. Beware those tipping fees.

In the Farmatic models, we see $30 tipping fees per ton of organic waste. Those are definitely available now in selected locales. However, we’ve seen tipping fees turn into feedstock fees quite rapidly in other fuel markets. rem,ember the days when you could get waste fryer oils for nothing, and pick up a $25 per week collection fee from a restaurant? Now, you pay up to 25 cents per pound for fryer oil.

5. Energy crop costs have doubled.

In the Farmatic model, we see the Billion Ton Study numbers, accurately reported, for feedstock costs. The problem is, they’ve evolved. Right now, the DOE is guiding project developers to think in terms of around $115 per ton today for biomass. Longer-term, $80 per ton. So, those models that use the old Billion Ton figures of around $50 per ton — they all have to be updated.

6. The real costs of infrastructure.

A CNG vehicle cost? You can buy a DIY converter kit for between $1000 and $1800 — but professional truck conversion will run around $9000, according to this report. Another way to go to market is to simply wait for the fleet to turn over and sell CNG one vehicle at a time — that takes decades. There are 300 million registered vehicles in the US. Converting half to CNG would probably drive the conversion cost down dramatically, but it would be something like $750 billion to convert half the fleet at $5000 a pop.

Dispensers? To get around 50 percent fuel usage, you need to add on large-station, fast-fill capacity at roughly 129,000 or more outlets in the US.

Consider that it takes around 150,000 outlets to distribute gasoline, and that has around 60 percent market share. But, do the math, based on 1750 GGE/day at a large station.

Those conversions run $1.2M- $1.8M per outlet, according to the ADFC. Let’s assume that the conversion cost could come down by half if there was a massive deployment that afforded economies of scale. Still, we’re looking at something like $97 billion.

These locations can do onsite compression — but they will need a natural gas feed. Hopefully, not with expensive pipelines. We’ve left out that delivery cost, entirely, on the assumption that it costs no more to deploy gas than any other novel fuel.

The Bottom Line on cost

There’s a short-term, high-impact conversion path — and there’s a dramatically less costly growth path for renewable natural gas, based on hoping to change over the fleet as it retires.

Short-term cost? There’s the $240 billion aforementioned to deploy the technology. There’s some $750 billion in vehicle conversion costs, the $96 billion in fueling infrastructure. And, there’s a $30 per acre capital “establishment cost” per acre for energy crops, according to this report. Needing something like 50-100 million acres: that’s another $1.5-$3 billion in prep cost.

All in? Think $1.089 trillion to convert over half of US fuel usage to CNG in a reasonable time frame, excluding any costs associated with exploration or production, or the effect on the cost of natgas itself in the face of such a demand shock, which could be modeled and could be considerable.

So, it’s a $1 trillion solution. Compare that to around $50 billion for the build-out (to date) of the current liquid renewable fuels infrastructure — and you see the problem. It’s expensive.

RNG-2At incremental deployment levels, such as the Coalition for Renewable Natural Gas looks at, where the focus is on waste, and tipping fees, and a much smaller number of (mostly fleet) vehicles, purchased on a “as we replace them anyway” basis by fleet owners, running many more gallons than the average passenger car, and fueled with overnight time-fill systems: that is a much less impactful scenario, in terms of the dollars.

So, for now, consider that renewable CNG will be focused on organic waste streams, including food waste, manure and landfill gas — and “as you replace them” fleet conversions that might take 20 years, but will not have that much bottom line impact.

50% conversion of the US anytime soon? Not a chance in the world, despite some very attractive energy densities and yields for CNG compared to other renewable fuels — and highly attractive carbon numbers (though these change with the introduction of energy crops into the mix because of land use change factors).

In the end, it comes down to infrastructure and the costs of infrastructure change.

Jim Lane is editor and publisher of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

August 25, 2015

Gevo and Butamax Make Peace

Jim Lane

Butanol-peace1[1].jpg In Delaware and Colorado, Gevo (GEVO) and Butamax have entered into worldwide patent cross-license and settlement agreements, ending a patent dispute related to technologies for the production of bio-based isobutanol. This settlement ends all of the lawsuits and creates a new relationship between the companies, aimed at leveraging each other’s strengths and accelerating development of competitive supply for bio-based isobutanol.

The cross-license agreement grants both parties patent licenses to all fields for isobutanol and is structured to develop robust and sustainable isobutanol markets. The license will be royalty bearing for Butamax in certain fields and royalty bearing for Gevo in other fields. There are also a number of fields that are royalty-free for both companies. Both parties can sell up to 30 million gallons per year royalty-free into any field.

More on Gevo and Butamax

Butamax: The Digest’s 2015 5-Minute Guide

Gevo: The Digest’s 2015 5-Minute Guide

8-Slide Guides

Biobutanol breakout: The Digest’s 2015 8-Slide Guide to Gevo

Biobutanol breakout: The Digest’s 2015 8-Slide Guide to Butamax

Butamax to lead on road transport, Gevo on aviation

Butamax will take the lead role in developing the market for isobutanol as an on-road gasoline blendstock. This will include progressing ongoing programs to gain required EPA approvals for mainstream use of 16% isobutanol as a gasoline blend component. Butamax has also conducted joint research with Underwriters Laboratories (UL), which has demonstrated that these blends can be used safely in fuel storage and dispensing equipment meeting current UL standards. It is expected that UL’s guidance will clear the way for state government agencies to consider and approve the dispensing of biobutanol-gasoline fuel blends in the U.S.

In parallel, Gevo will lead development of the jet fuel market. Gevo has been producing and selling alcohol-to-jet fuel (ATJ) derived from isobutanol since 2011. To date, Gevo’s ATJ has been produced at its demo biorefinery in Silsbee, TX, using isobutanol produced at its Luverne, MN, fermentation facility. The company has successfully flown tests flights with the U.S. Air Force, U.S. Army, and U.S. Navy and now expects to secure the MIL-SPEC certification (JP-8 and JP-5) enabling bids on future RFPs for renewable jet fuel by the Defense Logistics Agency. Gevo also intends to begin test flights with the commercial aviation industry, including Alaska Airlines, following receipt of ASTM International certification, expected before the end of 2015.

The cross-licensing

While Butamax and Gevo have cross-licensed all of their patents for making and using isobutanol, both parties will have their own biocatalyst and process technologies. Both Butamax and Gevo are free to license their respective technology packages to third parties. A third party licensee would be granted a sub-license, and would be subject to terms and conditions that are consistent with the cross-license between Butamax and Gevo.

“We are very pleased to have reached this amicable and fair settlement. Setting up the marketing relationships, as we have done, brings to bear the capabilities of each of the companies,” said Dr. Patrick Gruber, Gevo’s Chief Executive Officer. “We very much look forward to developing a very large, growing and profitable isobutanol market in conjunction with Butamax.”

“The aim of these agreements is to accelerate development of markets for bio-based isobutanol,” commented Butamax Chief Executive Officer Paul Beckwith. “This will create exciting opportunities for ethanol producers to expand their businesses by becoming isobutanol producers, at the same time enabling the most competitive isobutanol supply for customers.”

Both parties have agreed to keep all details relating to these agreements confidential, other than what is disclosed in this press release and the attachment, or is otherwise required to be disclosed by law.

Analyst reaction

Cowen & Company’s Jeffrey Osborne writes:

The ongoing litigation has been a source of investor concern as it has led to increased operating expenses, higher cash burn levels and also likely delayed any license agreements in the U.S. given the ongoing litigation. We see the new agreement, signed this weekend ahead of the trial that was slated to start today as a long-term positive for the company. We are not making any changes to our estimates at this time.

This patent cross-licensing agreement will aim to leverage each company’s respective strengths to drive forward the development of bio-based isobutanol with the aim of developing a robust market for isobutanol. Per licensing agreement, Butamax and Gevo will be licensed to all fields, however, certain fields will be royalty bearing only for one of the respective companies and some fields will be royalty free for both companies.

Factsheet: Butamax and Gevo Patent Cross-License and Settlement Agreements

Butamax and Gevo have agreed to global settlement and cross license agreements resolving the ongoing intellectual property dispute and all current district court litigations will be dismissed by the parties.

Under the agreements Butamax and Gevo have licensed all of their respective patents to each other, with rights to sub-license their respective technologies.

Both parties are free to sell up to 30 million gallons per year royalty-free into any field, after which, certain fields bear royalties per the table image:

The parties have agreed to leverage each other’s regulatory approval and market development activities in order to accelerate the pace of market growth and to reduce duplication. Specifically:

Butamax will focus on gaining required approvals to support direct blending of bio-based isobutanol into on-road automotive gasoline, and is expected to market isobutanol for this application on behalf of both Butamax and Gevo.

Gevo will focus on gaining required approvals to support use of renewable ATJ made from bio-based isobutanol, and is expected to market isobutanol for this application on behalf of both Gevo and Butamax.

The licensing technology packages offered by Butamax and Gevo will differ at least as follows:

The parties will not exchange or utilize each other’s proprietary microorganisms.
The parties’ proprietary microorganisms will utilize different enzymes in the biobutanol pathway.
The parties’ process engineering designs will include different product recovery systems

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

August 18, 2015

Propel Fuels' Sales of Neste Renewable Diesel Jump 15x

Jim Lane

West Coast renewable fuel retailer says the launch of 100% drop-in renewable diesel has spiked sales on a per-outlet basis — 5X jump in renewable content, and 3X jump in gallons sold.

In California, Propel Fuels is reporting a 15X jump in per-outlet sales of renewable fuel for diesel engines, based on a 3X increase in gallons sold of its new Diesel HPR fuel and 5X increase in renewable content for Diesel HPR (100% renewable content, vs the 20 percent renewable content in B20 biodiesel, which Propel formerly sold).

With the news, Propel is expanding distribution to Southern California, adding 13 new locations in Los Angeles/Orange County (Fullerton, Harbor City, La Mirada, Lakewood, Norwalk, Torrance and Wilmington), San Diego (Chula Vista and Kearny Mesa), and the Inland Empire (Arcadia, Claremont, Hemet and Ontario). Propel debuted Diesel HPR at 18 locations in Northern California in March.

Diesel HPR is a low-carbon, renewable diesel fuel that meets petroleum diesel specifications and can be used in any diesel engine. Utilizing Neste’s [NEF.F] NEXBTL renewable diesel, Diesel HPR is designated as ASTM D-975, the standard for all ultra-low sulfur diesel fuel in the U.S., and is recognized as “CARB diesel” by the California Air Resources Board even though it contains no petroleum.

What’s the secret?

Propel-3For one, everyday low prices. The US Energy Information Administration is reporting an average retail diesel price of $2.96 in the state of California, for the week of August 10. The average retail price for Propel Fuels Diesel HPR, for 12 of its new locations in Southern California is $2.55 per gallon (Propel’s Torrance location is reporting a $3.89 per gallon price, a real outlier).

By the way, Propel’s 100-octane E85 is averaging $3.07 per gallon in Southern California, compared to $3.56 for 87-octane regular and $3.81 for 91-octane premium — a discount of 14 percent to regular and 19 percent to premium, not a compelling discount given the fuel economy differential.

(Note, for the discounts reported above, we’re comparing local (Southern California) Propel prices to a statewide average, so it’s not a precise apples-to-apples comparison.)

California retail fuel prices 081715

The other secret

Propel looks cool, and has good locations they’ve “re-thought the American fueling station”, as put it, offering customers a chance to offset their carbon, as well as re-fueling. In short, they’ve gone some lengths to change the retail mindset.

Propel Fuel

The secret in the Fuel

It’s not a top-secret fact, but it’s not widely known that Neste is supplying its NEXBTL fuel to Propel. Interested to learn more about that fuel, and the technology behind it? Our 8-Slide Guide to Neste is here.

Renewable diesel’s low-carbon fuel performance

According to the U.S. Department of Energy’s Alternative Fuels Data Center, renewable diesel’s high combustion quality results in similar or better vehicle performance compared to conventional diesel, while California Air Resources Board studies show that renewable diesel can reach up to 70 percent greenhouse gas reduction compared to petroleum diesel, and reduces nitrogen oxides (NOx) and particulates (PM 2.5) versus petroleum-based diesel.

Commercial and bulk fueling options

In addition to new retail locations, Propel has launched Diesel HPR commercial and bulk availability for business and government fleets statewide. Delivered in bulk to businesses and agencies, Propel’s HPR is bundled with the company’s CleanDrive emissions accounting software, allowing fleets to easily quantify and report GHG reductions and air quality benefits.

Where to find it, pricing, and customer testimonials

A complete list of locations is also available here. Directions and real-time pricing can be found on Propel’s mobile app available in the Android and Apple app stores. Customer testimonials are available here.

Reaction from stakeholders

“Drivers across Southern California can now experience the power, performance and value of Diesel HPR, while making a positive impact on the air quality of the region,” said Rob Elam, CEO of Propel. “Any diesel vehicle can fill with Diesel HPR since it meets the ASTM D-975 quality standard for petroleum diesel.”

“It’s good to see this high quality, low-carbon diesel coming to corner gas stations across Southern California,” said Mary D. Nichols, Chair of the California Air Resources Board. “This renewable diesel will now be conveniently located for all consumers, and joins a growing suite of new, cleaner transportation fuels in California thanks to our Low Carbon Fuel Standard and forward thinking companies like Propel.”

“We congratulate Propel Fuels on their initiative to introduce Diesel HPR to consumers in California and are excited to be their supplier of choice with our NEXBTL renewable diesel,” said Kaisa Hietala, Neste’s Executive Vice President of Renewable Products Business Area. “NEXBTL renewable diesel reduces emissions as well as enhances engine performance leading to lower maintenance and service costs.”

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

August 06, 2015

Gevo Boosts Revenue, Gets Favorable Ruling

Jim Lane
gevo logo
In Colorado, Gevo (GEVO)  reported Q2 2015 revenues of $8.9M compared with $7.7M for Q2 2014, and Q2 loss of $6.5 million, compared with $9.0 million in Q2 2014. The increase in revenue during 2015 is primarily a result of the production and sale of approximately $8.0 million of ethanol, isobutanol and distiller’s grains at the Luverne plant. Hydrocarbon revenues were $0.8 million, primarily related to the shipment of bio-jet fuel and isooctane during the quarter.

The company highlighted a flight planned with Alaska Airlines, an upcoming wood waste-to-fuels flight with an undisclosed airline, fulfillment of alcohol-to-jet supply agreements with the Defense Logistics Agency, the first retail pump sales of isobutanol-blended gasoline, in Texas, an agreement with FCStone to originate and supply corn for Luverne plant and endorsement for Gevo’s isobutanol in the marine fuel market from the National Marine Manufacturers Association.

Late-breaking news from the courts

Just as Gevo’s earnings were announced news filtered out from the US District Court for the District of Delaware in the complex Betamax vs Gevo patent litigation:

“On July 3, 2015, the United States District Court for the District of Delaware issued its determinations concerning several pending motions for summary judgment in Case Nos. 12-1036-SLR; 12-1200-SLR; and 12-1300-SLR. Specifically, the Court denied all of Butamax’s motions for summary judgment that Gevo, Inc., (the “Company’) infringed various claims of U.S Patent Nos. 8,241,878 (the ‘878 patent); 8,273,558 (the ‘558 patent); and 8,283,144 (the ‘144 patent). The Court granted one of the Company’s motions for summary judgment of invalidity regarding the asserted claims of the ‘878 patent, finding that the claims are not definite. The Court granted the Company’s motion for summary judgment that claim 3 of the ‘878 patent was not infringed under the doctrine of equivalents, and the Court granted the Company’s motion for summary judgment of no willful infringement. Disputes of fact regarding infringement and invalidity of the asserted claims of the ‘144 and ‘558 patents remain alive and are set to be included within a trial set for August 24, 2015.”

Gevo CEO Pat Gruber hailed the news.

“We have a trial set for August 24 in one of our ongoing patent litigations with Butamax. In this litigation, Butamax has asserted three patents against Gevo. We refer to these patents as the Butamax ‘144, ‘558, and ‘878 patents. In the litigation, as is typical, the parties filed various motions in an attempt to simplify the trial. Butamax filed motions seeking a summary judgment of infringement with respect to at least one claim in each of the asserted patents, and Gevo filed motions seeking summary judgments that the asserted claims of the ‘144, ‘558, and ‘878 patents are not valid, that claim 3 of the ‘878 patent was not infringed, and that Gevo had not willfully infringed any of the patents.

“Yesterday, the Court issued rulings on those motions. The Court denied all of Butamax’s motions for summary judgment of infringement of the asserted patents. It granted one of Gevo’s invalidity motions finding that the asserted claims of the ‘878 patent are not valid, because those claims are not definite and infringement cannot be determined. And, it found that Gevo has not willfully infringed any of the asserted patents, because Gevo’s defenses are credible.

“As such, factual disputes regarding infringement and invalidity of the ‘144 and ‘558 patents remain alive and will be included in the trial set for August 24.”

Comments from analysts and stakeholders

Cowen & Company energy analyst Jeffrey Osborne said: “Gevo continues to expand the commercialization applications for its isobutanol. The company has made meaningful entryways into the $1 billion/year marine fuels market. The alcohol-to-jet fuel market is a long-term strategic opportunity for the company as well. Lastly, management expects legal clarity on its pending litigation by 2H15.”

Looking at isobutanol fuels, Osborne added: “Management estimates that the addressable market for marine fuels is approximately $1 billion/yr. This is one of the nearer term opportunities for the company. We are also pleased to see the company securing its first service station to sell gasoline blended with Gevo’s renewable isobutanol. The Express Lube station in Texas will be selling the fuel for around $4.50/gallon, which is a premium over the E10 fuel that sells for close to $2.75. The fuel is primarily targeted towards marine, outdoor, and off-road applications.”

Meanwhile, Gevo CEO Pat Gruber said, “Our balance sheet is in its strongest position since the end of 2013 and this will support us in meeting the important milestones that we established earlier in the year, namely signing our first binding license agreement, securing ASTM certification for our alcohol-to-jet fuel and developing further strategic partnerships to propel our alcohol-to-hydrocarbons business. These are all targets that we still expect to achieve in 2015.”

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

July 06, 2015

Brew-ha-ha: Is Amyris' Brazillian JV Over?

Jim Lane amyris logo

In a Brazilian securities filing, with respect to the Joint Venture between São Martinho and Amyris (AMRS), Sao Martinho reports “the non-achievement of certain contractual targets by Amyris, impacting the viability of the project. Thus, Sao Martinho decides not to approve the continuation of the Joint Venture Plant construction with the US company Amyris Inc. and its Brazilian subsidiary Amyris Brazil Ltda.”

The company did not elaborate as to which contractural targets were not achieved by Amyris. In the filing, Sao Martinho added:

“Amyris may provide new information regarding the project feasibility in order to discuss a new deal potential. However, the Joint Venture and other contracts between the parties will be automatically terminated on August 31, 2015, if such date is not entered into a new agreement at the discretion of São Martinho.”

“Sao Martinho clarifies that the company did not make investments in the joint venture, which were scheduled to take place only after the start of plant operation.”

Amyris fired off a “clarification” shortly afterwards “regarding its inactive manufacturing joint venture with Usina Sao Martinho”, stating:

“[The] existing Brotas facility is exceeding targets and provides adequate capacity to meet its near and mid-term business needs. Amyris has been in discussions with Sao Martinho and is considering how the joint venture could best benefit Amyris’s future production capacity and achieve investment returns comparable to or better than Amyris’s best-in-class fermentation plant in Brotas. Based on these discussions, Amyris and Sao Martinho have agreed to explore, over the next 60 days, the best options for the joint venture.”

“We are excited about the continued strong performance and our ability to exceed our production and cost targets at Brotas,” said Amyris CEO John Melo. “Current production capacity at our Brotas facility meets our near- and mid-term growth plans and we have better economic options than our agreement with Sao Martinho initially contemplated. We are engaged in working towards a mutually beneficial agreement with Sao Martinho over the next 60 days. We continue to enjoy a strong presence and relationships in Brazil, including our more than 150 employees, our collaboration with Cosan, and our growing sales in personal care and industrial products for the Brazilian market.”

Amyris noted that the flexibility at the Brotas plant and space available potentially allows the company to double the capacity of this plant when required. In addition, the company is evaluating with Sao Martinho the best investment options available to determine which scenario would provide the best returns and balanced economics for both parties.

The Sao Martinho project

The joint venture dates some ways back, predating Amyris’ April 2010 IPO filing. in which the company stated:

“We plan to commence commercialization of our products starting in 2011 using contract manufacturers, and to have our first capital light production facility, our joint venture with Usina São Martinho, operational in the second quarter of 2012. As we commence commercial production of our initial molecule, farnesene, we expect to target specialty chemical markets.”

The company’s stock was upgraded to a $31 target by Raymond James in April 2011, citing amongst other factors the “company’s first large-scale production plant in Brazil – the joint venture with Grupo São Martinho – which should drive positive companywide EBITDA upon start-up in 2Q12.”

By Q1 2012, Amyris had reciognized “the operational challenges of translating yields in the lab to commercial-scale production,” and said that “following completion of the 50 million liter facility at Paraiso, it would focus on completing its 100M liter San Martinho project.” In late 2012, Cowen & Company was modeling “$146MM additional debt to fund losses and Sao Martinho capex in 2013-15.”

Meanwhile, Sao Martinho has downshifted its own emphasis this year on fuels. Last week, the company reported that “it will turn its attention to sugar production. It’s crushing ratio will be 52% for sugar and 48% for ethanol of 19.5 million metric tons of sugarcane, compared to 49% for sugar and 51% for ethanol during 2014/15.”

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

July 03, 2015

Total Doubles Down On Amyris' Jet Fuel

Jim Lane amyris logo

In California, Amyris (AMRS) announced that it has agreed on key business terms with Total for restructuring its fuels joint venture to open the way for proceeding with commercialization of its jet fuel technology over the coming years. Following the restructuring, Total would own 75% of the joint venture with Amyris.


In conjunction with this transaction, Amyris has also agreed on terms with Total and Temasek, another major stockholder of Amyris, under which, and as part of a plan to strengthen the balance sheet, these stockholders would exchange an aggregate of $138 million of convertible debt for Amyris common stock at a price of $2.30 per share, with an additional $37 million of outstanding convertible debt being restructured to eliminate Amyris’s repayment obligation at maturity and provide for mandatory conversion to Amyris common stock.

Customers, ASTM on board

In September 2014, KLM tipped that it intended to fly on Amyris-Total renewable jet fuel, as soon as it receives favorable advice from their independent Sustainability Advisory Board. Amyris noted that is producing commercial product “for our launch partners (which include GOL), and that a 10% blend of Amyris-Total jet fuel can reduce about 3% of the particulate matter from aircraft engine exhaust.”

Last November, news filtered out of California that ASTM has revised the D7566, the Standard Specification for Aviation Turbine Fuel Containing Synthesized Hydrocarbons to include the use of renewable farnesane as a blending component in jet fuels for commercial aviation.

With that news, Amyris and Total said that they will now prepare to market a drop-in jet fuel that contains up to 10% blends of renewable farnesane.

Reaction from The Street

Cowen & Company’s Jeffrey Osborne wrote:

This conversion has a tangible effect on the ownership stake that both Total and Temasek has in the company. According to Thomson the companies own a combined ~24 million shares, which is around 30% of current shares outstanding. With the creation of 60 million additional shares, the combined ownership of Total and Temasek would be 84 million, or 60% of AMRS’ post-converted outstanding shares. We see this as confirmation that both companies see strong long-term potential for Amyris.

The reduction of convertible debt also improves Amyris’ balance sheet. Total debt, including a current portion of $18 million, was $242.5 million as of March 31, 2015. Upon the conversion of $175 million in debt the company will have reduced its total debt by 72% to $67.5 million. This should give Amyris greater flexibility as the commercialization of its various products continues to gain traction.

We see both of these updates as signaling a strong fundamental change in the company’s financial standing, as well as a solid validation of the viability of its jet fuel bioproduct. The terms of the restructuring are subject to standard closing procedures, including any approvals from the board or other internal requirements, as well as regulatory approvals.

Raymond James’ Pavel Molchanov wrote:

In aggregate, [it’s] $175 million of debt relief, equating to 72% of the company’s total debt burden as of 1Q15. If only Greece was able to get a deal like that! Naturally, there is no free lunch, and Amyris is giving up some future project economics. Specifically, Total will own 75% of the fuels joint venture with Amyris, up from the previously envisioned 50/50 split. But since this JV does not entail any meaningful revenue now, or even for the foreseeable future, Amyris gets the full deleveraging benefit upfront, with reduced JV economics only out in the distant future.

* In conjunction with this, Total has confirmed that it will proceed with commercialization of jet fuel under the JV. There is no real detail yet as far as the timetable, capital investment plans, or what the target economics might look like – all of those remain important question marks that will need to be addressed by management in due course. But it’s still a surprising move on the part of Total – surprisingly bullish, that is – considering the context of the oil and gas industry’s current period of austerity…Nonetheless, as a practical matter, we wouldn’t expect any production scale-up until around 2020, so it’s far too early for us to change estimates.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

June 18, 2015

BYOB: Bio-Yachts On Butanol

Jim Lane

Luxury YachtsIn Washington, the National Marine Manufacturers Association (NMMA) announced support of the use of fuels blended with up to 16 percent biobutanol in recreational marine engines.

This decision follows five years of evaluation performed by NMMA with the American Boat and Yacht Council (ABYC), under the direction and guidance of the U.S. Department of Energy and Argonne National Laboratory, and in partnership with the US Coast Guard, Gevo and Butamax.

During this time, the NMMA has gathered a great amount of data supporting the viability of isobutanol as the preferred renewable fuel blendstock for gasoline-powered marine engines. The studies showed that isobutanol fuel blends are a preferable power source for the marina markets.

Biobutanol-blended fuels are especially valuable for use in marine engines, as they are highly resistant to phase separation in the presence of water and have been demonstrated to offer a high level of compatibility with the materials commonly employed in engines and fuel-handling equipment. Applicable for use in marine, automotive and other gasoline-fueled engines, 16 percent biobutanol blends offer a valuable option for growing the use of renewable fuels beyond what is achieved with 10 percent ethanol blends, moving the market toward the long term goals of the U.S. Renewable Fuels Standard.

The formal announcement by the NMMA to endorse isobutanol as an industry-wide biofuel alternative comes as the fuel industry focuses on addressing the congressionally-mandated Renewable Fuel Standard (RFS), which requires 36 billion gallons of renewable fuel to be blended into the gasoline supply by 2022.

NMMA member companies produce more than 80 percent of the boats, engines, trailers, accessories and gear used by boaters and anglers throughout the U.S. and Canada.

Reaction from the isobutanol stakeholders

Jeff Wasil, BRP-Evinrude Engineering Manager for Emissions Testing, Certification & Regulatory Development and a key contributor to the NMMA biobutanol evaluation

Based on years of collaborative testing across the industry, biobutanol fuel blends, such as the ones provided by Gevo (GEVO) during our test program, are a safe and viable alternative to ethanol for use in recreational marine engines and boats up to 16.1 percent by volume.

Butamax CEO Paul Beckwith

The extensive work by NMMA and its partners, which enabled today’s announcement of support for 16 percent biobutanol blends, strengthens to the body of data supporting the value of biobutanol in the transportation fuels market. Butamax is continuing its work to secure required EPA and UL approvals for use of 16 percent biobutanol blends with existing road vehicles and dispensing infrastructure. The broad distribution which those approvals would enable will be key to making these blends widely and economically available for marine use.

Gevo CEO Dr. Patrick Gruber

We believe that the marine industry will be an important market for Gevo’s isobutanol. The technical properties of isobutanol shine in this application. We appreciate the efforts and the collaboration between Gevo and the NMMA throughout the testing program. We are pleased to have provided, from our plant in Luverne, the isobutanol needed to make the 16% isobutanol blended fuels that the studies required, for both on-water tests and in the laboratory,” said “We are delighted with the results of the testing and to have the endorsement of the NMMA. Isobutanol has proven to be an effective, highly compatible biofuel for the recreational boating industry.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

May 30, 2015

EPA Slashes Corn Ethanol Targets Under Proposed Renewable Fuel Standard

Renewable Diesel Takes Smaller Cut

Jim Lane

“EPA continues to assert authority under the general waiver provision to reduce biofuel volumes based on available infrastructure,” says BIO. “This is a point that will have to be litigated. It goes against Congressional intent.”

In Washington, the EPA released its proposed standards for 2014, 2015, and 2016 and volumes for renewable fuels. The volumes, as widely expected, include substantial reductions from the statutory standards in the original 2007 Energy Independence & Security Act. The EPA also released a 2017 proposed standard for biomass-based diesel.

Yet, while attracting significant industry criticism on volumes, the EPA won some cautious praise for cautiously advancing renewable fuels targets for 2014-16.

In today’s Digest, we have a complete coverage of the volumes, round-up of industry reaction, plus a look at the EPA’s rationale, the infrastructure dilemma, the options to change EPA’s proposal in the comment period, and the industry’s short-term and long-term options should the rule be finalized as proposed.

At a glance: 2014, 2015, 2016 volumes


* The EISA Act did not set volumes past 2012 and 1.0 billion gallons for biomass-based diesel, but required EPA to set a volume based on market conditions each year.

Detail: Growing levels of renewable fuels




Detail: The proposed rule for 2015

The proposed volumes are (in billons of US gallons):

Proposed Statutory volume for 2015
Cellulosic 0.106 3.000
Biomass-based diesel 1.700 1.000
Advanced biofuel 2.900 5.500
Renewable Fuel 16.300 20.500

* The EISA Act did not set volumes past 2012 and 1.0 billion gallons for biomass-based diesel, but required EPA to set a volume based on market conditions each year.

The effective corn-ethanol mandate is (in billons of US gallons):

Proposed Statutory volume for 2015
Corn ethanol 13.400 15.000

Detail: The proposed rule for 2016

The proposed volumes are (in billons of US gallons):

Proposed Statutory volume for 2016
Cellulosic 0.206 4.250
Biomass-based diesel 1.800 1.000
Advanced biofuel 3.400 7.250
Renewable Fuel 17.400 22.250

* The EISA Act did not set volumes past 2012 and 1.0 billion gallons for biomass-based diesel, but required EPA to set a volume based on market conditions each year.

The effective corn-ethanol mandate is (in billons of US gallons):

Corn ethanol 14.000 15.000

Detail: The proposed rule for 2014

The proposed volumes are (in billons of US gallons):

Proposed Statutory volume for 2014
Cellulosic 0.033 1.750
Biomass-based diesel 1.630 1.000
Advanced biofuel 2.680 3.750
Renewable Fuel 15.930 18.15

* The EISA Act did not set volumes past 2012 and 1.0 billion gallons for biomass-based diesel, but required EPA to set a volume based on market conditions each year.

The effective corn-ethanol mandate is (in billons of US gallons):

Corn ethanol 13.250 14.400

The EPA says:

EPA writes: “EPA has evaluated the availability of qualifying renewable fuels and factors that in some cases constrain the supply of those fuels to the vehicles that can consume them. EPA has also considered the ability of the market to respond to the applicable standards by producing changes in production, infrastructure, and relative pricing to boost the use of renewable fuels.

“Based on these and other considerations, EPA is proposing volumes which, while be­ low the volumes originally set by Congress, would increase renewable fuel use in the U.S. above historical levels and provide for steady growth over time. In particular, the proposed volumes would ensure continued growth in advanced biofuels, which have a lower greenhouse gas emissions profile than conventional biofuels. EPA is also proposing to increase the required volume of biomass-based diesel in 2015, 2016, and 2017 while maintaining the opportunity for growth in other advanced biofuels that is needed over the long term.

“Due to constraints in the fuel market to accommodate increasing volumes of ethanol, along with limits on the availability of non-ethanol renewable fuels, the volume targets specified by Congress in the Clean Air Act for 2014, 2015 and 2016 cannot be achieved. However, EPA recognizes that the statutory volume targets were intended to be ambitious; Congress set targets that envisioned growth at a pace that far exceeded historical growth rates. Congress clearly intended the RFS program to incentivize changes that would be unlikely to occur absent the RFS program. Thus while EPA is proposing to use the tools provided by Congress to waive the annual volumes below the statutory levels, we are proposing standards that are directionally consistent with Congress’ clear goal of increasing renewable fuel production and use over time. The proposed volumes would require significant growth in renewable fuel production and use over historical levels. EPA believes the proposed standards to be ambitious but within reach of a responsive marketplace.”

The new EPA view, summarized

The EPA’s line of thinking is essentially this: they are considering that supply exists where that supply can find a market given existing infrastructure. So, if the market can only tolerate, say, 14 billion gallons of E10 ethanol, they do not consider capacity or production as “supply” rather, they look to alternative fuels (such as drop-ins) and, in that case, don’t see the production.

The practical goal for the EPA is not to use the RFS2 renewable fuels schedules as a driver to produce investment in capacity-building or infrastructure for distribution. Rather, the EPA opts for a more passive role of providing a market for those capacities that are built based on incremental, if any, changes in infrastructure.

Beyond the blendwall, the hidden issues

EPA wrote in 2013: “Although the production of renewable fuels has been increasing, overall gasoline consumption in the United States is less than anticipated when Congress established the program by law in 2007.”

In its own way, the EPA is signaling that it believes that the original mandates were set, as volumetric rather than percentage standards, at a time when it was believed that the overall gasoline market would be much larger. Lower gasoline volumes — which in their own way reduce emissions – in the EPA’s view bring on issues such as blend walls faster and more intensively, and require regulatory relief.

Options in the courts: Suing to enforce the 2015 statutory numbers

It’s going to be tough for the biofuels industry to sue to enforce the overall statutory volumes, given the shortfall in cellulosic biofuels — even though the EPA is wading into regions of doubtful legislative intent in using blendwall issues as a reason to cut the corn ethanol target. The authority of EPA to waive down cellulosic mandates in unquestioned, in the absence of production capacity — but their authority to waive down renewable fuel standard obligations in the absence of infrastructure being deployed is bound to suggest to incumbents that the best way to prevent renewable fuels is to ensure that there is no investment in distribution.

Why not balance less corn ethanol with more advanced biofuels?

The fear — rightly or wrongly — is that the advanced pool will be drowned in low-cost, imported ethanol that qualifies for the advanced biofuels pool — and exacerbates the blendwall issue that it sees in the marketplace. So, they have increased the advanced pool, but kept it quite close to the biobased diesel volumes.

At the end of the day, there’s not much production out there, outside of the biomass-based diesel capacity (representing renewable diesel and biodiesel) and the cellulosic fuels capacity. At scale, there are some providers such as Aemetis that can produce qualifying advanced ethanol at scale using the milo-biogas pathway, and there’s sugarcane ethanol.

Why is industry deeply disappointed?

RFS2 is based in production targeting, but it is ultimately about requiring distribution. The renewable fuels industry is taking the view that the E10 blendwall issue was well understood, at a technical level, by Congress when they passed the EISA Act — and that the law places the onus on the conventional fuel industry to develop distribution solutions, so long as the production is there.

Well, the production is there. The conventional fuels industry did not develop the distribution solutions, and the EPA is waiving the obligation. To the renewable fuels industry, it looks like rewarding the oil industry for doing nothing. And stranding renewable fuels capacity that was built in reliance on Congress and RFS2 to provide a market.

So, it’s a distribution war. Renewable fuels distributors haven’t built much to speak of — a few thousand outlets feature options for consumers to purchase high-blend renewable fuels. Congress gave every indication that they would expect rising RIN prices would compel obligated parties to find distribution solutions.

When RIN costs rose, the oil industry correctly foresaw that by waving the flag of “exploding prices at the pump,” they could count on the White House and Congress to cave in.

Industry reaction

Brent Erickson, executive vice president of BIO’s Industrial & Environmental Section

EPA has proven they still don’t understand the advanced biofuel industry’s need for policy stability. The RFS was designed by Congress to tear down the so-called blendwall by providing a market floor for biofuels that would enable us to attract capital for construction of new biorefineries and commercialization of advanced technologies. Instead, EPA is helping the oil industry build the blendwall to keep advanced biofuels out of the market.

Just as advanced biofuel companies began to successfully commercialize new technologies, EPA proposed to turn the RFS methodology upside down. That policy instability is responsible for chilling as much as $13.7 billion in investments that the advanced biofuel industry needed to build capacity to meet the RFS goals. Now EPA and the Obama administration claim to be scratching their heads as to why our industry hasn’t built more capacity.

And while the President took time on Thursday to warn that climate change will worsen storms in the future, EPA’s actions on the RFS have already resulted in 21 million metric tons of additional CO2 emissions — equal to putting 4.4 million more cars on the road or opening 5 new coal-fired power plants, which will only increase with today’s proposal.

EPA continues to assert authority under the general waiver provision to reduce biofuel volumes based on available infrastructure. This is a point that will have to be litigated. It goes against Congressional intent.

EPA has proposed higher volumes for advanced biofuels, still below the statutory volumes, but maintained a methodology that discourages investment in the industry. That will likely undercut future production, requiring additional cuts to volumes in future.

Michael McAdams, president, Advanced Biofuels Association

“The Advanced Biofuels Association looks forward to reviewing the complex, multi-year proposal unveiled today in detail and submitting our official comments on this important regulation. We are grateful for the EPA’s good-faith efforts to support this industry, today’s proposal is a step in the right direction and gives more growth potential to advanced and cellulosic biofuels relative to the original proposal. However, we continue to believe that the cellulosic waiver credit and other areas require legislative reform. We look forward to continuing to work with Congress and the Administration to reform and strengthen the RFS so it can deliver on the promise of next-generation renewable fuels.”

Bob Dinneen, president and CEO of the Renewable Fuels Association

“EPA has to be given some credit for attempting to get the RFS back on track by increasing the renewable volume obligations (RVOs) over time. But the frustrating fact is the Agency continues to misunderstand the clear intent of the statute — to drive innovation in both ethanol production and ethanol marketing. The Agency has eviscerated the program’s ability to incentivize investments in infrastructure that would break through the blend wall and encourage the commercialization of new technologies. By adopting the oil company narrative regarding the ability of the market to effectively distribute increasing volumes of renewable fuels, rather than putting the RFS back on track, the Agency has created its own slower, more costly, and ultimately diminished track for renewable fuels in this country.

“Today’s announcement represents a step backward for the RFS. EPA successfully enforced a 13.8 billion gallon RVO in 2013. The industry produced 14.3 billion gallons of ethanol last year. There is no reason to promulgate an RVO rule that takes us backward. All it will do is result in an ever-increasing supply of renewable fuel credits (RINs) that will further discourage private sector investment in infrastructure and technology. This doesn’t make sense.

“The EPA plan fundamentally places the potential growth in renewable fuels in the hands of the oil companies — empowering the incumbent industry to continue to thwart consumer choice at the pump with no fear of consequence for their bad behavior. That is not what the statute intended. And that is not what’s in the best interests of consumers — who will be denied greater access to the lowest cost liquid transportation fuel and octane source on the planet.”

Joe Jobe, CEO, National Biodiesel Board

“It is not perfect, but it will get the U.S. biodiesel industry growing again and put people back to work. I want to thank Administrator McCarthy and Secretary Vilsack for restoring growth to the program and for their commitment to renewable fuels.”

“Biodiesel has proven that Advanced Biofuels can do just what we said they would, which is create jobs and strengthen our energy security while significantly cutting harmful pollution from petroleum,” Jobe said. “Biodiesel has displaced more than 8 billion gallons of petroleum diesel in the U.S. over the last decade. That is an incredible achievement, and we will build on that success under the proposal the EPA released today.”

“However, more can be done, and we particularly look forward to working with the administration on strengthening biodiesel volumes for 2016 and 2017 during the comment period in the coming weeks.”

Brian Jennings, Executive Vice President, American Coalition for Ethanol

“Promises to get the RFS back on track and USDA funding for flex fuel pumps are appreciated, but EPA is yet again proposing to circumvent the RFS by limiting ethanol use to the amount oil companies are willing to blend with the gasoline they refine and not one gallon more. It’s like the NFL saying it’s ok for the New England Patriots to deflate footballs while everyone else must play by the rules.”

As expected, proposed volumes for the 2014 RFS largely reflect actual use. The Agency intends for renewable fuel use to increase from 2014 to 2016. But EPA’s proposed blending targets for 2015 and 2016 fall back on the E10 “blend wall” methodology which has disrupted RFS implementation for more than a year. Earlier this week the U.S. Department of Energy’s National Renewable Energy Laboratory released a report confirming that most retail infrastructure is already compatible with E15. The majority of cars on the road can use E15.

“EPA was forced to withdraw their original 2014 proposal because the law doesn’t allow them to use the blend wall to set levels and doing so undermines the integrity of the program. The good news is that there is still time to get the RFS back on track,” Jennings said. “We will provide ACE members and biofuel supporters a platform to once again blitz EPA with comments before the final rules are issued on November 30.”

Tom Buis, CEO, Growth Energy

“Today’s proposals are better than EPA’s initial proposed rule for 2014, but they still need significant improvement. We have sincere concerns that these proposed numbers are not moving forward to the degree that Congress had intended for the RFS.

“It is unfortunate that EPA chose to side with the obligated parties who have deliberately refused to live up to their obligation to provide consumers with a choice of fossil fuels or lower cost, higher performing, homegrown renewable energy at the pump. Everyone in Congress, as well as all parties in the renewables and oil industry, knew when this legislation was debated and passed into law that the only way the RFS goals could be met was by introducing higher blends into the market moving forward. Now the obligated parties, controlled primarily by Big Oil, have refused to live up to their obligation and the initial read on EPA’s proposal is they have simply acquiesced to the demands of Big Oil.

“One thing that everyone should keep in mind is that this a proposed rule. We will continue to analyze and review these proposals for 2014, 2015 and 2016. Furthermore, Growth Energy will file exhaustive comments with EPA. Just as we successfully commented on the original 2014 RVO proposal by EPA, which ultimately forced EPA to reconsider their initial flawed rule, we are confident that our forthcoming comments will highlight the changes that are necessary to meet the goals of the RFS.

Elizabeth Farina, President, UNICA (Brazilian sugar growers association)

“While UNICA is disappointed that today’s Renewable Fuels Standard proposal from the U.S. EPA significantly reduces target volumes for advanced biofuels below Congressionally mandated levels, we are pleased to see growing requirements for advanced biofuels in 2015 and 2016. This leaves the door open for continued American access to sugarcane ethanol, one of the cleanest and most commercially ready advanced biofuels available today.

“EPA identifies Brazilian sugarcane ethanol as an advanced biofuel because it reduces greenhouse gases by more than 60 percent compared to gasoline. This advanced biofuel from an American ally plays a modest but important role supplying the United States with clean renewable fuel. For the past three years, more than one billion gallons of sugarcane biofuel imported from Brazil flowed into American vehicles. During this time, sugarcane ethanol has comprised only 2 percent of all renewable fuel consumed by Americans, but has provided nearly 15 percent of the U.S. advanced biofuel supply.

“Our association looks forward to commenting on this proposal and will continue to play an active role in the RFS rulemaking process, serving as a source of credible information about the efficiency and sustainability of sugarcane ethanol. Likewise, Brazil will continue to be a strong, dependable partner helping America meet its clean energy goals.”

Jeff Lautt, CEO, POET

“Today’s proposal by the EPA puts the oil industry’s agenda ahead of farmers and rural America. While the EPA is correct in recognizing the intent of Congress to continue growth in biofuels, the targets announced today fall well short of rural America’s potential to produce low-cost, clean-burning ethanol.

“America’s farmers have answered the call laid out in the Renewable Fuel Standard to help wean our nation off of foreign oil. Agriculture has taken incredible strides in recent years, growing yields through efficient farming practices and technology improvements, and we have all reaped the benefits of that labor through greater availability of high-performance, domesticly produced ethanol. Rural America has upheld its end of the deal, and I ask that the EPA uphold Washington’s end.

“Some in Washington do understand what’s at stake and are still committed to rural America. The announcement by Sec. Vilsack today that UDSA would provide funds for flex pump infrastructure aims to increase consumer access to clean, high-performance fuel produced here at home. It is an effort obligated parties should have been driving since the RFS became law. We hope Sec. Vilsack’s commitment to clean fuels and rural America rubs off on some of his colleagues in the Administration.

“For the sake of consumer choice, rural jobs and strong markets for farmers, I hope the EPA fixes its mistakes in the proposed rule and recognizes our nation’s capability to power itself with clean, renewable fuel.”

Monte Shaw, executive director, Iowa Renewable Fuels Association

“Today’s RFS proposal gives in to Big Oil lies and turns its back on consumers, fuel choice, and the environment. The Obama Administration has no legal authority to reduce the ethanol numbers. For conventional biofuels, this is a path to nowhere. The proposed ethanol level for 2016 is less than what we already produced in 2014. This proposal will not crack the petroleum monopoly and will not allow consumers to benefit from the choice of lower-cost E15 and E85. As we’ve done over the past year, we’ll continue to work with all parties to fix this proposal.”

“It’s a positive that the proposal does allow for some growth in biodiesel. However, EPA inexplicably fast tracked Argentinian biodiesel imports earlier this year, and today’s proposed rule fails to take those imports into account. As this could actually lead to lower U.S. biodiesel production, we’ll be focused on working to improve the biodiesel targets for 2016 and 2017 during the comment period.”

“Last year Iowans swamped the EPA with negative comments on the previous RFS proposal. While this new proposal is better, it’s a far cry from good enough. We need Iowans to once again step up and tell the EPA to follow the law and to let the RFS crack the oil monopoly as Congress intended.”

Adam Monroe, President, Novozymes Americas

“Renewable fuels are a huge opportunity for the United States to achieve President Obama’s climate change goals, capture private investment, create jobs and save drivers money. Today’s proposal undermines all of that.

“We are disappointed that the agency is allowing Big Oil to maintain an artificial impediment like the so-called blend wall. While President Obama is pushing to reduce greenhouse gas emissions in other sectors, he is letting the oil industry attack climate-smart alternative energy.

“The only way the world will use more renewable energy is with bold leadership and bold policy. The EPA’s aspiration should not be a slow buildup in renewable fuel volumes, it should be an economy driven by clean technologies, supporting thousands of new jobs and billions in private investment. That all starts with aggressive goals for the RFS.

“During the comment period, we urge the Administration to rethink its approach and support an existing law that works: the Renewable Fuel Standard. Together, we can get this right. If America does not capitalize on the benefits of home-grown fuel, other countries will. In fact, they already are.”

Industry opponent reaction

Emily Cassidy, Research Analyst, Environmental Working Group

Using the Environmental Protection Agency’s own estimate, we calculate that the corn ethanol mandate has been worse for the climate than projected emissions from the controversial Keystone XL pipeline.

What makes matters worse is that the EPA is about to mandate that more corn ethanol must go into American gas tanks. Today the EPA proposed new minimum volumes of corn ethanol that refiners would be required to blend into gasoline this year and the next. Congress set this policy, called the Renewable Fuel Standard, in the Energy Independence and Security Act of 2007. At the time, lawmakers hoped that using ethanol and other renewable fuels would reduce carbon emissions and American dependence on foreign oil.

Last year, corn ethanol producers churned out 14 billion gallons, about 13.4 billion gallons of which were blended into the 135 billion gallons of gasoline the nation’s drivers used.

Extracting tar sands and turning them into oil is more energy-intensive than traditional drilling for petroleum. According to the Natural Resources Defense Council, dirty oil transmitted from Alberta, Canada, to the Gulf Coast by the Keystone Pipeline would emit 24 million tons of carbon per year. But our calculations show that last year’s production and use of 14 billion gallons of corn ethanol resulted in 27 million tons more carbon emissions than if Americans had used straight gasoline in their vehicles. That’s worse than Keystone’s projected emissions. It’s the equivalent of emissions from seven coal-fired power plants.

So far the federal corn ethanol mandate has resulted in a massive influx of dirty corn ethanol, which is bad for the climate and bad for consumers. The only interest it benefits is the ethanol industry. As we’ve said before, it’s time for Congress to correct course and reform the broken Renewable Fuels Standard to make way for truly green biofuels.

Comment period

Once the proposal is published in the Federal Register, it will be open to a 60 day public comment period through July 27.

