Nice Methanol Pickup

Great article in Technology Review on a means of capturing methane from industrial process.
A Practical Use for Waste Methane

Just a snippet:

A new breakthrough by chemists at the Munich University of Technology, in Germany, and Dow Chemical, in Midland, MI, could lead to a technology for turning methane, the main component of natural gas, into easily transportable and valuable chemicals. Because of its simplicity, the new chemistry could be employed at natural-gas reserves that are in remote locations with no infrastructure to transfer the gas to markets. About half of the world’s known natural-gas reserves of 170 trillion cubic meters are in such deposits, according to the U.S. Department of Energy.

This is a nice article on how industrial producers can capture natural gas. Dow’s involvement make sense and shows the type of responsible investment that industry can take in the development of new technologies. Even better, it’s a cost-savings opportunity for Dow – they get to reclaim a valuable resource instead of incinerating it. Many other companies should be doing this type of technology development investing instead of waiting on the sidelines. Good job by all of those involved in this project.

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Biofuels Essay Part 0: Introduction

Over the next few days, I will be posting an essay that details my own take on the biofuels industry. It will be divided into multiple parts (noted in the header).

The purpose of this essay is to illustrate my perspective on the biofuels challenge, note some points about where we are today, and provide a framework with how I see the industry’s current dynamics. While this will not be as rigorous as Winning the Oil Endgame, I will share some references/resources for my thoughts. I also welcome your thoughtful feedback and discussion.

As a note, I tend to perceives things from a U.S.-centered perspective (which I perceive as neither negative nor positive). While I understand this is a global issue, my own education on this subject has been in the context of the U.S. market. It is not my intent to undermine or misrepresent the global nature of this topic.

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Turn Up the Volume

Great article in TechnologyReview on the cellulosic ethanol industry

This article makes some great points, but there are some other elements in it that are missing, I think.

The context of the article can be summed up by the following point:

But experts from industry and environmental groups say that without loan guarantees and other incentives, the nascent industry will fail to emerge from the current demonstration phase to produce commercial-scale quantities of ethanol. And without that, it may be impossible to meet President Bush’s ambitious goal of producing 35 billion gallons of renewable fuels a year by 2017.

The article notes the relatively small scale demonstration plants that are being constructed to prove-out technology. This is a necessary step in developing any process technology. If there’s anything that Americans can do is build and start-up large production facilities. We’re about the best in the world at it. As long as there’s a Fluor and a Shaw Group we can handle it.

The issue about the loan guarantees, however, is a problem. Getting a plant up and running is a big risk for any financial backer to make. So whereas investors are willing to put money up to own the equity, and the government is willing to give grants for technology research, no one is giving money to ensure the vendors and suppliers to this industry that they will get paid by these companies. Raw materials still cost a lot of money as do industrial supplies. A loan guarantee would allow these companies to get give some assurances to creditors that they can make things right should something go wrong. This is a long-term, high dollar commitment that an organization would have to make for these companies. The investment community can’t/won’t provide that type of financial support. The government purports to have financial incentives according to their latest budget.

What’s missing in this article is the mention of companies that might do such a thing. Mainly, the oil companies. The article makes a mention of Iogen:

By “national effort,” he partly means money for loan guarantees that will encourage financiers to fund the building of large commercial-scale plants. Company executives and cellulosic-ethanol advocates agree on the need for such government help. Iogen Corporation, in Ottawa, Canada, is a case in point. The company has been producing cellulosic ethanol since 2004 and already has an almost 700,000-gallon-per-year demonstration plant. But Iogen’s plans for a 20-million-gallon commercial-scale plant are now on hold as the company awaits legislation to be passed in Canada, the United States, or Germany that will provide the financial incentives Iogen needs to build such a big operation.