What can industry do to change these outcomes?

The industry has two options, in general.

1. Demonstrate a stronger market for higher ethanol blends such as E15 or E85. This would contribute to restoring gallons lost in the overall renewable fuels pool — and, essentially, benefit corn ethanol producers.

2. Demonstrate a stronger biomass-based diesel production capacity, which should be a no-brainer, but also convince EPA that production capacity can and would translate into actual production.

Where can growth occur, outside of RFS2 rules and targets?

The RFS2 targets should incentivize all parties in renewable fuels to shift strategies more towards driving consumer demand over compliance-driven demand.

This means:

1. Build the higher-blend ethanol market based on price and positive community attributes as perceived by the consumer.

2. Build the biomass-based diesel market based on corporate demand for B5 blends based on social, and price-hedging opportunities — while limiting the practical impact of any differential in street prices of diesel vs biomass-based diesel by having low-level blends (that is, a $1.00 per gallon cent cost differential translates into a nickel a gallon at B5 blend levels).

3. Building markets in diesel and jet fuel based on overall price parity. That is, building a case that fuel price should include a) the cost of volatility and risk with fossil commodity fuels; b) the social costs, such as disappointing end-use customers who prefer renewable fuels, and c) differential in maintenance costs and engine replacement cycles.

4. Rely on the EPA to support long-term capacity building in cellulosic biofuels with appropriate market mandates.

The bottom line

Clearly the industry is apoplectic over the the strategic shift at EPA. As BIO’s Brent Erickson tipped, “EPA continues to assert authority under the general waiver provision to reduce biofuel volumes based on available infrastructure. This is a point that will have to be litigated. It goes against Congressional intent.”

For corn ethanol, there is going to be a strong push back based on hopes that persuading EPA to stick with a tough mandated number will prompt the conventional fuels industry to push through wider adoption of E15, which would be good not only for corn ethanol, but ultimately for advanced ethanol fuels when they are available in higher numbers.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

May 11, 2015

Alaska Airlines and Gevo to Demonstrate Alchohol-to-Jet Fuel

gevo logo

In Colorado, Gevo (GEVO) and Alaska Airlines announced a strategic alliance to purchase Gevo’s renewable jet fuel and fly the first-ever commercial flight on alcohol-to-jet fuel (ATJ).

The demonstration flight is expected to occur after Gevo receives ASTM International certification for its fuel, sometime in mid to late 2015. Gevo has been working through the rigorous ASTM process for six years, which includes extensive engine testing and data analysis by all of the major original equipment manufacturers to establish the specification for this drop in fuel. Once approved, this fuel can be seamlessly integrated into the existing distribution infrastructure and onto commercial aircraft.

“Developing a domestic, competitively priced, sustainable supply of biofuels is fundamental to the future of American aviation,” said Joe Sprague, senior vice president of external relations at Alaska Airlines. “The cost of fossil-based jet fuel is one of the largest expenses for airlines. This investment in Gevo’s ATJ will help reduce our exposure to high fuel prices, minimize our carbon footprint and demonstrate growing demand for fuel alternatives.”

“A sustainable biofuels industry would help insulate airlines from fuel price spikes, enabling them to offer economical air travel while remaining profitable, while helping meet their environmental goals, and spur economic growth within and outside of aviation,” said Gevo CEO Pat Gruber. “We greatly appreciate Alaska Airlines as a commercial partner as we move towards commercialization.”

Why alcohol-to-jet, anyways?

When most of us think of highly customized aviation alcohols, we probably think of the little bottles of Johnnie Walker. But a handful of companies such as Gevo, Butamax and LanzaTech could shake up the emerging aviation biofuels markets by developing renewable aviation fuels from ethanol and/or biobutanol.

“An alcohol molecule, looking at it one way, is really just a hydrocarbon carrying this extra OH [a hydroxyl group] on its back,” LanzaTech CEO Jennifer Holmgren told The Digest, explaining that chemically reforming alcohol into jet fuel is not a bizarre form of medieval alchemy.

In the process, you generally need two ethanol molecules to make a jet fuel molecule, so unless you are interested in trying to sell $3 jet fuel into a $2 market, you had better start with something that produces much better than $1.50 ethanol.

Isobutanol, such as made by Gevo and Butamax, is an alcohol with special applications in jet fuel because it is a four-carbon molecule to begin with. Back in 2009, Gevo opined that the first “Sasol Synthetic Jet was C12‐ centered isoparaffin mixture with similar properties” to Gevo’s jet fuel blend stock. Gevo said at the time that its jet fuel met all ASTM specifications except a slight miss on fuel density, and blended with 25% Jet A it met all specs. Gevo also indicated that it could make a jet fuel blend stock at an operating cost equivalent to $65 oil.

Gevo and aviation fuels

Gevo’s ATJ is produced at its demo biorefinery in Silsbee, TX, using isobutanol produced at its Luverne, MN, fermentation facility. Gevo is currently operating its Luverne plant in Side-by-Side operational mode, whereby isobutanol is being produced in one of the facility’s four fermenters, while the other three fermenters are dedicated to ethanol production. The isobutanol that Gevo is producing is meeting product specifications for direct drop-in applications, as well as for use as a feedstock for the Silsbee biorefinery to produce hydrocarbons such as ATJ.

In March, NASA purchased volumes Gevo’s renewable alcohol-to-jet fuel (ATJ) for aviation use at the NASA Glenn Research Center in Cleveland, Ohio. Gevo’s ATJ is manufactured at its demonstration biorefinery located in Silsbee, Texas, using renewable isobutanol produced at its Luverne, Minnesota, isobutanol plant. The biorefinery, where Gevo also produces bioparaxylene and bioisooctane, is operated in conjunction with South Hampton Resources.

In December 2014, the US Navy’s Naval Air Systems Command announced its first successful alcohol-to-jet supersonic flight, fueled by Gevo’s renewable isobutanol. This was the first aviation test program to comprehensively test and evaluate the performance of a 50/50 ATJ blend in supersonic (above Mach 1) afterburner operations – a critical test to successfully clear the F/A-18 for ATJ operations through its entire flight envelope. This military specification would allow for commercial supply of ATJ fuel to the Navy and Marines Corps.

In April 2014, Gevo announced an agreement with Lufthansa to evaluate Gevo’s renewable jet fuel with the goal of approving Gevo’s alcohol-to-jet fuel for commercial aviation use. Lufthansa’s testing is being supported through work with the European Commission.

Alaska Airlines and sustainable aviation fuel

The key takeaway for Alaska is that the airline has set a goal of using sustainable aviation biofuel at one or more of its airports by 2020.

Alaska Airlines was the first U.S. airline to fly multiple commercial passenger flights using a biofuel from used cooking oil. The carrier flew 75 flights between Seattle and Washington, D.C. and Seattle and Portland in November 2011.

The fuel was supplied by SkyNRG, an aviation biofuels broker, and made by Dynamic Fuels, a producer of next-generation renewable, synthetic fuels made from used cooking oil, now a division of Renewable Energy Group nown as REG Geismar.

At the time, Alaska Air Group estimated the 20 percent certified biofuel blend it is using for the 75 flights will reduce greenhouse gas emissions by an estimated 10 percent, or 134 metric tons, the equivalent of taking 26 cars off the road for a year. If the company powered all of its flights with a 20 percent biofuel blend for one year, the annual emissions savings would represent the equivalent of taking nearly 64,000 cars off the road or providing electricity to 28,000 homes.

In 2010, Alaska Airlines, Boeing, Portland International Airport, Seattle-Tacoma International Airport, Spokane International Airport and Washington State University announced a strategic initiative to promote aviation biofuel development in the Pacific Northwest, the first regional US assessment of its kind, dubbed the “Sustainable Aviation Fuels Northwest” project. The consortium examined biomass options “within a four-state area,” examining “all phases of developing a sustainable biofuel industry,” including ” an analysis of potential biomass sources that are indigenous to the Pacific Northwest.”

Since 2010, Alaska Air Group has been a partner in a strategic initiative called Sustainable Aviation Fuels Northwest (SAFN), a 10-month regional stakeholder effort to explore the feasibility, challenges and opportunities for creating an aviation biofuels industry in the U.S. Pacific Northwest. The study determined the region has the diverse stocks for biofuels, delivery infrastructure and political will needed to create a viable biofuels industry. There currently is no supply of aviation biofuels in the Pacific Northwest.

The Bottom Line

The Alaska / Gevo partnership is a solid step towards commercializing the fuels, which Gevo has the capability to produce at demonstration levels. It would need an equity infusion to take the Silsbee technology to the next level.

In that context, consider the March 2015 memorandum of understanding between Praj Industries and Gevo, in which Praj would undertake to license up to 250 million gallons of isobutanol capacity for sugar-based ethanol plants over the next ten years. Gevo will market the isobutanol produced by Praj’s sub-licensees — which could well include airline customers via a Silsbee-like commercial scale conversion facility.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

April 13, 2015

EPA Agrees To Timeline For Ethanol And Advanced Biofuel Targets Through 2016

Jim Lane

rp_epa.jpgProposed consent decree offers timelines for ethanol, advanced fuels through 2016, biobased diesel through 2017.

In Washington, the EPA released a proposed consent decree in litigation brought against EPA by, the American Petroleum Institute (API) and the American Fuel and Petrochemical Manufacturers (AFPM), that would establish the following schedule for issuing Renewable Fuel Standards for 2014 and 2015:

•By June 1, the agency will propose volume requirements for 2015;

•By November 30, EPA will finalize volume requirements for 2014 and 2015 and resolve a pending waiver petition for 2014.

Outside the scope of the consent decree, EPA also commits to:

•Propose the RFS volume requirements for 2016 by June 1, and finalize them by November 30;

•Propose and finalize the RFS biomass-based diesel volume requirement for 2017 on the same schedule; and

•Re-propose volume requirements for 2014, by June 1, that reflect the volumes of renewable fuel that were actually used in 2014.

EPA intends to issue a Federal Register Notice allowing the public an opportunity to comment on the proposed consent decree.

Reaction from stakeholders

Tom Buis, CEO, Growth Energy

“I am pleased to hear that the EPA has finally put a process in place to establish some certainty for biofuel producers with the recent announcement of the timeline for the proposed 2015 RVO rule by June 1st as well as the final 2014 and 2015 volume obligations by November 30, 2015.

“Our producers have faced ambiguity for too long and today is welcome news that they are establishing a level of certainty with this announcement. However, far more important than timing is that that the EPA establishes a final rule that moves our industry forward, and reflects the bipartisan vision Congress intended for the RFS.

“Additionally, while not part of the consent decree, we are pleased to see that the EPA has committed to finalizing the 2016 RFS RVO numbers this year as well. By taking this action, they are ensuring that the RFS is back on a path to certainty for the biofuels industry, providing the necessary guidance for the industry to continue to thrive and advance alternative fuel options for American consumers.”

Brooke Coleman, executive director, Advanced Ethanol Council

“The scheduling agreement between the oil industry and EPA is actually a good signal for the advanced biofuels industry because it lays out a time frame and a reasonable market expectation for resolving the regulatory uncertainty around the RFS. Now that we have a better idea of when it will happen, we look forward to working with EPA to make sure that the new RFS proposal supports the commercial deployment of advanced biofuels as called for by Congress. We were encouraged by EPA’s decision late last year to pull a problematic 2014 proposal, and we are optimistic that EPA will make the necessary adjustments and put the RFS back on track going forward.”

Brent Erickson, executive vice president, BIO’s Industrial & Environmental Section

“To continue making visible progress in commercializing advanced biofuels, our member companies need stable policy. The changes EPA proposed in 2013 to the Renewable Fuel Standard program and the delay in taking final action on the rule have chilled investment in advanced biofuels, even as the first companies began to successfully prove this technology at commercial scale.

“Today, EPA has set out a timeline to get this program back on track. The agency must take strong action to reverse the damaging proposal to change the methodology of the program in order to comply with the requirements of the RFS.”

The Bottom Line

Good news, indeed, some degree of policy certainty on 2014 volumes, which will be finalized on the basis of produced volumes, and in terms of timelines for 2015, 2016 and even parts of 2017.

As BIO points out, there’s not much in the agreement as proposed that addresses how the methodology problems will be resolved that caused the EPA’s delay in the first place.

And a comment period is shortly underway, and if reaction to the 2013 EPA proposal on 2014 volumes is any indidation, large numbers of comments can be expected and, to the extent that those comments derailed the 2014 proposals, may be expected to be given great weight.

The complete proposed consent degree can be viewed here.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

March 25, 2015

Praj Licenses Gevo's Isobutanol Technology

Jim Lane
gevo logo

In Colorado, Gevo (GEVO) announced that Praj Industries Limited has signed a memorandum of understanding to become a Gevo licensee for producing renewable isobutanol at sugar-based ethanol plants.

Under the MOU, Praj will undertake to license up to 250 million gallons of isobutanol capacity for sugar-based ethanol plants over the next ten years. Gevo will market the isobutanol produced by Praj’s sub-licensees. Praj will also contribute process engineering and equipment services to expand isobutanol capacity at Gevo’s plant in Luverne, Minn, as well as to improve yields and optimize energy consumption at the facility.

“Praj has conducted significant diligence on Gevo’s corn starch-based isobutanol technology and we believe in the technology,” said Pramod Chaudhari, Executive Chairman of Praj. “Isobutanol has a substantial market opportunity given that isobutanol is a high performance biofuel that can solve many of the issues of 1st generation biofuels. It also enables a true biorefinery model wherein a number of specialty chemicals and bio-products can be produced using isobutanol as a feedstock. We look forward to creating a new opportunity for 1st generation sugar-based ethanol plant owners, as well as accelerating the use of 2nd generation cellulosic feedstocks to produce isobutanol.”

“We are very pleased to be working with Praj and having them become an important licensee and partner. This new strategic alliance demonstrates the flexibility of Gevo’s GIFT technology to convert a wide range of sugar sources into isobutanol. It also continues to validate the interest in licensing our intellectual property portfolio as we look to transition our business to focus more on a licensing model,” said Dr. Patrick Gruber, Gevo’s Chief Executive Officer.

In a “quick take,” Cowen & Company’s Jeffrey Osborne noted:

“In addition to licensing Gevo’s technology for its first-gen ethanol plants, Praj will also tap Gevo to market the isobutanol produced. Praj will also contribute process engineering and equipment services for Gevo’s plant in Luverne, MN, which should help expand and stabilize Gevo’s in-house capability of producing isobutanol and improve yields and energy consumption at the plant.”

This news comes as a follow up to Gevo’s recent announcement of NASA’s purchase of Gevo’s Alcohol-to-Jet (ATJ) for aviation, which is manufactured at the company’s demonstration biorefinery in Silsbee, TX.

As of the last update in January, Gevo’s Luverne facility is producing 75-100k gallons of isobutanol per month, or approximately a run rate of 1 million gallons per year. Praj’s potential assistance at Gevo’s plant can help lead to stable increasing production levels, on top of the financial and technology validation benefits Gevo gains from the licensing arrangement.”

Gevo will announces its quarterly earnings on Thursday.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

January 29, 2015

Gevo Raises Money After Win At Supreme Court

Jim Lane
gevo logo

Following just one day after a big win in the Supreme Court and a corporate update last week, Gevo (GEVO) announced that it intends to offer and sell, subject to market and other conditions, common stock units.

Each common stock unit will consist of one share of common stock, Series A warrants to purchase a certain number of shares of common stock and Series B warrants to purchase a certain number of shares of common stock. The units are to be sold by Gevo subject to market and other conditions in an underwritten public offering.


Gevo announced this morning (Jan 29) that it has priced the public offering. The Series A warrants will have an exercise price of $0.27 per share, and the Series B warrants will have an exercise price of $0.20 per share, be exercisable from the date of original issuance and will expire on August 3, 2015.

The gross proceeds to Gevo from this offering are expected to be approximately $6.6 million not including any future proceeds from the exercise of the warrants.

How much runway?

Not much. Although Gevo slashed costs in the past few weeks, and reduced the average monthly corporate-wide EBITDA burn rate to $1.50-1.75 million in 2015 — this offering buys Gevo roughly 4 months of extra runway for its efforts — and came at a cruel cost to current investors. The Gevo share price dropped after the pricing (morning of Jan 29) to $0.14 in early trading.

More detail on the offering

Gevo currently intends to use the net proceeds from the offering, excluding any future proceeds from the exercise of the warrants, to fund working capital, potential capital optimizations at its Luverne, MN facility and for other general corporate purposes.

In connection with the offering, Cowen and Company, LLC is acting as sole manager.

A shelf registration statement relating to the shares of common stock and warrants to be issued in the proposed offering was filed with the Securities and Exchange Commission (SEC) and is effective. This press release does not constitute an offer to sell, or the solicitation of an offer to buy, these securities, nor will there be any sale of these securities in any state or other jurisdiction in which such offer, solicitation or sale is not permitted.

A preliminary prospectus supplement and accompanying prospectus describing the terms of the proposed offering will be filed with the SEC.

Here’s a link to the Gevo IR site with the SCOTUS win, the corporate update and the filing.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

Supreme Court Sides With Gevo In Patent Dispute

Jim Lane

gevo logoIn Washington, the U.S. Supreme Court ruled in Gevo’s (NASD: GEVO) favor and overturned an earlier Federal Circuit Court of Appeals ruling on the interpretation of key patent claims.

On April 11, 2013, the Delaware District Court (District Court) entered a final judgment of non-infringement in Gevo’s favor following the acknowledgment by Butamax Advanced Biofuels LLC (Butamax) that Gevo does not infringe Butamax’s asserted patents under the District Court’s construction of a key claim term in Butamax’s Patent Nos. 7,851,188 and 7,993,889.

At the time, Butamax appealed Gevo’s victory, and a US Court of Appeals in February 2014 vacated the District Court’s prior rulings, and ordered the District Court to reconsider issues related to infringement and invalidity.

In turn, Gevo asked the Supreme Court to vacate the Appeals Court’s de novo nterpretation of a disputed claim term. Today, the Supreme Court granted Gevo’s petition and vacated the decision of the Appeals Court.

According to Gevo:

“The result is that Gevo’s victory in the Delaware District Court is reinstated, and that the case has been remanded back to the Appeals Court for consideration in light of the new standard of appellate review that was decided in the Teva Pharmaceuticals USA, Inc., v. Sandoz, Inc. (Teva) case last week.”

The Teva case

In Teva, the Supreme Court ruled 7-2 that the Appeals Court must apply a more stringent “clear error” standard of review, rather than a “de novo” standard of review. In Gevo’s case, the Appeals Court must now apply the “clear error” standard of review and cannot set aside the Delaware District Court’s (District Court) findings of fact in Gevo’s favor (including interpretation of patent claims) unless they were clearly erroneous.

And you might wonder, what has this to do with the advanced bioeconomy and, in particular, the world of fuels and chemicals.

Turns out, a lot, particularly in the ongoing dispute between Gevo and DuPont over intellectual property used to convert sugars into isobutanol, a higher-density alcohol fuel that has immense promise in circumventing the “blend wall” that bedevils renewable fuels deployment. Not to mention isobutanol’s potential as a chemical blendstock.

Here’s the essence of the case. Teva holds a bunch of patens, which it sued Sandoz over, claiming infrigement. It won a judgement in District Court, but lost in the Court of Appeals when the appellate judges threw out some key elements relating to Teva’s case and the patent claim construction and conducted it’s own “de novo” review, leading it to side with Sandoz.

Now, claim construction is a matter of law and is subject to appelate review — but what about certain key elements that underlie a claim construction? Are they a matter of law and subject to higher review — or are they facts which are tried in a lower court (either by judge or jury), not subject to review?

One of the most perplexing questions has been the reasonableness of a patent claim — would someone skilled in the art understand the claim as written? Is that a fact, not subject to apelate review once found by the lower court or jury — or is that a matter of law.

Well, the Supreme Court has ruled now. Those underlying elements — they are facts. Not subject to de novo review by a Court of Appeal. Meaning that biotech companies, once they have faced their jury or judge on those facts, doesn’t have to worry that a Court of Appeal might conduct a top-to-bottom wholly new review and perhaps, without the benefit of expert witnesses, go another way.

The Supreme Court’s decision effectively reinstates Gevo’s victory at the District Court where a final judgment of non-infringement was entered in Gevo’s favor following the acknowledgment by Butamax Advanced Biofuels LLC (Butamax) that Gevo does not infringe Butamax’s Patent Nos. 7,851,188 and 7,993,889.

The Gevo-DuPont dispute

Gevo and Butamax fell into the Teva orbit last February, when the U.S. Court of Appeals, in a patent case involving Butamax’s Patent Nos. 7,851,188 (‘188 Patent) and 7,993,889 (‘889 Patent). The appeals court offered a new interpretation of a disputed claim term.

Gevo writes, “On remand, two issues remain to be determined: 1) whether the patents are valid; and 2) whether Gevo infringes them under the new claim interpretation. The claims of the two Butamax patents at issue are currently under reexamination at the United States Patent and Trademark Office (USPTO), which has declared them unpatentable. Gevo believes that it does not infringe any valid claims, and at this time maintains freedom to produce and sell isobutanol worldwide and into all markets. “

In a filing for Supreme Court review, Gevo wrote:

“Indefiniteness calls into question additional considerations of whether a claim is ‘insolubly ambiguous, Here the dispute is plainly and cleanly an issue only of the proper construction of the disputed term.”

It comes down to whether an enzyme known as KARI is dependent on a co-enzyme. If yes, then Gevo is in the clear. If not, then it could be found in violation of a Butamax patent. The District Court ruled yes, the Court of Appeals ruled no. Gevo said the Court of Appeals should not have conducted such a broad de novo review.

“In this case, the district court conducted a painstaking claim construction, carefully reviewing voluminous evidence and testimony presented by the parties, including detailed expert declarations, and held multiple days of hearings. The Federal Circuit gave no deference to those findings when it reviewed the district court’s construction de novo, and issued a new construction that changed the outcome of the case.”

More on the story

The Supreme Court’s docket for the case can be found here.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

January 28, 2015

Gevo: Isobutanol Lottery Ticket

by Debra Fiakas CFA

gevo logoThe last time renewable chemicals developer Gevo (GEVO:  Nasdaq) was featured in this forum in August 2014, the stock was looking quite oversold around $0.50 per share. The stock had recently taken a tumble after management sold 30 million shares of the company’s common stock at $0.60 a share at the end of July 2014.  The plan was to use the $19 million in new capital to upgrade a production plant in Minnesota to better produce renewable isobutanol along with ethanol fuel. 

Isobutanol is a popular solvent used widely in industrial applications.  It is most commonly produced from by-products of refined crude oil and users are keen to get their hands on renewable sources to reduce their carbon footprints.   At the time Gevo out raising capital the company was aiming to get to a goal of one million gallons in annual isobutanol production by the end of 2014, and then ramping to three million gallons in annual production in 2015. The plant in Minnesota had already been producing eighteen million gallons of ethanol each year.

Today GEVO appears even more oversold, having slipped to $0.29 per share. Directly after the common stock sales, the company raised another $26.1 million through the sale of a note to single creditor.  By the end of September 2014, only $14.0 million in cash remained.  If Gevo continued using cash to support operations and capital spending at the same rate it had been spending in the first nine months of the year, I estimate they used another $11.0 million in cash by the end of December 2014.

If I am correct in my back of the envelope bank account balance, things cannot be very comfortable at Gevo.  The company is still not selling either its ethanol fuel or isobutanol in bulk despite new customer relationships such as Brenntag Canada, which is buying Gevo’s renewable isobutanol for use in a range of solvents and specialty chemicals.  There are apparently no minimum purchase commitments and the company was tight lipped about order quantities except to say the orders can be filled with ‘truckloads’ of isobutanol.

Last week Gevo management issued a press release detailing its plans to improve cash flow at the company.  There will be a headcount reduction by 40%.  That will eventually save some hard cash in the coming quarters.  Gevo’s CEO is taking 25% of his pay in stock rather than cash, a move which in the end is probably more symbolic than anything.

Of course, the press release is also embroidered with the usual Gevo-style promises of new technologies to use ethanol for various end-products.  As part of the plan to save in operations, the company is planning to shift to ethanol-only production in all four of the fermenters in its Laverne, Minnesota plant.  Here is apparently where the new technologies figure into the picture.  The company claims to have already filed patent applications to cover new technologies for the use of ethanol as feed stock for hydrocarbons, renewable hydrogen and other chemical intermediates.  Gevo appears poised to capitalize on the dearth of renewable hydrogen for fuel cells and renewable polyprolylene for packaging and automotive components.

The CFO claims they can bring the monthly use of cash for operations down to $1.5 million to $1.8 million, compared to $2.8 million in 2014.  This figure of $2.8 million per month in cash usage in 2014, differs from my calculation of $3.6 million in cash usage noted in the paragraph above because I was using cash flow from operations in the first nine months of 2014 as my gauge of how much cash the company was spending each month to keep the doors open.

When Gevo was out raising new capital in the summer of 2014, management had promised to achieve breakeven by the end of the year.  That goal may not have been realized.  However in the recent company update, management lays claim to having reached its production goal for isobutanol of 75,000 gallons per month.  Now that seems to be a bit short of the one million annual product capacity as that implies 83,333 gallons per month.  Most investors will probably not quibble over the 8,000 gallon shortfall if the company could produce more sales – even sales by the truckload!

GEVO still looks more like a lottery ticket than a stock as we noted in our last article on the company.  What is worse, the balance sheet now looks stressed.  The company has let a number of people go and along with them they have probably lost some important process knowledge that at times can be even more vital for a company than its patented technologies.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

December 14, 2014

Biofuels' Upside From $60 Oil

Jim Lane

Boom times for two-product strategies? Can feed markets offer relief for the challenges on the fuel side?
$60 Oil

The energy industry continues to feel the impact of falling energy prices. In Wednesday’s Top Story, we noted that the industry conversation has shifted from long-term fundamentals to a form of “oil price watching” — not even the short-term fundamentals, but the kind of paralyzed ticker watching, waiting for the bottom, that comes during stock market crashes.

“Barron’s says oil is going to $35bbl,” writes a trusted Digesterati. “The same guy who predicted the 2004 and 2009 lows.”

Well, we haven’t seen the argument made for that low-point — perhaps there’s evidence in the options market — but it’s evidence that we’re seeing ticker-watching.

Besides behavioral change, we’ve seen three types of fallout in the hard data:

a. Layoffs and assets sales announced by major energy companies, including BP, Shell and Chevron.

b. ConocoPhillips just issued its 2015 capital budget of $13.5 billion, “a decrease of approximately 20 percent compared to 2014″. ConocoPhillips notes that the cuts strongly reflect ” the deferral of spending on North American unconventional plays…In 2015, the Lower 48 development program capital will continue to target the Eagle Ford and Bakken, and will defer significant investment in the emerging North American unconventional plays, including the Permian, Niobrara, Montney and Duvernay.”

CEO Ryan Lance said “We are setting our 2015 capital budget at a level that we believe is prudent given the current environment.”

c. Rising gasoline sales. Low prices have stimulated a modest but trackable rise in consumption, despite increases in vehicle fuel economy. EIA said in September that the “short-term forecast of gasoline consumption” has risen to “8.82 million barrels per day (135.2 billion gallons), 0.13 million barrels per day (2 billion gallons) higher than last November’s forecast.”

In the December short term forecast released this week, the 2014 forecast was revised to 8.88 million barrels per day, while actual November consumption rose to 9.04 MBD, up from 8.94 MBD in 2013 and 8.48 MBD in 2012. Overall, gasoline consumption grew 1.9 percent in 2013 and 0.5% in 2014.

The uncertainty in prices going forward.

In Wednesday’s Top Story, we discussed at length the fundamentals driving uncertainty in forward oil prices, but we’ll add here that the EIA, in the December Short-Term Energy Outlook released Tuesday, forecast “$68-per-barrel average Brent crude price in 2015 (and $63 for West Texas Intermediate) while recognizing high price uncertainty,” which you can contrast with:


EIA Forecast from December 2014

a) The $35 Barron’s forecast for the new low; or b) The EIA’s previous forecast of $102 for Brent and $95 for WTI just 3 short months ago, which as of this morning was still proudly displayed on the agency’s website front page.


EIA Forecast from September 2014

We continue to point attention to what we described as a “competition between storylines,” for those who wish to divine the oil price for 2015 at this time.

The opportunities in $60 oil

In looking at the fundamentals driving oil prices (amidst other factors), one of the Digesterati writes this week with a good reminder to focus in on the opportunities that comes with low-priced oil. Namely, in a world where unconventional plays become unprofitable, the opportunities for technologies that make a feed and a fuel product. A friend writes:

I’ve attached an index graphs [comparing the crude oil, soymeal and fish meal price] which makes crude look better than it would be if the data were through November/December 2014 (the data from stopped at October 2014 at $83/bbl crude oil).


What this helps me see is that, as the price of crude oil / energy further uncouples from the price of fishmeal and soymeal, the opportunity for those companies whose primary products are feed/food/protein is great and getting even better with every dollar reduction in the price for crude oil.

Soymeal seems to trade in more sympathy with crude oil, even now, but fishmeal hasn’t for some time, as the data indicate to me.

So this obviously plays into the strategies that focus on making Omega-3s and, later, protein/feed the primary product, but with strains that make meaningful volumes of crude oil that can be refined into biofuels.

This strategy, in particular, plays into the algae market — where proteins are aiming to compete with fishmeal. In the case of algae, the opportunity to use algae oil for the biofuels market gives the volume by which an algae operation can reach meaningful economies of scale — omega-3s and other products just can’t make the enterprise big enough to capture the potential rewards seen in the fishmeal market.

Over in the ethanol markets

The same logic applies. Although fuel ethanol prices have dropped fast, in keeping with the overall drop in petroleum prices, we are seeing RIN prices on the rise — as rising gasoline consumption obviously doesn’t square with the kind of production slow-down that low ethanol prices generally result in. At the same time, ethanol producers (and biodiesel producers) have a secondary product (dried distillers grains and glycerine, respectively) to take some of the sting out of low energy prices.

The hard data?

Here’s a chart of commodity prices, contrasting September 10, 2014 with December 10, 2014: BD-TS-121214-9 As you can see, a massive drop in gasoline futures, nearly 35 percent. But we don’t see the same fall in ethanol future, which are off, but by a comparatively minor 6 percent. Interestingly, ethanol spot prices are up nearly 7 percent in the same period. Though, in bad news for ethanol producers, corn prices have spiked 14 percent since the fall — though still below $4.

At the same time, some other ethanol fundamentals have modestly improved over the past few months. For one, natural gas prices have dropped 5 percent, making it less expensive to run ethanol plants and in particular to dry out distillers grains. Meanwhile, corn oil and distillers grains spot prices have risen, by 10 and 7 percent, respectively.

A two-product strategy looks pretty good — in fact, overall prices for ethanol producers would be up something around 7 percent in this period — compared to a catastrophic fall in gasoline futures. Challenges in fuel prices can be partly mitigated by prices for co-products.

Note on methodology — state data is averaged but not weighted for DDGs— so, for example, Iowa’s prices are given the same importance that Michigan’s are, which could lift DDG prices a percent or two above a true weighted average. Ethanol, corn oil, corn prices, ethanol futures, natgas futures and RBOB gasoline futures are not affected in this way.

The Bottom Line

Our friend writes:

“It would obviously be good to see crude oil prices higher, but, to the extent that fishmeal & soymeal and other protein sources continue their march upward asymmetrically to crude oil, it’s not necessarily a bad thing for the price of crude oil to stay persistently under $100/bbl. One could still get to energy scale and be competitive with the going price of crude oil (no premium to the market price), and make profits, all without a subsidy.”

A two-product strategy is no guarantee of good times during period of rapidly falling energy prices. But it is a hedge, and a solid one based on the data we’re seeing. And unexpected good news, perhaps, for those watching the falling ticker and the tumble in oil prices.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

December 10, 2014

What $60 Oil Means For Biofuels

Jim Lane

$60 Oil As if tough financing conditions and policy instability weren’t worrying enough for many observers, along comes a crash in global oil prices. One of the US-based Digesterati writes:

“Most of the biofuels projects that I have worked on in the last 5 years have based their proformas on an $80/barrel oil price. With the recent dip and worldwide “power play,” I feel that investors as well as Boards of Directors will be really re-evaluating their business models, with most going overseas to markets that do not have the abundant reserves that we do.

“If we can make biofuels at a competitive price at $60-$70/barrel, they will be the big winners but I don’t see that happening. I feel that chemicals will be the big winners right now. I am working on a couple of feasibility studies around biofuels and it is hard for me to come up with an independent conclusion that will be credible, too much US political risk, economic risk, and international political risk.”

Another of the Digesterati forwarded this summary of an MIT Review article:

“According to Wallace Tyner, an agriculture and energy economist at Purdue University, all cellulosic ethanol plants were planned for oil above $100 a barrel, and since now it’s at US$70, they are no longer profitable and new plants simply won’t get built. Updated requirements are expected from the EPA early next year. If the mandates are repealed, says Tyner, “then cellulosic biofuels and biodiesel would cease to exist.”

Many are asking — why are oil prices so low? Is this the new normal — an extended period of months, or years, at these levels? Will they return to $100 or so any time soon, when, and what will be the trigger?

Let’s look at the data, and look behind the data, also towards the world of market sentiment and behavior.

Why are oil prices so low?

According to those who believe in orderly, rational markets based on broad and deep consideration of available public information, generally we are seeing commentary around three converging factors:

a. Currency and monetary policy. Succinctly put, the dollar is appreciating fast against world currencies, oil prices are dollarized, meaning that energy prices are rising quickly in local currencies, which softens demand. While, at the same time, producers of energy have costs in (devaluing) local currencies, but see revenues in (revaluing) dollars — meaning that they are not always economically incentivized to cut production as fast as you think, as margins can be altered by currency moves.

b. Global growth. China’s growth is slowing, the EU is in rough shape, and the US is somewhere between sluggish and fine — put together, the three trigger promoting a downward revision in a number of commodity prices.

c. Supply/demand. While demand drops with a slackening in growth, we’re seeing no cutback in OPEC production, and US production from shale oil has been continuing to accelerate, creating an oil glut.

The “rational market” turnaround timeline? Nothing soon, if you watch futures prices as an indicator of when tightness might return to the oil markets and boost prices.

Today, the WTI Jan 2015 contract is trading at $65.17 and the Jan 2017 contract is trading at $70.88 — that’s roughly the impact of inflation. The Jan 2015 Brent contract is trading at $69.07 and the Jan 2017 contract trades at $78.79 — not much more than inflation.

What’s the impact for biofuels? 5 Factors to Consider for the Long and Short Term

A. The sweet spot problem. Generally speaking, biofuels work best in a sweet spot that’s somewhere around $80-$95 right now. Much lower — as our Digesterati friends expressed, the projects don’t pencil out, can’t compete against oil prices, and it is just tough to get bankers excited . Much higher? Capital heads for unconventional oil plays. But in the $85-$90 range there aren’t quite so many great US shale options, and many biofuels projects can compete on price. That’s the sweet spot argument. Right now, biofuels have been falling off the lower end — but, according to this line of thinking, the market doesn’t have to return to the days of $120 Brent for the biofuels outlook to improve.

B. The long-term outlook. The long-range energy outlooks have been less excited about the capability of existing oil technology to meet growing global energy demand, without a robust alternative fuels component. The IEA, for example, sees around 11 million barrels per day in total oil production growth — not enough to prevent sharp price increases given the likely global growth over the next 20 years.

Last year, the IEA opined:

The capacity of technologies to unlock new types of resources, such as light tight oil (LTO) and ultra-deepwater fields, and to improve recovery rates in existing fields is pushing up estimates of the amount of oil that remains to be produced. But this does not mean that the world is on the cusp of a new era of oil abundance. An oil price that rises steadily to $128 per barrel (in year-2012 dollars) in 2035 supports the development of these new resources, though no country replicates the level of success with LTO that is making the United States the largest global oil producer…by the mid-2020s, non-OPEC production starts to fall back and countries in the Middle East provide most of the increase in global supply. Overall, national oil companies and their host governments control some 80% of the world’s proven-plus-probable oil reserves.


C. The feedstock problem. Will biofuels feedstocks track the oil market and keep biofuels competitive? Within a limited range of price shift, oil prices and (for example) corn prices are reasonably well correlated — but when you have a $30 drop in oil in a short period, there’s a disconnect, and right now biofuels feedstocks such as corn have fundamental food-supply price support that is keeping corn prices near $4.00 and soybean oil prices near $0.32 per pound. So, there’s a fundamental gap between biofuels prices and petroleum prices that is tough to close. And, feedstocks such as MSW which are available at negative cost based on social concerns (e.g. “no more landfills!”), don’t generally track with short-term oil prices.

D. The long-term project challenge. As Abengoa CEO Manuel Sánchez Ortega opined in Kansas in September, Abengoa isn’t looking at short-term prices and demand factors to make decisions about 30-year projects. They are looking at long-term prices and demand.

E. The increasingly short-term nature of RFS targets in the US, and EU 2020 targets. The RFS offered a conceptual 15-year time window for project developers back in 2007 as to market size and growth. Leaving aside the short-term problem that it is December and the EPA has not issued its volume obligations for 2014 yet, we only have a 7 year timeline going forward for advanced biofuels projects. That begins now to seriously impact the ability of companies to see long-term price and demand signals. Shell has been emphatic on the need for longer-range biofuels mandates.

The Conventional Wisdom

So, where are we, in terms of understanding a “rational market” for biofuels? We can see two Storylines — the short-term and the long-term. And, one more that lies beyond “rational markets’ that we’ll get to in a minute.

The short-term Storyline was well summed up by our Digesterati friend: the projects don’t pencil out, can’t compete against oil prices, and it is just tough to get bankers excited, and not much will turn around here until at least 2017.

The long-term Storyline is well summed up by Abengoa and Shell. The long-range outlooks show tremendous opportunities across the fuels spectrum — demand and price outlooks are strong, particularly in diesel and jet fuel. Unconventional oil growth rates are uncertainties, and RFS2 targets too — but overall, the projects will likely be financeable so long as feedstock prices stay in line.

So, what’s the third option? The third option is that what we are seeing is a competition between multiple Storylines — not only short-term and long-term outlook, but food vs fuel, indirect land use change, will carbon outcomes be incorporated into energy prices, and the proper risk tolerance for government in commercializing alternative energy, to name a few.

According to that way of thinking, what is far more important to discover is not what the market fundamentals are all about, but how that battle between Storylines will shake out, and when.

For example, you could not have bought a $65 contract for Jan 2015 West Texas Intermediate two years ago — conventional wisdom was wrong about late-2014 energy prices, but decisions about projects today are being made on the basis of conventional wisdom about energy prices in 2017-18, and beyond, not the reality. So, we are not looking necessarily at hard markets in commodities; when it comes to project decisions, we are actually looking more at markets in “Conventional Wisdom”.

And Conventional Wisdom has the considerable power to move prices and markets, but it also has the power to be completely wrong, too.

For example, the market did not price in the Global Financial Crisis of 08/09 into energy futures, until the crisis was apparent. Neither did the markets forecast 9/11. Markets do not have to be right about the future to hold power over it.

Game Theory and Biofuels

“In mathematics you don’t understand things. You just get used to them.” ― John von Neumann

Let’s look at the nature and dynamics of Conventional Wisdom via a quick game.

Let’s say that, next year, here at The Digest we offer a prize to all the readers who correctly select the #1 Hottest Company in Biofuels, as voted in our annual rankings. Note, this is not the price for selecting “the best “company, but “the #1 ranked” company

There’s a couple of ways to play the game. First, you could simply make selections based on your perception of merit. A more sophisticated way to maximize your chance of winning a prize would, instead, be to focus your attention of figuring out what most people believe constitutes merit, and base your selection on what most others would believe.

But, then, consider that other voters might be thinking the same thing you are — that they are all, at the same time, trying to figure out how to win a prize based on (simultaneously) guessing at everyone’s perceptions.

You may have recognized game theory, here, and in particular Keynes’s “Beauty Contest”. As Keynes wrote in 1936:

“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be.”

In his online journal Epsilon Theory, Ben Hunt has applied game theory in general to market behavior and recently to oil prices — and here is a recent example of his line of thinking to consider. It’s the best read we’ve had in a month of Sundays. Really fine work, on a number of levels. Where does game theory take us in considering oil prices? Hunt writes:

“When you’re not sure of yourself and you’re trying to figure out what consensus view to adopt, as likely as not everyone else is trying to do the same thing. In these situations it’s Common Knowledge – public signals that we all believe that we all heard, aka Narratives – that largely determines each of our individual behavioral decisions.

“My personal, entirely subjective view is that oil prices over the past 3+ months have been driven by 3 parts monetary policy to 1 part fundamentals…For at least this week and next my personal, entirely subjective view of the ratio of explanatory factors is going to flip to 3 parts fundamentals to 1 part monetary policy.

“That doesn’t mean that I don’t have strong ideas about how the world works, about how both monetary policy and fundamentals impact the price of oil. What it means is that it doesn’t matter what I think about the way the world works. The only thing that matters is what the market thinks about the way the world works, and in times like these the market will think whatever Common Knowledge says it should think. “

Applying this back to advanced biofuels, and recent oil prices.

Right now, the dominant Storyline is oil prices — not the fundamentals driving oil prices, but oil prices themselves. The Common Knowledge is that oil prices are low, and that no one exactly knows how low they will go, and so long as that Storyline dominates, it is going to be tough sledding for financing advanced biofuels.

But, take for example the $60M investment by the NZ Superannuation Fund into LanzaTech that was announced on Monday morning.

Clearly, not an investment decision driven by short-term oil prices. The decision was, as likely as not, driven by the very factors that NZ Super gave in their public statements:

a. Expansion capital, while a small part of their investment pie, is a good accelerator of returns for their superannuation fund, and they are committed to it.

b. LanzaTech, being within 24 months of a first commercial, with a global set of committed partners and investors and a good track run in the lab and at the demo plant level , is an appropriate candidate for expansion capital. While keeping in mind that not every Starbucks or Sears ever built with expansion capital was still around 10 years later.

c. The long-term outlook in energy is strong — the fundamentals are driven by industrialization in the developing world, and global growth everywhere.

d. Sufficient evidence for a market for alternative fuels — a combination of national agendas on security, social agendas on carbon, and the line-up of supply and demand on oil has led experts to conclude that there a long term opportunity for projects that can demonstrate they are competitive with $80-$90 oil in today’s prices.

The Battle of Storyline

At this point, you may find your mind rebelling against the idea that markets are driven by competitions between Storylines. Surely, you say, markets are driven by fundamentals. And you might prove your point by sending to me an elegant explanation of why oil prices have dropped $30+ in recent months, based on currency movements. Or, based on supply and demand fundamentals.

As Ben Hunt explained in his Storyline on oil prices, you’d both be right. There is a Storyline for each, all the way down to $65 oil. In fact, if you added up all the impacts from all the available (and cogently argued) Storylines to explain the drop in oil prices — you’d get easily all the way down to $0 oil.

Free energy! Energy is free! Free Gas! Spread the word!

Whoops. Oil isn’t free, and gasoline isn’t either.

Despite the Reduction in Ukrainian Tension Storyline, the Saudis Killing Off Shale Oil Storyline, the Good Nuclear News from Iran Storyline, the Finally Doing Something About ISIS Storyline, the China Hard Landing Storyline, the EU not Getting Better Anytime Soon Storyline, the Drill Baby Drill Storyline, and the Fracking is Energy Liberation for Everyone Forever Storyline. Not to mention the Ethanol Made it Happen by Capping US Demand Storyline.

Not that there’s anything wrong with any of those Storylines, or the sound economic analysis that often goes with them. They just add up to more than $35.

Which tells you that the oil price isn’t being driven by a Monster Storyline, or the Sum of All Storylines — but by the Market in Storylines, where one story dominates the trading sentiment as traders try desperately to understand what the market is thinking.

It is not the Storylines that are changing, but the mix has suddenly shifted from being dominated by the long-term to the short term Storyline.

And we see it here in Digest email.

We are definitely not being inundated with email from traders along the lines of “my thinking has changed to a short-term Storyline.” But we are seeing, as we have shared at the beginning of this column, that we are getting a bunch of communications along the lines of “we think that other people are thinking that other people think that the Storyline has changed to the short-term.”

Generally they replace “what other people are thinking that other people think” with “the market is obsessed with” or a link to a review article about what “the market is saying”— and they replace “the Storyline has changed to the short-term” with “the challenges of biofuels in a world of $70 oil”.

So, we get emails roughly saying “the market is obsessed with the challenges of biofuels in a world of $70 oil”.

Who do these shifts occur, and so suddenly?

First ingredient: The mathematics of group realignment. Well, consider how birds communicate — in mobbing attacks out of “The Birds” or in flying south for the winter — a change in circumstances that can be perceived as a threat, generates an openness to changes in thinking. Two or three birds start flying around, then five or six, then a couple of hundred. Finally a giant flock heads south. What you are seeing is the phenomenon of group thinking and realignment.

Second ingredient: the failure of “business as usual” to explain a new market fact. Example: 1993 Al-Queda bombing of the World Trade Center – explained quickly within the Big Story of Terrorism as understood at the time. Bad people do bad things. Buildings get bombed. But The World Trade Center Does Not Fall Down. That’s Business as Usual.

Then, there’s 9/11. And the dialogue changes, forever.

The Big Story Around Monetary Policy.

Consider this: Easy Money leads to Bad Mortgages Leads to Systemic Collapse of Too Big To Fail Banks, Which Tanks Global Demand, and Commodity Prices Collapse. That’s one way to explain the Storyline of 2008/09 – if not the actual events, and it’s one of the reasons that we didn’t fret over the collapse of oil prices in 2008/09 with respect to biofuels, nearly as much as now. The GFC was seen as the outcome of bad monetary policy – Easy Money.

Believe me, the drop in 2008/09 commodity prices was far more dire than today’s, and tanked a lot of biofuels companies right into bankruptcy. But not so many people fretted about “the end of cellulosic biofuels” then, as now.

Why the Change?

So, let’s turn to the problem of the Storyline of Global Monetary Policy.

Right now, no one can figure out the Fed. The US dollar is rising, despite US long-term focus on a weak dollar, and the interest of the rest of the world in maintain stable energy prices. And maybe you can explain to me the Big Storyline that explains the Downshift in Central Bank Liquidity Operations in the US, vs the Uptick in Central Bank Liquidity Operations in the EU and China.

And, when there’s an uncertainty in the Fed Storyline just as material changes in markets happen, that’s when traders start to think that maybe everyone else’s thinking has shifted. So, are we seeing commodity markets move because there isn’t a dominant way to understand Global Monetary policy at the moment – that the Fed has been struggling to maintain a storyline?

We think so.

Ultimately, the Fed will make its move, and we’ll see the dollar head down, and with that, we’d expect to see pressure on oil prices to rise. And you may find at that point that energy markets get re-focused on the long-term Storyline. Those long-term fundamentals are still out there.

When? Could be a while. A tool for predicting shifts in market sentiment, timing and intensity, doesn’t yet exist. That Might well be the 12th Nobel from a game theorist, when we get that. Between now and then, there’s an arbitrage between the values seen in the marketplace today, and those we will see when the market re-focuses on the long-term energy scenarios. An arb that groups investing for the long-term might well be capturing now.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

November 28, 2014

Highlands EnviroFuels Wants Gevo's Isobutanol Tech For Florida Plant

Jim Lane

gevo logo Plant to convert sugar cane and sweet sorghum to 20-25 million gallons per year of Isobutanol

From Colorado, Gevo (GEVO) announced that Highlands EnviroFuels has signed a letter of intent to become a Gevo licensee to produce renewable isobutanol.

Highlands will build a commercial-scale “Brazilian-style” syrup mill in Highlands County, Florida, which would have a production capacity of approximately 200,000 metric tons of fermentable sugar per year. The facility will process locally grown sugar cane and sweet sorghum to a high quality syrup as a clean sugar stream for fermentation and recovery of isobutanol. The isobutanol plant would be bolted on to the back-end of the syrup mill and have a nameplate capacity of approximately 20-25 million gallons per year.

The US cane background

You might ask yourself, since the US has some extensive cane-growing areas in Hawaii, Florida, and Louisiana — and since sugarcane ethanol has been so successful in Brazil, what gives with US sugarcane ethanol? The answer lies in protected pricing — sugar has been historically protected in the US, and the price thereby has been substantially higher than, say, Brazil or Mexico, but strict quotas on imports have ensured a market but one that generally is only affordable for food sugars, not fuels.

A number of ventures over the years have come close to announcing a project based around sugarcane bagasse, energy cane, or other like assets in Florida. Coskata had an announced project that never quite got over the line. BP Biofuels had its first commercial project targeted for the Okeechobee region in south-central Florida, though focused on energy crops.

The Highlands background

Highlands has been in development for quite some time. Back in 2010, we reported that Highlands EnviroFuels said that it proceeding with plans to construct a 30 Mgy ethanol plant in Highlands County using sweet sorghum and sugar cane as a feedstock. The project will also produce 25 MW of green power, and the company said that it has signed LOIs with growers representing 48,000 acres of production to provide feedstock for the plant.

By fall 2011, we reported that Highlands EnviroFuels received its PSD Air Construction Permit from the Florida Department of Environmental Protection, authorizing the construction of a 36 million gallon per year Advanced Biofuel ethanol production plant in Highlands County, Florida. By then, the project had also expanded its power gen, moving to 30 megawatts of renewable power from residual cane and sorghum stalk fiber and leaves, known as “bagasse”. At the time, groundbreaking was targeted for Q2 2012.

There’s a lot of economic opportunity in the project. A study in 2011 concluded that plant would provide $51 million of GDP for the Highlands County economy and nearly $44 million in household income annually. In addition, the economic activity generated by the plant will support up to 60 full-time, high paying permanent jobs, and nearly 700 indirect and induced jobs in all sectors of the county. The study also estimated that the one-time construction impact will account for $47 million of GDP for Highlands County, generate more than $39 million in household income. Overall, the project received $7 million in support from the Florida Farm to Fuel fund as well as a $305,000 grant from the Florida Energy and Climate Commission.

The switch to isobutanol

Why make a $2 fuel when you can make a $4 fuel or chemical? That’s the question that, presumably, Highlands answered for itself in opting for Gevo’s isobutanol model — although we may well find that the proposed Highlands plant may utilize the Gevo side-by-side production approach to give itself the flexibility to produce both ethanol and isobutanol.

Reaction from the principals

“We believe the probability of success increases significantly by transitioning the project from ethanol to isobutanol,” Brad Krohn, President of Highlands, told The Digest. “given the tremendous market optionality for isobutanol (marine fuel, paraxylene for bio-PET, renewable jet fuel production, or chemicals). Not to mention isobutanol for gasoline blending does not suffer from the current blend wall as does ethanol. Nothing is yet binding with Gevo, but we are excited to be moving in this direction. We are eager to finalize the details of a binding agreement so that we can start constructing the facility.”

Pat Gruber, Gevo’s Chief Executive Officer, said, “We are very pleased to be working with Highlands and having them join Gevo as a licensee. This new partnership shows the flexibility of Gevo’s GIFT technology to convert a wide range of sugar sources into isobutanol. It also continues to validate the interest in licensing our intellectual property portfolio as we look to transition our business to focus more on a licensing model.”

The Bottom Line

LOIs are not hard contracts — and we’ll see how far this goes, it’s been a tough row to hoe for Highlands EnviroFuels in translating project ambitions into steel in the ground — and Florida repealing its own in-state E10 RFS last year didn’t help much.

Nevertheless, as the principals indicate, isobutanol gives the project some upside on the revenue side, and it’s been tempting and popular country for a number of project developers over the years. The combination of sweet sorghum and isobutanol might be just the sweeteners the project needs.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

November 17, 2014

Gevo Finds A Way

Jim Lane

gevo logoLike Rocky Balboa, no matter how many punches they take, Gevo [NASD: GEVO] just won’t fall over. In fact, the company’s prospects have brightened considerably in recent months — is the company “gonna fly now”? How and why is success on the horizon?

For most of its history, Gevo has looked like a long-shot — a company aiming at making high-value, bio-based butanol, mostly from corn sugars, via retrofitting its exotic bug into ethanol fermenters.

The opportunity is pretty simple to understand. Isobutanol sells for around 60 cents a pound, sugars check in at 16 cents a pound. If you can make the yields work, the upside is pretty good.

Of course, you have to get the butanol out of the broth before it reaches a point of concentration where it kills the magic bug — if you’ve splashed some rubbing alcohol on a wound to kill unwanted microbes, you’ll understand right away why an alcohol like butanol is deadly to Gevo’s modified yeast biocatalyst. So that’s part of Gevo’s portfolio of magic, a GIFT system for separating butanol out of the broth, that was so deft it felt like it was right out of Hogwarts:

Bacterium de-brothemus divisium!

Voila, a batch of butanol and all those magic bugs, separated out. Step right this way to clang the NASDAQ bell after your monster IPO, please.

It sort of worked out that way. The company raised a whole bunch of capital, recruited a team of notables and worthies, bought an ethanol plant that was too small to make money any more for a technology demonstration at scale, and navigated an IPO.

Then the butanol hit the fan.

Two problems beset Gevo even before the ink was dry on its IPO registration: a debilitating battle over intellectual property with DuPont, and an infection in the ethanol plant that was about as welcome to Gevo’s microbe as the ebola virus.

So beganneth Gevo’s long descent into a seemingly perpetual winter. The cash burn began to require ever-more dilutive capital raises.

“You have to hand it to [CEO] Pat Gruber for finding a way to keep going,” wrote a longtime reader in essaying Gevo in a private note last month.

For some time, it has looked grim, as the costs of litigation have stacked up, and not every battle has gone 100% Gevo’s way in the courts (though no knockout punches have been recorded by either party). Meanwhile, that little ethanol plant that didn’t make any money became an isobutanol plant that didn’t make any money. So, plans emerged to have it retro-retrofitted to make either ethanol or butanol, depending on which one offered a better return.

Which sounded to critics like a whole lot of optionality on the road to not making any money.

But then.

Against all odds

In its Q3 earnings announce, Gevo reported a net loss of just $200,000 on $10.1 million in revenue — compared to a loss of $15.9 million on revenues of $1.1 million for Q3 2013.

What? Where’s the funeral, the undertaker, the mournful relatives and investors dropping their share certificates onto Gevo’s coffin like flowers on a casket?

Gevo commented: “The increase in revenue during 2014 is primarily a result of the production and sale of approximately $9.2 million of ethanol and distiller’s grains following the transition of the Luverne plant to the SBS. During Q3, hydrocarbon revenues were $0.8 million, primarily related to the shipment of bio-jet fuel to the U.S. military during the quarter. Gevo also continued to generate revenue during the third quarter of 2014 associated with ongoing research agreements.”

It’s not all good — the company did not generate positive cash flow, and warned that it expects, ahem, “an increase in expense associated with its ongoing litigation with Butamax Advanced Biofuels,” — another way of saying that the lawyers are rolling through the dollars about as fast as they did in Jarndyce v Jarndyce, the case that ruined nearly every life it touched in Charles Dickens’ masterful Bleak House.

But there were a number of operational highlights: In Q3, Gevo decreased the plant-level EBITDA loss for the quarter by almost 70% as compared to Q1 2014, and has managed to double the isobutanol batch sizes and cut the batch turnaround times in half — and has been seeing prices of $3.50-4.50 per gallon from isobtuanol sales, as well as some revenues beginning from selling iDGs, its branded animal feed product from the isobutanol side of the Luverne plant.

Gevo’s Take

“Even before purification, isobutanol purity levels have been at 95%, excluding water, which has exceeded our targets. At the same time, isobutanol production costs continue to improve, and importantly, based on Luverne data, we can see that our long-term isobutanol production cost targets remain achievable with incremental process improvements. The team at Luverne has done a very good job implementing the SBS, moving down the isobutanol learning curve while successfully operating the ethanol side of the plant,” said the ever-optimistic CEO Pat Gruber.

But he had some friends in the land of Wall Street, which of course has been known to invest in some Hogwartzian enterprises from time to time, but when it comes to singing choruses of “Stand by Me”, rarely sticks with anything except the real thing for more than a few quarters.

Encouragement from the Street

Piper Jaffray’s Mike Ritzenthaler now has the stock (trading at sub-50 cents) price targeted at two bucks. He writes:

We maintain our Overweight rating and $2 target on shares of GEVO following a 3Q print which highlighted continued, steady technology improvements – suggesting that the company is on track to exit FY14 with the Luverne facility at cash break even, and poised to transition more ethanol fermenters to isobutanol in FY15.

“Higher than expected purity levels, reduced batch turnaround times, and a steadily increasing rate of isobutanol production should enable a run-rate of ~100k gallons of isobutanol per month. Turning to FY15, we see the potential for further cost cutting measures to further slow the cash burn, although we also note the probability of additional capital infusions as the company moves toward corporate-level EBITDA break-even.”

Ritz adds: “The most important takeaway on the technology front, in our view, is the high purity level of isobutanol production which should help drive production/tolling costs down. Combined with other improvements (such as lower cycle times and higher productivity) management was able to make and ship commercial quantities of isobutanol out of one fermenter at Luverne and is on track to hit a year-end run-rate of 50-100k gallons per month. Management reiterated on the call that ASPs for isobutanol are in the $3.50-$4.50 per gallon range, and while long-term economic targets are still in the distance, we think the company is sufficiently seeding markets needed to reach an inflection point in the business model in the 3-4 coming quarters.”

The Street is expecting one more dilutive cash raise between now and break-even — but the company is targeted for $66 million in sales, even in these days of falling commodity prices as China’s big economic engine grinds in low gear.

The Fast 500

Looking back, the growth is impressive. Just this week, Gevo was named on Deloitte’s Technology Fast 500, a ranking of the 500 fastest growing technology, media, telecommunications, life sciences and clean technology companies in North America. Gevo grew 1,146% during this period and was ranked 103rd overall but, notably, in the industry where it competes, Gevo ranked third out of all clean technology companies.

Bottom line, break-even at Luverne — and some welcome dollars from the ramp-up in production — appears to be on the horizon in 2015. It looks like Gevo has found a way.

Jim Lane Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

November 03, 2014

Earnings Season For The BioEconomy: Novozymes, Green Plains & Pacific Ethanol

Jim Lane 

In the first half of November we will be hearing from a slew of companies regarding Q3 earnings — but earnings season is well underway already, and we have good indicators from the likes of Novozymes, Clariant, BP, Pacific Ethanol and Green Plains about the overall environment for energy, speciality chemicals, industrial biotechnology — and specifically, biofuels.

Let’s take a look.

Novozymes-logoIndustrial biotechnology — robust growth at Novozymes.

Also this week, Novozymes (NVZMY) announced 9% organic sales growth for Q3 and 8 percent growth for the nine months of 2014 to date. The company is saying that growth is “broadly based” but highlighted that sales in Household Care and in the bioenergy business have been growing in line with expectations.

Outlook: In comments on the earnings call as reported by Seeking Alpha, CFO Andy Fordyce said that China “provides some headwinds” with “more competition” but described bioenergy as the “brightest star this year” with “23% organic sales growth” this year to date. Fordyne noted that the “U.S. ethanol market product is up around 10% this year so far” and alluded to “new innovation” in the “bioenergy pipeline” within the next six months.

SVP Thomas Videbæk highlighted the opening of celluloisc next-gen plants by Abengoa, GranmBio and POET-DSM as expected, but still great to see” and noted that upgrades at the Beta Renewables’ Crescentino “have started to contribute to higher production volumes” and that “Capacity utilization is increasing” while hailing Italy’s 1% advanced biofuels mandate. But Videbæk said that Crescentino is not yet running at full capacity though Novozymes remains “confident we’ll get there.”

He added that it has been “a significant ramp of time for Crescentino” and stated that “we certainly hope that the other ones will be able to do it faster.”

In looking at the company’s planned target of 15 biomass conversion plants by 2015, Videbæk described the target as “a very challenging and ambitious target” but did not back down from the target, saying that “There’s no indication that this is no longer possible,” while conceding that “It’s not going to be a walk in the park.”

On the 15 by 17 target, CEO Peder Holk Nielsen added that “it’s going to depend a lot on how many new investments goes into these plants in 2015.” On E15, CFO Benny Loft commented that on E15, “we certainly must commit or say that it’s really difficult to see where the E15 – when it will come.”

On the impact of US elections, CEO Nielsen commented that “there’s some risk around the U.S. midterm election and that will create a different mood around bioenergy in the U.S.” He also said that the company is watching for “a potential slowdown in Europe and the emerging markets.”

green-plainsEthanol — big earnings growth at Green Plains

In Nebraska, Green Plains (GPRE) announced its financial results for the third quarter of 2014. Net income for the quarter was $41.7 million, or $1.03 per diluted share, compared to net income of $9.4 million, or $0.28 per diluted share, for the same period in 2013. Revenues were $833.9 million for the third quarter of 2014 compared to $758.0 million for the same period in 2013.

During the third quarter, Green Plains had record production of 246.9 million gallons of ethanol, or approximately 96% of its daily average production capacity. Non-ethanol operating income from the corn oil production, agribusiness, and marketing and distribution segments was $22.2 million in the third quarter of 2014 compared to $14.2 million for the same period in 2013. Non-ethanol operating income for the nine-month period ended September 30, 2014 was $79.9 million compared to $52.7 million for the same period in 2013.

Revenues were $2.4 billion for the nine-month period ended September 30, 2014 compared to $2.3 billion for the same period in 2013. Net income for the nine-month period ended September 30, 2014 was $117.3 million, or $2.90 per diluted share, compared to net income of $17.9 million, or $0.56 per diluted share, for the same period in 2013.

For the nine-month period ending September 30, 2014, EBITDA was $260.0 million compared to $92.7 million for the same period in 2013.
The earnings took Wall Street by surprise, with Zacks Investment Research reporting a consensus Street estimate of 89 cents — so a 12% beat. However, Zacks reported a consensus Street expectation of $987.2M, with the company dragging in $833.9M — so a 15% miss there. Obviously a huge swing in margin — 5% margin delivered compared to Street expectations of 3.7%.

CEO Todd Becker commented, “U.S. ethanol production margins continue to reflect strong demand, both domestically and globally. As a result of this environment, we are reaffirming our mid-year guidance of stronger earnings per share performance in the second half of 2014,” added Becker.

Green Plains had $414.3 million in total cash and equivalents and $167.7 million available under committed loan agreements at subsidiaries (subject to borrowing base restrictions and other specified lending conditions) at September 30, 2014.

peixConfirming the ethanol trend – Pacific Ethanol reports record gallons, big growth in revenues, earnings.

In California, Pacific Ethanol (PEIX) reported net sales of $275.6M, an increase of 18%, compared to $233.9M for Q3 2013. The company’s increase in net sales is attributable to its record total gallons sold resulting from increases in both production and third party gallons.

Gross profit was $18.0M, compared to $3.5M for Q3 2013. The improvement in gross profit was driven by significantly improved production margins and corn oil production. Operating income was $13.6M, compared to $1.0M for Q3 2013. Net income available to common stockholders was $3.7M, or $0.15 per diluted share, compared to a net loss of $0.40 loss per share for Q3 2013.

CEO Neil Kohler noted: “We delivered solid financial results for the third quarter of 2014, supported by efficient operations and continued strong ethanol market fundamentals.” CFO Bryon McGregor, added: “Since December 31, 2013, we increased our cash balances by over $51.1 million. As a result, our working capital increased to approximately $93.3 million from $51.2 million at the end of 2013.”

Jim Lane is editor and publisher of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

October 13, 2014

Earth to Cellulosic Ethanol: Glad You’re Here, What Took So Long?

Jim Lane 

Part I of II

Cellulosic ethanol arrives at scale — “The five years away forever” put to rest — but are there troubling waters still ahead? For whom, and why?

There’s a gigantic disconnect between two sections in the country as to whether the United States should be celebrating the success or the failure of cellulosic biofuels — biofuels made from crop residues, energy crops, and other feedstocks including municipal solid waste, and which feature a 60 percent or greater full-lifecycle reduction of greenhouse gas emissions compared to conventional gasoline.

The supporters

On the one hand are the supporters — including project developers, growers, the US Department of Energy, Department of Agriculture, several foreign governments (particularly in the EU) and supporters of renewable fuels.

They point to the growing number of commercial-scale biorefineries, and the reaching of cost-competitiveness with $100 oil, as signature achievements of the renewable fuels movement.

Many of the supporters will be gathered in Hugoton, Kansas next week for the official opening of Abengoa (ABGB) Bioenergy’s commercial-scale cellulosic biorefinery, which at 25 millions gallons of capacity will (for a period of a few months) be the world’s largest of its type.

Typical of supporter enthusiasm is this report from the Department of Energy:

In September 2012, conversion technologies were demonstrated at the National Renewable Energy Laboratory…where scientists led pilot-scale projects for two cellulosic ethanol production processes: biochemical conversion and thermochemical conversion. Both…demonstrated process yield and operating cost…At the biochemical pilot plant, cellulosic ethanol was produced at a modeled commercial-scale cost of $2.15 per gallon—a process that was approximately $9 per gallon just a decade ago. For the thermochemical pilot plant, cellulosic ethanol was produced at a modeled commercial-scale cost of $2.05 per gallon.

Beta Renewables

The detractors

On the other hand are ranged a number of detractors — oil companies, some environmentalists, skeptics of government R&D for renewables, and mandate-hating conservatives.

Typical of their critique is a report from Jonathan Fahey of the Associated Press that ran last November:

“As refineries churn out this so-called cellulosic fuel, it has become clear, even to the industry’s allies, that the benefits remain, as ever, years away…The failure so far of cellulosic fuel is central to the debate over corn-based ethanol…Ethanol from corn has proven far more damaging to the environment than the government predicted, and cellulosic fuel hasn’t emerged as a replacement…Cellulosic makers are expected to turn out at most 6 million gallons of fuel this year, the government says. That’s enough fuel to meet U.S. demand for 11 minutes…Corn ethanol…has limited environmental benefits and some drastic side effects…Despite the mandate and government subsidies, cellulosic fuels haven’t performed. This year will be the fourth in a row the biofuels industry failed by large margins to meet required targets for cellulosic biofuels….

“The Obama administration’s annual estimates of cellulosic fuel production have proven wildly inaccurate…supporters acknowledge there is almost no chance to meet the law’s original yearly targets that top out at 16 billion gallons by 2022…expectations were simply set too high. To attract support from Washington and money from investors, the industry underestimated and understated the difficulty of turning cellulose into fuel…

Fahey continues, “The industry was also dealt a setback by the global financial crisis, which all but stopped commercial lending soon after the biofuel mandates were established in 2007…Hundreds of companies failed that had attracted hundreds of millions of dollars from venture capitalists and government financing.”

You’ve come a long ways, baby

Part of the excitement around competitive-cost cellulosic biofuels is the magnitude of the effort and the achievement. Just a few years ago, the projected cost per gallon was $9.00. Just a few years ago, a kilogram was a tough quantity to find produced in the United States.

A problem of targets and language

One of the biggest confusions over the Renewable Fuel Standard is the language of the “cellulosic mandate”. It’s not much of a mandate, at the end of the day. Congress set a maximum target of 21 billion gallons of advanced (that is, no-corn ethanol) fuel by 2022, which included biodiesel, all other forms of advanced fuels that EPA qualified, and cellulosic fuels.

DuPont's Nevada cellulosic biofuels plant, as of August.
The core technology and fermenter units can be seen at center;
at left center, biomass intake; at left, storage and

DuPont’s Nevada cellulosic biofuels plant, as of earlier this year. The core technology and fermenter units can be seen at center; at left center, biomass intake; at left, storage and distillation

The maximum target for cellulosic was 16 billion gallons by 2022 — but it was specifically tied back to actual capacity levels, given that the fuel was, in 2007, only available in labs. EPA was required to reset the mandate each year to actual production volumes.

In other words, no production, no mandate. It’s not exactly right to say that the Congress “mandated” the blending of 16 billion gallons of cellulosic biofuels in 2022. It is true to say that Congress intended to mandate that, if the industry produced the volumes, Congress would require obligated parties (such as oil refiners and marketers) to blend the (competing) fuels into their petroleum fuels, or pay for waiver credits. Which is to say, if the detractors could come up with some way of frightening the heck out of investors and otherwise frustrate efforts to build capacity, the mandate would disappear.

Imagine an EPA mandate that says, in effect, “we mandate lower levels of arsenic and mercury in groundwater if someone comes up with a product to substitute for the one causing the arsenic and mercury problem. If no one produces a substitute, you can go on polluting.” Well, imagine the galvanizing impact on polluters. They could take the hard road of developing cost-effective alternatives, or the easier road of demonizing all the substitutes and thereby keeping them out of the market.

The Projection Problem

POET-DSM's Project LIBERTY under construction last winter.
The project opened to great fanfare this summer.

POET-DSM’s Project LIBERTY under construction last winter. The project opened to great fanfare this summer.

One of the difficulties relates back to the difference between capacity and production. What happens if someone builds a 10 million gallon integrated biorefinery that can make fuels or chemicals — and market conditions change radically mid-year to make either fuels or chemicals wildly more profitable or unprofitable?

A normal industrial response to changing commodity demand is to alter production – shift to a higher-value market, and tune up or down the volumes. At some times, it makes sense to idle or limit a plant’s production capacity — and definitely, industry will make $5 chemicals over $3 fuels every time, if the input costs are the same.

INEOS Bio New Planet Energy's 8 million gallon cellulosic
ethanol plant in Vero Beach, FL — also producing a healthy
stream of renewable power.

INEOS Bio New Planet Energy’s 8 million gallon cellulosic ethanol plant in Vero Beach, FL — also producing a healthy stream of renewable power.

Another problem. When is a plant market-ready, as opposed to mechanically complete? No plant operates at full capacity until it has gone through a commissioning period — and that can range from moths to several years as bottlenecks in a design are worked out.

Take for example Gevo (GEVO). It has four production lines, which can a) produce ethanol b) produce isobutanol for the fuel markets c) produce isobutanol for the chemical markets or d) be idled individually or in total because of input/output commodity price imbalances, commissioning troubles, or technology upgrades.

Cópia de GranBio_1_Crédito_Divulgação

The 21.6 million gallon per year GranBio project which just opened in Alagoas, Brazil.

So, EPA has the tricky job of projecting production volumes, as opposed to “mechanically-complete production capacity”. In the short-term, it will have troubles projecting production volumes from new plants that may intend to be in full production with, say, 6 months, but encounter more bottlenecks than expected. In the long-term, it has the problem of deciding how much fuel will be made for a domestic market, how much may be exported, and how much production capacity might be devoted to making higher-value specialty chemicals.

Industry’s optimistic timelines

The cellulosic fuels movement and industry probably didn’t help itself much back in 2007 when the first commercial-scale DOE grants were awarded to six projects.

The project and promise. “Abengoa Bioenergy Biomass of Kansas LLC received $76 million for a proposed plant in Colwich, Kan. The facility will thermochemically and biochemically produce 11.4 MMgy of ethanol from 700 tons per day of corn stover, wheat straw, milo stubble, switchgrass and other feedstocks. The project is expected to start construction in late 2008. Abengoa is also building a pilot-scale cellulose facility in York, Neb.”

The actual outcome. The project grew to 25 million gallons, shifted to Hugoton, Kansas from Colwich — and is opening this year after starting construction in late 2011.

The project and promise. “ALICO Inc. received $33 million for a 13.9 MMgy project in LaBelle, Fla. The project is also proposed to produce electric power, hydrogen and ammonia from 770 tons per day of yard, wood and vegetative wastes. Construction is slated to begin in 2008 with start-up in 2010.”

The actual outcome. ALICO backed out, their partners New Planet Energy stayed in and ultimately partnered with INEOS Bio. The partners shifted the project to 8 million gallons of ethanol and 4MW of renewable power in Vero Beach, FL, started construction in 2011, completed in 2012. The project remains in a commissioning period — which may possibly finish up by year end when equipment upgrading is complete.

The project and promise. “BlueFire Ethanol Inc. received up to $40 million for a proposed facility in southern California. The facility will be sited on an existing landfill and produce about 19 MMgy of ethanol from 700 tons per day of sorted green waste and wood waste from landfills. Construction is slated to begin in 2008.”

The actual outcome. The company (now known as Bluefire Renewables (BFRE)) has struggled to complete financing, and is still intending to build but has not yet commenced construction although site-prep work has been done and designs are in place. Ultimately, BlueFire shifted the project to Natchez, Mississippi and attracted a total of $87 million in grants when this project was re-awarded out of Recovery Act funds.

The project and promise. “Broin Companies received up to $80 million for its Project Liberty proposal. The company plans to add cellulosic ethanol production to its existing corn dry mill in Emmetsburg, Iowa. Construction is expected to begin later this year.” At the time Ethanol Producer observed, “The company plans to convert the company’s existing 50 MMgy Emmetsburg, Iowa, corn dry mill plant to also handle cellulosic feedstocks, mainly corn stover. The expansion is slated to take approximately 30 months and increase the facility’s capacity to 125 MMgy of ethanol.”

The actual outcome. The company, now known as POET, formed POET-DSM Advanced Biofuels in a JV with DSM, and opened the 20 million gallon Project Liberty this year in Emmetsburg,

The project and promise. “Iogen Biorefinery Partners received up to $80 million to build its proposed 18 MMgy facility in Shelley, Idaho. Iogen already operates a demonstration-scale wheat straw-to-ethanol facility in Canada.”

The actual outcome. The company ultimately abandoned the project. The Shell-Cosan JV Raizen broke ground last November on a $100 million, 10 million gallons first commercial facility in Piricicaba, Brazil that was expected to open by the end of this year.

The project and promise. Range Fuels was awarded up to $76 million for a proposed project near Soperton, Ga. The 40 MMgy ethanol plant would also produce 9 MMgy of methanol from 1,200 tons per day of wood residues and wood-based energy crops. Construction on the Khosla Ventures-backed project is expected to begin this year.

The actual outcome. The company and project ultimately failed, and the site was sold to LanzaTech, which maintains a pilot facility there to this day — although LanzaTech is focused at this point on developing its first commercial-scale capacity in China.

Some unexpected big wins along the way

The project and promise. Beta Renewables was not formed in time to compete for the 2007 DOE grants, or the round of grants announced under the Recovery Act in late 2009. Chemtex was developing a technology at the time, and ultimately formed Beta with investors Texas Pacific Group and Novozymes (NVZMY).

The actual outcome. The company opened a 20 million gallon commercial-scale facility in Crescentino, Italy in 2012, which is now operating at full capacity. The company has signed firm deals for new plants in China and Slovakia, and is developing a project on its own balance sheet for North Carolina. More licenses are expected over the next 12 months.

The project and promise. GranBio was not formed in time to compete for the 2007 DOE grants, or the round of grants announced under the Recovery Act in late 2009.

The actual outcome. The company opened a 21.6 million gallon commercial-scale facility in Alagoas state in Brazil this past month, which is currently the world’s largest. The company has announced plans to invest $724.5 million in five cellulosic ethanol plants during the next few years.

The project and promise. DuPont (DD) Industrial Biosciences (operating than as the JV DuPont Danisco Cellulosic Ethanol) either did not compete or did not win a 2007 DOE grant, or in the round of grants announced under the Recovery Act in late 2009.

The actual outcome. The company is expected to open what will become the world’s largest cellulosic ethanol facility in the world when its 30 million gallon, $200M Nevada, Iowa plant is completed by the end of December.

The project and promise. Enerkem’s Edmonton project was not legible for a DOE grant because it is in Canada — but it did pick up a grant for a future project in Pontotoc, Mississippi.

The actual outcome. The company just opened its first commercial 10 million gallon facility — which owing to trends in commodity prices, is currently producing methanol instead of ethanol. All of it, though, from Edmonton’s supply of municipal solid waste.

The tale of the tape

Six commercial-scale projects were originally envisioned by the DOE in 2007. Ultimately, we have four open, one more this week, two more by the end of the year, four in development, and ultimately a whole generation of new technology competitors with at-scale capabliities. One failed.

The timelines were not pretty. We’re seeing the real wave hit the beach in 2014, something like 5 years late.

Were the targets “juiced”?

According to a Digest source employed in a senior role at Iogen during 2007, when the EISA Act established the cellulosic targets:

“There was no way those targets were going to get met. We were the only company at the time that had reached demonstration scale, and we did not believe that we would be ready with a first commercial facility by that timetable. Knowing how long it takes to get to pilot and demonstration scale, a first commercial and then a fleet of new plants.

“Most experts agreed that we need until the mid-decade to really start ramping up capacity. And this was before the 2008-09 financial crisis and other factors causing slowdowns. We told everyone this, and originally the timetables and targets were much more conservative. But one prominent investor in the sector was far more bullish, called the more conservative targets “a joke”, and at some stage Congress became convinced that a more aggressive timetable was the right way to go.”

[Editor's note: The DOE timetables for first commercials in the 2007 grants indicated that 159 million gallons in capacity would have reached mechanical completion by 2010, with Iogen's 18 million gallons coming on-line after that — but only if all projects were financed and all were successful technologically. At the time, one of the six had reached demonstration-scale, and another one or two had reached pilot-scale. It is virtually impossible to imagine how the projects would have reached steady-state operations in 2011 without skipping a minimum-scale full demonstration step altogether. The absence of a proven demonstration at scale of the technologies would prove to be, in some cases — fatal to projects which proceeding to jump to scale prematurely — and a delaying factor in financing for the rest.]

How realistic were the targets and timelines given the state of technical readiness?

It’s easy to answer this one. Given the outcomes, the projects were real, the timelines were not.

For example, POET’s 2007 projections indicated a construction start in 2007 and and opening as soon as 2010. But the company only reached pilot-scale at Scotland, South Dakota in the 4th quarter of 2008 and began producing cellulosic ethanol in Q1 2009. Commercial biomass harvesting began in Q3 2010.

Now, realistic timelines and realistic projects are two different things. The United State originally hoped to invade France in 1943, 19 months after Pearl Harbor, and ended up staging Operation Overlord in June 1944, 12 months and 63% later than the original targets. The winning of the war was vastly more important than the timeline. And in the case of POET-DSM — the opening of the plant in 2014 is proof that the journey had a successful ending.

Which brings us to the problem of financing. As we’ll continue in PART II of this special report, which you can find here.

Jim Lane is editor and publisher of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

Earth to Cellulosic Ethanol: Glad You’re Here, What Took So Long?

Jim Lane 

Part II of II

Cellulosic ethanol arrives at scale — “The five years away forever” put to rest — but are there troubling waters still ahead? For whom, and why?

There’s a gigantic disconnect between two sections in the country as to whether the United States should be celebrating the success or the failure of cellulosic biofuels. Supporters and detractors alike saying that the wave of commercial-scale cellulosic ethanol refineries is a new wave in technology or the latest round in a wave of unimportant hype.

We looked at the supporters, the detractors, the problems of targets, the Projection Problem, optimistic timelines — and the question of whether targets were “juiced” - in part I, here.

Which brings us to the problem of financing. As we’ll continue in PART II of this special report.

The smoking gun: the failed loan guarantee program for cellulosics

Beta Renewables_Cellulosic Ethanol Deliveries_3

No one ever, ever thought that cellulosic fuels would get off the ground without a loan guarantee program. First-of-kind technologies are simply too risky for conventional project finance lenders and costs — and credit-card interest rates made the projects not economically viable.

So, DOE-backed projects — into which DOE would have extraordinary oversight and insight — weresupposed to have access to DOE-backed loan guarantees for their first commercial projects — which theoretically would allow them to zero out the project risk to the lender and allow them to tap conventional project finance at conventional interest rates — something like 4-7 percent. After the first commercial, the technology risk would be eliminated, and the companies could tap conventional project finance on their own — so went the theory.

Did DOE get a start on the program? Sure, In fact, it was not authorized under the 2007 EISA Act, one was originally established under the 2005 Energy Policy Act. By 2007, Ethanol Producer was reporting, “The DOE is also developing a loan guarantee program for cellulosic projects as authorized in the Energy Policy Act of 2005.”

As of today, the DOE has only two loan guarantees in its portfolio for this 1703 program — both for nuclear energy.

What happened?

Bottom line, of the 11 projects we outlined, only one received one of those DOE loan guarantees, and that one was not finalized until September 2011 — $132.4M for the Abengoa Bioenergy project. The INEOS New Planet Energy project and Range Fuels (ironically) received USDA loan guarantees. BlueFire has a conditional USDA loan guarantee commitment, but no lender of record yet. The rest of them had to find wealthy corporate backers.

Numerous projects attempted to attract DOE loan guarantees, and no dice.

A house oversight committee found that:

“DOE invested a disproportionate amount of its funds into solar technology leaving taxpayers vulnerable by overemphasizing a single technology. 16 of the 27 1705-backed projects employed solar technology – that represented 80 percent of DOE’s funds.”

And noted that:

“DOE has engaged in a disturbing pattern of suspending the approval of a credible project that adheres to all stated standards, only to later approve massive funding for a project proven to be nowhere nearly as far along in the process as DOE purported. DOE’s favoritism significantly harmed numerous companies that had relied on the promise of 1705 financing. The perception is that DOE actively misleads applicants about the status of their loan application, thereby encouraging these firms to misallocate capital, which has led to financial harm.”

Bottom line, financing woes have been the biggest cause of delay — primarily, the government’s inability to construct the loan guarantee program it knew would be needed for first commercials.

The Abengoa project that received funding was, in fact, the lowest-rated project in the DOE’s entire technology loan portfolio — receiving a CCC rating, which is rated as a “highly-speculative investment”. In fact., Abengoa was exposed to criticism in the House Oversight Report because of the Abengoa Bioenergy loan:

A single Spanish firm, Abengoa, received an aggregate $2.45 billion in loans and loan guarantees plus $818 million in Treasury cash grants.54 This reveals excessive risk and subsidies provided to a single firm via multiple subsidiaries. Abengoa has a credit rating of BB, which is considered Junk, thus making this concentration of investment in one company speculative and highly questionable. Exemplifying the risk DOE took in the case of Abengoa, the company managed to obtain a DOE loan commitment for the lowest rated project across the entire DOE Junk portfolio; Abengoa Bioenergy Biomass of Kansas received an extraordinarily low CCC rating and yet the DOE approved a direct loan to the project.

In a 2011 independent review of loan guarantees ordered by the White House, former Assistant Secretary of the Treasury, Herbert Allison, found:

” A lack of clarity in the lines of authority within the loan program office; A lack of clear guidance regarding DOE’s standard of “reasonable prospect of repayment;” and “A lack of clarity with regard to DOE’s goals and tradeoffs with respect to financial goals versus policy goals”

The crisis of innovative technology financing

The problem of the Loan Guarantee program is that it simultaneously required a “reasonable prospect of repayment” while at the same time focusing, in the language of the Energy Policy Act:

The Secretary may only make loan guarantees under §1703 for projects that employ “new or significantly improved technologies.” DOE’s implementing regulation defines this as an energy technology “that is not a Commercial Technology, and that has either (1) Only recently been developed, discovered, or learned; or (2) Involves or constitutes one or more meaningful and important improvements in productivity and value, in comparison to Commercial Technologies in use in the United States. . . .”

Common-sense tells us that energy technology “that is not a Commercial Technology” and has “Only recently been developed, discovered, or learned” or “Involves or constitutes one or more meaningful and important improvements in productivity and value, in comparison to Commercial Technologies” is by definition a first-of-kind project.


Common-sense also tells us that first-of-kind projects are not going to have “investment-grade” project ratings.

Fitch, the project finance rating agency, in commenting on the DOE’s newest round of loan guarantee funds, noted:

“The DOE will favor projects that may be unable to obtain full commercial financing due to perceived risks accompanying newer technologies. Eligible projects offering a catalytic effect on subsequent projects, which replicate or extend the innovative features of eligible projects, may also be favored. In determining which applicants advance, the DOE will assess whether a project provides a reasonable prospect of repaying all project debt, and whether available capital from all sources will be sufficient to carry out a project. No minimum credit rating is specified for this solicitation.”

‘Projects seeking funding must use new or significantly improved technology,” said Gregory Remec, Senior Director with Fitch’s Global Infrastructure Group.

The repayment problem in the face of feedstock and product price risk

What we are left with is this, that borrowers must provide:

“An analysis demonstrating that, at the time of the Application, there is a reasonable prospect that Borrower will be able to repay the Guaranteed Obligations (including interest) according to their terms, and a complete description of the operational and financial assumptions and methodologies on which this demonstration is based.”

Which isn’t much. The definition of “reasonability” is critical in the case of first-of-kind technologies, and was left so entirely vague that a DOE Loan Programs officer could rightly determine that repayment prospects could and should be entirely based on a Fitch rating where feedstock and commodity market risk would be heaped on biofuels — vs, say wind or solar that have free feedstock and fixed power contracts with utilities — and that left the financing of cellulosic biofuels in the lurch.

The First Lien Problem

Another critical failure in the Loan Guarantee program. Despite no specific language requiring this in the Energy Policy Act of 2005, the DOE Loan Program rules specified that:

‘‘[t]he [guaranteed] obligation shall be subject to the condition that the obligation is not subordinate to other financing.’ and that ‘‘[t]he rights of the Secretary, with respect to any property acquired pursuant to a guarantee or related agreements, shall be superior to the rights of any other person with respect to the property.’’

What does that mean, exactly? Comes down to interpretation. In this case, in 2007 DOE issued a final rule implementing Title XVII, and issued regulations which requiring a first lien security interest in all project assets as an incident to making a guarantee.

Now, if you’ve tried to get a home loan, and had a parent or relative guarantee the loan, you know that the guarantor is not going to wrest the first lien away from the bank. The bank remains first in line with a right to foreclose. It was a non-starter for many projects, all across the energy spectrum.

It was bad news for energy projects. As DOE itself reflected in late 2009, “nowhere does section 1702 itself require that the Secretary receive a first lien on all project assets as a condition of his ability to make a loan guarantee. Instead the statute requires only that the Secretary’s guaranteed obligation ‘‘not be subordinate to other financing.’’ In fact, section 1702 does not require that the lender or the Secretary receive any collateral as a statutory requirement for making a loan guarantee.

DOE reexamined the statute, particularly its text and structure, and now concludes that “A first lien on all project assets is better understood as one element that the Secretary may require for a particular project, but is not compelled by the statute to require,” and amended its rules. Pushing back the start date for many projects by almost four years.

Now, keep in mind that cellulosic targets were set to commence in 2011, just 13 months after the clarifications on the 1703 loan guarantee program. And the rules for the cellulosic provisions of RFS2 itself — the critical rules that would underpin any efforts commercially to build capacity to meet of those targets — were finalized by EPA in early 2010.

The impact of the rule problems

All this unsophisticated hoo-hah about “missed targets”. And, also, companies put the extra time to good use in developing more cost-effective technology and logistic operations. So, in the long-term the delay produced better technologies and more of them.

So — that’s the technology — but what about market access?

E10 saturation

One thing that supporters and detractors can agree on is that, in the United States, E10 (10 percent ethanol blends) have reached a saturation point, with around 13.5 billion gallons of ethanol blended into roughly 135 billion gallons of gasoline. The overwhelming majority of that fuel is corn ethanol — which has advantages in cost and availability over cellulosic fuels.

Ethanol vs gasoline, which costs less?

Today, in fact, on an energy basis, ethanol is so cheap that what was once a subsidized fuel — and criticized as such in some quarters — is right at parity with gasoline on an energy basis. As pointed out here, ethanol-free gasoline costs 10-15 cents more per gallon than E10 unleaded.

And there’s good reason for that. November ethanol futures were trading at $1.59 on the Chicago Board of trade, while the November RBOB gasoline contract was trading at $2.30. RBOB is blended with 10% ethanol content to make 87-octane regular unleaded fuel — with ethanol supplying an extra boost of octane.

What’s the market access debate over now?

Most of the debate focuses on where fuels go, past the E10 saturation point. That’s not the base for biodiesel or drop-in fuels — but for first-generation and cellulosic ethanol, and for obligated blenders, it’s the big issue on the table.

One option is E15 blending, which is now EPA-approved for vehicles made in 2001 or later. But adoption rates have been cruelly slow — a handful of outlets offer E15. Opinions differ on whether that reflects petroleum industry influence or retailer resistance.

Another option is E85, which is very cost effective for consumers, but it is only available at fewer than 3,000 fuel stations (out of 150,000 nationally), mostly in the Midwest. Retailers balk at the cost of retrofitting for E85 without government help — and in general E85 is marked up way higher at retail than the market will bear. We reported on that here.

Bottom line, there’s no clear path for added ethanol capacity to reach a market at the moment. And corn ethanol is going to be more cost competitive right now. With corn trading at $3.41 per bushel for the December contract, there’s a notional cost of $0.78 per gallon for the corn feedstock right now (even without considering renewable fuel credit values – RINs) — and that’s impossible for cellulosic fuel to compete with right now.

Which puts a brake on financing until the market access picture clears up.

E85 vs gasoline, which costs less?

On a wholesale basis, E85 wins. It’s priced as low as $1.39, wholesale, if you avoid buying it from petroleum companies. That’s a savings of 32 cents per gallon, vs RBOB gasoline, after allowing for differences in energy density.

The Bottom Line

The technologies were hamstrung by a combination of:

1. Overly optimistic views of construction and development timelines from pilot to demonstration, to first commercial, to steady-state operations at scale, to the multiple facility scale. The project developers point out that they are creating several new industries, from scratch (e.g. in many cases, biomass harvesting, pre-treatment, cellulosic hydrolysis, and fermentation) and there is much to be considered in the fact that they did what they said they’d do, in greater numbers, only later.

2. Unlucky timing in terms of the 2008-09 financing crisis and the shutdown of project finance markets.

3. No emergence of consensus on how to deal with the E10 saturation point — which accelerated in the face of falling gasoline demand.

4. Poor structure of loan guarantee program, in a way that virtually shut out liquid transportation fuels, even though they were the primary focus of “ending the oil addiction” and the 2005 and 2007 energy policy legislation.

In the short-term, much of the excitement of their arrival, in the general public view — has been dampened by the exhaustive timeline of the journey. Many in the public have moved on, to electrics, cheap natural gas, or to taking more selfies.

In the long-term, the market access problem looms large. Unless that is solved — perhaps through confrontation, perhaps through confrontation — this wave of cellulosic ethanol technologies will not be joined by a second wave, at least in the United States. Asia and Latin America have become the most likely candidates for deployment now.

Jim Lane is editor and publisher of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

September 17, 2014

Cellulosic Feedstock: The Gap Between Switchgrass And High Yield Corn

Jim Lane 

As the first wave of cellulosic biorefineries launch — is there really enough affordable feedstock for the next wave? Can growers make enough money to justify the switch…and risk?

For several years, the questions that have perplexed actors in the advanced bioeconomy have revolved around policy stability and the effectiveness of the new technology: can new advanced fuels be affordably produced and will there be a market for them?

Years ago, these were the same questions that were asked about petroleum. Today, when people talk about petroleum and long-term availability (when they choose not to focus on carbon or on energy security issues), it all relates back to feedstock cost and availability. $80 oil (good), $120 oil (bad), $200 oil (aprés moi, le deluge).

It’s not all that different with the first advanced biorefineries — being built by in this first wave by the technology developers like Beta Renewables, DuPont, Abengoa and Poet-DSM. With the first locations they have chosen — in places like Crescentino, Italy; Nevada, IA; Hugoton, KS and Emmetsburg, IA — the feedstock supply and economics look good. Grower relations look excellent.

According to Deputy Under-Secretary for Science and Energy Dr. Michael Knotek, “we need 1000 of these”. And, true, one thousand of the POET-DSM-sized facilities would generate 20 billion gallons of cellulosic biofuels, and cover the spread between production today and Renewable Fuel Standard targets for 2022. That’s a lot of feedstock. IS there enough?



The DOE has assessed feedstock availability in The Billion Ton Study and Son of Billion Ton — bottom line conclusion, not much to worry about in terms of land availability, as a billion tons would cover 1000 biorefineries three times over, or more.

So, why are we even talking about it? Little secret in Billion Ton — the authors found 328 million tons of feedstock currently available. 767 million dry tons (in the baseline scenario) come from “potential resources” by 2030. And that “potential resource” drops to 46 million dry tons by 2017, if the price is $50 per ton — and POET is targeting closer to $50 than $60.

Whoops. So let’s look closer at the data.

Stover economics.

According to DuPont’s analysis, stover economics look pretty good for growers in and around their Nevada, Iowa project. Bottom line, growers can realize $36 per acre in increased profit by removing 2 tons per acre of corn stover. The increased cost of fertilizer replacement is more than offset by yield gains and stover income. And the yield gains have been confirmed in 93% of field trials.




Here’s the catch, though. Nevada, Iowa is among the most feedstock-replete areas of the country, when it comes to corn stover. What about the rest of the country?

Some data to consider:

1. National corn yields are 5% lower, at 171 bushels per acre (projected for this year by USDA)

2. 80% of farmland is in corn-soy rotation rather than continuous corn, according to USDA.

3. Roughly one-third of farmers practice no-till techniques, according to USDA.

Going back to the DuPont data, let’s note.

1. Without no-till, stover yields drop by 1.1 tons per acre for continuous corn, and 1.2 tons for corn-soy rotation.

2. Without continuous corn, stover yields drop by 1.2 tons per acre for no-till, and drop to zero with tilling.

So, let’s re-do that last DuPont chart, to show how this maps out against the nation’s supply of corn stover. The average is 0.379 tons per acre.


The stover income would fall from $36 per acre to $6.82 per acre, for the average acre.

Energy Crop economics

Let’s look at a leading energy crop candidate, switchgrass, which Genera Energy described as “likely the most studied biomass crop in the US and is one that Genera has had success with as a sustainable and economical feedstock”

In an article published this summer at, authors Susan Harlow and Richard Perrin suggested that switchgrass may well produce animal feed instead of a biofuels feedstock.

Rationale? A production cost of $65 per ton in the Upper Midwest based on yields of 3.5 tons per acre— including a $200 per acre establishment cost. More importantly, the authors point out that “refineries…will have to pay at least its value as livestock feed, which is expected to be about $95 per ton of DM (equivalent to $83 per ton of 15%-moisture hay).”

And establishment opportunities may be limited, for the authors note that “marginal cropland that can produce corn at yields higher than 60 to 70 bushels per acre, corn is likely to be more profitable [than switchgrass].”

The Bottom Line

Stover economics work well in selected areas like Iowa — but it’s far from universal. Roughly 6 million acres have the optimal economics (7 percent of 93 million acres) — enough for 25 biorefineries of the current standard size, or about 500 million gallons. And that’s assuming that all of the optimized growers are within 30 miles of one of these biorefineries. As it happens, areas with high corn yields such as the Midwest have lagging rates of no-till farming, according to USDA.

Where corn yields drop below 70 bushels per acre, switchgrass economics are fine, says Genera. For high-yielding land using continuous corn, and no-till — stover pick-up looks great. But there’s a lot of acreage in the middle where corn is going to continue to be the crop of coice, but stover is less likely to work.

For the rest, it is going to be about producing energy crops — and we are looking at several years to establish those at sufficient scale to support a biorefinery.

All of which suggests that building out cellulosic biofuels is going to be a lengthy process, stretching well into the 2020s if these numbers hold up.

Jim Lane is editor and publisher of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

September 11, 2014

The Ginsu Knife of Biofuel Litgation: Butamax vs Gevo

Jim Lane 

It’s like the selling of Ginsu knives, the legal dispute between these two companies. No matter how much you hear….but wait, there’s more!

This week, we heard from Butamax that the District Court of Delaware has issued an order scheduling two further rounds of patent infringement actions pending between Butamax and Gevo (GEVO) for resolution.

The next phase of litigation, involving three Butamax patents asserted against Gevo, will begin in September 2014 with the discovery process and trial is scheduled for August 2015. Thereafter the remaining cases, involving three other Butamax patents asserted against Gevo, will recommence later in 2015 with trial scheduled for as early as April 2016.