Iogen is backed by Shell Oil, who certainly has the financial resources to back the building of a large-scale plant. Iogen has done everything that any cellulosic producer should be expected to do in bringing their product to market. They have proven out their technologies, they have an operating history, they are owned in part by a big oil company, and are looking to build a large facility in the U.S. (bringing new jobs for Americans and new customers for American businesses). Let’s compare this with Mascoma – a start-up bioethanol producer with plans of developing a desmonstration facility. Masoma is backed by venture capital firms KPCB and Khosla Ventures. These two funds combined don’t match the financial resources of a Shell Oil. Not to mention that Shell has much more long-term vested interest in Iogen’s success. So how should Mascoma be expected to succeed if Iogen ultimately can’t?

This speaks more to the detriment of the American (and perhaps Canadian) investment community and governmental programming. We have the money (For crying out loud, KKR and TPG just bought TXU, a utility company, this morning). Creating a new industry is hard and costly, but the promise of returns are there. This isn’t something that these new ventures should be expected to solve by themselves. The government and investment community have a part to play. I think they should get on the field already.

My call, it’ll happen. Let’s be patient. I mean, afterall, it took 20+ years to get a computer into everyone’s home. That’s a long way from Steve Wozniac and Steve Jobs’ garage. We’ll get it.

Doug

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Getting CO2 on the left side of the equation

Read this article from MIT Technology Review:
Capturing Carbon with Enzymes

The difficulty with managing CO2 is that it is so pervasive in nature as a product of energetic processes. Combustion almost always creates CO2 – and there are many types of combustion reactions throughout nature and man-made processes. It’s so easy (i.e. cheap), and accessible to humans that it makes perfect sense to use CO2 producing energy sources.

But we see what problems we’re in now. We’re too good at burning energy and creating more CO2 than our planet can naturally absorb (particularly while we’re tearing down rain forests).

This article shows one of the few technologies that can scrub CO2 from stack gas and make it into a useful product.

A new way to capture carbon dioxide from smokestacks produces a raw material that can be sequestered underground or turned into substances such as baking soda, chalk, or limestone. CO₂ Solution, of Quebec City, Canada, has already tested its process on a small municipal incinerator and an Alcoa aluminum smelter. Its scientists are now working with power-plant equipment giant Babcock and Wilcox on ways to adapt the technology to a coal-fired generating station.

Greenfuel uses a similar algae-based product that can consume up to 80% CO2 from a stack gas and use the algae oils for a feedstock for biodiesel. Also a good technology. The end result could mean that our coal-fired plants may not be “dirty” anymore. Does this make it okay to start producing hydrogen-based cars using coal as the energy source (and hydrogen as a carrier)? Plug-in hybrids? This would address a big “clean supply chain” issue that our coal-fired plants pose to the global CO2-reduction initiatives. In its mature state, this could be a great technology for minimizing the negative impact that our industries have on our environment.

Good show.

Compan: CO2 Solution

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Algae Oil

Here’s an article on producing biofuels from Algae from Technology Review.

It’s an interesting concept. Presumably, so says the article, you could produce oils from algae and refine it in our current refineries:

Algae makes oil naturally. Raw algae can be processed to make biocrude, the renewable equivalent of petroleum, and refined to make gasoline, diesel, jet fuel, and chemical feedstocks for plastics and drugs. Indeed, it can be processed at existing oil refineries to make just about anything that can be made from crude oil.

The question is how scalable this can be. Growing crops has its own scale flaws, albeit very well understood. But how well can they be grown and can they produce the volume that our refineries need to run to scale.

I’ll be keeping an eye on this type of research.

Doug

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The Celunol Diversa Deal

On February 12, Diversa and Celunol merged
Read article from Business 2.0.

This is an important deal as it represents the first high-profile merger for this industry as well as a comparable for future liquidity events. Celunol’s CEO and CFO will operate the combined company. This make sense as the combined company must ultimately have an operational focus going forward.

Diversa will issue 15MM shares to finance a buyout of Celunol’s equity. When the deal was announced on Feb 12, the share price for Diversa shares were $10.37. The shares have since declined to $8.63 (close on Feb 16). This is a 17% decline indicating that the market doesn’t like the deal. But why?