The news is not all that new — these two rounds of litigation have been long discussed in the Digest and have been on the books — if not on the exact calendar — for a year or more.

Some of the scheduling has to do with the status of litigation that was originally expected to go froward this summer — the first phase. These suits were postponed based on their similarity to an upcoming Supreme Court case.

Bottom line, the Supremes will hear this fall, rule next spring (we expect) — and then phase two and phase three litigation is scheduled for summer 2015 and summer 2016.

According to Butamax, “Butamax continues to assert a total of eight patents against Gevo. Meanwhile, all of the cases involving patents asserted by Gevo against Butamax have either been ruled in Butamax’s favor or dismissed.”

Worth reminding readers that we have reported that almost all of the cases were dismissed on application by Gevo, which is waiting to sue until Butamax is in production and therefore creating actual harm.

Gevo’s final case against Butamax was dismissed by the Court in August 2014, following an Action Closing Prosecution from the Patent Office rejecting all claims.

Butamax also requested Patent Office re-examination or inter partes review of a total of 15 Gevo patents, of which 14 are ongoing and 1 has concluded in Butamax’s favor. Gevo requested re-examination of four Butamax patents, all of which are ongoing.

Jim Lane is editor and publisher of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

August 24, 2014

Playing The Advanced Biofuel Lottery

by Debra Fiakas CFA

Over the past six months advanced biofuel producers have raised $450 million in new capital.  The industry has finally gained traction after shifting focus from strictly cellulosic ethanol technologies to a mix of biochemical and renewable fuels.  Few if any of the advanced biofuel companies ‘climbed up out of the red,’ but we suspect the investors who had a chance to participate in these deals thought they had got a whiff of profits.  Indeed, Gevo, Inc. (GEVO:  Nasdaq) promised to achieve breakeven at its Luverne, Minnesota plant this year as the ethanol and isobutanol producer was raising capital for renovations and capacity expansion.  The stock still languishes below a dollar per share.

If we take the view that so-called smart money participated in these transactions and that the capital infusion will have a catalytic effect on operations, then the public advanced biofuel companies could be strong growth stocks.  I looked at each of the public biofuel developers  -  PEIX, MEIL, GEVO, AMRS, REGI and KIOR  -  that have raised capital in the last six months to see which one looks like a strong buy.

None of them have earned a dime in profits for shareholders, so we are unable to make a comparison using a valuation metric such as price to earnings or price to cash flow.  In terms of price-to-sales, Pacific Ethanol (PEIX:  Nasdaq) and Renewable Energy Group (REGI :  Nasdaq) are the most interesting, with stocks that trade at 0.40 times sales.

However, a relatively low valuation metric might not be the most compelling factor.  A short interest has built up in shares of Kior, Inc. (KIOR :  Nasdaq), a developer of cellulosic gasoline and diesel, that is near a quarter of the company’s float.  The stock is trades for pennies per share in modest volumes, largely because by all accounts it is on its last leg so to speak.  KiOR raised $10 million earlier this year, but still needs more capital to stay in business. Reportedly, management miss a loan payment and long-time investor Vinod Khosla seems to have lost interest.  However, a last minute infusion of capital or a sale of the company to a strategic investor would likely drive the stock higher from the current price level.

Amyris, Inc. (AMRS:  Nasdaq) has also won the disrespect of short-sellers who are not impressed with the company’s specialty chemicals and biofene business model.  Just over a quarter of AMRS has been sold short.  Near the end of June AMRS shares formed a so-called ‘low pole warning,’ suggesting the stock could sink lower.  However, the stock almost immediately began trading new momentum and traded dramatically higher in the last week, as the company announced the availability of a new loan facility to support development of farnesene technologies.  A short-squeeze could change things.  I believe a majorty of shares was shorted at prices between $3.50 and $4.20.  Thus any development that might push the shares above $4.20 would likely put some fear into the hearts of short-sellers.  The stock has tested the $4.20 price level twice in recent weeks and failed both times, so it might be worthwhile to watch AMRS closely.

The only stock left on our short-list of advanced biofuel developers is that of Methes Energies International Ltd. (MEIL:  Nasdaq). The company raised $5.0 million in new capital through the sale of common stock in May this year.  The shares were sold at $2.00 per share, leaving everyone who participated in the offering under water as the stock has steadily downward ever since the deal was priced.  The company has announced a string of accomplishments over the past couple of months and appears to be on the cusp of delivering its first shipments of biodiesel valued t $6.0 million.  Investors have not been impressed, but it is possible they are missing an important turn.

In my view, the odds a bit better with any of these stocks than lotto…and a few a priced better than a lottery ticket! 

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

August 19, 2014

Amyris Aims For Huge Second Half

Jim Lane amyris logo

The Pharaohs of Farnesene continue to pick up momentum.

In California, Amyris (AMRS) reported a net loss of $35.5M for the second quarter of 2014 on sales of $9.3M, with a 5.4 percent increase in sales over Q2 2013. Renewable product sales were $4.4M for the quarter, while “Recognized grants and collaborations revenues” reached $4.9M.

In announcing results, the company highlighted:

• End of quarter cash, cash equivalents and short-term investments balance of $90.2 million.
• Lowest farnesene production costs to date and successful start of fragrance molecule production.
• Addition of Braskem as a new collaboration partner for renewable isoprene and Natura for cosmetics sector.
• Produced and shipped jet grade farnesane, now in use in commercial flights at 10% blends with Jet A/A1.

In addition, the company affirmed guidance for doubling renewable product sales year-on-year and achieving cash flow positive from operations in second half of 2014. Specifically, Amyris expected for 2014:

Inflows. Renewable product sales to be over $32 million, doubling our 2013 renewable product sales, and to achieve positive cash margin from products. In addition, we continue to expect collaboration inflows, a non-GAAP measure, in the range of $60 million to $70 million by the end of the year.
Expenses. Cash operating expenses for R&D and SG&A in the range of $80 million to $85 million and capital expenditures less than $10 million in 2014.
Earnings. Positive cash flow from operations during the second half of the year and to achieve positive EBITDA in 2015.
Payback. Cash payback for our Brotas biorefinery in the next two years (following 2013 start-up year), based on plant cash contributions of $10 million to $15 million in 2014 and $40 million to $50 million in 2015.

“With two new collaboration partners, continued progress on renewable product sales, and our best operational performance to date, we’re well positioned to double our renewable product sales this year over 2013 and deliver positive operational cash flow in the second half of this year. In May, we completed a $75 million convertible note financing and, since quarter-end, increased our cash balance sheet with payments from our ongoing collaborations as well as additional inflows from new collaborations,”said John Melo, Amyris President & CEO.

“We rounded out our developing product portfolio for the tire industry when Braskem joined our collaboration to develop and produce renewable isoprene, and our expanded collaboration with Kuraray for liquid rubber. With TOTAL, we obtained industry certification for sales of our renewable jet fuel and have begun sales of jet fuel. We continue to experience strong demand for sustainable products that perform better than the alternative and are cost competitive, while solving the supply challenges our customers face in growing their business,” concluded Melo.

The analysts react:

Rob Stone and James Medvedeff, Cowen & Company

Q2 non-GAAP loss was 36c (vs. St. 30c) on $8.2MM (vs. St. $12.4MM). Product costs are improving, but COGS reflected higher-cost inventory. New collaborations and product segments are encouraging, raising our PT to $3.50 (vs. $3.00), but expected product sales for 2014 are heavily H2-weighted. Execution risk on a steep ramp and potential dilution from converts keep us at Market Perform (2).

Product revenue of $4.4MM missed our $7.0MM estimate. A new fragrance molecule was not yet shipping. Three new products should launch in 2015, and a total of 10 molecules supports expected growth.

Adjusting Our Model for Smaller 2015 Ramp, Slower Cost Reduction. We now project 2014-15E losses of $1.01 and $1.23, on sales of $76.3MM and $115MM, vs. prior ($0.64) and ($0.35) on $76.5MM and $196MM.

Pavel Molchanov, Raymond James & Company

After a period of retooling while in the “overpromise and underdeliver” penalty box, 2013 and 2014 have been Amyris’ first years with operations truly in commercial mode, and the outlook for the rest of 2014 (and beyond) is encouraging. There is visible commercialization progress, but the top line’s reliance (for now) on partner-based R&D revenue makes quarterly results very choppy. We maintain our Market Perform rating.

* Brotas: steady as she goes. The 50 million liter Brotas plant in Brazil made its first farnesene shipment over a year ago and is back online (following its 1Q downtime). Recall, as of last November, the initial 2014 target has been for product sales to at least double – likely conservative after last year’s shortfall. This target remains in place, and our current “guesstimate” for product sales is $38 million for 2014, up ~2.5x.

* $3.50/gal diesel: intriguing target, but we’ll believe it when we see it. It is on the Total front that the most interesting revelations came out of yesterday’s call. Amyris is working on a framework for producing renewable diesel in Europe – as part of the fuels JV with Total – with a long-term target cost of $1.00/liter, or $3.50/gallon. The feedstock is… to be disclosed later, so we can’t help but feel some skepticism. The working assumption is that the first large diesel plant will start up in 2017, with two or three by decade’s end. If true, this would solidify Total’s status as one of the most active strategics in bioindustrials.

Valuation. Consistent with peers, we apply a discounted cash flow approach to arrive at a DCF value of $2.90/share.

The Digest’s take

The analysts don’t see much upside in the stock for now — a ramp-up in price over the past year has absorbed most of the short-term potential. It’s highly intriguing that the company is targeting $3.50 diesel with a Total/Amyris plant as soon as 2017. That’s big news, if it materializes — but we would expect a move away from the spot Brazilian sugar market in order to facilitate this. Cellulosic sugars would be appropriate targets for anything sold in the aviation to avoid food vs fuel debates.

Jim Lane is editor and publisher of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

August 01, 2014

Solazyme: Return On Dream (and ROI Next Year)

Jim Lane solazyme logo 

Signature AkzoNobel deal expansion highlights Solazyme’s Q2 results.

But there’s something more to this company than the cash that sustains it, though sustain it cash does, and necessarily so.

In California, Solazyme (SZYM) and AkzoNobel announced that they have expanded their multi-year agreement with supply terms targeting 10,000 MT annually of algal oils for a new proprietary surfactant and with funding for the joint-development. The parties said that they expect Solazyme’s algal oil to replace both petroleum- and palm oil-derived chemicals. Product development is expected to commence immediately, and the parties anticipate entering into a definitive supply agreement as they near completion of product development.

At the same time, Solazyme announced a net loss for the quarter of $42.9M on Q2 revenues of $15.9M. For Q2 2013, the company lost $25.8M on revenues of $11.2M.

The 43% revenue jump

In May, Solazyme’s joint venture with Bunge (BG) started producing commercially saleable products at the Solazyme Bunge Renewable Oils plant in Brazil and has subsequently begun shipping. Both oil and encapsulated lubricant, Encapso, products have been manufactured using full-scale production lines that include the 625,000L fermentation tanks. In addition, Solazyme expanded its customer base and increased total output by >40% from Q1 2014 to Q2 2014 at its Clinton/Galva processing facility in Iowa.

Reviewing the commercial highlights

Highlights include:

  • AlgaVia brand launched at the International Food Technology (IFT) Food Expo, Solazyme’s High Stability High Oleic oil won a prestigious 2014 IFT Innovation Award, and Solazyme added key food ingredient customer, and distribution agreements. Solazyme secured an important new AlgaVia Whole Algal Flour customer, and also signed agreements with two of the top North American food ingredient distributors to meet demand in the US and Mexico.
  • Signed agreement with a leading North American oleochemicals company to commercialize microalgae-derived oleic acids. The agreement is to commercialize kosher certified high oleic algal oils for the oleic fatty acid market. The Soleum base oils, the company says, offer “performance, safety and sustainability.”

Solazyme’s progress

The Solazyme view

“Solazyme made important progress in the second quarter on its commercialization path,” said Jonathan Wolfson, CEO of Solazyme. “We are now manufacturing product in three facilities on two continents. We are shipping multiple oils and have increased production volumes out of our Clinton/Galva, Iowa operations, and we have begun production and shipment from the Solazyme Bunge Renewable Oils plant in Brazil. We are also building commercial momentum, including an expanded multi-year agreement with AkzoNobel involving funded joint development and targeting up to 10,000 MT of oil per year.

“In food ingredients, we launched our AlgaVia brand and won the highly prestigious IFT Food Expo innovation award. We have more work ahead as we progress on our production ramps and continue to build our commercial pipeline, but I believe we have the products, the plants, the capital and the team to execute moving forward.”

“We are continuing to drive fiscal discipline and balance sheet management as we ramp our capacity and focus on delivering products to our customers,” said Tyler Painter, CFO and COO of Solazyme. “We achieved a number of milestones this quarter and continue to strengthen our sales and market application efforts across our targeted markets.”

View from The Street: Bear side, Mike Ritzenthaler, Piper Jaffray

Initial commercial volumes at Moema prove anticlimactic on limited commentary. The framework (non-binding) collaboration expansion with AkzoNobel announced on the call is for up to 10 kMT/yr, and even if converted to a binding sale agreement, still leaves the majority of the 100 kMT capacity unsold. We believe that, ultimately, low sales volumes and high fixed costs will beget poorer than expected economics in an effort to secure volumes. We remain concerned about the alarming cash burn rate, the very limited visibility/obfuscation into tangible production metrics (in order to gauge the underlying health of the ramp), and lack of firm off-take agreements in place, in addition to the standard start-up risks that we have outlined previously. Maintain Underweight rating and $4 target.

View from The Street: Bull side Rob Stone, Cowen & Company

Q2 financial results missed the St., impacted by plant startup and 1x expenses. However, revenue grew 29% Q/Q, shipping customers increased 50%, the AkzoNobel partnership was extended, Encapso is expanding outside N. America, an important food ingredient customer was signed, and Algenist added customers and countries. Revenue grew Q/Q in every segment: Algenist $6MM (+21% Y/Y, 22% Q/Q), funded R&D $6.9MM (+10% Y/Y, +37% Q/Q), chemicals, fuels and nutrition $3MM (vs. $0 last year, +26% Q/Q). At Clinton there are 15 Customers (vs. 10) and 75 Qualifying; Algenist +40% Store Count. Maintain Outperform rating and $18 price target.

View from The Street: Bull side Pavel Molchanov, Raymond James

“The key inflection point for scale-up is materializing in 2014. The balance sheet is also in great shape, with by far the largest cash balance in the peer group, implying optionality of yet-to-be-disclosed growth initiatives. The adjusted loss per share of $(0.43) was below our estimate of $(0.37) and consensus of $(0.36), the delta coming from higher operating expenses, same as in 1Q. Total revenue of $15.9 million was exactly in line, with upside in R&D revenue offsetting slightly slower-than-expected growth in product sales. The latter, while not increasing quite as rapidly as we had modeled, rose 84% y/y (and 23% q/q) to a new record. This was the second quarter with sales from the Clinton plant, where output jumped 40% q/q.

Clinton customer count rises to 15. January marked the first of Solazyme’s major scale-up milestones, as production began at the Clinton, Iowa plant, built with Archer Daniels Midland. Production will ramp over 12 to 18 months until reaching nameplate capacity of 20,000 metric tons per year. Product from Clinton has been shipped to 15 customers to date, up from 10 in 1Q, and another 75 industrial customers (an impressively long list) are prequalifying product. Positive cash flow on deck for 2015. Outperform 2 – Target price = $12.50;

The Digest view

You get a lot of insight from Solazyme’s progress as to the general direction of the industry. Consider this cool chart from Cowen & Co’s Rob Stone:

Screen Shot 2014-07-31 at 6.18.02 AM

The key takeaways, in our view:

1. Ramping capacity and utilization are the story for 2014-17. The company has gone from less than 20,000 metric tons last year (and less than 1 million tons less than four years ago) to a projected 401,000 metric tons by 2017. Utilization is modeled to grow to 85% by 2017.

2. Multiple product lines and application sectors. Algenist skin care products started the company on its road to revenue and profit. It remains a dominant product along with R&D revenue even by 2014. Despite strong YoY growth rates, it is expected to be swamped by fuels and chemicals by 2017, which by then would represent 65% of the revenues.

3. Higher margins in personal care and skin creams.

4. It will have taken 14 years from start-up to $1B in revenues.

The Bottom line

Look at that AkzoNobel announce — tailored algal oils will be replacing not only dread petroleum but (for some) dread palm oil. Up until now, the alternatives have been to pay one heck of a lot more to use an alternative, or simply stop consuming a given product in order to show support. Look how the equation has changed. And that’s not exactly Ed Begley Jr. embracing a new world order – that’s AkzoNobel.

Consider where they are making this product. Anywhere you can grow sugars in reasonable quantities. It happened to be Iowa and Brazil. It could have been sugarbeets in Idaho or Russia, or sugarcane in India or Pakistan or Angola, or ultimately synthetic sugars made by companies like Proterro wherever you can find water and CO2 in concentrated quantities. Any country could have capacity — everyone has access to the riches of the new world.

Because the new world doesn’t consist any more of somewhere you sail to. It’s found within. You don’t have to grab some advantaged geography rich in mineral wealth, to be pumped or dug out of the ground until the country’s wealth is exhausted. It’s not renewable oil, it’s renewable wealth, and distributed opportunity.

A number of years ago, Solazyme put this graphic out. It remains a Digest favorite — just a simple graphic that shows all the places where renewable products touch and change everyday lives.


Now, investors will see things through a slightly different lens — not just a case of making a difference, but making one with an attractive yield at an attractive rate of return. Rate matters. They would, for example, measure Van Gogh’s Starry Starry Night by the metric of a financial return. There is more to life than the cash that sustains it, though sustain it cash does, and necessarily so.

Solazyme just changed the world. It happened in your lifetime, you got to see it. Lucky you.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

July 05, 2014

A Deal A Day At Renewable Energy Group

They are hoopin’ it up in Ames, Iowa these days.  Local producer Renewable Energy Group (REGI:  Nasdaq) completed the acquisition of Dynamic Fuels, Inc., one of the first renewable diesel biorefineries in the country.  The Dynamic Fuels facility located in Geismar, Louisiana has 75 million gallon annual nameplate production capacity. Renewable Energy Group (REG) already had eight other fully operational biorefineries with a nameplate production capacity near 250 million gallons per year.  REG also has a demonstration plant in Oklahoma for renewable chemicals.

It was a two-part deal.  First REG struck a deal with for most of the assets of Syntroleum Corporation for 3.5 million shares of REGI common stock.  The deal included a 50% ownership interest in Dynamic Fuels.  Shortly after the Syntroleum acquisition in early June 2014, REG paid $18 million in cash to Tyson Foods for the remaining 50% interest.  Tyson may also be paid up to $35 million over the next decade depending upon production volume.  REG will also repay Tyson for $12 million in debt owed by Dynamic Fuels.

REG is not only on the prowl for production capacity.  The company has used the acquisition strategy to build out its technology portfolio.  Earlier this year REG paid $40 million in cash and stock for LS9, Inc., a developer of renewable industrial chemicals.  REG may pay an additional $21.5 million over the next five years if certain milestones are reached.  LS9’s technology relies on the fatty acid metabolic pathway of microorganisms, which are used to transform a variety of feedstocks into detergents and other renewable chemicals.  Included among those feedstocks is glycerol, which is a by-product of REG’s biodiesel production processes, making for very nice synergy between the two companies.

Investors responded warmly to the LS9 acquisition, driving REGI shares from a price near $9.75 in early February 2014 to just over $12.50 in early May.  Unfortunately, mixed signals from the first quarter 2014 financial results reported in early May, were fodder for some disappointment and the stock began a slide back down to the $10 price level.  Perhaps investors also began anticipating potential dilution from  the company’s $125 million convertible note deal that was completed in late May 2014.  The Dynamic Fuels to near a key line of resistance near the $11.50 price level.

The question for investors is whether the stock has sufficient momentum to break through and remain above the resistance line.  Based on the Average Directional Index, a trend indicator, the stock is indeed trending higher and the signal is  relatively strong.  Let me also note that the Moving Average Directional Index is quite favorable and is currently signaling higher prices ahead.

What is less clear for REGI is an absolute value for the stock.  Technical indicators are silent on just how far the stock might go.  From a fundamental standpoint, it is not very difficult to come up the raw data for an earnings forecast.  The consensus estimate for the year 2015, is for $0.82 per share on $1.13 billion in sales.  At a multiple of 20 times earnings, a price of $16.40 seems justified, given the company’s improved competitive position.  Only one of the analysts has a price target of $16.00 while the mean price target is $13.67.

It seems prudent to accumulate shares of Renewable Energy Group at price levels below $11.50.  For those with long positions at lower prices levels, that will ensure a profit in the long-term.  The stock closed out trading last week with a strong volume and the engulfing pattern that formed at the week-end suggests the climber higher will continue in the new week.  However, given the volatility in REGI shares, it seems more likely than not the the stock will again present a strong buying opportunities from investors.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

April 18, 2014

Cosan: Brazillian Sweetheart

by Debra Fiakas CFA

The first thing we think about Brazil in the context of alternative energy is sugar cane and ethanol.

In the last growing season Brazil producer 596 million tons of sugar cane, a feat that secured Brazil’s position as the largest sugar cane grower in the world.  About 55% of the crop was used to producer ethanol and the balance ended up as sugar.  Brazil’s sugar cane industry association has predicted that despite a severe drought, the 2014-2015 growing season will be even more productive with expected sugar cane production in the range 632 million tons to 636 million tons.  About 40% of Brazil’s sugar cane is produced by a highly populated group of independent farmers. 

Investors are perhaps more interested in the processors.  The three largest processors in Brazil include Cosan Ltd (NYSE:CZZ), Sao Martinho and Acucar Guarani.

Like many of the other sugar cane processors Cosan is integrated backward in to sugar cane growing and as well as forward into ethanol production.  Cosan controls the world’s largest sugar cane processor Raizen, SA in a partnership with Royal Dutch Shell.  Riazen has a capacity to crush as much as 65 tons annually, but only reached 62 million tons in the 2013-2014 growing season.  That represents approximately 10% of Brazil’s sugar cane crushing capacity.  The company earned $4.5 billion in sales in the last twelve months, representing 15.7% growth over the prior year.   Cosan earned a 3.2% net profit during the year.
Raizen is expected to benefit from government support for ethanol production.  The Brazilian national development bank recently announced major financing package for the construction of Raizen’s cellulosic ethanol project in Sao Paulo state.  The plant is apparently designed to rely on Iogen’s cellulosic ethanol technology and is estimated to require US$90 million for construction.  Raizen management has bragged that within ten years it will have as many as eight plants producing advanced ethanol.  Already the company has pledged to invests US$7 billion to increasing sugar cane crushing capacity by 50% or 100 billion tons. 

Cosan trades on the NYSE under the symbol CZZ and has been on a long-term downward journey since the beginning of last year.  That has left the stock trading at 11.4 times forward earnings.  Before investors jump to buy these seemingly cheap shares, it is well to look at the long-term and short-term character of the stock’s trading.  The stock has been attempting something of a seasonal recovery over the past month as the company has just released its financial results for the year ending March 2014, which coincides with the last growing season.  The upward trend appears to be proceeding with some strength, but it might be prudent to wait for the stock to take a bit of a breather before loading up for a long position.
Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

March 29, 2014

Gevolution 2014: Gevo's Progress, And Detours

Jim Lane

This week, Gevo (GEVO) reported its year-end results, generally in line with expectations, with a $0.35 loss per share and $24.6M in the bank. Given the company’s rate of progress with isobutanol, the cash burn rate, the low share price, and high prices for ethanol — the company announced that it is “transitioning the Luverne plant to the production of both isobutanol and ethanol…Producing both ethanol and isobutanol allows Gevo to fully utilize the Luverne plant and increase cash flow as Gevo continues to commercialize its isobutanol production capabilities.”

“Our original vision was to focus our efforts on one product,” said CEO Pat Gruber. “However we now are confident that we can leverage the flexibility of our technology and more fully utilize all the operating units in the plant to produce ethanol simultaneously with isobutanol. Needless to say, the expected additional cash flow is a benefit as we work to maximize the learning per dollar as we scale up our technology.

“Therefore, we plan to run three of our fermenters to produce ethanol, while the fourth fermenter will remain dedicated to isobutanol production. We are calling this configuration “side by side”, meaning both ethanol and isobutanol could be produced concurrently.

Analyst reaction

Rob Stone and James Medvedeff, Cowen & Co:

The economics now favor, and the science now enables, concurrent production of isobutanol and ethanol at Luverne. However, we believe ramping to full nameplate, regardless of configuration, is still at least several quarters away.

Luverne is shifting to concurrent production of ethanol and isobutanol, to take advantage of current wide ethanol spreads. The initial mix will be three fermenters producing ethanol, one producing isobutanol. We believe this demonstrates the flexibility of the GEVO technology, and highlights successful isolation and eradication of sources of infection. It may have been influential in attracting the two licensing LOIs signed since October. Important side benefits include more stable flows of corn mash, water recycling, and solids removal (animal feed) from the plant, the opportunity to optimize operations at higher production rates, and reduced cash burn.

Mike Ritzenthaler, Piper Jaffray

The decision to produce ethanol ‘side-by-side’ with increasing isobutanol production rates will be controversial – but ultimately we view as a positive for cash (with spot ethanol EBITDA margins >$1/gallon) and provides more stable operating parameters. This will further aid isobutanol optimization efforts that have seen ~71% of target gallons per batch and a lift to 1-2 batches per week on average (from 1-2 batches per month in December). We are adjusting our estimates due to incremental ethanol sales that we did not previously factor into our model.

We expect ethanol production to start in mid-May and reach a 15k gallon/year run-rate starting in 3Q13, resulting in FY2014 Sales of $45 million. Ultimately, however, we see ethanol production at Luverne tailing off in 1H15 as isobutanol continues to ramp. This results in FY14E revenues of $45.4 million (from $14.5 million) and ($20.7) million in EBITDA, from ($36.5) million previously.

This should make the technology package more attractive to potential licensors while investors should welcome the cash flow attributes of ethanol production as isobutanol production ramps, in our view. Our price target is based on 5x our FY15 EBITDA estimate (from FY15 EBITDA discounted to 2014), with $0 million in net debt and 49 million shares.

Progress with the Process

Gevo reported in this cycle the following process improvements:

• Commissioned a proprietary system to sterilize corn mash.
• Proven that its two key technologies, our isobutanol producing yeast and our GIFT system, work at commercial scale utilizing full corn mash to produce isobutanol.
• Achieved up to 71% of our targeted gallons per batch goal.
• Produced isobutanol that met quality targets.
• Demonstrated that the company can manage infections during fermentation, achieving over 100% of goal, although not with the consistency or reliability that we need.
• Operated all of the fermenters and GIFT systems and they performed as expected.
• Begun the integration of the water recycle streams, and achieved greater that 90% water recycle in fermentation.

The Licensing Option

On March 6, 2014, Gevo announced that Porta Hnos signed a letter of intent to become the exclusive licensee of GIFT in Argentina to produce renewable isobutanol. Porta is a 131 year old family owned company in Argentina that produces liquor, vinegars and has a 120 m3/day corn ethanol plant (approximately 12mgpy).

In addition, Porta has designed and built two 250 m3/day ethanol plants for others and they are working on two more ethanol plants for 2014. Half of all current ethanol plants in Argentina were designed by Porta, and they have a joint venture with Alpha Laval to provide separation and evaporation expertise.

Offtake and testing: the Q4 highlight reel

In Q4 2013, Gevo began selling bio-isooctane for specialty fuel applications such as racing fuel. Gevo’s renewable isobutanol from Luverne, Minn. is being converted into bio-isooctane at its biorefinery at South Hampton Resources. Initial volumes are being used for testing purposes.

Also in Q4 2013, the U.S. Army has successfully flew the Sikorsky UH-60 Black Hawk helicopter on a 50/50 blend of Gevo’s ATJ-8 (Alcohol-to-Jet). This testing is being performed as part of the previously announced contract with Gevo to supply more than 16,000 gallons to the U.S. Army. Gevo’s patented ATJ fuel is designed to be the same as petroleum jet fuel, and to be fully compliant with aviation fuel specifications and provide equal performance, including fit-for-purpose properties.

In December, Gevo announced that Underwriter Laboratories approved the use of up to 16% isobutanol in UL 87A pumps, providing all of the service stations across the country with the assurance that isobutanol blended gasoline will work in their current gasoline pumps without the need to purchase new equipment.

The Move to Ethanol

Let’s be frank about this — for a long time, Gevo has taken a dim view of the first generation biofuels it now proposes to produce. “1st generation biofuels created conflict,” the company noted earlier, citing that refiners lose volume, pipeline companies lose volume, customers get lower energy fuel and ethanol producers struggle with the blend wall, with the push for ethanol causing more conflict.”


The company switched “back to ethanol” once before, in fall 2012, at the time its contamination difficulties were becoming more apparent at scale. “Gevo has successfully demonstrated commercial scale isobutanol production, has navigated idiosyncratic biocatalyst challenges in past scale-ups, and elected to utilize the Luverne asset while the contamination controls are optimized,” Piper Jaffray analyst Mike Ritzenthaler wrote in 2012. Adding, that “the biologists are working to improve the production strain and fermentation parameters to enable better control of competing reactions, a process that in our experience will take a handful of months at most to optimize.”

“The switch to ethanol does not reflect any change in strategy,” Ritzenthaler added. “Management is electing to operate the facility rather than conduct the strain improvement at such a large-scale.”

Having noted all that, Gevo has been consistent in touting the “carbohydrate market” and superior US productivity in this regard, compared to the oil market — as much or more as they have waded into the ethanol-or-isobutanol question.

Doubtless, given normal price environments and steady-state operations in ethnaol and isobutanol, they would generally produce isobutanol. The switch to ethanol reflects the “Market opportunity driven by the spread between carbohydrate and oil” as they have detailed in many presentations. With oil topping $100 and corn sub-$5, Gevo is clearly seeing that the time to produce alcohols is now — and if isobutanol is not yet ready for immediate scale-up, the other alcohol will do nicely.


But there’s a caveat in their strategy. Spreads are high, but they vary, and often quickly. CEO Pat Gruber has been out front with the industry on warming about the dangers of selling the “same” molecule with the “same” price and performance, as this slide illustrates.


Further to that point, one has to consider how much damage has piled up on the Gevo “brand” over the past two years, with the well-publicized difficulties in getting to full production at Luverne — while discussions of a conversion at Redfield seem to have pushed off into the distance. On the potential for selling into markets with a damaged brand, Gruber was stark in his assessment, here:


Gevo’s legion of admirers will be quick to point out that the company’s struggles are not untypical for introducing first-of-kind technology, and they are temporary in nature — causing delays rather than failure — and that the brand of the company is strong with partners like Coca-Cola and the US Army. With a strong brand, Gruber took the view that even a “same” product at the “same” price and performance could have very strong sales prospects, here.


The delays with isobutanol

The delays have been, for its investors and stakeholders, frustrating to say the least. Two years ago, the company was “on track for isobutanol production in 2012″ and expected to be bringing Redfield online in 2013.


We didn’t hear much back then about the time delays associated “Learning to run a ‘new-to-the-world’ process at the scale of our Luverne plant with 1 million liter fermenters requires a lot of work. Working through the issues that arise creates the crucial know-how needed for steady full scale production, expansion, and licensing,” as Gevo reflected on its progress in its latest update.

The company’s strong management team — especailly in managing start-ups with first-of-kind-technology — caused many to underestimate the challenges of scaling this technology. “While every novel process startup contains some uncertainties, we believe Gevo has an outstanding team in place with the optimal expertise needed to understand and mitigate risks – and meet or exceed important production milestones between now and the end of the year,”

Piper Jaffray analyst Mike Ritzenthaler wrote in May 2012. He added in July: “Based on our background and observations, we believe startup is proceeding remarkably well, and we are confident that Gevo’s team can quickly handle normal startup issues, should they arise.”

The biojet options

The company’s struggles with isobutanol have to some extent overshadowed its successes with biojet fuel — passing Army tests with flying colors, and proceeding rapidly towards an adoption of an approved ATJ (alcohol to jet) fuel spec in the not-distant future. The company’s South Hampton demonstration plant has been supporting those efforts.


The isobutanol option

The company would like to produce all-isobutanol no doubt about it: as Pat Gruber pointed out, “isobutanol and its derivatives can serve multiple large markets.” But here’s the caveat, he warned in 2013: “low cost isobutanol is the enabler,” and frankly, Gevo’s yields and throughput is keeping its isobutanol out of all those juicy verticals.


The Bottom Line: the vital importance of getting back to isobutanol

Let’s be clear about restating this: Gevo has never spun a story about a “single molecule” strategy. But they simply have not showcased their ethanol capabilities in this respect. Ethanol has been a sub-optimal fallback. They’ve been much more excited about opportunities with isobutene and renewable jet fuel, for example.


Why? As Gruber warned the industry at ABLC 2012, “drop-in fuels can realign value chains. Refiners gain volume, pipelines too. Downstream logistics costs decrease, consumers get a better product, and there’s no blend wall.”


As we outlined in the Bioenergy Project of the Future series, staring with a first-generation ethanol plant is a great idea. Stating with that technology a while while other technologies are introduced: that’s fine, for a while, But falling back on first-generation fermentation is not a demonstration of production flexibility, in a 19 million gallon facility that is unlikely to be able to compete with the likes of POET and its fleet of 100 million gallons plants, based on economies of scale.

So, this is a temporary move, based around cash conservation, aimed according to analyst estimates at improving EBITDA by an estimated $15.8M in 2014. Coincidentally, about the same amount of capital the company parted with in early 2013 in a $15M share buy-back program. The company also takes the view that it helps to solidify its licensing story, by giving licensees a side-by-side production opportunity in isobutanol and ethanol.

We’re a little skeptical, here in Digestville, about the long-term value of that strategy. Short-term, while the company works through what is proving to be a 3-year scale-up effort, it makes sense. Should ethanol prices hold up, it will certainly help with earnings and cash – though it will tie-up talent, working capital, and divert the focus to some extent. We’ll see shortly how Gevo navigates those waters — as it continues to make steady, if slow, progress towards its game-changing isobutanol ambitions.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

March 23, 2014

As KiOR Stumbles, Aemetis Soars: What Made The Difference?

Jim Lane

Is it just coincidence that KiOR’s stock is down sharply as Aemetis has been on a tear? 
Just a lucky break for ethanol based on attractive “crush spreads”? Or something important about the strategy and how it has played out?

On a clear morning last October at ABLCNext in San Francisco, two companies joined us on stage to discuss their technologies, and their pathway to commercialization.

They had a lot in common.

Both companies produce advanced biofuels for the American domestic market. Both utilize advanced technologies deployed at commercial-scale in the past 24 months. Both are publicly-traded stocks. Both were founded in 2006-07, after the Energy Policy Act of 2005, but before the Energy Independence and Security Act was signed in December 2007.

Both at one time numbered Vinod Khosla among their shareholders (one also had Bill Gates, while the other had Sir Richard Branson). Both have intelligent, highly-educated, passionate and driven people.

Just this week, one of those companies, KiOR (KIOR), announced a $347 million annual loss and related a series of challenges in their technology and financing that led it to declare “substantial doubts about our ability to continue as a going concern.”

The other, Aemetis, (AMTX) announced record quarterly and annual gross profit, record operating income and adjusted EBITDA (including $54.2 million in Q4 revenues and $11.3 million in gross profit), and 54 million gallons of production.

What made the difference?

In our 10-part series The Bioenergy Project of the Future, published in late 2010, our interviews led us to conclude that the winning strategy was likely to be about using, as Aemetis CEO Eric McAfee once outlined it to The Digest, “first generation assets and positive cash flow as a basis to adopt advanced fuel and chemical technology, lowering risk while building an operations team, revenues and cash flow.”

Since then, there have been an big number of new advanced biofuels technologies coming to scale: INEOS Bio, KiOR, Beta Renewables, Amyris (AMRS), Aemetis, BioProcess Algae, Dynamic Fuels, Neste Oil (NEF.F), Diamond Green Diesel and Gevo (GEVO) to name a few — with POET, Abengoa (ABGB), GranBio, Raizen, and DuPont (DD) ready to join the list in upcoming months. REG (REGI) has been producing advanced biofuels at scale all along, and has expanded remarkably.

None have followed the Bioenergy Project of the Future playbook exactly — and some of them have bypassed the script altogether and chosen a different strategy as a path to commercial success, and we’ve wished them all well, as we always do here in Digestville.

But at this juncture, they are worth repeating, the first five steps.

Five steps to success from the Bioenergy project of the Future

Step number one: Buy an existing ethanol or biodiesel plant, or equivalent. Why? We learned that projects “not only have to demonstrate technological prowess in bioprocessing, we have to demonstrate financial and management acumen to all our stakeholders – the community, policymakers, lenders, and customers. As well as to begin to establish that eco-system of relationships in our community that will serve us later on, when we add-on riskier and more advanced second-generation features.”

Step number two: a graduated series of bolt-ons, beginning with the collection of cellulosic (or residue-based, that is to say, lower-cost, non-food) biomass. First, we have to demonstrate that we can build a sustainable ecosystem around the harvest and delivery of biomass.

Step number three: Add renewable chemicals. We heard that “If we have learned anything from the stories of hot companies like Amyris, Gevo, Solazyme (SZYM), or Cobalt Technologies, as well as exciting pure-plays like Genomatica, Heliae, Verdezyne, Segetis, Elevance, or Rivertop Renewables, it is the importance of producing chemicals or other bio-based materials first to generate revenues, before taking the company further down the cost curve and up in scale in order to make competitively-priced renewable fuels.”

Step number four: Add renewable fuels. No longer are we producing advanced biofuels “because we can”, as a demonstration of technology. We are demonstrating the power of our network of relationships in the community, and the power of our growing balance sheet. Now that capacity expands and we begin to saturate some of the market we developed in high-value organic acids, we turn to the fuel market with a capacity expansion effort.

Step number five: add algae. ”Monetize the CO2,” we heard. By adding technologies that will help create renewable fuels from the CO2 we are producing as a byproduct, adding economic strength as well as reducing our carbon footprint.

Looking at Aemetis’ run of success

The strategy of the company has generally been clear for years – which is generally summarized in Step One of the “five steps to success”: buy an existing ethanol or biodiesel plant (or, own one already), and begin to aggressively bolt-on technologies that improve the financials of the business.

We’ve seen a number of companies go that route. Amyris, Gevo, Raizen, POET, Green Plains (GPRE), and REG among them, in addition to Aemetis. Some investors may feel that the “Add ingredients slowly and stir” part was to an extent overlooked at Amyris, KiOR, and Gevo — certainly, the pressure to keep up a very high pace towards commercialization is something that all VC-backed firms feel.

Virtually all ethanol plants have been bolting on and improving. Water efficiency, energy efficiency, corn oil extraction, and so on. Some more boldly than others. Diversification of feedstock has been a hallmark of REG’s successful strategy in biodiesel — but we hear less about it in the ethanol business.

“Our fourth quarter 2013 results reflect a year of record financial performance and significant progress for Aemetis,” said McAfee in a statement accompanying the results. “During 2013, we diversified our feedstock. After retrofitting and restarting our plant in May 2013, we processed about 84 million pounds (42,000 tons) of grain sorghum; became the first US ethanol plant approved by the EPA to produce lower-carbon, higher-value Advanced Biofuels (and to receive D5 RINs) using sorghum/biogas/CHP; and upgraded our India plant by constructing and commissioning a biodiesel distillation unit. These efforts translated into record levels of revenue from our India operations, and company-wide records for operating income and Adjusted EBITDA,” he added.

The company certainly benefited from the relatively high “crush” spread between energy and feedstock prices — but also, Aemetis put itself in a position to earn D5 RINs and utilize diversified feedstock. As Jack Nicklaus once observed, “If I played well and prepared myself properly, then all I had to do was control myself and put myself in a position to win.”

But we’re struck by the way that the Aemetis run adhered to the playbook based on all those interviews with industry back in 2010. Buy an ethanol plant. Add cellulosic feedstock. Think fuels, but also think chemicals and other high-value and high-demand markets (such as jet fuel). Think about monetizing CO2 via algae. Those were ideas that were — four years ago, everywhere, on everyone’s mind.

It is reminiscent of something else right out of the Jack Nicklaus playbook: “Don’t be too proud to take lessons. I’m not.”

The steps to success: who employs what, and how

In the case of step two, most companies skipped it — either working with traditional feedstocks or counting on other companies to successfully shepherd the aggregation of biomass. Gevo and Amyris have continued to work with traditional corn and cane as feedstocks. Valero partnered with Darling (DAR). But others have developed aggregation systems and direct relationships with growers: KiOR, Beta Renewables, POET, DuPont and Abengoa among them. Raizen and GranBio are working with bagasse, already aggregated at ethanol plants in Brazil. Most of them will tell you they learned a lot from the process.

In the case of step three and step four, the decision to produce chemicals first and fuels later has been a choice embraced only by a few, primarily Gevo and Amyris amongst those who have reached scale. Solazyme will join them when their plant opens in Brazil. Most — like Dynamic Fuels, Neste Oil, REG, POET, DuPont and Abengoa — have opted for the fuels market. In part that is because of the role of RINs in the marketplace, the renewable fuels credits that add value to the fuels side (and are valueless for chemical off-takers). That’s part of the design of the Renewable Fuels Standard — not only to incentivize obligated parties to buy advanced alternative fuels, but to ensure that producers have a financial incentive in the nearer-term to make $3 fuels when there are $5 chemicals to be made.

In the case of step five, the decision to embrace algae as a pathway to monetizing the CO2 that vents from a first-generation ethanol plant — well, Green Plains is well advanced down that pathway in its BioProcessAlgae JV.

Why companies struggle

As I outlined in a private note to readers two months ago, why sector executives tell The Digest is that “it comes down to knowledge, and how you use it, adding that “if you have real dialogue by the real leaders about the real issues, the best technologies and companies will be able to gain the knowledge and competitive edge they need. And I believe…that no company can succeed without industry-leading knowledge in every aspect of its operations.”

But we’ll add one more factor we hear about. Time. It’s very tempting, in the digital age, to want new manufacturing technologies to proceed to scale and commercial success in very short time frames — to meet corporate hurdle rates or expected rates of return from investment in venture funds. It’s a competitive market for capital, after all, and companies with elevated risks require the potential for elevated returns in order to attract capital at all.

The Bottom Line

Let’s keep the results of one quarter or year in perspective — in the months ahead, the technology of KiOR is expected by its owners to reach steady-state operations and its fortunes would then revive in the financing markets.

And, the economics of sorghum and biogas, or the RIN values for advanced biofuels, may not prove as attractive in the coming months as they have in the past several, for Aemetis.

But in 2010, when we spoke to executives about the Bioenergy Project of the Future, we did hear a drumbeat of interest in the model based on building “first generation assets and positive cash flow as a basis to adopt advanced fuel and chemical technology, lowering risk while building an operations team, revenues and cash flow.”

It’s been a long-run for Aemetis and KiOR, both — and their stories are still in incomplete form.

But it’s clear enough to us here in Digestville that there’s not much we’re seeing now that we didn’t hear about back in 2010. As Socrates once remarked of The Republic, the ideal city-state, “it exists in the heavens, like a constellation, as a pattern for those able to see it. And seeing, they can found a Republic in themselves.”

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

March 19, 2014

Can KiOR Continue As A Going Concern?

Jim Lane

KiOR LogoDelayed 2013 results includes going concern statement. Future Khosla financing contingent on milestones. Default looms as soon as April. Financing after August unclear.

In Texas, KiOR (KIOR) announced a $347.5M net loss for 2013, and issued a “going concern” statement that focused on its ability to raise future capital to sustain operations and build its next plant.

In a 10-K filing with the SEC made today, the company said that “Currently, we have ceased work on a series of optimization projects and upgrades at the Columbus facility and are bringing the facility to an idle state,” and warned:

“If we are unsuccessful in finalizing definitive documentation with Mr. Khosla on or before April 1, 2014, we will not have adequate liquidity …This will likely cause us to default under our existing debt and we could be forced to seek relief under the U.S. Bankruptcy Code.”

Excerpts from the KiOR 10-K are provided below. The complete statement is available here.

Excerpts from the KiOR statement

We have substantial doubts about our ability to continue as a going concern. To continue as a going concern, we must secure additional capital to provide us with additional liquidity. Other than the Commitment from Mr. Khosla to invest in us a cash amount of up to an aggregate of $25,000,000 in available funds in a number of monthly borrowings of no more than $5,000,000 per month, we have no other near-term sources of financing.

Because the Commitment is subject to the negotiation and execution of definitive financing documents and the achievement of performance milestones, we cannot be certain as to the ultimate timing or terms of this investment.

If we are unsuccessful in finalizing definitive documentation with Mr. Khosla on or before April 1, 2014, we will not have adequate liquidity to fund our operations and meet our obligations (including our debt payment obligations) and we do not expect other sources of financing to be available to us. This will likely cause us to default under our existing debt and we could be forced to seek relief under the U.S. Bankruptcy Code (or an involuntary petition for bankruptcy may be filed against us). In addition, any new financing will require the consent of our existing debt holders and may require the restructuring of our existing debt.

If we successfully achieve our performance milestones that allow us to receive the full Commitment in the near term, we expect to be able to fund our operations and meet our obligations until August 31, 2014, but will need to raise additional funds to continue our operations beyond that date.

During the first quarter of 2014, we commenced a series of optimization projects and upgrades at our Columbus facility. The optimization projects and upgrades are targeted at improving throughput, yield and overall process efficiency and reliability. In terms of throughput, we have experienced issues with structural design bottlenecks and reliability that have limited the amount of wood that we can introduce to our BFCC system. These issues have caused the Columbus facility to run significantly below its nameplate capacity for biomass of 500 bone dry tons per day and limited our ability to produce cellulosic gasoline and diesel.

We have identified and intend to implement changes to the BFCC, hydrotreater and wood yard that we believe will alleviate these issues. In terms of yield, we have identified additional enhancements that we believe will improve the overall yield of transportation fuels from each ton of biomass from the Columbus facility, which has been lower than expected due to a delay introducing our new generation of catalyst to the facility and mechanical failures impeding desired chemical reactions in the BFCC reactor.

In terms of overall process efficiency and reliability, we have previously generated products with an unfavorable mix that includes higher percentages of fuel oil and off specification product. Products with higher percentages of fuel oil result in lower product and RIN revenue and higher overall costs. We have identified and intend to implement changes that we believe will further optimize our processes and increase reliability and on-stream percentage throughout our Columbus facility.

We are also aiming to make reductions to our cost structure by, among other things, decreasing natural gas consumption by the facility. While we have completed some of these projects and upgrades, we have elected to suspend further optimization work and bring the Columbus facility to a safe, idle state, which we believe will enable us to restart the facility upon the achievement of additional research and development milestones, financing and completion of the optimization work. We do not expect to complete these optimization projects until we achieve additional research and development milestones and receive additional financing.

Subject to our ability to achieve these additional research and development milestones, our ability to raise capital, our ability to successfully complete our optimization projects and upgrades and the success of these projects and upgrades in improving operations at our Columbus facility, we intend to begin construction of our next commercial production facility, which we do not expect to occur before the second half of 2015 at the earliest. We will also need to raise additional capital to continue our operations, build our next commercial production facility and subsequent facilities, continue the development of our technology and products, commercialize any products resulting from our research and development efforts, and satisfy our debt service obligations.

Currently, we have ceased work on a series of optimization projects and upgrades at the Columbus facility and are bringing the facility to an idle state. These projects were targeted at improving throughput, yield and overall process efficiency and reliability and to address problems we have had to date in the Columbus facility with structural design bottlenecks and reliability issues, operations below nameplate capacity, unfavorable product mix and higher costs due to overall process inefficiencies.

As a result of this cessation of operations, we are unable to estimate 2014 production levels.

Subject to our ability to achieve these additional research and development milestones, our ability to raise capital, our ability to successfully complete our optimization projects and upgrades and the success of these projects and upgrades in improving operations at our Columbus facility, we intend to begin construction of our next commercial production facility, which we do not expect to occur before the second half of 2015 at the earliest. We will also need to raise additional capital to continue our operations, build our next commercial production facility and subsequent facilities, continue the development of our technology and products, commercialize any products resulting from our research and development efforts, and satisfy our debt obligations.