Further, Diversa will issue $20MM in debt for Celunol to continue operations. So this brings the total value of this deal to $175.5

Is this a good valuation?
This acquisition of Celunol was not a purchase of established capacity, intellectual properties, or long-term contracts – traditional elements of long-term value. So it’s not clear what will come of all of this between these companies. So from this perspective, it doesn’t seem to have created value. Couldn’t they have purchased a company with more capacity? Couldn’t they have just made an equity investment? A future production partnership deal? Why a full acquisition (other than get their management team)?

Neither of these company makes any money. Diversa has yet to have a profitable year (which makes sense given their focus on developing technology, not producing a particular product). They are making this acquisition by issuing stock – a great opportunity when you’re public. Well played!

But where did they get this valuation?Celunol currently only has a 50K gal/yr ethanol plant – which is very tiny. I could probably build one that size in my back yard. They’re currently building a 1.4MMgal/yr plant (and have another venture in Japan of the same volume). They also have plans of building a 55MM gal/yr plant in the coming years. They do have some intellectual property. Their website claims:

Celunol’s groundbreaking technology is based on the metabolic engineering of microorganisms. Its key element is a set of genetically engineered strains of Escherichia coli bacteria that are capable of fermenting into ethanol essentially all of the sugars released from many types of cellulosic biomass. This trait enables Celunol to achieve the required efficiency to make the process commercially feasible.

Celunol’s license extends to a large portfolio of global patents protecting this core technology and subsequent improvements, including landmark U.S. patent #5,000,000. Celunol’s license currently includes 59 technical and process patents, and 66 pending applications, in the U.S. and worldwide.

But as my professors at Stanford beat into me, operational efficiency is not a competitive advantage. So I’m skeptical that these patents or processes can create a long-term value proposition, particularly given how many other companies are creating micro-organism based production efficiency technologies (Mascoma being another Khosla-funded venture).

Let’s try and come up with a multiple for this deal (this will be more voodoo than science so say a prayer).

The only funding I’ve been able to find on Celunol was $13.8 MM (not sure for how much equity or if it was just a series A, B or what). So let’s say for exercise, this $13.8MM was their latest round of funding and represented, say, 40% of the company, then the company was valued prior to this merger at around $35Million. This merger then, is on the order of a 5X multiple for Celunol. It could realistically have as high as a $70 Million valuation which would bring the multiple to the order of 2.5X. Either way, that’s a pretty good for a backyard ethanol plant.

An Omen or an Omission?
The next question would be what does this mean for the industry from an investment standpoint. This merger seemed to have very specific benefits to it. It’s not clear that it was simply a liquidity event for Celunol’s investors. The combined entity would be much better poised to address market competition. It has strong IP and infrastructure (planned or otherwise) in its parts of the value chain. It has a strong IP research arm in Diversa and a strong processing group from Celunol. However, many of Diversa’s potential customers – other processors – are now competitors, perhaps diminishing their future revenues. The company is also public making it easier to get financing from the public markets (not necessarily good for stockholders in the short term and could contribute to the stock decline). So while it’s a significant move from an industry-player perspective, it’s not clear that it will (or should) be indicative of future M&A activity in this industry.

Congratulations to both companies for making this happen.

Doug

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Khosla on cleantech

Read this article on Vinod Khosla in Red Herring:
Khosla: Cost is Bottom Line for Energy

Khosla makes the statement:

“Growth will never be sacrificed for the environment,” he said, in a press conference before the panel. “I don’t agree with it, but there it is.”

and goes on to say:

“What’s good for me as an investor is not necessarily what’s the solution for the planet,” he said. “Are these good technologies? Should we encourage them? Yes. But what will convince TXU?” (TXU Energy is a Texas utility that is proposing building 11 new coal-fired plants.)

These are interesting comments because they beg the question as to how should these projects be funded? Should it be industry, the government, or private investors (VCs, Private Equity). My experience has been that industry, while having made significant investments, are unnecessarily risk averse and have poor incentives to make investments in clean tech. A company like Shell has been doing business with biofuels and clean-tech for decades, but have very few outside investments in these spaces (Choren and Iogen for biodiesel and ethanol respectively). But Shell has more money to invest than any single venture capital firm – $11 Billion in cash at the end of 2005 and $26 Billion in profits from that same year. Not to mention the other oil, semiconductor, and industrials. By comparison, KPCB have earmarked $100million in clean-tech investments from their latest fund. Khosla Ventures has invested in several start-ups (including Celunol which was just acquired – I’ll have more to say on that).