We have generated net losses of $347.5 million, $96.4 million and $64.1 million for the years ended December 31, 2013, 2012 and 2011, respectively, as well as total of $525.5 million of operating losses and an accumulated deficit of $574.3 million from our inception through December 31, 2013. We expect to continue to incur operating losses until we construct our first standard commercial production facility and it is operational.

As discussed above, we have substantial doubts about our ability to continue as a going concern and we must raise capital in one or more external equity and/or debt financings to fund the cash requirements of our ongoing operations. Other than the Commitment from Mr. Khosla, all of our other committed sources of financing are contingent upon, among other things, our raising $400 million from one or more offerings, private placements or other financing transactions, which we do not expect to occur prior to the completion of the optimization projects and upgrades at our Columbus facility.

Analyst reaction

Piper Jaffray’s Mike Ritzenthaler writes:

“We are downgrading shares of KIOR to Neutral (from Overweight) and lowering our price target to $1 (from $3) following the company’s 10-K filing yesterday…additional liquidity in the form of $42.5 million of convertible debt was raised in 4Q13. In our opinion, it no longer seems reasonable that a substantial liquidity infusion outside of expensive ‘just in time’ insider debt is likely over the next 12 months.

“We believe that the pace of the commercial scale-up in 2014 will be too methodical to keep investors interested in the company’s progress. Additionally, rising levels of expensive insider debt will likely be the only material source of funds to compensate for quarterly cash burn, and we see no reason to believe that covenant issues will abate over the coming 12 months (indeed, they will likely intensify as the ‘cash loop’ gets larger). Ultimately, we believe that investor patience will be worn too thin before Columbus is capable of operating at nameplate capacity, absorb all the fixed production costs, and turn a gross profit — allowing the company’s auditors to remove the going concern language from its filings and finally enabling the company to pursue a healthier balance sheet.”

Cowen & Co’s Rob Stone and James Medvedeff write:

“Q4:13 included a $196MM write-down of Columbus and Natchez engineering work; Columbus is expected to remain idle until R&D on improvements is completed (likely six months). A $25MM commitment from Khosla could fund operations through August, but more funding will be needed. We are suspending our rating and price target due to lack of visibility on continued operations and funding sources.”

Raymond James’ Pavel Molchanov writes:

“While we are still fans of the technology platform, we have slim confidence in positive catalysts over the next six to 12 months, and the prospect of equity dilution is also concerning.

“With $25 million of cash at year-end, given the commitment from the company’s largest shareholder, KiOR also needs to raise capital for near-term funding needs. We don’t doubt the company’s ability to raise the funds, but there is no escaping further near-term dilution – which is especially painful given the current market cap. As such, the “going concern” statement included in the 10-K should not come as a major surprise – the auditors required the statement because the company does not have committed financing to cover a full 12 months of costs.

“The good news is that Vinod Khosla, one of Silicon Valley’s wealthiest venture capitalists and the primary shareholder who owns a controlling position in the stock, remains committed to the story. The company has received a $25 million commitment in interim funding from Khosla until additional long-term financing can be secured. This commitment, together with cash on hand, covers expected costs through August.”

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

March 18, 2014

Gevo: Are We There Yet?

by Debra Fiakas CFA

The renewable chemicals and biofuel company Gevo, Inc. (GEVO:  Nasdaq) is scheduled to report fourth quarter 2013 financial results on March 25th.  Analysts have a couple of weeks to prepare questions for management during the earnings conference call.  Top on the list has to be got to be about Gevo’s recent agreement to license its novel isobutanol technology to Porta Hnos of Argentina.  Porta Hnos is a well established ethanol producer so if the license is consummated, it is expected that this partner has the ability to execute on plans to produce isobutanol for the South America market.

Isobutanol is popular as a solvent, but it has a plethora of applications across several industries.  It is used in paint solvents, varnish removers and automobile polish.  Importantly it is a building block for plastic bottles and synthetic textiles.  It even has a use in food production as a flavoring agent.  That all adds up to the kind ‘very large market opportunity” that generates strong sales and profits.

Gevo has already begun production for other markets and the company has several off-take agreements and supply agreements in place, including Sasol Chemical Industries and Land O’Lakes Purina Feed.  The company has also been diligent in putting together development agreements with high profile customers like Coca Cola and the U.S. Army to build the market for its isobutanol made from the fermentation of sorghum, barley wheat or corn.

In December 2013, Gevo announced successful test flights by the U.S. Army with a Black Hawk helicopter fueled up with a 50/50 blend of Gevo’s alcohol-to-jet fuel and conventional jet fuel.  The test was part of the Department of Defense program to get all of its craft certified to operate on alternative fuels.  Gevo already had agreed to supply up to 16,000 gallons to the U.S. Army for test purposes, but has yet to get a long-term supply contract.  Thus another great question for Gevo management is what visibility they have into the DOD’s plans for USING alternative jet fuel.

In the most recently reported twelve months Gevo claimed $8.5 million in total sales, resulting in a net loss of $62.6 million.  This is well below revenue levels in previous periods.  Indeed Gevo has had a fairly erratic track record as its isobutanol sales are still at an early stage and have not yet replaced the sale of ethanol that had previously been produced in the company’s Luverne, Minnesota plant.  The cash burn was nearly as discouraging.  Gevo used $52.5 million in cash in the most recently reported twelve months.

The logic of converting an ethanol plant to isobutanol production is understood.  Unfortunately, while we appreciate the route Gevo has mapped out, the journey seems to be taking some time.  What we really need to understand is “ARE WE THERE YET?”  In December 2013, the company raised about $25 million through the sale of common stock and warrants.  Some of the money will be used to ramp up production at the Luverne plant.

A review of recent trading patterns in GEVO has not been encouraging. Many of the technical formations in recent months point to continued bearish sentiment.  One source of concern for shareholders has been the suppressive effects of the recent common stock issuance on near-term trading.  Shareholders need to know if the pain of dilution is going to be worth it.
Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

March 04, 2014

Solazyme and the Year of Living Dangerously

Jim Lane
solazyme logo

Solazyme steps up to slay the scale-up dragon.

Will the company stay on its scale-up schedule, at the final step where Amyris, Gevo and KiOR ran into crushing delays?

In California, Solazyme (SZYM) announced results for the fourth quarter and full year ended December 31, 2013.

The Results

Q4 Revenue (vs Q4 2012): $11.3M (+34%)
Q4 Net (vs Q4 2012): -$33.3M (+35%)
2013 Revenue (vs 2012): $39.8M (-10%)
2013 Net (vs 2012): -$116.4M (+40%)

So — widening losses, falling annual revenue. So, why the excitement amongst most of the analysts?

2013 Highlights

Scale-up: Completed construction at 20,000 MT Archer-Daniels-Midland Company (ADM) facility in Clinton, IA; downstream companion facility operated by American Natural Products in Galva, IA; neared completion of 100,000 MT SB Oils facility in Brazil.

R&D Partnerships: Partnership inked with Mitsui & Co., new JDA with AkzoNobel, and extension of JDA agreements with Bunge Limited and Unilever.

Offtake: 10,000 MT supply agreement inked with Unilever; also, agreements with Goulston Technologies and Koda Distribution Group.

New platforms: Development announced with myristic, oleic, erucic, capric and caprylic Tailored oils.

Algenist Sales Growth: Algenist revenues totaled $19.9 million in 2013, a 21% increase versus 2012. The Algenist brand also won the 2014 Marie Claire Prix d’Excellence de la Beauté in France. Algenist was unanimously selected by the judging panel.

Bunge's Moema sugar mill
Bunge's Moema sugar mill

Bunge’s Moema sugar mill

The analyst bulls speak:

Pavel Molchanov, Raymond James

Price target: $12.50. The versatility of Solazyme’s algae-produced oils opens the door to wide-ranging opportunities across the fuel, chemical, personal care, and nutrition markets. While fully recognizing the inherent execution risks in early-stage industrial biotech, we are bullish on the roadmap to commercialization, with two major proof points during 1H14. The balance sheet is also in great shape, with the largest cash balance in the peer group, virtually eliminating equity dilution risk over the next 12 months. We reiterate our Outperform rating.

Ben Kallo, Tyler Frank, Baird

Price target: $18. We reiterate our Outperform rating and are increasing our price target to $18 following SZYM’s Q4 earnings. SZYM made critical strides during Q4 and the first part of 2014 in commercializing its Clinton, IA factory and began commissioning its factory in Brazil. Although scale-up risk remains, early runs show that SZYM can produce and sell several types of oils at commercial scale. We will continue to follow its production ramp and would be buyers of the stock at current levels.

Rob Stone, James Medvedeff, Cowen & Co

Price target: $17.00. The Q4:13 loss per share of 49c was wider than St. (38c), but essentially in-line with our (48c) estimate on higher expenses, mainly Clinton startup costs. Clinton is in production. Moema has begun fermentation at 125K liter scale; full production is expected in March/April. We cut estimates to a more conservative ramp/ASP/GM profile, but raise our PT to $17 (vs. $14) as startup risks are easing.

The Bear: Mike Ritzenthaler, Piper Jaffray

Price target: $4.00. We maintain our Underweight rating and $4 price target on shares of SZYM following a 4Q print that included a GAAP EPS loss of ($0.40) on revenues of $11.3 million versus PJC estimates of ($0.28) on $11.8 million. Looking past the shortfall in sales relative to our estimate and the company’s guidance, our main takeaways from the results and the call last evening are that product prices will not likely be above $2k per MT this year, that Solazyme likely lacks sufficient liquidity to ramp both Clinton and Moema to full rates, and that the Moema startup is likely a 2Q event (versus management’s previous target of 1Q).

In the Outlook


Molchanov notes: “Clinton producing, Moema is next. On December 23, we noted that Solazyme is on the cusp of two major milestones along its commercialization roadmap. The first of these materialized on January 30, as commercial-scale production began at the Clinton, Iowa plant, a project built in collaboration with Archer Daniels Midland.

“Consistent with past commentary, production at the Clinton facility will ramp over 12 to 18 months – along a back-end-loaded “S curve” – until reaching nameplate capacity of 20,000 metric tons per year. (Year-to-date, 500 metric tons among three distinct products have been produced, with selling prices averaging $2,600/ton and the high end at $3,700/ton.) Over time, there is room to expand capacity to 100,000 metric tons per year.

“This also happens to be the capacity of the Moema plant in Brazil (a joint venture with Bunge), which is currently being commissioned, with fermentation set to start in March and product recovery in April. At that point, Solazyme will be the first player in the algae bioindustrial arena to have achieved commercial-scale production in both North and South America.”

Ritzenthaler cautions: “Notables from the call include pricing pressure and further delays at Moema. Management stated on the call that they do not expect initial ASPs to be above $2k per MT – a harbinger, in our opinion, of the effects of building capacity ahead of demand. We do not share management’s confidence in their long-term margin targets, with straight-forward production economics combining with what we believe to be a lower level of pricing power to paint a very different picture. With the Recovery area still under construction, and four weeks to the end of 1Q14, the startup of Moema on an integrated basis will almost certainly be a 2Q event.

Positive cash flow

Molchanov says: “Positive cash flow on tap for 2015. While the ramp-up of production will certainly not be linear – as is always the case in industrial biotech – we anticipate utilization rising to 50% in 4Q14. This translates to a nearly four-fold increase in total revenue from 4Q13 to 4Q14. To be clear, Solazyme can get to positive cash flow at the corporate level (in 2015) even before full utilization at either Clinton or Moema.”

Kallo & Frank add: “Two commercial factories ramping in 2014. Clinton is currently producing ~500 MT per month and Moema is on track to begin commercial production by Q2:14. Importantly, SZYM scaled three different oil-based products at Clinton and has a fourth underway. Management believes the ramp of both (Clinton and Moema) facilities will take 12-18 months and expects to be cash flow positive by 2015.

Averaged price target (4 analysts)

$12.87. Feb 28 closing price: $12.27.

Reaction from Solazyme

“2013 was a year of great progress for Solazyme as we readied our first major capacity projects, signed new commercial supply agreements, added important joint development partners, and further expanded our portfolio of Tailored oils,” said Jonathan Wolfson, CEO of Solazyme. “In the first half of 2014, we are focused on successfully executing Solazyme’s entry into broad commercial operations. We have begun shipping multiple products from the Clinton/Galva, Iowa facilities and are deep into commissioning in Brazil as we complete the first-of-its-kind 100,000 MT Solazyme Bunge Renewable Oils (SB Oils) facility at Moema. In these early days we are focused on generating consistent and reliable production for our partners, ahead of accelerating our production ramp later this year.”

“Solazyme’s 2013 results included 21% growth in our most commercially mature business, as our Algenist skin care line expanded its product offerings and geographic footprint. We also delivered on all of our joint development milestones for our partners,” said Tyler Painter, CFO of Solazyme. “We anticipate continued growth in these revenue streams in 2014 and look forward to growing product revenues from commercial supply of our products later this year as we ramp commercial production. In the meantime, Solazyme remains in a healthy financial position as we complete our first plants and prepare to broadly scale operations.”

The Digest’s Take: The Year of Living Dangerously

2014 is Solazyme’s take-off year. After more than a decade as a development-stage company, now begins the real-scale up of operations and revenues.

We’ll know about scale-up by year-end — by then, SZYM will be past the Hillary Step where AMRS, KIOR and GEVO stumbled…or not. We also should know if the product demand is there at prices that meet the market’s anticipations.

Incremental steps along the way. Mechanical completion on all aspects in Q2. And look for any warnings on the commissioning process in Q3, plus news on the customer front.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

February 08, 2014

Biofuels Companies Rev Up While Oilcos Sputter

Jim Lane 

What’s going on – aren’t biofuels supposed to be dead, and fracking changing everything forever in oil & gas?

Yet, tough times for growth at the public oil companies, while bellwether renewable fuel equities are on the rise.

Why aren’t results tracking the hype?

It’s earnings season — time to look away from the pundits, the fans, and the Las Vegas oddsmakers — and look squarely at who made how much, where, when and why. And time to draw some conclusions and look ahead towards the 2014 calendar year.

Neste Oil (NEF.F)

Renewable diesel owner/operator

2013 in review

Overall, a strong year at Neste.

Comparable operating profit totaled EUR 604 million (2012: EUR 355 million), a 70% increase in comparable operating profit, while net cash from operations totaled EUR 839 million (2012: EUR 468 million). The fourth quarter more than held up its end with a Q4 profit of EUR 164 million (Q4/2012: EUR 77 million). Return on capital was 11.8% (2012: 5.0%) and earnings per share were EUR 1.92 (2012: EUR 0.70).

CEO Matti Lievonen commented: “This was the first full year of operations at Renewable Fuels with all plants running at full capacity. The business succeeded in increasing its sales and customer base, particularly in the US, and opened up a new market in Australia. Margins were very strong, both in Europe and North America, during the summer, but declined towards the end of the year. The use of waste- and residue-based feedstock was successfully expanded to 52% of total renewable inputs. Renewable Fuels recorded a full-year comparable operating profit of EUR 273 million compared to a loss of EUR 56 million in 2012.

The 2014 outlook

In the global economy, volatility is expected to continue. Diesel is projected to be the strongest part of the barrel, and gasoline margins are expected to improve seasonally during the spring and summer. While demand for premium-quality base oils is continuing to grow, base oil margins are likely to remain under pressure due to overcapacity.

Vegetable oil price differentials are expected to vary, depending on crop outlooks, weather phenomena, and variations in demand for different feedstocks, but no fundamental changes in the drivers influencing feedstock price differentials are expected. Price differentials between vegetable oils are likely to widen from the current narrow levels during the year 2014 in both Europe and North America.

Uncertainties regarding political decision-making in the US are likely to be reflected in the renewable fuel markets. Examples of pending decisions include the volume targets for biomass-based diesel and renewal of the Blender’s Tax Credit, which both impact the US market. The reintroduction of a US Blender’s Tax Credit for biofuels would impact the result positively. Weakening of the euro against the US dollar would also have a positive impact on the result. Overall, the company is forecasting a full-year comparable operating profit of EUR 500 million in 2014.

Novozymes (NVZMY)

Integrated supplier for renewable fuels fermentation technologies.

2013 in review

Also a good year at Novozymes. All financial targets were met or exceeded for 2013 following a good fourth quarter. Organic sales growth was 7% (5% DKK, 8% LCY), EBIT grew by 6% and net profit by 9%, and the EBIT margin increased by 0.3 percentage point to 24.7% compared with 2012.

Peder Holk Nielsen, President and CEO of Novozymes, comments: “Today we close the books on an eventful 2013 for Novozymes. We delivered a good finish to the year and ended at the high end of our guided ranges for sales growth and above that for earnings. We also signed a number of landmark agreements within Biomass Conversion and BioAgriculture that will enable Novozymes to change the world together with its customers. The outlook for 2014 is positive. We expect that our diversified growth platform will enable us to deliver good sales and EBIT growth. We also expect that The BioAg Alliance will receive the final green light from regulators soon, so we can hit the ground running on developing novel, game-changing BioAg solutions for farmers worldwide.”

The 2014 outlook

2014 is expected to show a continuation of trends seen in 2013. As a result, the outlook for 2014 is positive with good underlying sales and EBIT growth. The outlook includes the expected financial impact from The BioAg Alliance with Monsanto. The BioAg Alliance does not affect the outlook for organic sales growth, but is expected to have a negative impact on sales growth in LCY and DKK of up to one percentage point. The BioAg Alliance is expected to have a positive impact on the EBIT margin of between a half and a full percentage point. All in all, including The BioAg Alliance, Novozymes expects organic and LCY sales growth of 6-9%, sales growth in DKK of 4-7%, EBIT growth of 6-9% and an EBIT margin of 25-26%.

The longer-term for Novozymes

Novozymes is projecting that it will sell enzymes to at least 15 plants by 2017 with a ramp-up in 2015-16. This will include Beta and non-Beta projects.
Another projection is that Beta Renewables will have 15-25 new facilities contracted in 2015-17 (Novozymes made this forecast in 2012, and has not changed it.) Contracted doesn’t mean that the facilities will be complete , and buying enzymes at that time — but, ultimately, sales from those 15-25 projects are expected to be 1B DKK.

Novozymes is also projecting that “The biofuel market in the U.S. moves toward E15” — but Novozymes spokesman Johan Melchior put those expectations into context earlier this week. “At the time of launching those targets (one year ago), E15 appeared to be the way to increase the ethanol consumption in the US. Today, it is a little more opaque as to what could drive ethanol consumption higher. It could be E85, or it could still be E15.

Generally, growth in Novozymes’ corn ethanol business in the U.S. is not predicated on a growing ethanol production. We have launched a series of new technologies to this industry, which is generating a lot of growth today. We have innovation in the pipeline to secure growth in the future. Of course, underlying ethanol volume growth is preferred, but it is not a requirement for growth.

In the context of the company’s overall financial targets, it is also important to remember that U.S. corn ethanol currently only accounts for 14% of our business. This is of course significant, but it remains a smaller part of Novozymes’ business.

The Ethanol sector: Green Plains Renewable Energy, Pacific Ethanol, Aemetis

Let’s look at the ethanol companies, which have been on a complete tear, with an average share price gain of 54.53% in the past three months.

Pacific Ethanol (PEIX)
11/6/13 closing price $3.82
2/6/14 closing price $6.67
Gain: 74.6%

Pacific Ethanol announced this week it will implement yield-enhancing technology at its Magic Valley, Idaho plant. The company chose ICM Inc.’s Selective Milling Technology as a component in its process to increase corn oil production and boost ethanol yields by increasing available starch for conversion.

Neil Koehler, the company’s president and CEO, stated: “We are committed to increasing our product yields, diversifying our revenue streams and improving profitability. We began commercial corn oil production with an ICM-designed system at our Magic Valley plant in mid-2013. SMT complements these operations by increasing both corn oil and ethanol yields and positions our Magic Valley plant for the potential future production of advanced biofuels that builds upon the SMT platform.”

Last month, the company announced it has retired in full its $14.0 million senior convertible notes.

Green Plains Renewable Energy (GPRE)
Closing price 11/6/13: $15.77
Closing price 2/6/14: $23.50
Gain: 49.0%

In Nebraska, Green Plains Renewable Energy announced 4Q net income of $25.5 million compared to net income of $6.7 million for the same period in 2012. Revenues were $712.9 million for Q4 2013 compared to $883.7 million for Q4 2012.

Net income for the full year was $43.4 million, or $1.26 per diluted share, compared to $11.8 million, or $0.39 per diluted share for the same period in 2012. Revenues were $3.0 billion for the full year of 2013 compared to $3.5 billion for the same period in 2012.

“Green Plains generated operating income of $51 million in the fourth quarter and a company record of $108 million for the full year of 2013,” stated Todd Becker, President and Chief Executive Officer. “We have invested in our assets and employees which, we believe, will continue to drive our financial results in the future.” During the fourth quarter, Green Plains’ ethanol production segment produced approximately 209.6 million gallons of ethanol, or approximately 100 percent of its daily average production capacity.

Aemetis (AMTX)
Closing price 11/7/13: $0.20
Closing price 2/6/14: $0.28
Gain: 40.0%

Aemetis announced this week that its 50 million gallon per year capacity biodiesel and refined glycerin production facility in Kakinada, India has been upgraded to produce high-quality distilled biodiesel. The Aemetis plant was built in 2008 using advanced technology to produce biodiesel and refined glycerin using large volumes of lower-cost, non-food by-products from the edible oil industry as feedstock to supply the biofuel, pharmaceutical, and industrial markets.

The Aemetis plant is the only distilled biodiesel producer in India and is one of the only plants in Asia capable of producing large supplies of biodiesel that meet the rigorous European Union (ISCC) standards. During 2013, approximately $20 million of biodiesel was produced by the Aemetis plant in India and delivered to customers in Europe.

What’s driving the results?

These are good years, with strong outlooks for two businesses very much at different ends of the biofuels spectrum — one an enzyme supplier for fermentation technologies associated primarily with ethanol, the other an owner/operator of thermocatalytic refining capacity associated primarily with drop-in renewable diesel. Both have significant operations outside of renewable fuels, but are aggressive in terms of their ambitions in this sector, and realizing substantial results herein.

Reinforcing that there’s very good money to be made in renewable fuels — which may trouble some who fondly remember the days when it was more about a movement than an industry, and small biodiesel co-ops and ethanol co-ops were the order of the day.

But investment chases dollars — and stability — capital being a coward as well as greedy. Growth flows from growth. It demonstrates that the sector is not for the faint of heart — neither Novozymes nor Neste has had a series of free passes handed to them in building up their respective businesses (at one point, one crazy environmental group named Neste the worst company on earth, owing to their use of palm oil) — but the sector is definitely capable of generating the kinds of cash flows that even a hard-hearted, carbon-skeptic Wall Street financier would take an interest in.

Over at the integrated oil companies

Bad fourth quarter and a so-so year at ExxonMobil, Shell, Chevron and BP.

Shell reported a 71% drop in Q4 profits. Exploration costs, production drops and a weak refining & marketing environment were all to blame. Shell’s been backing out of projects — its ethane cracker in Louisiana, and it’s dropping out at Eagle Ford after acquiring 100,000 acres in 2010. Production dropped 4.7% compared to Q4 2012.

Chevron reported a production drop of 3.5% with revenue down 3.6% and earnings down 18,3 percent compared to 2012. Like Shell, they have dumped their oil shale project.

ExxonMobil. Earnings dropped 24% YoY, and costs rose 7%. Q4 was a little better, down 13% over Q4 2012. Production dropped 1.8% compared to Q4 2012. Both exploration & production and the refining & marketing businesses were down — profits dropped by half in the downstream.

BP. Profits are down 28% compared to Q4 2012, and 23.4% for the full year compared to 2012

The bottom line

For investors

Short-term. The Biofuels Digest Index, up 1.2% in the past year. Ethanol equities up 54%. A basket of Chevron, BP, Shell and ExxonMobil, down 1.9% in the same period. Neither looks all that great given the big run-up in the S&P 500, but certainly there’s a delta between the two that’s worth some thinking. Especially given that the BDI was somewhat dragged down by the weak performance of BP and Shell, two components of the Index.

Mid-term. Here’s the bad news on fracking. Polish reserve estimates were cut by 85% after drilling began, and operations in Romania were challenging given environmental opposition. On renewables: we recently projected 6B+ gallon in new advanced biofuels projects scheduled to be online by 2019. That’s just over 400,000 barrels per day — just enough to provide some pause for thought for the mid-term investor.

Long-term. If you are thinking long-ish term in the energy space, the production declines, fracking challenges, and the cancellations with respect to oil shale (kerogen oil) tend to confirm that the world is looking at $100+ production costs in terms of the marginal fields that will be needed to keep up with the IEA’s forecast for sharp increases in energy demand through 2035. Clearly, the space is ripe for another technology breakthrough either in fossil oil or renewable yields.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

February 01, 2014

Dyadic: Congenial Customer Relations

by Debra Fiakas CFADyadic Logo

A continuous quest to find companies that can turn sales into profits has turned up an unlikely font of cash.  Dyadic International (DYAI:  OTC/PK) is a developer of industrial enzymes.    Back in the day the company sold enzymes to the rag trade to create those fancy jeans with the stone washed look.  More recently Dyadic has worked with Abengoa (ABGB: NASD) and Codexis (CDXS : NASD) in support of their renewable fuel processes.

Dyadic uses the fungus Myceliopthora thermophila in a fungal expression system for gene discovery, expression and the production of enzymes and proteins.  Dyadic ferments the fungus, called C1 for short, at commercial scale to speed up time to new product introduction and reduce cost.  The company has been successful in getting its innovations protected with a series of U.S. patents  -  an important shield in the somewhat crowded industrial enzyme playing field.  The most recent patent award came in November 2013 for a method to use novel combinations of enzymes to convert lignocellulosic biomass into fermentable sugars.

Yet, let’s get to the cash flow news.  In the twelve months ending September 2013 the company claims to have earned $15.7 million in sales from customers, largely to sales of enzymes to animal feed producers.  The company declared a net loss in the annual period but claims to have squeezed $5.7 million in operating cash flow out of $15.7 million in total sales.

The thing is, Dyadic’s financial news is unverified.  The company issues press releases and submits reports to OTC Markets where its stock price is quoted.  However, it files no reports with the Securities and Exchange Commission and does not have its books audited.

Investors have to treat Dyadic as a private company, conducting the sort of intense scrutiny needed to dig into information held close to the vest.  Even though the OTC Markets calls for financial reports from quoted companies that are in a style and format reminiscent of SEC reports, it would be ill advised to assume that preparation of reports to OTC Markets are as vigorous.  One plus for Dyadic is an audit of its annual report by a recognized regional auditor.

Dyadic and its founder/CEO Mark Emalfarb have a colorful history.  It is worthwhile to check out the story as a means to get perspective on Dyadic’s present reporting and trading circumstances.  It involves a Hong Kong subsidiary, allegations of accounting improprieties, quite a lot of finger pointing and numerous lawsuits.  The dust appears to have settled on most of it and the company has moved on to new product introductions and customer relationships.  Still Dyadic has still not resumed filing reports with the SEC and that leaves DYAI quotation on the OTC Pink service.

Approximately 27,000 DYAI shares trade each day.  The recent $0.08 spread between the bid and ask prices is surprisingly narrow for an OTC quoted security.  It is a company with some blemishes.  What is more, a position in DYAI could be one of the more time consuming in your portfolio, given the level of due diligence required to manage the risk. 

Yet recent developments suggest there could be more sales and cash flow in Dyadic’s future.  Dyadic is to have received a $1.0 million milestone payment from BASF related to research work and licensing in the December 2013 quarter.  A long-time relationships with Abengoa is about to enter commercial stage as that company’s cellulosic ethanol plant in Kansas goes into volume production in 2014.  Royalty payments should follow.  Dyadic is brewing up its second target protein for Sanofi that will ultimately end up in pre-clinical tests.  As long as Dyadic management can keep its customer relationships congenial, it prospects are certainly looking up.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

January 23, 2014

Renewable Energy Group Acquires LS9

Jim Lane

A stunner at NBB. Renewable Energy Group (REGI) deploys its balance sheet — and takes aim at renewable chemicals — as it acquires the storied LS9.

In Iowa, Renewable Energy Group (REGI) announced it has acquired LS9 for a purchase price of up to $61.5 million, consisting of up front and earnout payments, in stock and cash. Most of the LS9 team, including the entire R&D leadership group, will join the newly named REG Life Sciences, LLC, which will operate out of LS9’s headquarters in South San Francisco, CA.

Under the terms of the agreement between REG and LS9, REG paid $15.3 million in cash and issued 2.2 million shares of REG common stock (valued at approximately $24.7 million based on a trading average for REG stock) at closing. In addition, REG may pay up to $21.5 million in cash and/or shares of REG common stock consideration for achievement of certain milestones over the next five years related to the development and commercialization of products from LS9’s technology.

The technology

LS9’s proprietary technologies harness the efficiency of the fatty acid metabolic pathway of microorganisms and are expected to make a wide range of renewable chemicals for large, diverse markets such as detergents and personal care, as well as renewable fuels. LS9’s technology platform can utilize diverse feedstocks including conventional corn and cane sugars, low-cost crude glycerin from biodiesel production, and cellulosic sugars. LS9 is a cornerstone investment for REG Life Sciences, which also plans to develop adjacent and complementary fermentation technologies.

All about LS9 here in our 5-Minute Guide to their technology and story.

Follows the Syntroleum acquisition

Last month, REG announced that it would acquire substantially all of the assets of Syntroleum Corporation (SYNM), and assume substantially all of the material liabilities of Syntroleum, for 3,796,000 shares of REG common stock worth $40.08 million at today’s market close.

Syntroleum has pioneered Fischer-Tropsch gas-to-liquids and renewable diesel fuel technologies, has 101 patents issued or pending, and owns a 50% interest in Dynamic Fuels, LLC, a 75-million gallon renewable diesel production facility in Geismar, Louisiana.

”Syntroleum and its 50%-owned subsidiary Dynamic Fuels represent an attractive entry path for REG into renewable diesel,” Oh continued. “They have invested substantial resources in their Bio-Synfining technology, which enables the economical conversion of lipid-based biomass into diesel and jet fuel. Their technology and products complement our core biodiesel business.”

Restarting in Iowa and Texas

In October, REG was primping up its core biodiesel business in Iowa when it held a ribbon cutting ceremony to formally open their recently acquired biodiesel refinery in Mason City and announced it has begun a $20 million project to upgrade the plant to a multi-feedstock facility. REG completed the acquisition of the former Soy Energy, LLC refinery on July 31, 2013. REG immediately began efforts to repair and re-start the plant and began producing biodiesel on October 1.

And back in July, REG re-opened the former North Texas Bio Energy plant it bought in November. The waste cooking oil and fats biodiesel plant in Western Bowie County can produce 15 million gallons of biodiesel annually.

Reaction from REG and Khosla

“This acquisition is a major step in realizing REG’s strategy to expand into the production of renewable chemicals and other products,” said Daniel J. Oh, Renewable Energy Group President and CEO. “The industrial biotechnology platform and robust patent portfolio LS9 has been building will now be combined with REG’s proven production and commercialization capabilities to accelerate the commercial introduction of renewable chemicals to meet increasing customer demand for sustainable products.”

“LS9 is a leader in developing technology for the next generation of chemicals and fuels to be produced from renewable feedstocks rather than petroleum,” said Vinod Khosla, founding partner of Khosla Ventures, an investor in LS9. “REG’s proven capabilities, track record for execution, and access to lower cost feedstock make it an ideal partner to commercialize LS9’s technology.”

What’s it all mean?

Two takeaways.

1. LS9′s investors bail with a so-so deal. Keep in mind, LS9 raised $75 million in its four public funding rounds. $5M in 2006′s Series A, $15M in a 2007 Series B, $25M in a 2009 Series C that brought in Chevron in addition to Flagship, Khosla and Lightspeed, and $30M in a 2010 Series D that added BlackRock. Not to mention sweeteners given to insiders, and the founder’s stock.

But there’s upside in the REG shares — if the shares double — and LS9′s team hit their milestones — the investors may recoup their investment and more.

2. Renewable diesel and chemicals. That’s what’s hot and that’s where REG is pointing its long-term strategy, as a complement to biodiesel, as it charts its path forward and also puts its strong balance sheet to work.

Is this more about renewable diesel or chemicals? We think the latter, short-term. The Syntroleum acquisition creates the short-term capacity for renewable diesel – LS9′s strengths lie also in areas such as surfactant alcohols — and other designer molecules. And we see REG having the market heft to take this to scale when the technical readiness is there.

The feedstock problem

As with biodiesel, LS9′s technology bumps up against a feedstock problem — it requires reasonably pure sugars, for now. Although Jay Keasling’s lab has done work to expand LS9′s capabilities to waste biomass.

Jim Lane  Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

December 19, 2013

REG Enters Renewable Diesel With Syntroleum Purchase

Jim Lane

In Oklahoma, and Iowa, Renewable Energy Group (REG; NASD:REGI) announced that it would acquire substantially all of the assets of Syntroleum Corporation (NASD:SYNM), and assume substantially all of the material liabilities of Syntroleum, for 3,796,000 shares of REG common stock worth $40.08 million at today’s market close.

The purchase price subject to reduction in the event that the aggregate market value of the REG common stock to be issued would exceed $49 million or if the cash transferred to REG is less than $3.2 million).

“This will help us grow our advanced biofuel business, enhance our intellectual property portfolio, expand our geographic footprint and launch REG into new customer segments.”” said REG CEO Daniel Oh.

Syntroleum has pioneered Fischer-Tropsch gas-to-liquids and renewable diesel fuel technologies, has 101 patents issued or pending, and owns a 50% interest in Dynamic Fuels, LLC, a 75-million gallon renewable diesel production facility in Geismar, Louisiana.

”Syntroleum and its 50%-owned subsidiary Dynamic Fuels represent an attractive entry path for REG into renewable diesel,” Oh continued. “They have invested substantial resources in their Bio-Synfining technology, which enables the economical conversion of lipid-based biomass into diesel and jet fuel. Their technology and products complement our core biodiesel business.”

Syntroleum’s Board of Directors unanimously approved the asset purchase agreement and recommends that Syntroleum stockholders vote in favor of the transactions contemplated by the asset purchase agreement at a special meeting of stockholders to be convened for that purpose.

“Today’s announcement marks the culmination of our comprehensive process to review Syntroleum’s strategic alternatives to enhance shareholder value,” said Syntroleum President and CEO, Gary Roth. “We are confident that REG’s multi-feedstock business model and the combination of our strong management teams is the best path forward for Syntroleum.”

Syntroleum’s Board of Directors also has approved a plan of dissolution for Syntroleum pursuant to which Syntroleum will be liquidated and dissolved, in accordance with Delaware law, following consummation of the asset sale and subject to stockholder approval of the plan of dissolution at the special meeting.

The asset sale is expected to close in the first quarter of 2014, subject to satisfaction or waiver of the closing conditions.

More on the story.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

December 16, 2013

Total and Amyris Take Another Step Down The Aisle Towards Commercial Biofuels

Jim Lane amyris logo

Total elects to bottle up the IP and protect itself against Amyris “hardship” as it advances towards commercializing key biofuels.

In California and France, Amyris (AMRS) and Total announced the formation of Total Amyris BioSolutions B.V., a 50-50 joint venture that now holds exclusive rights and a license under Amyris’s intellectual property to produce and market renewable diesel and jet fuel from Amyris’s renewable farnesene. Amyris also plans to initiate sales of renewable jet fuel in Brazil once it achieves ASTM validation.

“The joint-venture Total Amyris Biosolutions is a first step towards the commercialization of our renewable diesel and jet fuels. We are in the phase of scaling-up the industrial process and we expect to start commercialization within the next few years, once our joint research and development goals are met,” said Philippe Boisseau, President, Marketing & Services and New Energies, and a member of TOTAL’s Executive Committee. “As far as commercialization is concerned, the new joint-venture will benefit from the know-how and customer access of TOTAL, which operates in more than 130 countries and is aiming to become a key supplier in renewable fuels,” Boisseau added.

“The formation of this joint venture, anticipated by our streamlined collaboration agreement signed last year, paves the way for us to initiate our fuels commercialization efforts globally, building on Amyris experience with renewable diesel in Brazil and the growing demand for lower-emission jet fuels worldwide,” said John Melo, President & CEO of Amyris, Inc. “TOTAL has been a strategic partner for Amyris for the last three years and a model of how global companies can leverage our inspired science to deliver sustainable solutions for a growing world,” Melo added.

Background to the JV

In July 2012, the Company and Total entered into a series of agreements to establish a framework for forming a joint venture to produce and commercialize farnesene-based and farnesane-based diesel and jet fuels and to provide the Company with convertible debt financing for research and development relating to the JV Products, including a Master Framework Agreement, a second amendment to the Technology License, Development, Research and Collaboration Agreement, Securities Purchase Agreement and Registration Rights Agreement.

The interim JV

The July 2012 Agreements contemplated that the Parties would form an interim joint venture entity in advance of the completion of the R&D Program to provide Total with (i) certainty that the Parties’ joint venture would receive the proposed intellectual property licenses from the Company and (ii) an option for Total to purchase the Company’s interest in the interim joint venture in the event the Company were to experience a financial hardship prior to the formation of the production and commercialization joint venture. Consequently, the Parties incorporated JVCO on November 29, 2013.

The Parties have agreed that JVCO’s purpose is limited to executing the License Agreement and maintaining such licenses under it — until one of three outcomes occurs.

They are:

1. Go. Total elects to go forward with either the full (diesel and jet fuel) JVCO commercialization program or the jet fuel component of the JV commercialization program.
2. No-Go. Total elects to not continue its participation in the R&D Program and the JV.
3. Buy-out. Total exercises any of its rights to buy out the Company’s interest in the JV.

Timing on the go / no-go

A final decision from Total on whether to proceed with commercialization is generally due no later than early 2017.

Following a Go Decision, the Articles and Shareholders’ Agreement would be amended and restated to be consistent with the shareholders’ agreement contemplated by the July 2012 Agreements.

The Bottom Line

There are two way to look at this interim JV — a bundle of sudden excitement at Total about the technology as it burns through milestones — or, Total seeing enough investment to date and promise going forward to bottle up the technology rights inside a JV, should Amyris be sold, founder, or otherwise be diverted from carrying on with its obligations under the original 2012 agreement. Looks to the Digest like the latter. Which is good news for all parties.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

November 18, 2013

Renewable Fuels Proposal: "Complete Capitulation to Big Oil"

Jim Lane

Obama, in trouble on healthcare, sounds the retreat on renewable fuels; industry groups aghast as EPA targets next-generation, non-food biofuels for biggest cuts; slashes corn ethanol also.

Major push-back expected following “complete capitulation to Big Oil”.

What are the political, economic drivers? What’s the impact, and how will industry respond?

In Washington, the EPA released its 2014 proposed standards and volumes for renewable fuels. The volumes, as widely expected, include substantial reductions from the statutory standards in the original Energy Independence & Security Act.

The announced proposed volumes met with united outcry from biofuels trade associations, and sniping criticism over the continued existence of the Renewable Fuel Standard from food and oil industry groups. Oil refiners were remarkably silent on a day which handed them a significant regulatory victory.

As analysts began to pore over the detail, the EPA’s proposal won support from Jason Bordoff, former Special Assistant to President Obama and Senior Director for Energy and Climate Change at the National Security Council — and senior Piper Jaffray equities analyst Mike Ritzenthaler wrote that producers would find work-arounds or alternative markets to maintain revenues and cash-flow.

In today’s Digest, we have a complete wrap-up of reaction, plus as look at the proposed rule, the EPA’s rationale, the advanced biofuels vs corn ethanol dilemma, the options to change EPA’s proposal in the comment period, and the industry’s short-term and long-term options should the rule be finalized as proposed.


Continue reading "Renewable Fuels Proposal: "Complete Capitulation to Big Oil"" »

November 17, 2013

Everything Going for KiOR - Just Not Very Fast

Jim LaneKiOR Logo

What’s up with the cellulosic biofuels leader? Good news, bad news?

If you have ever spent any time reading up on ion thrusters — a next-gen engine technology that NASA recently employed on the Dawn spacecraft — you might chuckle when you think of the plight of poor KiOR (KIOR).

The good news about ion thrusters is that they can ultimately achieve speeds of 200,000 miles per hour, ten times that of the Space Shuttle. The bad news is that the Dawn took four days to accelerate from zero to 60 miles per hour.

Yep, zero to 60 in four days. Not exactly the Tesla (TSLA) of outer space. And that’s the story, as it happens, with KiOR.

It’s got everything going for it except pace.

Consider the background. You have one of the first next generation advanced biofuels plants at commercial scale. The woody biomass feedstock promises a way around the food vs fuel conundrum and promises new economic opportunity to the timber-rich US Southeast. The fuels costs are expected to be competitive with fuels made from fossil crude oil. Plus, the drop-in, renewable fuels offer a complete solution to the problem of blend walls and automotive infrastructure.

Not to mention, a celebrated cleantech investor in Vinod Khosla — recently augmented by Bill Gates — and the equity package for a second commercial plant all sewn up.

But the whole enterprise — well, it’s been a slow and steady tortoise, hasn’t it? How soon will it perform at capacity? For answers to your questions, let’s look at the progress in Q3.

The Tale of the Tape

In the third quarter, KiOR used 10,373 tons of wood chip feedstock, well short of the 45,000 tons the plant would consume at full capacity. Overall plant utilization was 23 percent. Reflective of 41% uptime and running at 50-60% capacity.

Production of 323,841 gallons of fuel was reported, a substantial gain over last quarter, when production was 75,000 gallons.

Overall yield was 31 gallons of cellulosic fuel per ton of feedstock, if we simply divide the fuel production into feedstock use — what we don’t know is how much bio-oil is being produced that was not upgraded to fuel. The process is supposed to yield, in this generation of the technology, north of 70 gallons of bio-oil per ton of feedstock. Suggesting that either yields are way short of optimal, or there’s a lake of 400,000 gallons of bio-oil awaiting upgrade — or, possibly, not suitable for upgrade.

The company is reporting 167,087 gallons of cellulosic fuel production in October — a gain of 50 percent over the average for Q3, and more than double the output for Q2.

Caveat catalystor: Those input costs

The company reported that “we saw a $2.3 million net increase in cost of goods sold relating primarily to feedstock and catalyst costs, along, to a lesser extent, with utilities, maintenance and other costs related to the ramp-up.”

In the general context of a $43 million quarterly loss and a development-stage company, we didn’t see much attention to this number in the analyst community. But, taken against a production jump of 248,000 gallons of fuels — well, it is easy to divide one number into the other and get a “feedstock and catalyst” cost jump of $9.27 per gallon. Again, we think there might be a lake of bio-oil out there. But it is a metric to watch.

Analyst reaction

Overall, analysts were bullish and share prices are up. Why? Analysts are applauding the increase in revenues and fuel production, noting the emphasis on increasing throughout from 50-60% towards 100%, and willing to wait for yield optimization to occur in 2014.

In other words, “we’ll bear the unsuitable oils or excess char for now — show us that you can shove in the woodchips.”

Pavel Molchanov at Raymond James writes:

“The first shipment from the Columbus plant in 1Q was a major milestone for KiOR and the cellulosic biofuel industry as a whole. The plant’s ramp-up since then, albeit slow, provides additional validation.

“Revenue up 3x in 3Q13: The key metric, of course, remains revenue which jumped 3x sequentially (after also tripling in 2Q) to $720,000. Production at Columbus reached 324,000 gallons, a similarly healthy ramp from 2Q, with October the best production month yet at 167,000 gallons. We continue to project that full nameplate utilization will be reached in the second half of 2014.

“Debt financing on deck: The equity round is therefore completed, putting to rest the market’s fears of more near-term dilution. The final step before construction can begin on the next production plant (Columbus II) is a high-yield debt raise, which we think will be in the range of $100-200 million. We see better than 50/50 odds of wrapping up the debt raise by year-end.

Piper Jaffray’s Mike Ritzenthaler adds:

“We maintain our Overweight rating and $5 target on shares of KIOR following the company’s 3Q13 print that included EPS of ($0.40) on $720k in revenue, both of which were in-line with management’s previous comments.

“Operations is currently focused on increasing feed rates (approximately 50-60% of nameplate in October) and is not yet optimizing yield (which partially explains why total production in October was ~15-16% of nameplate). We look forward to optimization through 2014 when the earnings power of the facility will become far more apparent.

“Columbus ramping as expected and on-stream improvements highlight the quarter. In 3Q13, KiOR shipped ~245k gallons of blendstock, at ASPs discounted to wholesale as (temporarily) expected. Management expects the discount to continue through 2013 as the facility ramps. On the call, management reiterated their target of >1 million gallons in 2013. Considering the uptime of the Columbus plant recently, we believe this production target is very achievable.”

The bottom line

Glacier, tortoise, ion thruster. Take your pick from the basket of analogies. But think in terms of tripled revenues, tripled production. Yield will have to come — and we doubt if anyone thought it would take this long, in the KiOR boardroom.

As long as investors stay with the company as it makes its Slow March to Energy Freedom — we expect great things out of KiOR in 2014 when yields come under the microscope.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

KiOR: Too Early to Jump In

by Debra Fiakas CFA
Kior's Columbus Facility

Last week cellulosic ethanol producer Kior, Inc. (KIOR:  Nasdaq)reported its strongest quarter production and financial results since the company first started commercial operations at its Columbus, Mississippi facility.  Kior turned out 323,841 gallons of ethanol fuel in the three months ending September 2013, bringing total production for the year to 508,975 gallons.  Along with the third quarter report, management did a bit of boasting over record production of 167,087 gallons in the month of October.  That represents a 2.0 million gallon per year run rate, but management is guiding for a more modest 1.0 million gallons.

All that good news was not enough to cover up a record net loss for the quarter of $43.1 million.  Cash production costs are still higher than revenue.  Granted some costs in the most recently reported quarter might be one-time in nature as the company settles into what they call ‘steady state’ production.  Still management has a big job ahead to ramp production level that will generate even breakeven results.

Kior has made a point of the scalability of its production technology  -  fluid catalytic cracking.  Granted it is a proven process perfected in the oil refining industry.  Management has also made a point of its wood chip feedstock  -  Southern Yellow Pine.  We have to concede the Southern Yellow Pine is available in abundance and it is priced accordingly.  Management is so confident in its production technology the company is planning a second production facility near Columbus.

Even with the $100 million Kior is getting from long-time fan Vinod Khosla and a few close friends, there is much for KIOR shareholders to worry about before production scales to breakeven in both its plants.  The company has been using about $25 million in cash per quarter to support operations in just one facility.

Since Kior went public in June 20111, the share price has been on a long-term grind downward.  There have been many more opportunities to collect shares at low levels than there have been chances to sell at peak prices.  The stock has recovered from a dramatic sell off and record low in September, but it still may be too early to jump into KIOR. 
Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

November 09, 2013

Third Quarter Earnings: Biofuels: Gevo, Solazyme, and Amyris

Jim Lanefour_horsemen-all

SZYM, AMRS, GEVO check in with Q3 results. What’s heavenly, what’s hellish?

In years gone by, it was not too hard to write up a summary of Gevo (GEVO), Solazyme (SZYM) and Amyris (AMRS)— all aimed at fuels, all in the development stage, all used synthetic biology in closed fermenters, all had big backers ranging from brand-name equity partners to big-time strategics, all went public in the same 2010-11 IPO window.

These days, much more complex. It’s a jungle of production costs, average selling prices, offtake deals, LOIs, and MOUs. Following them requires just a certain mastering of the markets in farnesene, dielectric acid, paraxylene, oleic oil, erucic acid, squalane, fragrance oils, skin cream. Oh, and fuels like renewable diesel, biodiesel, isobutanol and jet fuel, too.

But we need not look only at the complications, friend. All you have to do is locate and measure the four horsemen of the financials — the items that are critical for industrial biotechnology at scale..

As Grantland Rice was moved to observe, you might know the Four Horsemen by aliases. In industrial biotech, you might have heard them described as Revenues, Strength, Capacity and Mix. But they are the Pale Horse, the Black Horse, the Red Horse and the White Horse.

They deliver the company from the high-value, small-market products at the top end of the price curve to the lower-value, high-volume products (where fuels reside, for example). So, the Q3 results are in and what have we learned?

four_horsemen-paleThe Pale Horse: Revenues

Like the pale horse, revenues should be strong and transparent.


Total revenue for the third quarter ended September 30, 2013 was $10.6 million compared with $8.6 million in the third quarter of 2012, an increase of 24%. Revenues in the third quarter of 2013 included $4.8 million of product sales compared to $3.8 million in the same period of 2012, an increase of 27%. Going forward, Piper Jaffray’s Mike Ritzenthaler cautions: “First, that the 2014 milestones are far less granular and under control than those in 2013, and that the company will not disclose many supply agreements – obfuscating investors’ ability to gauge firm underlying demand for tailored oils.”

Digest note: Strong growth that just missed Wall Street expectations.


Aggregate revenues for the quarter ended September 30, 2013 were $7.0 million compared to aggregate revenues of $19.1 million in the third quarter of 2012. Last year’s third quarter revenues included $1.7 million of sales related to the Company’s ethanol and ethanol-blended gasoline business, a business which the Company transitioned out of in the third quarter of 2012. Of the $7.0 million in aggregate revenues in the quarter ended September 30, 2013, $4.1 million was related to renewable product sales and $2.9 million was related to collaboration and grant revenue.

Digest note: Biofene sales are gaining traction…it all depends on production capacity and cost.


Revenues for the third quarter of 2013 were $1.1 million compared to $0.6 million in the same period in 2012. They included proceeds from sales of biobased jet fuel to the U.S. Air Force (USAF) of $0.4 million, revenue under Gevo’s agreement with The Coca-Cola Company, and revenue from ongoing research agreements.

Digest note: Essentially development-stage here – the meaningful numbers await 2014 and full ops at Luverne.

four_horsemen-blackThe Black Horse: Margins, financial strength and partner relations

Like the black horse, these should be robustly positive and utterly fearsome.


Third quarter GAAP net loss attributable to Solazyme, Inc. common stockholders was $30.7 million, which compares with net loss of $22.5 million in the prior year period. Cowen & Company’s Rob Stone and James Medvedeff: add: “2013 guidance lowered, now targeting to be cash flow positive in 2015. SZYM lowered its FY:13 revenue guidance. As such, SZYM expects FY:2013 revenue of $40-$42M and expects to be cash flow positive in 2015. Piper Jaffray’s Mike Ritzenthaler strikes a cautious note in warning: “With Bunge (BG) exploring alternatives for its Brazilian sugar business, we question whether a new owner would find much novelty in the Solazyme project – we believe investors should account for this risk.”

Digest note: has the partners and the balance sheet to manage growth. But watch Bunge.


Rob Stone and James Medvedeff of Cowen & Company note: “AMRS targets $4.00 per liter cash cost by year-end, about breakeven on the lowest ASP products in the portfolio. Jet fuel is making progress, and work continues on drilling fluids, but time to volume use is not certain.” GAAP net loss for Q3 was $24.2 million compared to a loss of $20.3 million for Q3 2012. Cost of products sold increased to $8.3 million for the three months ended September 30, 2013 from $4.4 million for the same period in the prior year. “Achieved lowest quarterly cash operating expenses since our Initial Public Offering in 2010… Following quarter-end, closed initial tranche of convertible note financing for $42.6 million.”

Digest note: Has the partners and they believe; but will costs come down and capacity expand fast enough?


The net loss for Q3 was $15.9 million compared to $12.1 million for the Q3 2012. Baird’s Ben Kallo writes: “Capital raise will be needed in the near term. GEVO ended Q3:13 with ~$25.7M in cash, and we believe GEVO has enough liquidity to operate into Q1:14. We believe continued progress at Luverne and/or increased interest in the licensing of GEVO’s GIFT technology could help the company to receive funding from a strategic investor or return to capital markets..

Funding used in the development of the bio-para-xylene facility was received from Toray Industries, Inc. under a definitive agreement previously announced in 2012. Speaking of partners, in August Gevo announced the opening of its biorefinery for fully renewable paraxylene at South Hampton Resources in partnership with Coca-Cola and Toray Industries. Toray has provided capital for the construction of the Silsbee facility and has signed an offtake agreement for paraxylene produced at that facility.

Digest note: Expect a capital raise soon. The model for paraxylene is locked in and a winner, if the technology comes through.

four_horsemen-redThe Red Horse: Production capacity and timeline to scale

Like the Red Horse, these must be as urgent and swift as fire trucks racing towards a rescue.


If ever there was an argument for the supremacy of the Red Horse, it’s this: after announcing a 3-month slip at the Moema plant — and keeping in mind, leading energy analysts like Raymond James’ Pavel Molchanov had long-modeled such a slip — the stock was hammered 15 percent in today’s trading.

Solazyme CEO Jonathan Wolfson notes: “The facility in Iowa is already supplying market development samples to customers. Construction at the Brazil facility is in its final phases at over 90% complete and commissioning is underway…our timeline for oil production at Moema has been moved into 1Q14, in part to accommodate additional enhancements we are making at the facility. Stone and Medvedeff at Cowen & Co add “Two different tailored oils have been produced at 500K liter scale and a third is planned before year-end at the Clinton plant.”

Raymond James SVP Pavel Molchanov writes: “Solazyme is set to reach commercial-scale production in the U.S. and Brazil in 1Q14 – unquestionably the first player in the algae arena to claim such a feat, although it is a quarter later than management had previously targeted. It’s a minor pushout in the grand scheme of things…The trajectory of the ramp-up will certainly be back-end-loaded: while this is not much more than a guesstimate on our part at this point, we anticipate utilization of 8% in 1Q14, rising to 50% in 4Q14.

Digest note: It’s a delay at Moema, but if it is three months and if Clinton proceeds to accelerate, it will hardly matter in the long run. But this scale-up step — from a development-stage company to heavy production at scale – it’s the big one now. Risks abound – we’ll see in the next 12 months how Solazyme has prepared for the bumps in the road.


The company notes that it “operated with all six fermentors during the entire quarter at the Company’s farnesene production facility in Brotas, Sao Paulo, Brazil. The Motley Fool’s Maxx Chatsko adds: “Management expects total farnesene production for 2013 to come in at more than 4 million liters.

Rob Stone and James Medvedeff of Cowen & Company noted: “In addition to squalane, niche diesel, and farnesene for base oils, shipments may commence for other categories such as flavor and fragrance, and polymers and plastics. However, Brotas is likely to take 2-3 years to fully ramp to 40MM liter annual capacity.”

Digest note: It’s a long way to Tipperary — or, rather, the tipping point of full-scale operations at Brotas. That, perhaps more than anything, represents the discount on the valuation of Amyris compared to the underlying value of its disruptive technology. It’s a long walk to freedom, as Mandela noted.


The company notes that in August, it had “increased commercial production of isobutanol at its Luverne facility by bringing online a second production train,” and added that “Current production of isobutanol is intended to be sold into the specialty chemicals market with Sasol (SSL), specialty fuels market and converted into bio-jet fuel for the U.S. military.”

Last month, Gevo signed its first letter of intent to commercially license its GIFT technology to IGPC Ethanol. IGPC is a farmer owned co-op that owns a 150 million liter plant in Ontario, Canada and has been producing ethanol since 2008. IGPC is interested in licensing Gevo’s GIFT technology to incorporate isobutanol production at its ethanol facility.

Digest note: Customers are there, and more coming. It all comes down to the production cost — can Gevo deliver? If so, it’s a massively undervalued stock.

four_horsemen-whiteThe White Horse: Product and customer mix

Like the White Horse, these should be as dazzling as the new-drifted snow and a blend of all the colors of the rainbow.


Solazyme CEO Jonathan Wolfson notes: “Our commercial progress has accelerated with the recent announcement of two supply agreements…and advance the commercialization of our food ingredients out of our Peoria facility. This week we launched a completely new skin-care brand and product line, EverDeep, our second brand along with Algenist.”

Yep, there are supply agreements with Unilever in the (initial) 10,000 MT range, scheduled for 2014. And one with Goulston Technologies in the textile lubricants market. In addition, Solazyme and Bunge extended and expanded their JDA to enable the Solazyme Bunge Renewable Oils JV to have access to a broader portfolio of oils.

Digest note: Early days on delivering full offtake for Moema — but the momentum is there with big brands. Can Moema open on time, produce as expected, and will the customers line up at the right time. It’s all about Moementum, isn’t it?


Rob Stone and James Medvedeff of Cowen & Company note: “In addition to squalane, niche diesel, and farnesene for base oils, shipments may commence for other categories such as flavor and fragrance, and polymers and plastics.

However, The Motley Fool’s Maxx Chatsko adds: “Successfully commercializing the first fragrance molecule with partner Firmenich early next year will pave the way for higher-value products, while additional oils and fragrances being developed with International Flavors & Fragrances hold even more promise for the company’s future…The average selling price per liter of farnesene dropped considerably, but that was expected as sales of lubricants with Cosan increased in the product mix. Previously, most of the company’s sales were the emollient squalane — the highest-value product made from farnesene — to the cosmetic industry, as well as renewable diesel — one of the lower-value products offered — to various Brazilian transportation authorities.

Digest note: Very nice broadening of the customer mix — which should broaden still further as the costs come down and Amyris can start reeling in margins on bigger-market products. But how big, how soon?


In September, Gevo signed a supply agreement with the U.S. Navy to supply them with 20,000 gallons of Gevo’s renewable alcohol-to-jet-5 (ATJ-5) jet fuel and an option to increase the order to 90,000 gallons.

Gevo has previously supplied ATJ-8 jet fuel under its contracts with the U.S. Air Force for 56,000 gallons and the U.S. Army for 16,150 gallons. On July 24, 2013 Gevo announced that it had signed a supply agreement to supply the U.S. Coast Guard with up to 18,600 gallons of finished 16 percent renewable isobutanol-blended gasoline.

Digest note: For right now, it’s anchors aweigh as the company leans heavily on government contracts — look for the Sasol (SSL) relationship to take up the slack as Luverne expands.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

October 26, 2013

Bunge: Now Less Sugar

Jim Lane

In New York, in the wake of a $37 million Q1 loss in its sugar unit, Bunge [BG] CEO Soren Schroder, who took the reins of the company in June, announced yesterday that the trading giant is commencing what he termed a “thoughtful comprehensive review” for its sugar business, including a potential sale of all the assets.

The company, which announced a $137 million overall quarterly loss, after posting a Q4 loss of $599 million in June. The Q4 loss included write-downs and charges of $683 million, including a $327 million write-down in its sugar and bioenergy unit.

Bunge’s sugar woes

The cause of the troubles? After buying five sugar mills in 2006 and entering the sugar business in 2006, Bunge has struggled along with the entire sector in the face of low sugar prices, which declined to a low of 16 cents a pound (the May 2014 NYMEX sugar contract has since recovered to $0.183, but apparently not enough to convince Schroder of the long-term opportunities in sugar. The sugar business had swung into losses starting with the forth quarter, losing $49 million in the face of falling ethanol and sugar prices.

Bunge's Moema
sugar mill

Bunge’s Moema sugar mill

The improvement in this quarter was slight and, though Bunge projected a profit in 2014, it described its $8-$10 per tonne profit target as “difficult.”

Brazil-wide output troubles

In addition to price troubles, the sector has been hit with poor cane yields — with Bunge finance director Drew Burke, the Bunge finance director noting that “Last year’s average ATR [cane sugar concentration] was near historic lows and this year it is expected to be below that level,” and indicated that delays in the harvest would also provide challenges in terms of getting all the cane off the fields.

According to a Reuters report, sugar output in Brazil has already been trimmed nearly five percent from a high of 690 million tonnes, as some 40 smaller mills have been forced to shut down, or have been consolidated into larger operations.

The shift from sugar? What does it mean for partners like Solazyme and Cobalt

The company did not discuss its new directions in detail as it announced its quarterly results — except to say that it had not had specific discussions with any buyers. Speculation from observers ranging from outright sale of the entire unit. to a sale of selected assets as Bunge reduces exposure, to the shutdown of capacity to stem the flow of losses.

The announcement puts more strategic light on Brazil for advanced biofuels — which is recent years has been considered a haven for potential collaboration between US technologies and Brazilian producers — but often finding deployment challenges as both early-stage advanced technology developers, as well as cash-strapped Brazilian operations — struggled to form capital for large-scale deployments of new technology.

One bright spot, to date, has been the sustained entry of Bunge into the sugar business — and especially its plans to add advanced biofuels and especially high-value chemicals and tailored oils into its product mix.

Bunge and Solazyme [SZYM]


This past summer, Solazyme and Bunge broke ground on a their 100,000 metric ton renewable oil production facility adjacent to Bunge’s Moema sugarcane mill in Brazil. Construction started on schedule and the plant is targeted to be operational in the fourth quarter of 2013. It will service the renewable chemical and fuel industries within the Brazilian marketplace and will initially target 100,000 metric tons per year of renewable oil production.

A new Bunge agreement signed at the end of last year will expand the joint venture-owned oil production capacity at Solazyme Bunge Renewable Oils from the current 100,000 metric tons under construction in Brazil to 300,000 metric tons by 2016 at select Bunge owned and operated processing facilities worldwide.

In a recent quarterly report, Bunge posted $2.395 billion in edible oils sales, representing 1.692 million tons of product sold at $1,415 per metric ton. In that context, this deal represents $424 million in potential revenues at current prices, using the average edible oils prices that Bunge is currently generating.

Bunge and Cobalt

Last October, Bunge’s innovation arm invested an undisclosed amount in the Series E funding round for California-based Cobalt Technologies and Bunge aid at the time that it anticipates introducing the biobutanol technology in its sugarcane mills. The companies are working Rhodia to produce n-butanol from bagasse at a pilot facility in Campinas.

Last summer, Cobalt Technologies and Rhodia announced they would begin joint development and operation of a biobutanol demonstration facility in Brazil. The Cobalt/Rhodia plant is planned to utilize sugarcane bagasse to make n-butanol; bagasse is used at sugar mills to provide process energy to drive the mill and to supply power to the local grid; the Cobalt project will utilize that fraction of the bagasse that generates power for the grid, or any residual biomass that is burned as waste.

Work was scheduled to begin in August 2012 and move to a mill site in early 2013 for integration testing. Operational testing at the demonstration plant was expected to be completed by mid-2013. The exact production capacity of the plant was not disclosed.

Not exactly a fire sale

Bunge bought the assets for $1.5 billion and CEO Schroeder said that the had a “replacement value” today of $3 billion — which indicates that the company is not exactly in a “desperate to sell at any price” mode at this time. At the same time, despite the losses, Bunge stock has been riding high, with shares recovering from a low of $69.00 in June to reach $80.11 in yesterday’s trading.

Support from the Brazilian government

This year, substantially good news came from the Brazilian government when it announced that it plans to invest $2.85 billion in renewable energy and biofuel technology research. The funds were specially pointed towards support for companies like Bunge Ltd. and Petroleo Brasileiro SA to develop high-margin chemicals and increase ethanol output. Brazil is seeking to be a leader in next generation biofuels development after a decade of underinvestment in research.

Expanding in soy, biodiesel

At the same time that its sugar and ethanol operations are in doubt, Bunge is still growing its biodiesel unit in Brazil. In March, Bunge inaugurated its new biodiesel factory in Nova Mutum, Mato Grasso, which has a capacity of nearly 110,000 gallons of biodiesel per day from soy, or 40 million gallons per year.

The bottom line

In hindsight, you can see the overall wisdom of Bunge’s strategy in advanced biofuels.

The Solazyme relationship — not to mention the stake in Cobalt — had taken Bunge from a typical Brazilian sugarcane ethanol play to a unique and dynamic venturist looking to connect its sugar and oil trading operations, through biotech that converts low-cost, renewable sugars into tailored, high-value renewable oils.

Will Bunge, in fact, hold on, in time reap the benefit from its substantial investments of time and money? We suspect they will – not only because of the company’s confidence in its strategy, but because it may be hard to find suitors for all these assets at one time, and with its advanced bioenergy investments at such a critical juncture.

If Bunge unloads assets, it may find reasons to hang on to Moema and at least one other plant, to reap the benefits of the connection between low-cost sugar and high-priced oils that it has sought.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here

October 08, 2013

BlueFire Renewables: Solid and Liquid

Jim Lane

You just can’t beat the financing of renewable fuels for all-out zaniness. Tragicomedy, anyone? Consider the case of BlueFire Renewables (BFRE).

Sometimes, the financing of renewable fuels can start to sound a little like an Abbott & Costello routine.

The planned
BlueFire plant
The planned BlueFire plant

Allow us to summarize. You can finance a liquid renewable fuel as long as the market is solid, especially if you are making solids, and the market for solids is liquid, and your liquidity is solid. Adding solids to your liquids will make you more solid, and eventually more liquid. If you know what I mean.

In other words, to get altitude, what you need is a little more grounding.

So that clears up that.

Fuel financing paradoxes and BlueFire Renewables

The paradoxes of financing renewable fuels come to mind with the news, from BlueFire Renewables (BFRE), that they have conjured up a new configuration for their long-contemplated cellulosic biofuels project in Mississippi. To which they have added wood pellet production.

The process — well, it’s been proven at pilot scale for more than a decade — is based on the old Arkenol technology that has been in place in Japan since 2003 — an acid pretreatment that releases cellulosic sugars for fermentation. BlueFire has long demonstrated production of biofuels from urban trash (post-sorted MSW), rice and wheat straws, wood waste and other agricultural residues.

Back in 2009, BlueFire was one of six companies to receive large DOE grants aimed at stimulating the cellulosic biofuels markets in time for the large cellulosic targets that were a key part of the Renewable Fuel Standard.

Given that the technology was already long-in-place at pilot scale, it had an advanced state of technical readiness compared to other technologies just then coming along — companies like KiOR, for example, were just getting underway. So, it landed $88 million under the American Recovery and Reinvestment Act, in December of 2009 (largely still untapped, at this stage, as the grant money is staged and most of it tied to future project milestones).

After the 2009 grants, the financing process started for that generation of technologies that BlueFire found itself amongst. It’s a script right out of the Marx Brothers.

“Cowcookies”, the lost Marx Brothers script

Scene, an office on Wall Street. Enter a lender, Harold P. Cheesebreath — and his prospective borrower, Al Cohol.

Cohol: (confidently) See here, it’s a no-brainer. Mandated fuel, pilot-proven technology, no food crops, carbon-friendly.
Cheesebreath: I don’t care about carbon.

Cohol: (brightly) OK, here’s a mandated fuel, demonstrated technology, and no food crops.
Cheesebreath: I don’t care for mandated markets.

Cohol: (chastened, but unbowed) OK, here’s a demonstrated technology, and no food crops.
Cheesebreath: Why can’t you use crops with a track record?
Cohol: (sighing) Because those would be food crops.
Cheesebreath: Food vs fuel? Well, I won’t finance that.

Cohol: (sadly) OK, here’s a demonstrated technology.
Cheesebreath: I don’t do first commercial projects. I’ll do your next one.

Cohol (brightening): You mean you’ll finance my second plant?
Cheesebreath: No, your next one. If you’re planning your second, I’m only interested in your third. If you’re ready for your third, I’m only interested in your fourth.

Cohol: (distressed) But that will take at least five years, to get to a fourth.
Cheesebreath. And that’s another thing, your sector is always five years away.

Cohol glumly leaves the building.

Of course, most project owners give up at this stage. Which appears to be the point of the process.

But some carry on. In doing so, they remind us of the character of Boxer, an impressively strong and dedicated horse who plays a leading role in George Orwell’s Animal Farm. At a time when the pigs running the farm had become completely corrupted, and the farm went through a great crisis, Boxer reflected:

“I would not have believed that such things could happen on our farm. It must be due to some fault in ourselves. The solution, as I see it, is to work harder.”

BlueFire soldiers on

And so, those project owners that carry on, carried on as if the fault lay within themselves and simply worked harder. In the case of BlueFire, it has been a half-decade of structure the deal, re-structure the deal, and re-re-structure the deal until you’d think that Joan Rivers had fewer facelifts.

“While the rumors, hopes and comments about our death have swirled about,” CEO Arnold Klann reflected with a sigh, “we have been trying to figure out how to finance a first of its kind commercial project without any corporate, venture, cash flow or other financial support.

“I can say with great confidence, we know at least 50 ways on how not to finance a project. I am thinking about writing a song about it to the tune of “50 ways to leave your lover” by Paul Simon. The other thought is to write a book,” Fifty shades of no financing”.

As Paul Simon wrote in 50 Ways to Leave Your Lover:

She said it grieves me so
To see you in such pain
I wish there was something I could do
To make you smile again
I said I appreciate that
And would you please explain
About the fifty ways

But Klann demurs in explaining the fifty ways. One of those optimistic types who generally insists on putting the past in the past. Instead, he’s focused on the next structure, the next financing. You have to admire that indefatigable quality; it’s the quality that Edison had.

“While it has not been easy nor fun,” he told the Digest, “I think we may have discovered the way for a pure project finance that stands alone.”

Option #51: The pellet story

What is it? BlueFire has integrated a synergistic wood pellet production plant to its proposed facility in Fulton, Mississippi. The reconfigured design will be a 9 million gallon per year ethanol plant integrated with a 400,000 ton per year wood pellet plant. The pellets will be sold under long term contracts into the European mandated renewable energy market.

Traditionally wood pellets are used for electricity generation and can be sold under long term, fixed price contracts to credit worthy utilities thereby adding financial stability to a project.

Klann explains. “This restructure provides a more robust economic model for the Fulton facility with a significant increase in projected revenues. It has become apparent in our attempts to obtain financing for the project that the right synergies and revenue model would be needed to build this first of a kind facility.

“The optimum use of biomass in the integrated facility strikes a much better balance of revenue with costs and a better utilization of resources. The more profitable use of capital and the enhanced security of projected revenue streams more closely match what the banks have been requiring in the very conservative and restricted credit markets.”

Ah, you see, there’s the lignin to be considered. A byproduct of most cellulosic biofuels processes — especially those of the enzymatic kind (as opposed to the thermochemical companies that blow through lignin’s complex bonds by meting them with heat).

And you know what they say about it. “You can make anything with lignin except money.”

But here’s the exception to the rule, Klann says. Blended with lignin from BlueFire’s process, the wood pellets create a market advantage under the international mandates for renewable energy, especially for power in the European Union.”

The state of play

BlueFire has previously announced start of construction in Mississippi and has completed the preliminary site work for the ethanol facility. The engineering and other development activities needed are already under way to add the pellet plant. Synergistic partners will be announced once the definitive agreements are signed.

The Bottom Line

Will this approach work? Only those with access to the complete data will ultimately be able to tell. But it’s significant that we haven’t heard a media-ready peep out of BlueFire for nearly 17 months as they have gone through their financing cycles. Klann and his clan are the opposite of hypesters.

So, that they are prairie-dogging this approach and sticking their heads out of the dark tunnels of financing and showing themselves to the outside world — well, it’s a good sign.

And we wish them well. More about BlueFire here.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

September 25, 2013

KiOR's Hard Yards of Commercialization

Jim Lane

Businessman leaping
Businessman leaping photo via BigStock

“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 second quarter.

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, attracted the following extraordinary post.

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 Aug. 31.”

The response from a reader, Mark Henry, writing in the comment box, set alight a wave of web traffic with a series of stunning allegations.

Henry writes:

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!”

KiOr logo

The Allegations

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 going out.”

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 production.

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.

The skinny

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, KiOR observes:

“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 phase.

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 report.”

The Digest adds: Some of the confusion may clear up shortly, with the EPA’s new heating oil rule released today.

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, said:

“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 contractors.

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 to KiOR.”

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 the answers.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

September 24, 2013

KiOR Shows Its Gallons

KiOR Shows Its Gallons

Jim Lane


Landmark cellulosic drop-in biofuels producer releases update on early-stage production: is the increasing gallonage enough to silence the critics?

Today, we head to the Chapel of Hard Data, and get closer to the music.

Nobody walks slower, in public, than at a wedding or a funeral. In the case of KiOR (KIOR), the critics and supporters have been shouting loud as the company makes its slow, public march up the aisle towards steady-state operations.

Most observers, sitting in the pews, have been unsure as to whether to be tossing rice in celebration, or breaking into a chorus of “Nearer My God To Thee”.

So it was highly welcome when the company this week provided an update on the operations at its Columbus, Mississippi, facility in response to the volumes and Renewable Identification Numbers, or RINs, listed in the EPA Moderated Transaction Systems monthly report issued on September 18, 2013.

In July and August, the Columbus facility produced 172,398 gallons of fuel, bringing the 2013 production total from the facility to 357,532 gallons through August 31, 2013. Approximately 83% of production was in the form of gasoline and diesel, with the remaining production as fuel oil. Production from Columbus during July and August exceeded total second quarter production by nearly 40,000 gallons.

As of August 31, 2013, Columbus has shipped 199,071 gallons of fuel since the beginning of 2013, about half of which (99,175 gallons) were shipped in July and August. The Company expects to continue shipping fuel produced in July and August during the month of September.

Reaction from KiOR

“KiOR’s Columbus facility continues to make strides toward steady state operations,” said Fred Cannon, President and CEO. “With the BFCC section of the Columbus facility currently producing additional oil, we believe that we are well-positioned to build on the progress made during July and August and to produce additional volumes of cellulosic fuel for American vehicles consistent with our most recent guidance.”

Analyst commentary

Lats month. Raymond James energy analyst Pavel Molchanov posted a thoughtful commentary on KiOR’s progress towards regular commercial operations.

Key thought: “We can think of plenty of liquefied natural gas (LNG) plants and offshore oilfields that had delays much worse than this.”

The Molchanov thesis

KiOR’s Columbus plant is North America’s first-ever cellulosic biofuel plant to achieve commercial-scale production. Large energy infrastructure projects always go through a ramp-up process, and of course Columbus uses a novel technology with its own unique set of operational growing pains. Yes, Columbus is behind schedule (by 4-5 months) relative to where management had originally expected to be at this point, hence the cut in 2013 guidance (from 3-5 million gallons to 1-2 million gallons). But this does not imply any structural flaws in the underlying technology, and 4-5 months is hardly a crisis in the grand scheme of things.

“Following last week’s 37% sell-off – an excessive, momentum-driven reaction to previously disclosed information – we are reiterating our Outperform rating on shares of KiOR. Our fundamental thesis is intact, the business model remains valid, and we think that investors open to early-stage stories should look at the current entry point (29% of our DCF estimate) as a buying opportunity. This, of course, has always been a risky stock – hence our Venture Risk suitability rating – but in that context, our stance remains positive.

“Amid a sharp market pullback,” Molchanov continued, “KiOR shares had a particularly rough week, falling 37% to an all-time low. (The small float, 21% of shares outstanding, inherently exacerbates the share price impact of any selling.) In the absence of incremental news flow, this was simply the continuation of the sell-off from August 8 and 9, when KiOR (1) reported below-guidance 2Q shipments and lowered guidance for the rest of the year, (2) raised future production cost estimates, and (3) filed a 10-Q with a going concern statement.”

KiOR vs petroleum

In the company’s August 8 announcement, KiOR signaled that it was increasing its production cost target for its proposed Natchez facility from $1.80/gal to $2.25-2.48/gal.

It’s a substantial increase, but let’s compare that to the price of the incumbent fossil-based gasoline — currently pricing at $2.97 (gasoline) and $3.08 (diesel).

Now, let’s review.

1. Priced below the incumbent, without subsidies.
2. Uses cellulosic, non-food feedstocks.
3. Drop-in fuel with no blend wall issues.
3. A here-today technology, producing fuel now and at increasing gallonages.

Would that the world had a few more of these.

The bad news

One lesson that KiOR would have benefited from is the studying the Amyris (AMRS) and Gevo (GEVO) examples of the pain that comes when missing production forecasts made as a public company.

We’ll not comment on any legal jeopardy that comes from disappointed shareholders filing class-action suits on a “we’ve been had” basis – as better experts on the protections offered in “safe harbor” statements will have a better view.

But, clearly, KiOR had expectations of producing 300-500,000 gallons in Q2 and 3-5 million gallons in Q3. This week’s announcement is consistent with a 300,000 – 500,000 gallon production in Q3 — so, a full quarter behind. The September production numbers may well be key, in terms of the company hitting 1-2 million gallons for the year.

Let’s look at this in terms of the plant’s stated capacity – 11 million gallons, or 900,000 gallons per month. Clearly, the company is producing something like 10% of its stated capacity right now.

What we don’t know is – why? Three possibilities.

1. KiOR is fundamentally far behind in terms of the technology’s production rate. Somethiing that would strike at the hearty of the business model.

2. The company is not running the technology full-time, possibly not even close — for technical reasons That could simply be a ramp-up problem — or related to issues in non-core technology. Or could be a fundamental issue that is being addressed — and would be a risk element.

3. The company is not running the technology full-time, possibly not even close — for cash reasons. When cash is short, and when production is not yet profitable at this smaller-scale facility, why make and ship money-losing gallons? Why not focus on rate and yield, and go for volume at the full-scale facility planned for Natchez?

Seen in perspective

As Molchanov says “4-5 months is hardly a crisis in the grand scheme of things.”

It’s no surprise that the enemies of biofuels are delighted to spread bad news of KiOR’s delays — with the implication that cellulosic fuels are fantasy fuels. Ensuring even more difficulty in other technologies obtaining first-of-kind commercil plant financing – causing further unexpected delays, and further shortfalls compared to cellulosic fuels mandates and expectations.

In short, a self-reinforcing phenomenon.

For now, we await the September production figures — or the corresponding RIN numbers from the plant. Should production fall below 100,000 gallons — could be a long haul towards full commercial success for KiOR, and its cash-raising opportunities are limited, given the tanked stock price.

Should production hit between 100,000-150,000 gallons — good incremental progress, though far from full-scale operations. North of 200,000 — would be a good sign that KiOR is on its way.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

August 13, 2013

KiOR's Columbus II: A New World of Profits?

Jim Lane

One of biofuels’ hottest companies aims to accelerate path to break-even; is a shortfall in gallons produced in Q2 meaningful?

In Texas, KiOR (KIOR) reported a Q2 loss of $38.5M, compared to a Q1 loss of $31.3M. on revenues of $239K, up from $71K in Q1. Net loss for the second quarter of 2012 totaled $23.0 million, or $0.22 per share.

The biggest news coming out of the quarterly results is that the company is looking at an additional 500 dry ton/day facility, dubbed “Columbus II”, as an intermediate step between now and building its 40 million gallon plant at Natchez. That would build potential capacity at Columbus to 24 million gallons, overall — at KiOR’s stated 72 gallon per ton yields.

According to the company, the capex for the facility is in the $177M to $225M range and the unsubsidized cost of production would be in the $2.60 to $2.80 range. The switch is prompted, according to CEO Fred Cannon, by advances from the R&D team in utilizing other feedstocks in addition to yellow pine.

According to KiOR, the construction phase would last around 13 months and reduce the time needed to bring the company to cash-positive.
“I am happy to report that Columbus has made significant operational progress and is continuing to build its on-stream performance and reliability,” said Fred Cannon, KiOR’s President and Chief Executive Officer. “In addition to making our first shipment of cellulosic gasoline in the second quarter, we more than doubled the run time of our core technology, the Biomass Fluid Catalytic Cracking Unit (BFCC), to 43% in the quarter, up from 20% in the first quarter.”

“In total,” Cannon continued, “we shipped over 75,000 gallons of cellulosic fuel from Columbus. The BFCC unit is running now and producing high quality oil that we are preparing to upgrade into fuel and ship to our customers. Over the next few months, we will focus on further building that progress and we look to push the facility closer to its nameplate capacity.”

Overall, on a per gallon basis, the company was netting some $3.18 per gallon for its gasoline and diesel shipments.

Let’s recap on the KiOR’s past and future milestones.

Q4 2012. The plant was mechanically completed and commissioning began. At the time, the company tipped that it would begin shipping fuel in Q1 and complete the commissioning process by the end of the first half.

Q1 2013. The plant shipped its first cellulosic diesel — though it was a minimal 5,000 gallons of cellulosic diesel – right before the end of the quarter. At the time, the company affirmed guidance that it would produce in the range of 3-5 million gallons of cellulosic fuel for the year. Groundbreaking for the second commercial facility, in Natchez, Mississippi, was tipped for 2H13 and expectations were raised that capacity there might be increased from 40 million gallons to 50 million gallons per year. The core technology, the Biomass Fluid Catalytic Cracking Unit, reaches 20% run-time in the quarter.

Q2 2013. The plant ships its first cellulosic gasoline, and reaches 43% run time with its core Biomass Fluid Catalytic Cracking Unit, including a 30-day run announced in early July that occurred in June.

Steady-state operations. Last month we wrote: “The gallonage for Q2 is not nearly as important as the reaching of steady-state operations,” and we continue to emphasize that reaching continuous operations on a regular basis will provide confirmation of a successful design at Columbus – and point towards expanded success when the 40 million gallon Natchez facility is completes. The achievement of 43% run-times is encouraging — but there’s far more progress to be made and Q3 will be highly important.

Q3 2013. This is the big, big quarter. As we wrote in July, “that’s where we’ll need to see the production yields move into the 1M+ range for the quarter, if the Natchez project is going to look attractive to providers of lower-cost financing.”

Volume confusion.

Confusing in the Q2 release was the announce that the company had shipped 75,000 gallons of cellulosic fuels for the quarter, well below the 300,000-500,000 guidance the company gave in May. Why confusing? While the company tipped back in July that it has only commenced shipping fuels on June 28th – obviously, the reason for the low gallonage by quarter-end — we’re not sure here at the Digest how to square the run-time increases with the low shipments.

The plant’s nameplate capacity is 2.75 million gallons per quarter (or, 11 million gallons per year), and CEO Fred Cannon indicated that the core technology, the BFCC (biomass fluid catalytic cracking) unit had 43 percent uptime in the quarter. Accordingly, we would have, ordinarily, expected 1.18 million gallons is the plant had been running at full capacity. So, we’re left to surmise that about 1,000 tons of wood were processed during the quarter — a fraction of the plant’s capacity.

Why? Possibly, to conserve on cash while run-time was increased.

Another possibility is that the BFCC unit produced far more than 75,000 gallons of intermediates — but they were not upgraded into fuels for cost, quality, customer or logistic reasons.

Another possibility is that the yields out of the BFCC unit were lower than the 72 gallons per ton that the company has aimed for — making it possible to have high run-time but low output. The company has tipped that, having achieved continuous operation by the end of June, it will focus on increasing output in Q3, and yield optimization in Q4.

Suggesting that a combination of low yields, reduced inputs and Q2 downtime were the trio of culprits for the unexpected low gallonage for the quarter. For definitive answers, we’ll have to wait and see how the crucial Q3 shapes up.

Analyst Reaction

Ben Kallo at Baird:

We reiterate our Neutral rating and $6 price target following KIOR’s Q2 earnings call. KIOR successfully shipped its first commercial batch of cellulosic gasoline, increased run times at Columbus, and is considering a Columbus II plant in an effort to shorten the amount of time needed to become cash flow positive. Despite shipping cellulosic fuel, capital constraints remain a major overhang. Q2 misses estimates. Capital need overshadows the positives. KIOR ended the quarter ~$11.5M of cash and will need to raise capital for the construction of Columbus II or Natchez. Management has indicated a 1:2 equity/debt ratio for a potential capital raise. We need to see a successful capital raise and additional progress at Columbus to become buyers of the stock.

Pavel Molchanov at Raymond James:

KiOR reported a 2Q net loss of $0.36 per share, vs. our $(0.29) estimate and consensus’ $(0.34), reflecting higher plant startup costs. This was the second quarter with sales from the Columbus plant. Revenue jumped 3Q sequentially, to $239,000, though production volumes were still fairly slim. (Recall, KiOR announced on July 1 that continuous operations have been achieved, meaning that 2Q results cover only a partial quarter of steady-state production.) On the balance sheet, cash remained stable at $11 million; there is additional borrowing capacity under a bridge loan, though a sizable financing round has long been telegraphed by management, and we anticipate it taking place over the next several months. Columbus II Option Offers Lower Cost, Lower Risk. Building a copy of the existing plant would be able to use existing engineering while incorporating the latest catalyst improvements and potentially cheaper feedstock. The lead time to completion may be several months shorter, and startup would be aided by having an experienced team already at the plant.

The bottom line.

Reaching continuous production was an important milestone — moving from commissioning in late 2012 to continuous production in Q2 is monumentally faster than some of its peers in cellulosic and/or advanced biofuels. Confusion over production of intermediates and shipment of fuels not withstanding. But it all sets up for a hugely important Q3 — that’s when KiOR will need to show that it can raise production — in order that it can raise money for Natchez.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

July 19, 2013

The Economics of Biofuels: Three Drivers

Jim Lane

They’re known as the three E’s: emissions, energy security and economic development. But how do they contribute to the economics of biofuels?

And how do those economics compare to the economics of crude?

The financing of biofuels is founded, to put it as simply as possible, upon the economics of substitution. On the one hand, there’s the price of energy currently locked inside biomass; on the other hand, the price of energy currently locked inside crude oil. The monetary rationale for biofuels is a version of vive la difference.

To give a simple example, if renewable sugars are trading at 15 cents per pound, and crude oil is trading at 35 cents a pound — there’s an opportunity for converting sugar to fuels if the refining cost leaves a profit margin worth the agricultural and market risks.

Oh, there are enough complicating factors left over to keep a hive of economists busy for a year. There’s the differential in the energy value of, say, ethanol, compared to gasoline or diesel. The impact of losing mass when you blow off the oxygen to turn a sugar into a hydrocarbon. The impact of bioenergy demand on raw biomass prices. The value of co-products from biomass or oil refining. And so on, practically ad infinitum. It takes an advanced degree and a whole bunch of Tylenol to figure it all out.

But at the end of the day, the point where substitution makes economic sense is going to correlate back to the price of crude. No matter what the hoped-for margins are, or the opex of a biorefinery, or the capex — it all starts with the barrel.

The oil price: 54.40 or fight

In looking at the world of cost — an obscuring factor is that oil is generally quoted in a cost per barrel (42 US gallons), while biomass is generally quoted in a price per metric or US ton. To simplify, we have converted everything to US cents per pound. Plus, we’ve used constant dollars, so that you don’t have to constantly factor out inflation.

Today, the cost of Brent Crude oil is 35.88 cents per pound, and the IEA forecasts that price will increase to 54.40 cents by 2040.

So, here’s the good news or the bad news. If your biomass refining process at scale can beat that price — fully loaded for the raw inputs, capex, opex and margins — you’re going to find a lot of friends in the fuel markets.

Barriers? Even if your technology pencils out, there are the “3 Bewares“.

1. Beware! The technology has not yet reached scale. It may well not have fully de-risked itself, either – being somewhere in the path between concept and scale.

2. Beware! Qualified investors have more attractive options. No matter how attractive 10 percent returns might be to many investors, they weren’t sufficiently attractive to Chevron in evaluating their own solvent liquefaction technology — compared to 17 percent average corporate returns on capital, primarily from oil & gas exploration.

3. Beware! Policy and market risk frighten away investors. It could be that the requisite fuel requires a blending mandate to be assured of a market — mandates which may well be unstable. Or they may require flex-fuel vehicles, which may not be in wide supply. And so on.

If those barriers are addressed either by your technology (for example, by reaching scale, or producing drop-in fuels that negate the infrastructure risk) — then you may well have the basic economics to compete dollar-for-dollar with crude oil, and win.

It’s 54.40 or fight, though. Any technology that can’t compete with crude oil on price — must enter in to the more esoteric and unstable world of what is usually described as the 3 E’s of biofuels – emissions, energy security and economic development.

carbon-price[1].jpeg The carbon price

Whatever your take on the stability or wisdom of carbon prices, they have arrived in key markets such as Australia and the EU, and particularly in the EU there’s no reason to suppose they are going away any time soon.

What’s the value of carbon today? Well, again, we have the problem of carbon credits being generally quoted in euros per metric ton of CO2 avoided. An 8 euro per tonne carbon price works out to 0.65 cents per pound of biofuel — if you assume that an advanced biofuel reduces carbon emissions by 50 percent in a complete lifecycle.

That’s not much of an add-on or game-changer — one of the reasons why biofuels developers generally don’t take them into account when developing technology) the other reason is policy instability).

But, according to the UK government, carbon prices will begin to bite much more sharply in the next few decades. In fact, by 2040, the UK is projecting a carbon price of 12.27 cents per pound.

If you accept their projections — and many may be skeptical — that could raise your threshold “break-even” point with crude oil from 54.40 cents per pound to 66.67 cents, by 2040. That would be of material help.

The energy security price

Now, what about energy security? What’s the price of avoiding the unrest that being short on fuels brings?

Well, there are estimates all over the map. One line of thinking assigns the cost of the US Firth Fleet to the cost of oil — since the Fifth Fleet generally guards the Straits of Hormuz and is dedicated to assuring a flow of oil out of the Gulf.

Another, more conservative approach is to assign the cost of fossil energy subsidies as a cost of energy security. Generally, the subsidies are paid out to keep national populations content in a world of unstable and high energy prices — and to keep national economies producing. Those can be thought of as costs associated with being short on energy, or energy insecure.

Fortunately, the IEA has been tracking fossil energy subsidies — and it comes out to 3.70 cents per pound, if you assume that half of fossil energy subsidies go to fuel (the IEA says that it is “more than half” and leaves it at that), and that about 80 percent of the barrel goes to fuels (as opposed to chemicals and other co-products).

So, if you like to factor in energy security, you might start there, which brings your 2040 target price up to 70.37 cents per pound.

Economic development

The University of Wisconsin estimates that a biofuels refinery generates $1.82 in statewide economic activity for every $1 in sales. Now, “economic multipliers” can be all over the map — but this is a conservative estimate, on the whole — we’ve seen multipliers well north of 2.0 used in biofuels economics.

So, what does that mean? It means that a local biorefinery is going to be worth far more in overall economic impact than just the fuel it sells — and, accordingly, a nation, state, county or town has benefits that range above the direct profits, wages and equipment sales that go into our cents per pound calculation.

Making that refinery valuable to the community in terms of economic impact even if it doesn’t generate a profit.

Now, that’s a controversial benefit to work into the fuel price equation — because biorefineries are not going to be running at a loss simply because they generate overall benefit to the community. That is, unless they are owned by the community — in the same way that the NFL’s Green Bay Packers are owned by local investors, who have been able to maintain a competitive football team in a relatively small market and in 2011 sold $64 million in stock to local investors who know that “the redemption price is minimal, no dividends are ever paid, [and] the stock cannot appreciate in value.”

If you assign all that value into the enterprise — you get some pretty high “break-even” points — 73.22 cents per pound this year, and 128.07 cents per pound in 2040 (in constant dollars). Economic activity is not the same as margin — but it wouldn’t be unfair to assign some 10 percent of that impact as a value-add.

We’ve done that in our chart below. But individual investors, policymakers and technology developers will make their own choices on what to count.

The bottom line

For sure, it’s 54.40 or fight. Above the strict break-even with crude oil prices — that is, if your capex, opex, raw inputs and margin add up to more than 35.88 cents per pound today, or 54.40 cents per pound in 2040 — you’ll have a dogfight on your hands getting traction in the fuel markets.
crude-biofuels-substitution[1].png How much you want — or need to — lean on the impacts of emissions, energy security and economic development — well, it’s a tough call. In the case of economic development — what’s good for Iowa may not make you popular in Texas. What is good for the plant employee may not translate into a desire for In the case of carbon pricing — fickle friends you will find.

Nevertheless there is value in avoiding emissions, generating energy security and stimulating local economic impact. Especially the latter — though it is felt most intensely quite close to the plant, and your offtake contracting would be most successful if it also was kept local.

It may push you out to the higher-margin, lower-volume worlds of chemicals, fragrances, flavors, feed, lubricants and nutraceuticals. That’s where a lot of ventures working with algae and corn and cane sugars are generally heading now — though not all.

There’s good reason to do so. Today, the price of cane sugar is running in the 15 cents per pound range, and corn starch is running in that region as well.

But other forms of biomass look for more affordable — KiOR projects wood biomass in the 3 cent per pound range, as do POET-DSM and other makers of cellulosic ethanol from wheat straw and corn stover. The conversion rates are lower, the capex can be daunting, and there are limits to the ethanol market that are being tested now that pertain to the lack of flex-fuel vehicles — but you can see where the fuel arguments apply.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

July 12, 2013

Three Keys to Advanced Biofuels at Commercial Scale

Jim Lane

Is your team ready for the summit run?
Take our 3-question, 6 point quiz, and compare your route to the established routes that others have pioneered.

It’s become an cliché of late that “financing is tough” and that “the US is slowing” while “China is speeding up” on advanced biofuels. It’s also become a cliché that “cellulosic biofuels are slow, the economics are unworkable” and that “the next wav of investment will wait until 2015 or 2016, especially for commercial-scale.”

Like all clichés, they have their origin in real experience, but are generally over-broadened to represent a general trend — whether it is “white men can’t jump” or “women are lousy drivers” or “it never rains, but it pours” — it is important from time to time to re-validate the cliché against the hard data.

Here at the Digest, we see a lot of the same conditions that everyone else does. True, not every company is getting all the resources it could use, financially or otherwise. Neither did every US automotive company during the period when 200 carmakers were winnowed down to around five majors between 1920 and 1980. Not that there was anything wrong with a Stutz, DeSoto, DeLorean, Tucker, Packard, Checker or Olds — but the market generally supports a winnowing process, and financing is where it bites.

Key #1: Route to the Summit

In biorefinery financing, we have seen three trends emerge for successful projects.

1. The successful ones are generally integrated with others — so that resources such as infrastructure (e.g. rail, power, water), and biomass or residue aggregation are in place to the extent possible. Even existing refining units that can be utilized in a bolt-on strategy.

Think of this as simplifying the inputs and outputs — feedstocks into the plant and distribution of product out of the plant — so that as much financing as possible goes to the core technology, which often can be as little as 10 percent of the overall cost and footprint of an integrated biorefinery.

For this reason, we see wood biomass, sugarcane bagasse, corn stover and wheat straw projects getting the most traction, now. It’s been easier to use existing residues (bagasse), existing aggregation resources (wood) or at least an existing network of growers and delivery mechanisms (corn stover and wheat straw).

New feedstocks such as carinata, jatropha, sorghum and algae are incredibly exciting and getting closer every day — but it is tough to finance a first commercial plant when there is agricultural risk.

2. The successful projects typically involve a shared financial burden. There have been some notable go-it-alones — DuPont (DD) and Abengoa (ABGOY) come to mind, and they have really “put their back into it” on advanced biofuels in terms of getting a first commercial project going.

But there’s the Beta Renewables group – Novozymes, Chemtex, and Texas Pacific Group. Poet and DSM have teamed up. Shell and Cosan (CZZ) are in their Raizen JV and have Iogen in the mix.Fibria is tied up with Ensyn, Versalis with Genomatica. Darling (DAR) and Valero have tied up in Diamond Green Diesel, as have Tyson and Syntroleum (SYNM) Solazyme (SZYM) and Bunge (BG) have their sugar-to-oils JV. GranBio and American Process are tied in together now. Renmatix has JDAs with both UPM and Waste Management (WM)— and WM is also backing Enerkem and Fulcrum BioEnergy. British Airways has tied up with Solena. BP and DuPont tied up in Butamax.

The trend usually involves a company with access to feedstock — or at least a key cost element like enzymes — teamed up with a processor. In some cases — such as BP, BA and Eni’s Versalis unit, the tie-in is between a downstream marketer and a processing technology developer.

3. The successful projects have, so far, been the ones that are most cost-advantaged in terms of product cost — and cost advantaged within the universe of opportunity available to a given investor.

Carbon anxiety only goes so far, it turns out — it can attract players into the market in terms of inspiring them to investigate a sector. But those players will definitely measure the cost of buying mandatory renewables credits against the returns from a project, as Chevron’s many partners found out.

Enthusiasm and genuine interest will only find its way into project financing if the returns are there — measured against the other returns available to that company in other opportunities it has.

That means, generally, targeting companies not that have strong balance sheets — only — but companies that have low returns from other project opportunities. It means nothing that a biofuels venture can make a 10 percent IRR if this is measured against 18 percent available to that company in terms of its existing upstream opportunities in oil & gas.

Companies that are primarily refiners have smaller option sets than those deeply involved in upstream oil & gas exploration. Pulp & paper industries have fewer options, and challenged ones. Feedstock providers — such as companies that own large tonnages of palm residues or bagasse — see attractive upside economics in biofuels. As do owners of large caches of low-purity CO2, such as flue gas — if their other generation projects have low potential returns.

In short — it is not all about ROI. It is about comparative ROI.

Key #2: The geographies

You can divide the world according to three questions.

1. Is there a lot of carbon feedstock (e.g. biomass, CO2, etc) that has high potential but currently is sold for low values, or wasted? 3 points for Yes.

2. Is there a carbon emissions regime — e.g. mandates, carbon taxes and so on. Discount renewables targets, think only in terms of obligations. 1 point for Yes.

3. Is there a long-term energy shortage looming — e.g. rapidly declining domestic sources of energy, or a fast-growing economy that will outstrip growth in domestic resources. 2 points for Yes.

4-6 points. This region is hot to trot on biofuels, and is probably rapidly developing already, or will be.

2-3 points. This region is looking into biofuels — likes it, but the economics or existing infrastructure will weigh heavily. It’s tough to deploy alcohol fuels, tough to aggregate feedstock. If the resources are there for the products produced — look for biofuels. Otherwise, think chemicals, fragrances, flavors, nutraceuticals and other high-margin, small-volume markets where niche plays will be the order of the day for some time to come.

0-1 points. This region may make a lot of noise about biofuels — but mandates and targets will ultimately be too soft to inspire investor confidence.

Key #3: The players

Obligated customers – downstream.

As we have noted, not a good source of capital unless they lack exploration divisions. They’ll buy upgradable feedstocks – be they crude oil, bio-oil or what have you – if the economics are there. And they may wheel out their balance sheet if they see

Preferential customers – downstream – customers would prefer to use biobased fuels, chemicals or materials, but are not facing a mandate.

If you have a cost-advantaged molecule for them — especially if it smooths out volatility issues with fossil feedstocks — you may well have a winner. Green will be a tie-breaker, no more.

The bigger their balance sheet and the smaller their other opportunities, the more likely they will be to make a direct investment at scale. Otherwise, they may push technology along with a strategic investment and wait to buy the product. Or, they may co-operate in the form of testing and R&D collaboration, but not make a direct strategic investment — especially the consumer product companies will line up this way.

Growers and biomass aggregators

The best source for capital, long-term. After all, they have the real upside of a new market for their feedstock. It’s like getting a country that has discovered oil to get excited about supporting technology development that builds new applications.

The problem here? Usually they are disaggregated, and badly capitalized. Fixed-cost feedstock contracts may well help secure interest from purely financial players who can work within the project finance structure.

But seeking owners of aggregated sources of feedstock and have balance sheets — well, that should be job #1 on the list of any financier looking for dollars for a first commercial.

Government entities

Governments are pretty good at supporting long-term basic research, less so in mid-term advancement of technologies to commercial-readiness, generally terrible at helping companies to go forward to commercial scale. The best regimes are those where government has a cost-share role — limited a project sweetener of, say 20-40% of the total cost, and where there is a clear benefit to the local economy in adding value to biomass.

Carbon tax regimes are virtually useless except to the extent that they force obligate parties to get active in searching for partners. But at less than $10 per tonne for a carbon credit, it’s barely a sweetener for a bioenergy project.

Mandates are too inherently unstable to reduce financial risk. Especially when they have an offset mechanism such as the purchase of a credit in lieu of the fuel. Those regimes allow obligated parties to buy the credits until they can mount enough “why are we obligated to use non-existing fuels?” noise in government circles to tear the mandate down, or otherwise de-fang it.

Processing technology developers, catalysts, enzymes

Good source of capital for first commercial projects — no more. They rarely make early-stage investments, but often recognize that technology is coming along that needs to get through the valley of death to open up some real new market opportunity for the catalyst or enzyme maker. But the appetite for investing will rarely stretch beyond the first commercial.

Financial investors – aggregated (hedge, private equity, VC, institutions)

Good source for early-stage capital for technologies that have low market, policy risk but have technology risk. VCs will take technology risk all day long. Hedge and private equity are more interested in the “I’ll finance your third plant” strategies, if they have an interest in the sector.

Financial investors – disaggregated (retail, IPO)

Small investors beat up on technology stocks, and especially cleantech plays, and extra especially on advanced biofuels. Going public in advance of revenues and cash flow – yikes, the heat will be tough, and must be measured against the reduced cost of capital that a successful IPO can offer, and the opportunities to raise debt and equity through subsequent offerings that public entities have.

Once the revenue and cash flows are in place – once the stock has evolved from “story” to “value” — well, that’s different. But markets can still beat up on cyclical companies, badly. Look at all those revenue-generating ethanol plays.

Vehicle/engine manufacturers

Can join and even lead your R&D consortia — or help immensely with your roadmap to establishing a new fuel. Look at Boeing, practically investing aviation biofuels in terms of fostering the commercial testing and assisting where possible in fostering policy support.

Financial support – well, it will be minimal. GM has done some, Honda and Toyota too. It’s been early-stage, and not a huge amount lately.

Seed/plant developers

Generally, the Big 6 seed and plant companies have been investing where they also have technology arms that see customer sales or technology license sales down the line. BASF has been getting very active of late with companies like Renmatix and Genomatica. So, Dow’s been active as an investor in companies like OPX Bio, while DuPont has been hugely active via its cellulosic ethanol venture and in biobutanol.

Monsanto, Syngenta, Bayer — not much activity – though Monsanto has shown some interest in Sapphire Energy’s algal technologies.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

Photo: Mt Everest from Rombok Gompa, Tibet. Taken in 1994 by John Hill.

June 29, 2013

More Sorghum Sowers

by Debra Fiakas CFA
Sorghum Bicolor photo by Matt Lavin
The post “Ceres Plants Seeds of Success” featured seed and trait developer Ceres, Inc. (CERE:  Nasdaq).   This agricultural technology company develops seeds and traits for high-energy, low-cost feedstocks  like sorghum.  Ceres is not the only player in the sorghum game.

The presence of large agriculture products suppliers like Monsanto Company (MON:  NYSE) and Dow AgroSciences of the Dow Chemical Company (DOW:  NYSE) provide some validation of sorghum demand even if also triggering competitive concerns.  DuPont’s Pioneer HiBred (NYSE:DD) is also interested in the sorghum market.  Given the size and diversity of these companies, a position of any kind will not be a play on the renewable fuels sector.

There are a number of smaller privately held companies in the sorghum business.  Golden Acres Genetics, Ltd. acquired Syngenta’s sorghum seed inventory in June 2011.  Golden Acres is a private, family-owned company with an apparent successful history of market penetration and profitability.  Do not expect the door to open for minority investors any time soon.

There are few more small suppliers of sorghum seed.  You can find Richardson Seeds in the heart of the Texas sorghum seed country.  Richardson has been in business for a number of years and has a good reputation with growers.  A lesser known seed supplier, Mycogen Seeds, is not reticent about comparing its product line with competing seeds.  Mycogen offers six sorghum varieties.  Sustainable Seed Company is perhaps the smallest in the group, offering heirloom seed varieties.  Size may not be a factor at this point as even small player could own valuable traits that might be sought after.

Acreage in the U.S. devoted to sorghum has ranged from 15 to 18 million acres per year.  Farmers dedicate a bit more of their fields to grain sorghum than acreages for oats and barley, but considerably less than the land planted in corn, wheat and soybeans.  The U.S. Agriculture Department indicates nationwide sorghum acreage is expected to grow by 22% in 2013.  Some of those new acres are being sown in sorghum for animal field.   However, we expect more and more sorghum to end up in renewable fuel plants.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. 

June 28, 2013

Ceres Plants Seeds of Success

Sorghum Bicolor photo by Matt Lavin
I posted about sorghum’s designation by the U.S. Environmental Protection Agency as an advanced fuel last December.  Renewable fuel producers that use sorghum as a feedstock are obvious beneficiaries.  Ceres, Inc. (CERE:  Nasdaq) is an agricultural technology company, developing seeds and traits for high-energy, low-cost feedstocks  -  sorghum included.  I expect Ceres to be on the winning end of sorghum trade as well, especially since the California Air Resources Board (CARB) has set standards for carbon intensity of transportation fuels that appear to favor sorghum over corn as a feedstock for renewable fuels.

An investment in Ceres is not for the weak of heart.  As an early stage company, Ceres is spending to build a product line and forge relationships.  Most recently Ceres announced progress with its drought resistance traits for rice.  The company has recorded little revenue and is still reporting deep losses.  By the end of the March 2013 quarter the company had accumulated $258 million in net losses.  Based on the most recently reported six months, Ceres is using about $2.4 million in cash each month to support operations.

Past the market opportunity and the strength of Ceres technology, the principal concern for investors is whether Ceres has the financial staying power to reach profitability.  At the end of March 2013, the company had $15.5 million in cash on its balance sheet and another $29.4 million in marketable securities.  Even if there is no change in spending, Ceres could last about a year and a half without missing a bill.  With regulatory changes pushing the market toward Ceres, it seems more plausible than ever that Ceres can succeed without having to raise additional capital. 

Ceres is a relatively small company with a market cap of $68 million.  The stock is trading near $2.50 per share under modest volumes.  Insiders own about a third of the company.  That might signal considerable confidence by management in Cere’s future, but it has not been enough to convince everyone.  The equivalent of about 5% of the flotation has been sold short.  That is only about a day and a half of trading volume, so do not expect much of a “short squeeze” in the event of some encouraging fundamental development.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. 

June 25, 2013

Solazyme Breaks Up With Roquette

Jim Lane

solazyme logoSolazyme and Roquette dissolve their nutritionals JV; Solazyme to accelerate under its own flag; stock plunges.
What’s up? Who said “sorry?” on the way out the door?

It was a terse announcement that crossed the wire early yesterday morning from Fortress Solazyme, without warning except perhaps to equity analysts that hopped on a hastily-arranged call. Solazyme (SZYM) and Roquette Frères were announcing the dissolution of their two-year old joint venture, Solazyme Roquette Nutritionals.

The cause, “divergent views on an acceptable commercial strategy and timeline for the manufacturing and marketing of joint venture products” and in the announcement, Solazyme tipped that it “intends to accelerate commercialization of its suite of innovative microalgal food ingredients.”

Now, announcements by the #1 hottest company in the sector, as voted by Digest readers, that it intends to accelerate its pace of commercialization, would not ordinarily prompt a sell-off of its shares and a 13% one-day drop in its share price. Especially when that commercialization announcement is not paired with a dilutive financing event.

Simply put, the market was shaken yesterday. Our Vince Vaughn just broke up with Jennifer Aniston, and now shareholders are throwing tomatoes at the screen.

But important to note – this is styled as a disagreement on timeline, rather than technology. The primary product in question, Solazyme Roquette algal flour, has been cleared by the FDA and commissioning of what had been expected to be the next-phase in commercial capacity built-out, in Lestrem, started on time.

Positive or negative?

Here’s a Digest of reaction from equity analysts:

Pavel Molchanov: “From a substantive standpoint we think it will be neutral – and may even end up being positive in the long run. The most important point to underscore is that Solazyme has a wide range of other partnerships – including two new ones initiated just year-to-date – so the end of the Roquette relationship is much less impactful for the company’s opportunity set than the market seems to be perceiving.”

Rob Stone and James Medvedeff, Cowen & Company: “We recommend investors take advantage of share price weakness as an entry point. Breaking up the JV should have minimal, noncash financial impact. SZYM should now be able to fully consolidate this attractive, high-margin opportunity. It has retained most of the SRN employees. We believe it could readily expand capacity for this market and has ample cash to do so.

Ben Kallo, R.W. Baird: “The dissolution shouldn’t have a material financial impact in the near term. If SZYM is able to bring nutrition products to market more quickly, the dissolution would prove to be a positive for the company over the intermediate term.”

Mike Ritzenthaler, Piper Jaffray: “The history of the Industrial Biotechnology space is littered with major strategic partners pulling out of agreements that struggled during commercialization – when promise doesn’t match up with reality. Now we can add Roquette to that list…We can presume that if profitability was as near at hand as Solazyme’s management team would have us believe, Roquette’s hat would still be in the ring.”

Alyce Lomax, The Motley Fool: “Solazyme’s trip to the woodshed is hinged on actual news and, unfortunately, it’s one of the market’s biggest decliners as of this writing…but we shouldn’t rule out that the partnership’s dissolution may actually end up being better for the long term, not worse. Solazyme said that the failed partnership will not affect this year’s revenue; if it can accelerate ramping up its business, then it could be a strategic positive for its shareholders.”

Alternative production strategies

According to Pavel Molchanov, “Solazyme’s pilot and Peoria facilities will be used to meet near-term demand, but an unspecified amount of incremental capital could allow the Bunge (BG) and Archer Daniels Midland (ADM) plants to produce the ingredients, providing some optionality. Of note, both these plants remain on schedule and on budget, with the Bunge plant in Brazil on track for initial production in 4Q13 and the ADM plant in Iowa set to start up in early 2014.”

It looks like the flour for the pretty-darn-tasty Solacookies will be made in Peoria for now
Rob Stone and James Medvedeff add: “We believe SZYM could take over customer development shipments from the Peoria plant and it has the ability to expand the 20K MT Clinton plant with ADM up to 100K MT. The $125MM convert deal in Q1:13 should provide ample cash for the next phase of expansion.

But Mike Ritzenthaler cautions: “What we feel is critical for investors to keep in mind is that growth is not determined by Solazyme. Instead, demand dictates how much volume capacity is necessary to meet a given market, regardless of the expansion potential at the Moema and Clinton facilities. We believe that what investors should take away from the news this morning is that the fundamental economic undercurrent on demand for these new products is softer than expected, and we continue to advocate for a cautious approach to SZYM shares.”

Our Take

“I don’t want to to wait for our lives to be over
I want to know right now what will it be
I don’t want to wait for our lives to be over
Will it be yes or will it be sorry?”

Paula Cole, “I Don’t Want To Wait”

There’s a temptation to see these break-ups in the context of financial disagreements on the forecasts. That Solazyme sees the future in rosier terms than Roquette. That Roquette is a smart company, and is pulling back because it sees a speed-bump down the road. That technology considerations aside, Solazyme may not be able to muscle into enough markets at sufficiently attractive returns.

But that’s the conclusion that’s driven by the assumption that rates of return mean the same things to all parties — that risk lies only in technology or in market acceptance. But risk lurks also in differentiated opportunity. A/k/a “the unexpected, bigger upside opportunity for our capital in the general direction of elsewhere.” Most would be lucky to be with Jennifer Aniston; others also have options with Angelina Jolie.

To give an example, let’s say you and I were to form a business — for example, operating a gas station. Then Warren Buffett comes along and offers you, but not me, an opportunity elsewhere.

You might find yourself, regretfully, rethinking your earlier decision on the gas station. Nothing to do with the price of, or demand, for gasoline. But you might be explaining to me that we have, unexpectedly, developed divergent opinions about the right commercialization strategy and timeline for our venture. And I might be explaining to you that — to paraphrase Paula Cole: “I don’t want to wait for my life to be over – is it “yes” or is it “sorry”?

It is, for example, the reason, so far as we understand it, that Chevron downshifted away from biofuels in 2009-2010 — as we examined in “Who killed $2.18 gasoline?

At the time we wrote:

“The Bloomberg report points to an internal Chevron report, written in 2009, that concluded it would be cheaper to buy renewable energy exemptions than make renewable fuel. According to Bloomberg, a few months after the report appeared, Catchlight’s budget was scaled back. Originally the venture was intended to build 17 plants by 2029, making 2 billion gallons of renewable fuel, starting with a $370 million commitment by 2013 and a first commercial plant in 2014.

“The projects were projected to make a return on investment of between 5 and 10 percent per year, compared to Chevron-wide average return of 17 percent. According to Bloomberg, the Catchlight board said in April 2010 that there was “no urgency” in advancing the technology, set the minimum annual return at 20 percent to greenlight a project, and reduced Catchlight’s 2013 budget from $370 million to $8.9 million.”

It’s a cautionary tale in many ways.

Not the least because oil companies didn’t do a good job of forecasting the price of RINs and are now freaking out over the prospect of paying out zillions to cover the emission credits they would have hedged by building low-carbon fuel capacity. Putting the all-out war against the Renewable Fuel Standard in an interesting context.

But, in this context, consider that the classic saw with joint ventures is that “you only ever do one” not just because of divergent opinions about the joint opportunity, but divergent opportunities external to the JV.

JVs are a form of living together without getting married — sometimes partners have divergent levels of commitment when they decide to shack up — and divergent opportunities elsewhere when the moving boxes appear.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

June 19, 2013

Gevo Restarts Production

Jim Lane

gevo logoAs Gevo recommences the switchover to bio-based isobutanol at its first commercial plant, we look in-depth at 2012′s contamination issues — and the prospects and path forward.

In Colorado, Gevo, Inc. (NASD:GEVO) announced that it has resumed commercial production of isobutanol at its Luverne, Minn. plant in single train mode, successfully utilizing its proprietary Gevo Integrated Fermentation Technology (GIFT).

“I am pleased to report that we have been successful in operating our full scale fermentation and our GIFT separation system that separates the isobutanol from the fermentation broth. This serves to further validate our technology as we had not previously run the GIFT system at full scale. I can now say that it runs beautifully,” noted Gevo CEO Patrick Gruber.

“We plan to be producing isobutanol and operating throughout the rest of this year, bringing all of our fermenters and GIFT systems online in the third and fourth quarters, testing run rates, then ramping up production and sales in 2013 and 2014” Gruber added.

“We will sell the isobutanol we produce, using it for market development in the specialty chemicals market, in specialty oxygenated fuel blendstocks markets, and as a building block to make fuel products such as jet fuel and chemical products such as paraxylene for polyester used in the production of bottles and fibers.” Isobutanol applications for the specialty chemicals and chemical intermediates sectors include work in paraxylene with Toray (OTC:TRYIF) and Coca-Cola (NYSE:KO).


Let’s look at the 2012 problem – what it was, what it wasn’t. At the end of the day, the problem at Luverne came down to this guy and friends of his — strains of bacillus, a rod-shaped, single-celled bacteria with an insatiable appetite for dextrose, or corn sugars.

Microbial infections are a common feature of world-scale fermentation — especially in their commissioning period — they’re a common nuisance with ethanol plants, also, that have developed antibiotics and other strategies to combat them.

As Gevo CEO Pat Gruber observed, in talking with the Digest, “First step was, for us, to make sure we understood all the competitors that are chewing up the sugar, eating up yield. There’s no way to know until you do it, at scale. What matters is how you respond.”

Bacteria lurk. Picture the small white infection spots you see on a child’s inflamed tonsil when tonsillitis or strep throat strikes — and parents will know that those type of infections can go away and then suddenly strike again. Those are lurking bacteria that have found a happy home, hung up in a tube somewhere inside the body — lying in wait for the right conditions to appear, and then spring back into view.

It is not completely different with microbial contamination in fermentation systems — likewise, the microbes embed themselves in small infection pockets, and then rise up in numbers when the sugars start to flow.

“You are always going to have microbes, whether they come in through the air or water,” said Gruber. “But there is manageable, and then there is outnumbered

In Gevo’s case — given that this is a new system, producing isobutanol instead of ethanol, it was essential to understand the particular cocktail of microbes before designing a remedy. “The fixes included changing the fermentation conditions and related operating parameters,” noted Gruber, “making equipment modifications to improve sanitization, and, most importantly, improving our operating discipline—the procedures we use at the plant.

The House that Ruth Gevo Built

Let’s visit one aspect of Gevo’s changes for a moment. Interestingly, the production yeast microbe itself has not been altered. But the fermentation conditions were changes to ensure that it competes more effectively with whatever other critters get into the soup.

In its own way, not entirely unlike the way that the original (1923) Yankee Stadium, “the House that Ruth Built,” was designed with the Bambino’s batting style in mind. That facility had the “short porch” in right field tailored to Ruth’s left-handed pull swing, leaving big hitters from visiting teams to face 450-foot stretch of center field known as “Death Valley”.

The drought and the corn crisis

The path forward from 2012′s microbial infections might have looked differently if corn prices had not soared following the 2012 drought. The original backup plan for Luverne in the commissioning phase was to return to ethanol production, or to continue to produce isobutanol and work through yield and process improvement. But, as Gruber noted to the Digest, “it’s one thing if corn is $4 or $5. With corn at $7.50 and going to $8, profitable ethanol production was essentially out of the question,” so we decided to pause production last fall after generating the isobutanol we needed for initial market development.

The path to full production

“For now,” Gruber notes, “we are currently operating in single train mode. It is easier to manage one fermenter and one GIFT separation system while we learn how to run the plant at full scale. Also, it is a more efficient use of corn feedstock and we gain valuable operating experience as we go.”

Having said that, one fermenter at Gevo scale is, ahem, not exactly nothing — given that they are operating at million liter scale.

Let’s put that in the context of some other highly-successful paths to scale. Genomatica is operating at around 600,000 liter scale, Solazyme (SZYM) has reached 500,000 liter-scale, and we understand that Amyris (AMRS) is operating at something around 200,000 liter scale at the moment. Each company will find the scale that is right for their process — it is not the case that 500,000 is inevitably better than 200,000 although economies of scale apply.

The point is, operating in single-train mode with a million liter fermenter is akin to operating two at Solazyme scale, or more at Amyris scale.

The expectation is that Gevo will have all of its fermentation units running at scale by year end, and the company continues to aim towards its critical delivery dates in 2015 for its clients.

Redfield, Biofuel Energy and other projects

What about expansion of the Gevo system to Redfield and other plants, such as Biofuel Energy? “too early to say on timeline,” Gruber told the Digest. “The interest is out there. But for now we are going to be fully focused on getting the production optimized at Luverne.”

What about cellulosic sugars? For sure, Gevo has noted that companies like Sweetwater are landing deals with ethanol plants to bring cellulosic sugars into their production streams. “We can work with cellulosic sugars, for sure” said Gruber, “but our cellulosic is not ready for prime time.”

The Gevo-Butamax dispute

Next stop in the never ending battle between Gevo and Butamax over their respective patents is an August trial date over the ’375 Gevo patent, relating back to the use of a specific gene that has been knocked out to ensure high production rates for isobutanol. This is a Gevo suit against Butamax — there remains pending litigation on appeal relating to Butamax suits against Gevo for infringement on Butamax patents.

And the efforts to invalidate each others patents go on, as well. And on. And on.

The Bottom Line

It’s good news across the industry that Gevo is back to isobutanol production — and there are no voices amongst the Digesterati indicating that a slow-and-steady approach to having all the fermenters online before year end is a bad idea.

Items to watch? The August trial on Gevo’s patents. Corn prices, generally. A steady progress between now and end-of-year to having all the fermenters online. For the longer term, announcements on the Redfield second commercial facility, and progress with cellulosic sugars.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

June 09, 2013

Supersize My Whopper: Volt Gas Volt’s Fuzzy Math

Jim Lane

We were suitably intrigued by the headline, “Renewable Energy Program Could Make Fracking and Biofuels Obsolete.” And so the press release began:

“Project Volt Gas Volt, a new green program, shows the potential of storing renewable energy in surplus, which could make nuclear energy, natural gas, fracking, and biofuels seem like energy sources from the past.”

If that’s starting to sound like a pitch to fringe interests, read on.

“Surplus electricity that is generated by wind farms and solar parks and converted into methane can be stored for months in the existing natural gas grid. The surplus of energy makes it the battery for renewable energy while simultaneously making hydraulic fracturing (“fracking”) obsolete. The methane would be used to produce electricity, and district heating, or as a motor fuel.  We will use the surplus energy from nuclear, now largely wasted at night, to help pay for the exit from nuclear. And we will use the CO2 generated from burning waste, biomass and from steel mills and cement plants to generate the methane.”

Later in the underlying documents, the process is outlined. Use electricity to split water into hydrogen and oxygen, blowing off the oxygen. “Mixing hydrogen with CO2″ to make methane (note: it’s not exactly explained how, technically, this is achieved, though there are paths to make this happen.). Storing methane and burning eventually to generate power.

Then this.

“The first small scale industrial installation (6.3 MW) for the conversion of electricity into gas is currently being built in northern Germany by Audi, in collaboration with SolarFuel and EWE (a biogas user). Current production costs are high – around 25 euro cents per kWh of gas produced. The aim is to reduce this to around 8 cents per kWh by 2018…compared with the price of imported Russian gas, including transport costs, which is around 4 to 5 cents per kWh (2 euro cents not counting transport).”

So, let’s see if we get this. It costs 5X of the incumbent now. 3X after unspecified improvement that is five years away.

So here are the whoppers.

1. Not a substitute in real-world terms. If biofuels and other technologies simply had to reach 5X of the fuel price today and 3X by 2018 – why, all of them would be competitive with $500 per barrel oil today and $300 per barrel oil by 2018.

2. Not really replacing, er, biofuels. Note that the process is dependent on waste CO2 from…oops, burning biomass. Also, elsewhere in the project outline, it mentions crude biogas as a source of waste CO2 as well.

3. Transporting gas or power. We also might point out the dependency on aggregated sources of CO2, which is going to require transporting large amounts of a) power or b) gas. Sources of the kind of pure CO2 that’s needed, and wind/solar generation projects are unlikely to be co-located. You might also note how the transport cost is not included here, but is included for the comparative (Russian gas). Stripping out all transport costs, the cost premium is 12.5X.

4. The water sourcing problem. Watch out for the water usage. And, if the reaction uses salt-water, better prepare to have a use for the residual chlorine that may be produced as a byproduct of the reaction.

5. The CO2 sourcing problem. Good luck getting the CO2, anyway. Ethanol plants, cement plants and steel mills are going the liquid route, in search of higher values – rather than selling CO2 as  gas feedstock for the lower-value power market. Think Waste Management (invested in Fulcrum Bioenergy, Enerkem), BaoSteel (LanzaTech), St. Mary’s (Pond Biofuels).

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

June 03, 2013

Ethanol Producers Vs. California Air Resources Board

by Debra Fiakas CFA

Sometime back Poet, LLC, the private producer of ethanol based in Sioux Falls, SD (my home state), filed a lawsuit against the State of California, strenuously objecting to rules related to ‘carbon intensity’ adopted by the California Air Resources Board (CARB) When the dust settled, the California rules were still standing and Poet skulked off to the appeals court.  The appeal was filed this week in the California’s Fifth Appellate District in Fresno.

Originally approved in 2009, California’s ‘low carbon fuel standard’ (LCFS) is aimed at sorting apples and oranges in the renewable transportation fuels market by requiring that producers meet an average declining standard of carbon intensity.   Now they must reduce total carbon measure by 10% over the next seven years.  Carbon intensity is measured as the sum of all greenhouse gas emissions associated with the production, transportation, processing and consumption of a fuel.   CARB calls this a ‘pathway’.  More about pathways later.

Ethanol is at a disadvantage all around because it cannot be distributed through existing fuel pipelines.  It must be sent by rail or truck tanker to end-markets, adding to the carbon intensity.  What is more, ethanol fuels produced out-of-state end up classified lower than in-state product because the added transport element contributes even more to carbon intensity 

It is understandable why Poet has its corporate hackles up over the California rules. California is the largest ethanol market in the U.S.  The largest ethanol producers need to command a share.  Only Archer Daniels Midland (ADM:  NYSE) producers more ethanol than Poet.  Poet is not alone in its efforts to fight state bureaucrats.  The Renewable Fuels Association and Growth Energy also filed suit against California over the low carbon fuels standard.

Investors should also note that Poet is not arguing against the underlying principal of CARB’s LCSF.  Poet has told court that CARB failed to adequately assess the environmental impact of the standard before it was adopted.

The California Air Resources Board (CARB) is a group to watch in the renewable fuel industry.  They like it that way.  CARB was set up in 1967 by then Governor Ronald Regan.  It is a one-of-a-kind group, established before the federal government took over air quality standard setting for the country through a 1970 amendment to Clean Air Act.  Now the other forty-nine states are stuck with using CARB rules or federal rules.

CARB is not in the least intimidated by Poet’s arguments against the standard.  Earlier this year several parties with interests in the renewable fuel market weighed in to support CARB and its LCSF.  Natural gas supplier Clean Energy Fuels Corp. (CLNE:  Nasdaq) and California’s leading electric utility Pacific Gas & Electric (PCG:  NYSE) as well as the California Biodiesel Alliance and the National Biodiesel Board all filed briefs with the court extolling the virtues of CARB and its LCSF.  The briefs made note of California’s nascent cap-and-trade program, which sets California out ahead of the rest of the country.

Of course, these folks have a different view on California’s carbon intensity standard because it shifts the competitive balance in their favor.  Renewable diesel and algal-based fuels, for example, are so-called ‘drop-in’ fuels that can be distributed using the existing pipeline infrastructure.  These fuels come out looking good in the carbon intensity competition, even the producers from outside California.

So it is the ethanol industry against the renewable fuel industry.  What appears to be a blow to ADM and Poet may end up being a boon to others.

Companies that might benefit include Sapphire Energy, which produces an algal-based renewable diesel.  In March 2013 Sapphire landed an off-take agreement with oil refiner Tesoro Corp. (TSO:  NYSE).  Tesoro is buying an undisclosed amount of algal-based oil produced at Sapphire’s New Mexico plant.  Sapphire claims its plant has been producing two barrels of oil per day, but could ramp to 100 barrels per day.  Tesoro has reportedly agreed to take all production as the facility ramps to capacity.  The EPA still has not approved Sapphire’s fuel for on-road use.

Algal-based biofuel releases the same amount of carbon dioxide that was used to grow it.  This is about half the carbon dioxide released by burning gasoline.  However, when the carbon dioxide used to grow algae comes from power plant or other emissions, the carbon intensity is lowered.  Investors should note that there are a number of algal-based fuel producers in California.  The Algae Biomass Organization recently updated a U.S. map showing locations across the country

CARB has a table of carbon intensity ‘pathways’ for various fuels.  The table is to be used as guidance for all parties targeting the renewable fuel market in California.  CARB has invited renewable fuel producers to apply for new pathways.  With the competitive field tilted toward renewable diesel, it is not surprising that the market is attracting the interest of some big players. Indeed, oil refining giant Neste Oil (NEF: F)  has applied for a ‘pathway’ or carbon intensity measure for its non-ester renewable diesel product it calls NExBTL.  Neste’s Singapore plant produces about 250 million gallons of it per year from Australian tallow.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. 

May 24, 2013

Advanced Biofuels in the Valley of Disbelief

Jim Lane
bigstock--D-Roadsign-Of-Facts-Vs-Lies-W-42313771.jpg Lies, Truth, and Disbelief via BigStock Photo

Are you missing out on great investment returns – is the Dow really headed for 20,000? Is the advanced biofuels rally for real?
Why are investors sitting on the sidelines in the Valley of Disbelief?

This year in the United States, despite awesome returns in the stock market and miserable bond yields, the Investment Company Institute estimates that $85.4 billion in new investment has poured into bonds — by contrast, only $73.2 billion into stocks.

Seth Masters, CIO of Bernstein Global Wealth Management told the New York Times last week that “people were so traumatized by the financial crisis that they were seriously underestimating the stock market” – and projected that the Dow would reach 20,000 by the end of the decade.

Let’s look at investor trauma.

A contrarian investor who, by contrast, put money into an S&P tracking fund on the day after the Thanksgiving holiday, would have realized an 18.4 percent return in less than six months.

What would have happened to same investor putting money that same day into the highly-maligned category of advanced biofuels equities (Amyris [AMRS], Ceres[CERE], Codexis[CDXS], Gevo[GEVO], KiOR[KIOR], Renewable Energy Group[REGI] and Solazyme[SZYM]), and weighted the investment according to their market cap?

A 31.6 percent return.

Advanced Biofuels stock returns

So why all the negativism - both inside biofuels — and without? Twitter, as seen through the lens of a keyword like “biofuels” — offers a heavy stream of sarcasm about crony capitalism, broken technologies, government interventionalism, third world oppression, infrastructure incompatibility, and lousy investment performance.

Advanced biofuels — and equities as a class — appear to have entered into a geography which you might call the Valley of Disbelief.

Irrational inexuberance

If the Valley of Death describes the dangerous period when emerging companies face difficulties in raising expansion capital to build their innovative products at scale — the Valley of Disbelief represents the period when companies have figured out a means across the Valley of Death but the market remains irrationally skeptical. You could call it a period of irrational inexuberance.

True, public markets have always been less patient sources of capital than early-stage or strategic investors — and advanced biofuels companies came out early.

(But then, so have biotech companies. Gilead paid an 89% premium over Pharmasset’s stock value to acquire the company, for $11B, more than two years before its signature all-oral Hepatitis C treatment (Sofosbuvir) was even expected to win FDA approval. Gilead shares have rocketed up 43% this year as Sofosbuvir gets nearer to market.)

Which is to say there’s long been an arbitrage between perception (in the public markets) and reality. The explosion of information in the digital age was supposed to level the playing field for the small investor, but seems to have exacerbated the gap. Let’s look.

It’s a period that Apple (APPL) famously went through — to mention the highest-flying stock of the 2000s, when it tumbled 71 percent between the spring of 2000 and the fall of 2001, even while it was launching its seminal Mac OS operating system and the seminal iPod. In fact, its shares continued to tumble for some time after the iPod appeared – investors had a hard time grasping that the world had changed. A $10,000 investment made the day after the iPod launch is worth more that $480,000 today.

And anyone who ever listened to a Steve Jobs keynote back in those days can assure you that Jobs was not shy in describing Apple technologies as the revolutionary unlockers of value that, in fact, they proved to be. He described the iPod as a “breakthrough digital device” — and as a first step in Apple’s “digital hub” family of devices, which ultimately included the, er, iPhone and the iPad.

A year after Job’s launch keynote and the iPod launch? You could pick up APPL for 19% less than the day before the announcement. Remember, this was a company that had already rolled out the strategy, was rolling out the products, was getting rave reviews, and had assembled the cash to execute its strategy (as it did) without a single dilutive equity issue or even a debt offer. Plus has the Steve Jobs “reality distortion field” working for it.

There are powerful magnets dragging on reasonable expectations — down there in the Valley of Disbelief.

Advanced biofuels in the Valley of Disbelief

It affects many great companies. You might notice that a company like KiOR, in our advanced biofuels set, has seen its shares fall dramatically since last autumn. Last week we saw this meme floating around Twitter, “Yesterday Molchanov reiterated his Outperform on KiOR despite losing 61% since his initial Outperform rating”

KiOR’s unforgivable market sin? Producing drop-in renewable fuels successfully in its new first commercial facility for the first time in Q4, as promised. Shipping drop-in renewable fuels to customers starting in Q1, as promised.

For meeting all its pre-IPO commitments and timelines, Solazyme was rewarded with a post-IPO 50%+ fall in its stock price — before beginning a meteoric rise last November. Renewable Energy Group, which was operating at scale for years before its IPO, experienced a 40% drop-off, post-IPO, before crossing back into positive territory just this month, 15 months after its IPO.

The problem of information overload

Why causes companies to fall into the Valley of Disbelief? At a time in history when digital distribution of information has made investing so much more transparent. You can find more chatter about stocks today than ever before – whole television channels, message boards, newsletters. Why does the information revolution not result in the death of disbelief?

In the 2003 book Anchoring America, I observed that rate of information distribution was rising, but that the circles were narrowing — in short, intensity was on the rise, but broad awareness was falling. The number of private messages received by the average individual had grown at two times GDP since the 1920s — from one per day to 48 per day (as of 2002). Information has only increased in intensity — as anyone knows who counts their emails, tweets, facebook postings, phone calls and texts.

The result is not a shared information base of common public knowledge — but a shattered glass a highly-fragmented culture — divided into little tribes of people, daily reinforcing their beliefs through shared messaging, selective news distribution, and inductive reasoning. Technologies that challenged tribal values, or were irrelevant to them, are misunderstood or ignored. The jungle drums are broken.

In Anchoring America, it was noted that there were an increasing number of children who would name and describe every single character in the world of Harry Potter, but only 20% of US sixth graders could correctly identify the United States on a world map.

We are left with no effective means of efficiently communicating the impact of new technologies. Consequently, technologies can begin to transform society long before the culture can embrace the significance.

There was a time when the cost of innovation was so high that transformative technologies were owned by corporations for year, even decades, before they were rolled out to individuals. So there was a long stretch of time for ideas to diffuse through the culture.

For example, consider the 30 years it took for computers to migrate from the corporate sphere to the consumer. By contrast, the iPhone was pushed into corporations because of consumer pressure — executives rebelled against their own IT departments.

The Problem of Dogma

For the intrepid investor, there is evidence of a significant lag time between the moment that a company has transparently assembled the means to go big, and the moment when that fact is valued in the market.

For everyone, a challenge. Given that 80% of new start-ups fail within five years, it is pretty easy to look smart by picking holes in the strategies and technologies of new ventures. You’ll look mighty smart practicing your “no,” but no one ever found happiness or riches without practicing their “yes” from time to time. Your “yes” will set you free.

You might ask and answer for yourself three questions.

1. Do I have “the right stuff “to study and understand these technologies — and decide which places on the Monopoly board I will place my bets, practice my “yes” and place them?

2. Can my belief withstand the terrors of the Valley of Death — or the Valley of Disbelief — or both, or neither?

3. If I can answer those two questions in the affirmative, what am I doing about it?

As Jobs himself said in remarks at the 2005 Stanford commencement exercises, “Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma — which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.”

I’ll leave you today with a YouTube link to Steve Jobs’ October 2001 keynote.

Think Different.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

May 21, 2013

The Farm Bill: 5-Minute Guide to the Energy Title

  Jim Lane
5 min clock.jpg
Only 5 min BigStock Photo

What’s in that Durn-tootin’ US Farm Bill, anyhow?

For the harried taxpayer, some relief. For energy security and rural economic development, targeted investments that now head to the legislative floor.

Here are the need-to-knows.

In Washington, the House and Senate Agricultural committees have now passed their respective versions of the proposed 2013 farm bill, which would take effect for fiscal 2014 through fiscal 2018.

Both bills have energy titles — meaning that, should they find passage, as expected this summer, in the House and Senate, the measures in the Energy title will come up for negotiation in the House-Senate conference, but not the existence of the title itself. In today’s Digest, we look at the two different versions of the Energy title — what’s getting funding, what’s not — and how much, and how.

Weighing the bills

The Senate’s bill weighs in at 1150 pages, no ounces — the House Bill at a comparatively light 576 pages.

The Overall Farm Bill

The Senate version reduces spending by $18B over the previous Farm Bill ($24.4B if the sequestration provisions are repealed by Congress, which itself slashed $6.4B), to $955B over a 10 year period between 2014 and 2023.

The Energy Title

Overall spending on the Energy Title is increased by $780M (2014-2023) under the proposed Senate version.

By section, the changes are

Biorefinery Assistance — $216M
REAP — $240M
Biomass R&D — $130M
BCAP — $174M
Other programs — $20M

Timeline to passage

House Ranking Minority Member Collin Peterson said, “With today’s action, I’m optimistic the farm bill will continue through regular order and be brought to the House floor in June. If we can stay on track, I think we should be able to conference with the Senate in July and have a new five-year farm bill in place before the August recess.”

The Details


The House Bill does not add language to include renewable chemicals under the provisions of an Energy title — the Senate does.

Biobased Markets Program

Both the Senate and House include a biobased markets program. The House voted $2 million in discretionary funding (e.g. subject to annual appropriations). The Senate expanded the program’s scope to include assembled products, expands outreach and educational efforts, a study on market impact — and adds $3 million in mandatory funding from the Commodity Credit Corporation in addition to the $2M in discretionary funding offered by both the House and Senate.

Biorefinery Assistance

The House offered $75M per year here in discretionary funding, while the Senate offered $100M in for 2014 in mandatory funding and $58M in each of 2015 and 2016. The Senate also broadened the language to include renewable chemicals and biobased materials.

Repowering Assistance Program

The House authorized $10M for the program per year in discretionary funds, while the Senate did not vote funding.

Bioenergy Program for Advanced Biofuels

The Senate Bill authorizes $20M annually in discretionary funds, while the House authorizes $50M per year, also discretionary.

Biodiesel fuel education program

The Senate version keeps this program intact, but changes it from discretionary to mandatory funding. The House version doubles discretionary funding to $2M per year.

Rural Energy for America Program (REAP)

Both the Senate and House versions ask the Secretary to develop a three-tiered application process (for projects costing up to $80K, 80-2200K, and over 200K) and structure the comprehensiveness of the information required according to the cost of the program. The House version authorizes $45M per year in discretionary funding. The Senate offers $20M in annual discretionary funds, and $68M in mandatory funds via the Commodity Credit Corporation.

Biomass Research and Development

The Senate version offers $30M in annual discretionary funding, and $26M in mandatory annual funds. The House version authorizes $20M in annual discretionary funding.

Feedstock Flexibility Program

Both the Senate and House voted to extend this little-known, no-cost program through 2018. It’s purpose:

For each of the 2013 through 2018 crops, the Secretary shall purchase eligible commodities from eligible entities and sell such commodities to bioenergy producers for the purpose of producing bioenergy in a manner that ensures that section 7272 of this title is operated at no cost to the Federal Government by avoiding forfeitures to the Commodity Credit Corporation.

Biomass Crop Assistance Program

The House version eliminates the prohibition on animal, food or yard waste, and algae — and strikes the authorization to “assist agricultural and forest land owners and operators with collection, harvest, storage, and transportation of eligible material for use in a biomass conversion facility.” The House also increases funding from $20M to $75M per year, but changes this from mandatory to discretionary funding.

The Senate version adds a prohibition on funding “invasive species” and restricts use of lands enrolled in the conservation reserve program or is native sod — and generally prohibits food crops. The Senate version also sets a maximum BCAP term of 5 years for annuals or perennial crops and 15 years for woods.

Towards collection and harvesting, a maximum of $20 per ton for up to four year, on a matching dollar basis.

The Senate authorizes $38.6M per year in mandatory funding.

Forest Biomass for Energy program

The Senate voted to repeal the program, while the House version simply ignores and thereby effectively kills by de-funding.

Community wood energy program

The Senate voted to keep this program at $5M per year in discretionary funding, while the House version votes to reduce annual funding to $2M.

The Senate also creates a new category of ‘biomass consumer cooperative’ —”a consumer membership organization the purpose of which is to provide members with services or discounts relating to the purchase of biomass heating products or biomass heating systems.’’ and offers grants of up to $50K towards the establishment of expansion of such cooperatives.

The Bottom Line

It’s not a visionary Farm Bill for Energy — more about fine-tuning and maintaining provisions that were originally introduced in 2002 and 2008. But there’s a lot more meat on the bone, so to speak, with $780M in increased funding over a 10-year period.

On the other hand, it’s not a hugely expensive program when seen in the context of the federal budget — representing an addition expenditure of $0.26 per capita, per year.

There isn’t all that much for a House-Senate conference to bicker about — primarily, the status of renewable chemicals on the downstream side, and the inclusion of various new types of crops on the upstream side.

And there are funding differences that need to be ironed out – in particular, the balance between mandatory funding and discretionary embraced in the Senate version – while the House generally opts for a discretionary approach, especially for high ticket items.

There’s language in the BCAP program that will need to be settled out.

The Digest continues to point to opportunities for the creative use of Conservation Reserve program land — sensitive to and subject to hunting and environmental uses — for bioenergy projects, and thereby highlights the prohibition on BCAP funds being used for CRP lands, as envisioned in the Senate version of the bill (but not the House bill). We hope the House and Senate come to a creative mutual approach on this provision.

Read More:

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

May 03, 2013


Jim Lane

Has Gevo whipped its problems, and whipped them good?Gevo logo

When a problem comes along, you must whip it
Before the cream sets out too long, you must whip it
When something’s goin’ wrong, you must whip it
Now whip it into shape
Shape it up, get straight
Go forward, move ahead
Try to detect it, it’s not too late
To whip it, whip it good.
    Devo — “Whip It”

When last we took an in-depth look at Gevo, (NASD:GEVO) the company was beset by a swarm of motions, cross-motions and lawsuits in its long-running patent infringement drama, co-starring Butamax, “Bio’s Montagues and Capulets get it on, and on, and on“.

At the same time, Gevo had been forced by low yields induced by higher-than-desired levels of bacterial contamination in tis fermenters to switch back from isobutanol to ethanol production. Then, as the US drought caused corn prices to soar into the $8 range, Gevo all-but-halted production entirely as it improved its isobutanol process, shored up its cash position, and dealt with litigation.

The perfect storm of poor conditions in feedstock costs, processing yields and a cloudy picture on the “freedom to operate” front caused a number of investors to declare “there goes the neighborhood” and the stock has eventually run down into the sub-$2 range. Today, the company’s market cap is roughly the cost of acquiring and retrofitting its first commercial facility in Luverne, MN.

That was then, this is now.

The stock has not recovered much — but it’s remarkable the progress the company has made, all the same. Analysts are now expecting the company to bring its first production train up later this month with its improved isobutanol process, and moving towards full production on all four trains by year end.

Meanwhile, on the legal front, a Digest reader writes: “Gevo was very clear on their call last night that they had won on all counts and that Butamax had even greater legal risks.  I am sure Dupont disagrees, but the last time Dupont disagreed, they lost a $1 billion award to Monsanto.  And this is exactly the same legal team.”

Perhaps most remarkably, the company continues to enjoy strong support it continues to receive from key industry equity analysts at Piper Jaffray, Raymond James, and Canaccord Genuity — all of whom are rating the stock a buy. Piper Jaffray has a price target of $9 on the stock — more than five times its current value.

In a research note titled, “Less legal drain helps to regain (the focus on) the Train”, Canaccord Genuity analyst John Quealy writes: “While the Street continues to take a wait-and-see approach on the success of this speculative biorefinery business model, we find the technology and opportunity supporting a positive risk/reward long term.”

Looking at the legal front

Here’s what you need to know. Gevo has at this stage complete freedom to operate, and has been a consistent winner to date in the courts on patent infringement.

We asked a friend last week:

“From a legal strategy POV, why it is advantageous for a company like Butamax to sue now, before there is a product on the market?”

We heard back quickly.

“There is absolutely no reason to sue someone before they have a product on the market.  The reason you don’t sue someone before they have a product on the market is because there are no damages for you to recover.  The only reason to sue before there is a product on the market is to try to injure your competitor.  Butamax started this litigation fight in January 2011, years before Gevo could ever have a product on the market.”

Last word, we give to Piper Jaffray’s Ritzenthaler:

“Worst case scenario, in our view. Despite the negligible probability of a negative outcome for Gevo, a common inbound question is: what is the worst case scenario? We define a worst-case scenario as Gevo having to pay a royalty for use of some element of Butamax’s technology. If we assume an industry-standard licensing rate of 2% of revenues, our 2015 EBITDA estimate would be reduced by $25 million, resulting in a $12 stock using the same methodology – nearly 3x Monday’s closing price. In all reasonable likelihood, Gevo will emerge without any such strings attached.”

Looking at the production front

Cowen & Co’s Rob Stone writes, “Luverne is expected to begin limited production in one train in Q2, and be shipping by year end, with ramp pace hinged on corn/oil/isobutanol prices. The paraxylene pilot should also be operational by year end.

Raymond James’ Molchanov adds, “Finally, there is clarity. The plant is ready to start operating in single-train mode in May/June, and management made it clear that the entire facility (four fermenters and three GIFT systems) should be operational by year-end. We project full nameplate utilization (18 million gallons) by mid-2014.”

Looking at the financial front

In looking at the work-ups by the analysts, we see some different assumptions on timing, the expected price of isobutanol and the cost of inputs, but all analysts agree that a rapid expansion of revenues is expected throughout the 2013-15 period and beyond.

The consensus view? Revenues climbing from $14M this year to $99.4M in 2014, en route to $317.2M in 2014 — and analysts expect the company to reach break-even in 2015.

analyst estimates

Looking at Gevo and Butamax’s relative progress

Butamax is inherently more opaque (as a private company), and comparisons are somewhat difficult to make. However, we understand that Butamax’s demo plant in Hull is about the same size as the demo plant Gevo did in Denver in 2008. Gevo has subsequently built a 1 Mgy demo plant in St. Joseph, MO and the 18 million gallon plant in Luverne.

By that measure, there’s some evidence that Gevo is something on the order of 1-2 years ahead of Butamax in commercialization — and Butamax has confirmed that it expects to go into commercial scale production some time next year.

On the customer front, both companies have signed up an impressive roster of plants for their early adopter conversion program. However, Gevo has a definitive deal for its Redfield, SD plant, whereas all the others for both companies are at this stage, so far as is publicly revealed, non-binding letters of intent.

In addition, Gevo has firm offtake agreements with SASOL and the US Air Force.  In addition, deals of a less definitive nature with Coca-Cola, Lanxess, Mansfield, Total and others.   All of which supports the view that Gevo is leading by a year or more.

The stakes

Well, there’s a lot on the line. From a fuel POV, we’ve pointed out before that a conversion of the US ethanol fleet to isobutanol is the surest low-cost, low-pain path towards meeting a target of 36 billion gallons of (ethanol equivalent) renewable fuel by 2022. The reason? Blend wall, baby. The US could use as much as 22.9 billion gallons of ethanol-equivalent by switching to isobutanol, before it reached a blend wall, owing to butanol’s higher energy density and blend restrictions.

By contrast, anything above 12 billion gallons of ethanol blended into the fuel supply in 2022 supposes moving beyond E10 blending to controversial business cases associated with E15 through E85.

The bottom line

On all fronts, it appears that Gevo is, indeed, whipping its problems, and whipping them good.

Evolution or revolution — we’ll know more in a year, and certainly by 2015. But either way, there’s been significant Gevolution, and there’s a lot more reason to feel Gevolicious as we head towards the critical 2013-14 period for the company — when it will need to raise capital and move definitively and forever into commercial-scale production.
Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

April 13, 2013

Gevo wins a judgment in latest Butamax vs Gevo dust-up

Jim Lane

Gevo a winner? Not the issue, says Butamax, as the Capulets and Montagues get it on again.

It’s a tennis match in which the score is never love.

Scene: Verona. A public place.gevo logo

The Prince: Three civil brawls, bred of an airy word,

By thee, old Butamax, and Gevo,
Have thrice disturb’d the quiet of our streets,

And made the Digest’s ancient citizens
 setteth aside
required reading of matters thermochem and RFS,
to hear again, and again, and thence again
your claims and counterclaims and all the pleadings
that issueth, containing more commas than there are microbes under heaven.

This case shall confuseth us most relentlessly,
until we rent our clothes and throweth ourselves
into vats of isobutanol and drinketh thereof
until, verily, we goeth mad and blind.

Butamax logoIn Delaware, the United States District Court for the District of Delaware entered a final judgment in favor of Gevo (GEVO) and against Butamax Advanced Biofuels, LLC (Butamax), a 50/50 joint venture between DuPont (DD) and BP, ending the trial court proceedings on Butamax’s Patent Nos. 7,851,188 (’188 Patent) and 7,993,889 (’889 Patent).

For those newer to the saga, Butamax and Gevo both make isobutanol, using modified microorganisms and employing a separation technology to part the butanol from the broth.

It is not entirely clear who owns what rights, and there has been an awful lot of suing going on.

“This is a huge victory for Gevo and our shareholders,” noted Patrick Gruber, Ph.D., Gevo’s chief executive officer.

Over to Butamax

There was substantially less cheering over on Planet Butamax.

Butamax spokesman Mark Buse said, “As we previously stated, Butamax strongly disagrees with the Court’s claim construction and decided instead of going to trial decided to appeal the case immediately.  This issue was decided two weeks ago.”

Gevo general counsel Brett Lund was incredulous. “Instead of going to trial? You don’t get to skip a trial. You lose.”

Butamax wasn’t buying any of that.

“The only real news today,” said Buse, “is that the Patent office has dealt a huge blow to Gevo, by issuing an Action Closing Prosecution rejecting all claims from their so called landmark GIFT patent. ”

From the ruling

From Judge Sue L. Robinson: “It is hereby ordered and adjudged this 10th day of April 2013 that final judgment be and hereby is entered in favor of Defendant Gevo, Inc. and against Plaintiff Butamax Advance Biofuels, LLC with respect to the claims relating to ’188 and ’889 Patents.”

Final judgement? We are afraid not.

The press release flurry

In a release, Butamax set forth its argument.

On April 10, 2013, the United States Patent and Trademark Office (“USPTO”) issued an Action Closing Prosecution (“ACP”), rejecting all claims of Gevo Inc.’s U.S. Patent No. 8,101,808 (“‘808 patent”), in the inter partes reexamination filed by Butamax on May 7, 2012. The ‘808 patent was described by Gevo as “a landmark patent … on its GIFT® separation unit, a central element in the Company’s unique fermentation technology”.

“The significance of this ACP is that the Patent Reexamination Specialist responsible has now heard both sides of the argument with respect to this patent, and has concluded that all of the original, amended and added claims are unpatentable.

“In making this decision, the USPTO adopted all prior art grounds for unpatentability cited by Butamax against both the originally issued claims and the claims Gevo amended and added during the proceedings. These included the claims for both Gevo’s GIFT® system, as well as all claims purported to cover Butamax’s technology. The USPTO also rejected Gevo’s claims related to retrofit of an ethanol plant, which was already known due to prior disclosures from BP and DuPont.

Gevo responds post-haste

The Examiner’s decision, which dismissed 110 previous grounds of rejection and introduced a limited number of new rejections, is a non-final action called an Action Closing Prosecution (ACP), and gives Gevo the opportunity to respond to the limited new questions raised by the USPTO Examiner. During this period of review, the ’808 Patent remains valid and fully enforceable during the reexamination process.

“Importantly, Gevo was successful in eliminating all of the previous 110 rejections presented in the first office action and the minimal number of new rejections are based on obviousness as opposed to novelty.” said Brett Lund, Gevo’s executive vice president and general counsel.

The bottom line

You have three main lines of gravity here.

1. The Butamax vs Gevo suit. Butamax is going to appeal the decision just handed down today. That could take (easily) more than a year to work its way through the courts.

2. The first Gevo vs Butamax suit. Gevo is suing Butamax for infringing the ’808 Patent. This case is scheduled to go to trial in the US District Court of Delaware in July of 2014.

3. The second Gevo vs Butamax suit. Gevo is suing Butamax for infringing the ’375 and ’376 Patents. This case is scheduled to go to trial in the US District Court of Delaware in August of 2014.

So – with the loser likely to appeal, all of these three cases could drag for years. And, more suits may be filed in the future based on new patents.

It tells you one thing. For sure, the owners of both these technologies see massive value in them – enough to undertake the costly and debilitating legal parry and thrust.

The best news, then? Someone is going to end up owning these technologies — and drivers and chemists will all stand to benefit from isobutanol’s attractive properties and what we expect will be good prices for the customer and great margins for the owners.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe  here.

April 02, 2013

The Hydrogen Problem

Jim Lane

Hydro-Man[1].jpeg HydroMan may do his hydrogen-shift thing via water, at will – but outside of the Marvel Cinematic Universe, we have some hydrogen issues.

Psst! Like cutting out a fossil hydrogen dependency for many biofuels.

But, new pathways ensure that the status hydroquo may not last for long.

A numbers of readers responding to “Biofuels from a raging fireball” (on research work with the raging fireball, Pyrococchus furiosus, to make biofuels and renewable chemicals from hydrogen gas and CO2) raised the question, where is all the hydrogen going to come from?

As many know, hydrogen is not found in a free state in nature in much quantity — and we supply most of our hydrogen needs through steam reformation of natural gas, or cracking fossil petroleum. In other words, renewable fuels made using external hydrogen may well have a hidden fossil fuel dependency.

It all comes down to cost. There are alternative ways to make hydrogen gas, and renewable pathways for sure — if society is not using them, it is generally due to cost issues. In there, to some extent because the costs associated with renewable hydrogen are generally internalized in the process, while many of the social costs of fossil fuels are externalized — e.g. the venting of sequestered CO2.

The hydrogen dependency

Hydrogen gas is a dependency in a number of processes that make renewable fuels — most notably, those that have a hydrotreating step to remove excess oxygen. That includes the upgrade of pyrolysis oils, and even the production of aviation biofuels from renewable oils (the HEFA pathway that is currently powering most of the current flight activity).

Those beyond H2.

Now, hydrogen gas is not a required production element. Fermentation of biomass to produce an alcohol fuel does not require it. The production of diesel and jet fuels fuels using the processes pioneered by Amyris (AMRS) and LS9 do not. Neither does Joule’s process, not Cool Planet’s drop-in fuels (we think). We’ll get to the interesting case of LanzaTech shortly. Upgrading alcohol fuels to hydrocarbons can be accomplished without hydrogen gas — ORNL has developed such a process.

But some of the most promising companies are using hydrogen — Coskata, Sundrop Fuels, Primus Green Energy being three examples of companies that have begun to source fossil natural gas to get affordable feedstock. But processes such as Honeywell's (HON) UOP’s hydrotreating, used to make drop-in fuels with the Envergent process, or HEFA aviation biofuels in partnership with the likes of Dynamic Fuels and Solazyme (SZYM) — well, they need hydrogen.

So, what about hydrogen gas — can it be made renewably, and where and how?

The technical answer is, you bet. Affordably? Another question entirely. Let’s review the state of play with the two main pathways – and two outliers.


The process? Hydrogen can be produced from water, and routinely is, using an electrolytic process that you can demonstrate in a high school lab.

The problem? The process will chew up some 35-50 kilowatt hours of electricity per kilo of hydrogen. There being roughly a kilo of hydrogen in a gallon of hydrocarbon fuel — at $0.10 for lowest cost renewable electricity (e.g. wind), there’s $1.70-$2.50 cost per gallon just to provide the hydrogen feedstock, and you still have to pay for the process and whatever cost of aggregating CO2.

Solution? Advocates routinely talk about producing hydrogen using excess (and thereby, nominally priced) renewable power — at times when the grid is loaded, rather than shunting biomass steam energy to cooling towers (as opposed to the turbines) or using large scale battery storage of the type that Duke Energy put in place at its Notrees wind farm in North Carolina.

Another solution. ORNL has developed a low-cost process – yet to be demonstrated at scale. More on that here.

Anaerobic digesters.

The process? Here, microbes chew waste materials and produce biogas, rich in methane.

The problem? Costs have been the issue. But systems have been getting bigger, and options for producing hydrogen from them are there, using essentially the same processes by which hydrogen is produced from natural gas.

Solution? As an example of progression in system size, Western Plains Energy announced plans to build a $40 million anaerobic digester to produce enough biogas to replace 90% of the fossil fuel used in the manufacturing process at the company’s 50-million-gallon Oakley ethanol plant. When completed, the digester is expected to provide 15 jobs converting manure, grain dust and food waste to power. The project received a $5 million grant in April from the U.S. Dept. of Agriculture, and $15.9 million one year ago when Kansas Gov. Sam Brownback redirected unspent American Recovery and Reinvestment Act funding to the project.

Steam reformation or other catalytic processes from biogas or biooil

The process? Cracking hydrogen from biomass using heat and catalysis.

The problem? Cost, again. Steam reformation itself has struggled with high costs associated with the high temperatures at which the system operates. But it has been a technology worth chasing, for in the development of F-T plants it eliminates both the need for expensive oxygen plants and larger footprints needed to deal with nitrogen dilution from air, lowering capex and space requirements.

Solution? In 2010, we reported on a team from East China University of Science and Technology and Guangxi University  has conducted a study of hydrogen production via catalytic steam reforming of bio-oil in a fluidized-bed reactor. They note that “hydrogen production from renewable biomass is particularly adapted to sustainable development concerns. Biomass, a kind of renewable resource that adsorbs CO2 during its growth, contributes net zero carbon emissions when used to produce hydrogen.”

A system that has been attracting the most attention in this area is the ClearFuels gasifier, the star gasifier at Rentech’s (RTK) Product Demonstration Unit in Colorado. Unlike other gasifiers or pyrolysis processes, ClearFuels HEHTR is a one-step rapid steam reforming process that converts all the biomass to syngas with no char, no liquid intermediates, no ash slagging/fouling and low tar content.

The technology has operational controls for a tunable hydrogen to syngas ratio of 1:1 up to 3.5 to 1, while also interchangeably running on syngas, tailgas, biogas or natural gas.

A first outlier. Syngas as a source of hydrogen — and renewable fuels, all at once.

You may recall that LanzaTech can use hydrogen-free gases for the production of ethanol. That is because their proprietary microbe can produce hydrogen from carbon and water as required.

Which, of course, raises the possibility of combining a LanzaTech-type process with a process that needs hydrogen — and obtaining both feedstocks at the same time from synthesis gas (a combination of hydrogen and carbon monoxide), produced by gasifying biomass. Just a matter of membrane separation of the hydrogen gas. Voila, renewable hydrogen, ready to be fed to a second system that uses CO2 and hydrogen to make fuels.

A second outlier – mimicking photosynthesis.

As you might have reflected during your reading this morning, what can plants teach us? Clearly they are obtaining hydrogen to make their own biomass, from water — presumably affordably, since trees are not filing for bankruptcies.

In California last week, HyperSolar announced its plan to build renewable hydrogen generators for commercial use. Named the H2Generator, the company’s first commercial product is expected to sell at a substantially lower price than other renewable hydrogen systems that rely on expensive and energy intensive electrolyzers to split water.

By optimizing the science of water electrolysis, the low cost device mimics photosynthesis to efficiently use sunlight to separate hydrogen from water, to produce environmentally friendly renewable hydrogen.

Tim Young, CEO of HyperSolar commented, “We believe that our intensive R&D efforts will finally pay off in the form of a go to market commercial product. One key discovery was an efficient and low cost polymer protective coating that will allow us to protect solar devices against photocorrosion. Using this coating to treat traditional silicon solar cells, we are able to eliminate the expensive electrolyzer by integrating the electrolysis function directly into a solar cell immersed in water.

“We have given our tech team the green light to complete the product design required to build the first demonstration system,” Young continued. “With a demonstration system in hand, we can then move to the manufacturing phase of the business.”

The HyperSolar H2Generator will be designed to be a linearly scalable and self-contained renewable hydrogen production system. As a result, it is intended to be installed almost anywhere to produce hydrogen fuel for local use. This distributed model of hydrogen production will address one of the greatest challenges of using clean hydrogen fuel on a large scale – the need to transport hydrogen in large quantities.

The bottom line.

Digesterati, take faith. There are multiple paths to renewable hydrogen — all a matter of cost. Our take: look for symbiotic systems, of the LanzaTech type we discussed above, where hydrogen or electricity becomes available as a residue from another process. In terms of bolting on to a second technology, there’s no better way to be capital light, and get closer, faster, to parity costs with fossil pathways to hydrogen.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

March 15, 2013

Codexis Moves to the Front With CodeXyme4

Jim Lane
CodeXyme improvements.png

Compared to prior generations, CodeXyme 4 and CodeXyme 4X significantly reduce the cost of cellulosic sugar production for biofuels and bio‐based chemicals.

In California, Codexis (CDXS) announced the launch of CodeXyme 4 and CodeXyme 4X cellulase enzyme packages for use in producing cellulosic sugar for production of biofuels and bio‐based chemicals.

Codexis’ latest generation of advanced cellulase enzymes, CodeXyme 4 for dilute acid pretreatments and CodeXyme 4X for hydrothermal pretreatments, exhibits excellent performance, converting up to 85% of available fermentable sugars at high biomass and low enzyme loads. Combined with high strain productivity using the CodeXporter® enzyme production system, this allows for a cost‐in‐use that the company believes will be among the lowest available once in full‐scale commercial production.

CodeXyme 4 increases performance 10‐20% over Codexis’ last generation product, CodeXyme 3, measured by the amount of glucan converted into C6 fermentable sugar. For pre‐treatments with unconverted xylan, CodeXyme 4X maintains the same high C6 sugar activity while having additional C5 sugar conversion.

“After four years of development using our CodeEvolver directed evolution technology platform, we are proud to announce that our high‐performing CodeXyme cellulases are broadly available for the first time,” said John Nicols, Chief Executive Officer of Codexis. “CodeXyme has been tested against other commercially‐available cellulases and we have found the performance to be equal or better than alternative enzymes, across various feedstocks and pre‐treatment types. We expect CodeXyme cellulase to deliver significant cost savings and yield improvements for industrial‐scale production of cellulosic sugars.”

What does it mean?

Well, think a lot of things, but above all, think them in Portuguese.

This advance from Codexis — while having applications across a broad set of applications and geographies, has “Brazil” written all over it, and Codexis execs, speaking about the technology at World Biofuels Markets, confirmed that Brazil was on the radar.

Why? Iogen has parted with its other businesses and is laser-focused on commercializing its cellulosic ethanol technology with Raizen in Brazil — with no official enzyme partner announced to date. Not to mention that Raizen is the largest single shareholder in Codexis. Not to mention all that lovely bagasse. Not to mention that Raizen has been talking up their interest in cellulosic ethanol.
CodeXyme manufacturing.png

Leading Enzyme Performance?

During the past several months, CodeXyme cellulase has been tested on a variety of feedstocks and pre‐treatments, including corn stover, corn cobs, sugarcane bagasse, cane straw, wheat straw and rice straw. In all cases, CodeXyme 4 and 4X have been found to convert 75 – 85% of glucan and xylan into C6 and C5 sugars, at 10 – 15g enzyme per kg of glucan. With consistently high sugar conversion, customers are able to convert more sugar into high‐value biofuels and bio‐based chemicals.

Head to head with Novozymes, Dupont

In independent third‐party tests with the National Renewable Energy Laboratory (NREL) in Golden, Colorado and Chemical Engineering Research Consultants in Toronto, Canada, CodeXyme cellulase performed comparably or better than other leading enzymes. The studies compared the conversion of glucan to C6 sugars on dilute‐acid pre‐treated corn stover, using leading commercial enzyme products at their optimal pH and temperature. CodeXyme 3 (Codexis’ cellulase enzyme from 2011) was found to convert the same or more glucan at the same enzyme load as competing cellulase packages, and CodeXyme4 fared even better against the latest alternative commercial enzymes.

Commercial and Manufacturing Plan

In September 2012, Codexis established a robust applications capability and has since sold CodeXyme 4 and 4X to over a dozen potential partners and customers at lab and pilot scale. CodeXyme cellulase has been used successfully to hydrolyze biomass pre‐treated with both acid‐based and hydrothermal methods, as well as in sequential and simultaneous hydrolysis and fermentation.

Codexis is scheduled to scale up its novel CodeXyme 4X cellulase strain at commercial scale in the second quarter of this year. CodeXyme 4X cellulase will also be used in pilot production of bio‐based CodeXol detergent alcohols in collaboration with Chemtex in Rivalta, Italy by mid‐year.

More on the story.

Here are two must-reads.

An 11-slide deck from Codexis - the CodeXyme4 launch presentation.

CodeXyme4 product and applications info.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

March 10, 2013

When Will the Fog Lift of Biofuel Investors?

Jim Lane
Delays and cancellations photo via Bigstock

Investor flights GEVO, SZYM, AMRS — take off delayed by fog.

How soon will the potential of three of the hottest companies in the field be realized?

What are the key milestones coming up for the industrial biotech’s Gold Dust Triplets?

In Colorado, Gevo (GEVO) reported its Q4 and full-year 2012 results this week — and now the Q4 news for the gold-dust trio of Amyris (AMRS), Solazyme (SZYM) and Gevo is in — certainly the most highly-heralded three in the boomlet of cleantech IPOs in 2010 through early last year.

Today. we’ll look at those results briefly — but more importantly we would like to note the considerable fog which equity analysts are wading through in valuing the companies for the long-term. Fog that we believe is starting to lift — and the timing of that lift is where we would like to direct your attention to today.

For sure, it’s been a roller coaster ride.

Amyris originally opened in 2010 at $16.50, once traded over $30, but is trading at $2.97 today. Analysts at Raymond James, Piper, Cowen and Baird all have the stock rated at Neutral with targets between $3.32 and $4.00.

Gevo opened in 2011 at $15.50, once traded at a high of $26.36 and is trading today at $1.95. Analysts have the stock rated between Neutral and Outperform with targets between $3.00 and $9.00 — now, that’s a wide range.

Solazyme debuted two years ago this week at $20, once traded at a high of $27.47, and is trading today at $8.55. Analysts have the stock rated between Outperform and Underweight with targets between $5.00 and $10.50 — again, a wide range of values and we have a situation where analysts are recommending both “buy” and “sell” with seemingly no one in the middle.

Some of this — all analysts agree, is classic “sector compression” — where investor interest in giving lofty valuations to companies has evaporated based more on investor sentiment than a case of companies missing fundamental milestones.

But there have been slow-downs in scale-up — affecting Gevo and Amyris, and accounting generally for why these stock values have been more compressed.

When exactly will the fog lift — when will we have a materially clearer idea of the value of these companies? For early-stage companies it is much more about milestones rather than the kind of reporting on volume and price that drives quarterly reporting.

The fog-lift timetable


Q2 (June): Commissioning of phase 2 of the Solazyme Roquette joint venture’s Lestrem facility.

Q4: The Bunge (BG) Moema is expected to start production in Brazil.

Q2 2014 (Latest): Production starts at the Clinton, Iowa plant (with Archer Daniels Midland ).

Still in the fog: Timing of conversion of non-binding sales agreements with the likes of Qantas and Dow into binding contracts— a must for this year.


Q2 (May): Next quarterly results should give the first really clear look at renewable product margins not obscured as in the past by the legacy ethanol business, legacy inventory and limited plant output in 2012.

Q1 or Q2 (expected): A definitive agreement with Firmenich for the flavors and fragrances markets.

Q4 (latest): Amyris is expecting to generate $60M-$70M in collaboration funding from partners to offset its burn rate. If not, it will be forced to raise more money for scale-up and potentially dilute the share value.

Q3 and Q4. Amyris begins initial shipments under its Novvi lˇubricants JV and increases shipments with Kuraray. Lookm also for updates on shipments of specialty fluids (through the JV with Total).


March 20. A pretrial conference in the Butamax-Gevo patent dispute is expected should include a decision on claim construction that could heavily influence the patent trail.

April 1. Patent trial begins — resolution could be within the month. Raymond James’ Pavel Molchanov writes “we are of the view that Gevo enters this process in a substantively advantaged position. The reason is simple: last year, both the trial court and the appeals court firmly rejected Butamax’s request for a preliminary injunction against Gevo, with both courts explicitly finding that “plaintiff (Butamax) does not hold a valid patent, nor would defendant (Gevo) infringe if it did”.

Q2. Though Gevo is not guiding on specific dates for re-start at Luverne beyond a bland “sometime in 2013,” analysts expect restart in Q2, reaching full production by Q4.

Still in the fog: Start date for conversion of the Redfield (SD) plant, and the exact structure of future conversion agreements (e.g. how the value of a license turns into revenue).

Q4 2012 Financial results


Revenues for the fourth quarter of 2012 were $1.9 million compared to $17.2 million in the same period in 2011. The decrease in revenues resulted from the company suspending ethanol production at its Luverne, Minn. facility in May 2012. The net loss for the fourth quarter of 2012 was $13.2 million compared to $14.2 million for the fourth quarter of 2011.


Total revenue for the fourth quarter ended December 31, 2012 was $8.4 million compared with $14.9 million in the fourth quarter of 2011. Fourth quarter GAAP net loss attributable to Solazyme, Inc. common stockholders was $24.6 million, which compares with net loss of $15.6 million in the prior year period.


Aggregate revenues for the quarter ended December 31, 2012 were $5.9 million versus $41.5 million in the fourth quarter of 2011. Of the $5.9 million in aggregate revenues during the quarter ended December 31, 2012, $3.0 million related to renewable product sales compared to $0.7 million for the same period in the prior year. GAAP net loss attributable to common stockholders for the quarter was $43.5 million ($0.72 per share) compared to a loss of $59.4 million ($1.30 per share) in the same quarter of 2011.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

March 08, 2013

Phycal Captures CO2 Funding for Biofuel

by Debra Fiakas CFA

As part of its program to promote beneficial reuse of carbon dioxide, the Department of Energy awarded a total of $27.2 million ($3.0 million in the first phase and $24.2 million in a second phase) to a consortium led by alternative energy developer Phycal, Inc. (private).  According to the DOE website, Phycal is to develop an integrated system to produce biofuel from microalgae cultivated with captured carbon dioxide (CO2).  The biofuel is to be blended with other fuels for power generation or as drop-in diesel or jet fuel.

It is a bit of a stretch to see Phycal’s project as a bona fida “reuse” of CO2 that would have otherwise gone out into the atmosphere.  The company ferments the root food crop cassava (also called yucca or manioc) to produce ethanol.  Nonetheless, this is more by-product that final product, because what Phycal really needs are the sugars and CO2 that are also produced in the fermentation process.  That is because Phycal is principally focused on algae-based biofuel production and CO2 is the critical food source for growing algae.  Sugars give the algae an extra boost before the oil harvesting step.
The design does have a certain appeal.  Algal oil can be turned into a drop-in diesel or jet fuel that has significantly more versatility and lower distribution costs than ethanol.  Integration of the dual ethanol/biofuel plant affords precious economies that are vital to turn out a cost-competitive fuel product.

Phycal’s development partners include General Electric’s (GE:  NYSE) Global Research Group and Seambiotic (private) among others.  The group has set up a pilot cassava/algae farm near Hawaii’s Wahiawa, Oahu.  Phycal has some confidence in its ability to iron out the kinks in its process.  In late 2011, the company signed an off-take agreement with Hawaaiian Electric for delivery of 100,000 to 150,000 gallons of algae-based biofuel beginning in 2014.  The biofuel will be tested at the utility’s Kahe Generating Station.

Unfortunately, only accredited investors are in a position to get involved with Phycal at this stage in the company’s development.  A stake in its partner General Electric is a play on the myriad markets that are the targets of GE’s broad product portfolio.

Given that the world economy has yet to agree on a value for the liability of creating toxic CO2 emissions, it is impressive that work on CO2 sequestration has progressed at all, let alone the next step of finding uses for CO2.  Even though “carbon capture and use/reuse” gets little attention from investors, it appears to be quietly underway.  We expect the economic impact will be equally quiet, manifesting in lower costs rather than generating more visible new revenue streams.  However, knowing which companies are successfully harnessing the CO2 beast could be an advance look at higher earnings.

Basically, CO2 can be used in three major areas:  polymers, biofuels and inorganic materials.  The previous post “Capturing CO2 for Environmental Remediation” was about Alcoa’s (AA: NYSE) attempt to use CO2 for treating clay soil for environmental remediation  -  an inorganic material.  Phycal’s project is an example of biofuel production.  Next post will be a look at a polymer application.  
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. 

February 27, 2013

Good News for Kior: EPA Greenlights Camelina and Energy Cane

Jim Lane
Camelina microcarpa, aka Littlepod false flax.   Photo by Jim Pisarowicz, National Park Service

New renewable feedstock OKs. Good news, bad, neutral?

In Washington, the US Environmental Protection Agency issued a final rule qualifying biofuels produced from camelina oil as biomass-based diesel or advanced biofuel, as well as biofuels from energy cane which qualify as cellulosic biofuel.

This final rule also qualifies renewable gasoline and renewable gasoline blendstock made from certain qualifying feedstocks as cellulosic biofuel.

“This decision adds to the growing list of biodiesel feedstocks that meet the EPA’s standards for Advanced Biofuel and gives us yet another option for producing sustainable, domestic biodiesel that displaces imported oil,” said Anne Steckel, NBB’s vice president of federal affairs. “This is important for our energy security, for our economy and for addressing climate change, and we thank the EPA for conducting a thorough and fair review.”

By qualifying these new fuel pathways, this rule provides opportunities to increase the volume of advanced, low-GHG renewable fuels— such as cellulosic biofuels— under the RFS program. EPA’s comprehensive analyses show significant lifecycle GHG emission reductions from these fuel types, as compared to the baseline gasoline or diesel fuel that they replace.

Lastly, the rule clarifies the definition of renewable diesel to explicitly include jet fuel. This clarification offers additional market certainty and opportunity for renewable diesel producers.

Rulemaking Process

EPA published a direct final rule and a parallel proposed rule in January 2012 to amend the RFS regulations, but subsequently received adverse comment on certain aspects of the direct final rule and in March 2012, EPA withdrew the direct final rule.

EPA commented: “The adverse comments we received centered on a few narrow aspects of the assumptions underlying the greenhouse gas (GHG) estimates of producing biofuel feedstocks, including camelina, energy cane, napier grass, giant reed and corn stover. These comments were based on a misinterpretation of our analysis.

“In this final rule, we provide additional clarification regarding our assumptions, and the underlying analysis remains unchanged from the proposed rule.

“Commenters also stated the direct final rule did not properly address issues related to control of invasive species. The information provided did not raise significant concerns about the threat of invasiveness and related GHG emissions for camelina and energy cane. Therefore, we are finalizing the camelina and energy cane pathways in this rule based on our lifecycle analysis.”

No joy for elephant grass and arundo

EPA commented: “We are not finalizing at this time determinations on biofuels produced from giant reed (Arundo donax) or napier grass (Pennisetum purpureum), or biodiesel produced from esterification. We continue to consider the issues concerning these proposals, and will make a final decision on them at a later time.”

Pathway Determinations

The final rule describes EPA’s analysis and determinations for the following new fuel pathways:

Camelina oil

• Biodiesel and renewable diesel (including jet fuel and heating oil)— qualifying as biomass-based diesel and advanced biofuel
• Naphtha and liquefied petroleum gas (LPG)— qualifying as advanced biofuel

Energy cane cellulosic biomass

• Ethanol, renewable diesel (including renewable jet fuel and heating oil), and naphtha— qualifying as cellulosic biofuel

Renewable gasoline and renewable gasoline blendstock

• Produced from crop residue, slash, pre-commercial thinnings, tree residue, annual cover crops, and cellulosic components of separated yard waste, separated food waste, and separated municipal solid waste (MSW)

• Using the following processes— all utilizing natural gas, biogas, and/or biomass as the only process energy sources— qualifying as cellulosic biofuel:

o Thermochemical pyrolysis
o Thermochemical gasification
o Biochemical direct fermentation
o Biochemical fermentation with catalytic upgrading
o Any other process that uses biogas and/or biomass as the only process energy sources

Winners and loserslogo[2].png

Well, clearly any venture woking with camelina or energy cane. But there’s some love in there for jet fuel, pyrolysis and a host of other processing technologies that had aimed at cellulosic biofuels.

It’s good news for KiOR, Inc. (KIOR) and Dynamic Fuels, too.

Losers? For the time being, it puts a kibosh on some of the plans at Beta Renewables to employ arundo donax as a feedstock for cellulosic biofuels.

The bottom line

It’s an incredible leap forward in terms of broadening opportunities to meet RFS targets with a broader range of feedstocks, conversion technologies and downstream products and by-products.

There are ever more way to earn RINs — although, suffice to say, it would have been more exciting if there had been go-to major projects that were immediate beneficiaries. Disclosure: None.
Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

February 22, 2013

Earnings Season: Heading to the Biobased Scorecard

Jim Lane

harbourtown[1].jpeg Earnings season is upon us — time to go, as they say, to the scoreboard for an update on some of the sector’s perennial favorites.

GPRE earning, DSM acquiring, AMRS shipping — some welcome pars, even a birdie or two, from the front-lines.

Now, the ethanol sector has been going through one of its periodic rough patches in recent months — in this case, courtesy of the dire US drought last year which has forced up corn prices and tightened inventories. A number of ethanol plants have tumbled into the red, or shut down production entirely until corn and ethanol prices become better aligned.

First up to bat: Green Plains Renewable Energy

So, it was surprising news when Green Plains Renewable Enegy (GPRE) came out with positive earnings for the 4th quarter and the year as a whole.

Net income attributable to Green Plains for the full year of 2012 was $11.8M, compared to net income of $38.4M in 2011. Revenues were $3.5B for 2012 compared to $3.6B in 2011. For Q4, net income was $33.0M, compared to $13.3M in 2011. Revenues were $883.7M for Q4 compared to $922.8M for Q4 2011.

“All of our business segments reported positive operating income during both the fourth quarter and the last half of 2012,” said CEO Todd Becker. “We ended 2012 with $280 million in cash and the lowest ethanol plant debt in our history. This positions us for the future to take advantage of growth and diversification opportunities and to continue to withstand the cyclicality of our business.”

The strong earnings earned high marks from investors. Overall, shares jumped from a closing low of $7.59 on January 30, to $9.90 at the closing bell on Valentine’s Day before settling back to $9.88 at yesterday’s close. A very impressive 30% leap — and an upgrade from TheStreet Ratings (from sell to hold).

Looking at the company’s longer range future, news continues to be positive in GPRE’s BioProcess Algae venture. The start-up initiated and completed construction of Phase III Grower HarvesterTM reactors in Shenandoah, Iowa. Construction of Phase IV, involving an additional 4.25 acres of reactors and a new downstream processing facility, has begun with completion expected in September 2013.

The upside there is to convert the low-value CO2 byproduct at the conpany’s Shenandoah plant to a feedstock for a high-value algae venture in producing feed, nutraceuticals and fuels. A Bioseutica deal for Omega-3 oils is a first step in monetizing that project.

It’s proof positive, GPRE’s results that is, that lean times in corn do not necessarily have to translate into disaster at the earnings call. Investors who bought in during the company’s long run at the $10-$12 range may not have received satisfaction — both those who took the plunge when the company’s shares were trading at $3.57 back just 6 months ago are pocketing large gains.

Over to Amyris

Next on the docket — Amyris, Inc. (AMRS) reported in yesterday with its Q4 and year-end results.

Overall, aggregate revenues for the quarter ended December 31, 2012 were $5.9 million versus $41.5 million in the fourth quarter of 2011. The decline in revenue was due to the Company’s planned transition out of the ethanol and ethanol-blended gasoline business, which was completed in the third quarter of 2012.

Of the $5.9 million in aggregate revenues during the quarter ended December 31, 2012, $3.0 million related to renewable product sales compared to $0.7 million for the same period in the prior year.

On a non-GAAP basis net loss attributable to common stockholders was $29.7 million compared to $52.8 million ($1.15 per share) in 2011.

For the year as a whole, 2012 revenues were $73.7 million versus $147.0 million for 2011. On a non-GAAP basis, the net loss for 2012 was $131.8 million ($2.32 per share) compared to $153.4 million ($3.42 per share) in the prior year.

“In the final quarter of 2012, we completed commissioning and began commercial production of our industrial-scale farnesene production plant in Brazil. Also, we secured additional capital from some of our largest shareholders,” said John Melo, President & CEO of Amyris. “Amyris is focused on continued execution of our business strategy with the goal of achieving positive cash flow in 2014, underpinned by a reduced operating expense profile, strong product and collaboration revenues, and ongoing support from our investors,” Melo concluded.

Over at Cowen & Company, Rob Stone wrote: The Q4:12 cash loss was 20% wider than St. on lower revenue, weak mix, and higher expenses. Product and collaboration revenue both fell short of our estimates. Squalane and niche diesel are still the only products shipping; others should follow in H2:13. Despite the recent financing, only about 50% of expected 2013 collaboration funding is firm. Maintain Neutral (2).

Over at Piper Jaffray, Mike Ritzenthaler wrote:

“We maintain our Neutral rating and $3 target on shares of AMRS following their 4Q GAAP print of ($0.72) in loss per share, below our estimate of ($0.55). Gross margins on farnesene again appeared to be above zero, and $3 million in product sales were about half of the total 4Q revenues. Management’s focus continues to be on reducing costs, but with ~$30 million of burn in 4Q, cash availability remains a central tenet of the Amyris story. The Paraiso startup and new potential volumes are promising steps in the right direction, but with $30 million in cash on hand and ~$85 million in burn on tap for 2013, we remain on the sidelines.”

The stock is on a run in recent weeks — running up over $4.00 per share briefly, prompting a technical downgrade from Raymond James after shares shot up 60% in a month and overshot the RJ’s price targets. Since then, the buyer jets have cooled somewhat and the stock has settled back to $3.13 this morning after taking an 8% hit following the earnings announcement.

But, by any measure, miles better than the $1.57 low that AMRS shares reached after a steep slide last spring when the company’s ramp-up targets were abandoned due to technical problems in scale-up.

Over to DSM

This morning, Koninklijke DSM NV (DSM.AS) reported €243 million in EBITDA for Q4, with the company noting that this result came despite a €100 million lower contribution from its caprolactam activities compared to Q4 2011. For the full year EBITDA amounted to €1,109 million, 14% lower compared to 2011. Profit growth in all clusters was more than offset by approximately €300 million lower results from DSM’s caprolactam activities in Polymer Intermediates and Performance Materials.

Nutrition results in Q4 increased by 6% versus Q4 2011 and full year results increased by 8%, as a result of contributions from acquisitions and continued organic growth.

Pharma results in Q4 as well as for the full year 2012 were slightly above the level of the comparative periods of 2011.

Performance Materials recorded 21% higher EBITDA in Q4 compared to Q4 2011 due to higher volumes, improved margins and lower costs. Full year EBITDA was 4% lower due to lower margins in the polyamide-6 value chain (caprolactam effect) and lower volumes at DSM Dyneema.

In early trading, NYSE-traded shares in Royal DSM were up to $15.78, nestled quite close to an 18-month high (the stock briefly touched $16.00 in late January). DSM has not hit the $18 mark in the past five years — is the company poised to make a strong run in 2013, after dipping to as low as $10.83 in mid-summer. Certainly, the company has been active in M&A, most recently acquiring enzyme-related businesses from Cargill.

The Bottom Line

For all three reporting stocks — the companies have recovered strongly from share price jitters in the past year. Intrepid investors have been making large returns in all three stocks over the past few months. Each of the three issued relatively bullish outlooks for their development efforts — more cautious on the short-term economics and earnings.

But a whale of a lot batter than seven months ago — when scale-up concerns, drought concerns and capital-finding woes had tumbled shares associated with advanced bioenergy and renewable chemicals into the tank.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

February 19, 2013

The Dew Drop Inn — Who’s Dropping in What in Biofuels?

Jim Lane

Dew Drop Inn, Hathern
© Copyright Chris J Dixon and licensed for reuse under this Creative Commons Licence.

B20, B5, B100, E10, E22, E85, Bu12.5, HEFA 50

Is your head swimming with acronyms and blend ratios? Who exactly is making drop-in fuels, and what does that mean?

“Drop-in” — a spectrum more than a spec when it comes to renewable fuels.

In the world of alternative fuels and transport, there are two types of technologies that are highly controversial:

1. Specifically to biofuels, fuels made (exclusively) from feedstocks that are also used for food production.

2. In every alt transport sector, infrastructure-incompatible fuels or engine technologies.

While fuel or vehicle cost impact is a huge factor in adoption, much of the squabble over the US Renewable Fuel Standard, for example, has to do with how ethanol matches up with the existing vehicle fleet and fuel transport infrastructure.

The fact that Brazil solved a lot of those challenges, years ago, is one of the reasons why major petroleum producers like BP, Shell and Petrobras are diving into Brazilian ethanol while refiners in the US have been, by and large, tepid in their support.

Meanwhile, in the US producers have reached the distribution wall imposed by E10 blend limits; E15 blending is early-stage and controversial; for higher blends, there’s an acute shortage of pumps, and E85 prices aren’t tempting many customers.

But the controversy over infrastructure extends well beyond ethanol. Biodiesel producers have worked hard to move accepted blend ratios beyond B5 towards B20 and eventually B100. For compressed natural gas (CNG), there are only around 500 pumps in the country; for liquified natural gas (LNG), there are only around 40, and most of those in one state (California). Battery-electric vehicles struggle with recharge facility availabilities and charge-time.

Over to drop-ins

Which brings us to the drop-in fuels.

These are, by definition, infrastructure-compatible fuels — although, as we shall see, fuels form a spectrum and there really isn’t a simple “wall” dividing incompatible fuels and drop-ins.

Generally around the world, fuels are blended by refiners – who add anything from oxygenates to detergents — and for the foreseeable future, expect to live in a world of blends.

So, here’s a guide to the world of drop-ins and dropping in.

1. Drop-in intermediates for petroleum refineries.

These are feedstocks that can “drop into” existing refining capacity and can be used to make infrastructure-compatible fuels. These can include, for example, upgraded pyrolysis oils of the type that KiOR (KIOR) makes. For now, KiOR is upgrading at its own facility to demonstrate that it can make 100% drop-in, finished fuels — but they could, long-term, position themselves as a supplier of intermediates to conventional refiners.

These also can include renewable oils which can be “dropped into” a hydrotreating unit to make HEFA jet fuels, which are now certified for use in commercial aviation at 50/50 blends with conventional jet fuels.

2. Drop-in intermediates for biorefineries.

These are, for example, renewable sugars that can be dropped in to fermentation systems and used to make, for example, cellulosic sugars at an old corn ethanol plant; or, synthetic biology technologies of the LS9, Amyris (AMRS) or Solazyme (SZYM) type can use them to make a range of tailored drop-in fuels and chemicals including diesel and jet. Catalytic technologies of the Virent type can also convert them into renewable diesel or jet — as well as chemicals.

The renewable sugars can be made from a variety of non-food feedstocks — and Proterro is making them via synthetic biology directly from water, CO2 and nutrients.

Renewable sugars developers include Renmatix, Virdia, Sweetwater Energy, Comet Biorefining, Proterro, and Bluefire Renewables (BFRE).

3. Drop-in gasoline, diesel and jet fuels.

Companies like Diamond Green Diesel, Dynamic Fuels and Neste Oil (NEF.F) have built or are constructing, in biofuels terms, large-scale refineries to convert biobased oils to diesel fuel via hydrotreating. These can be blended by refiners or used as a 100% drop-in replacement. And, these providers can also produce renewable jet fuel at their plants.

In addition, there are the above-mentioned diesel and jet fuels made by the likes of LS9, Amyris, Virent from renewable sugars. The jet fuels are generally of the HFA spec, that can be blended in 50/50 ratios with conventional jet fuels.

Coming along in the development pipeline, there is the technology developed by Chevron Lummus and ARA – that makes a 100% drop-in jet fuel from renewable feedstocks. There has also been research in making jet fuel from biobased terpenes — and these could have enough fuel density to be used as a 100% drop-in replacement for JP-10 fuels, which are used for selected high-performance technologies like guided missiles.

4. Butanol

Companies like Butamax, Gevo (GEVO), Cobalt and Green Biologics are developing biobased isobutanol(Butamax, Gevo) and n-butanol (Green Biologics, Cobalt).

Isobutanol is case in point when we talk about “drop-in” being a spectrum rather than a spec. It is fully compatible with fuel infrastructure – e,g, tanks and pipelines and vehicle tanks and fuel lines. In terms of engine performance, it blends in at up to 60 percent with no loss in performance. However, EPA rules on emissions limit biobutanol right now to 16 percent blends (as a maximum – DuPont (DD) earned a waiver some time ago at that level) or 12.5 percent (generally). There is hope that biobutanol waivers could be issued by EPA for up to 24 percent blends in the future — but that is a ways off.

Of course, for those comparing butanol to ethanol, it’s also worth noting that a gallon of isobutanol has the energy density of 1.3 gallons of ethanol. So, you can travel roughly 50 percent farther on the renewable molecules in a 16 percent biobutanol blend than a 10 percent ethanol blend.

5. Biodiesel

A lot of people regard biodiesel as a drop-in fuel — and it's true, there are vehicles out there running on B100 today. Generally, though, B20 is the maximum blend for which carmakers will not void a warranty, today, and a lot of vehicle models are still only approved for B5. That’s changing – slowly.

At the same time, biodiesel has some infrastructure incompatibility when it comes to pipelines — it can’t be mixed, not one drop, with jet fuel.

6. Ethanol

Now, there are E100 cars in Brazil, and there are ethanol pipelines there, too. So, for that reason, sometimes you hear about ethanol being described as a drop-in fuel. Which is to say, it drops-in to some cars and infrastructure, but far from all.

In the US, ethanol is not compatible with pipelines, and requires its own special tanks and equipment because it corrodes conventional fuel storage.

With vehicles, it depends. Cars made since 1995 tolerate E10 ethanol blends. Cars made since 2001 tolerate E15 blends. Plus, there are more than 10 million “flex-fuel” vehicles that can drive on blends up to E85. Of course, there’s the problem with pumps — very few E15 pumps out there, and only about 3,000 E85 stations compared to well over 100,000 conventional fuel outlets.

Who’s Making What?

In the chart below, we look at the 50 Hottest Companies in Bioenergy to see exactly who is making what, and what progress they have made towards commercial-scale.

6 companies are excluded because they made the Hot 50 as feedstock developers (e,g, seeds and crops) or as downstream strategic partners. Of the remaining 44, eight make renewable sugars, yeasts or enzymes — these do drop-in at biorefineries, but are outside of the “fuels” category.

Of the remaining 36, 18 make ethanol, 2 make biobutanol, 3 make biodiesel, and 13 make high-blend or 100% drop-in replacements.

Of the 13, eight have completed scale-up demonstrations of the technology and are developing first commercial projects, one is constructing a first commercial facility, two have completed small commercial plants and two are operating (Neste and Dynamic Fuels) full-scale commercial biorefineries.

That’s a lot of progress. Six years ago, none of the 13 were operating at anything larger than pilot-scale – at least four were still at lab-scale.

Interest in companies with drop-in capabilities remains intense. Of the 13 companies in the Hot 50, eight of them are found in the top 16, and they currently hold the top two positions (Solazyme and KiOR).

The Digest’s 3-Minute Drop-In Guide


Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

February 09, 2013

KiOR and the Compression Spread

Jim Lane

logo[2].pngYou’ve heard about the crack spread, and the crush spread — as means to value oil refining and crop refining.
Let’s think about biomass densification and compression, and in that context, a little about KiOR.

You might have heard a little or a lot about KiOR, Inc. (Nasdaq: KIOR) — which is currently commissioning its first commercial-scale (11 million gallon) biofuels plant in Columbus, Mississippi.

Now, the oil industry might, via the American Petroleum Institute, be currently talking down the validity of the Renewable Fuel Standard — but it is not entirely clear that KIOR would have found the financing that it did without the EISA Act galvanizing investors into action.

KiOR’s secret sauce

Now, it is getting more clear — among all the glittering pieces of technology that the biofuels industry has developed — that the oil refining and marketing sector would really, really like to have invented KiOR’s BFCC unit — KiOR’s secret sauce.

What is a BFCC? It is a fluidized-bed catalytic cracker that works with biomass (in KiOR’s case, they are working now with southern yellow pine they expect to obtain at $72 per bone-dry ton).


Why is it coveted? It takes biomass, which has low density, and liquifies it into an intermediate with very high energy density — and does so at a transformatively low cost. That intermediate can be hydrotreated into an in-spec drop-in fuel — either in the gasoline range, or diesel, or even jet.

Why is that important? Because it is expected to be available at a lower cost than the marginal cost of oil production — when taken to an appropriate scale.

Equally importantly — because it is produced from renewable biomass — it can help de-carbonize an atmosphere that is producing increasingly wacky weather.

The marginal cost of producing oil

In a world where oil prices are highly volatile, one statistic for price prediction has held true for a long time — and that it is averaged cost of marginal production of oil for the world’s 50 largest public oil companies.

What exactly does ” the marginal cost of production” mean? It is the cost of exploring and capturing the last barrel of oil needed to meet overall global demand.

Bernstein Research circulated a note last year estimating that the marginal cost of production (for