Does this seem a bit out of wack?

Very nice article though.

Doug

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Oil Majors question Bush’s Plan

The title sounds like an oxymoron. But here it is in a CNN Story (take a look).

According to this article, the oil majors are making two points:

Dave O’Reilly, chief executive of No. 2 U.S. oil firm Chevron, said that if no advances are made in cellulosic ethanol, the United States will not be able to get beyond 15 billion gallons of ethanol per year.

The U.S. uses around 140 billion gallons of gasoline per year now. O’Reilly said a practical plan would be to require ethanol in 10 percent of U.S. gasoline supplies.

“To get beyond that requires technology that has not yet been invented,” he said.

It’s not clear what this technology that he’s referring to, but I’m presuming it’s the capability of enzymes for breaking down cellulose into fermentable sugars. This is true, but there’s plenty of research going on in this field (another note on that later). There are also some drawbacks with the distribution of ethanol (it’s corrosive to the pipelines so it can’t be piped). But I think that we have proven that E85 can be produced and distributed to some scale. Furthermore, there aren’t that many E85 flexfuel cars out there, but they’re growing in popularity (here are GM’s FlexFuel models). It seems plausible to think that we can put 10% ethanol into the general fuel supply (or some lower %) and scale E85 distribution with the growth in the number of FlexFuel vehicles on the road (which as you’ll note, neither Bush nor the DOE have control over). If fuel demand remains constant over the next ten years (God willing), that might have a shot at working.

Another point:

“(Biofuels production) is going to be limited in terms of its scale, absent some significant technological breakthroughs,” [ExxonMobil CEO] Tillerson said.

The same can be said about petroleum. So maybe he should get to work on his own technological breakthroughs (CO2 sequestration, CO2 injection for drilling, super ultra-low sulfur diesel – that should keep you busy). Let the farmers do their jobs.

Another point:

“Cellulosic ethanol is all about cooking up the right enzymes. When you get into that area it is basically a Holy Grail-area rather than a known science area,” said Matt Simmons of Houston-based energy investment bankers Simmons & Co.

The same was true with the petroleum industry was started during the early 1900s. CatCrackers are only economically viable today because of the development of advanced catalysts. A more efficient catalyst for cat-crackers was the biggest prize during the early part of the 20th century. By mid-century, alumina based catalysts were used for fluidic cracking. Today, advanced zeolite-based catalysts are used to more efficiently separate liquid fuels (interesting note: my professor at Northwestern had his focus on zeolite catalysis). These materials were developed through decades of government and industry-funded research programs which Bush’s bill calls for (we’ll see if the money makes it to the scientists). However, Mr. Simmons seems to indicate that the search for advanced enzymes for cellulosic processing is some quixotic crusade and not a topic for scientific research. That seems a very narrow-minded scope, particularly for an investor (and in fact Genencor here in Palo Alto already produces advanced enzymes for agricultural product processing including fuel ethanol). The moral of the story being that the requirements of technology-based hurdles is not a need for skepticism, but one for focused investment purposes.

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Biodiesel’s Stepping Up

Read this article from BusinessWeek:
Biodiesel hot on ethanol’s trail By LAUREN VILLAGRAN

Couple of interesting points about Biodiesel:

Not Enough Investment
The article makes a number of good points about the amount of investments. But I wanted to bring up some other thoughts. It says:

But annual biodiesel production of 864.4 million gallons still amounts to a fraction of the 4.48 billion gallons of ethanol produced each year in the U.S., according to the Renewable Fuels Association.

and goes on to say:

Depending on the raw material used, biodiesel production can be too costly to spark much demand in the gasoline-guzzling U.S. Diesel consumption amounts to about a third of the 140 billion gallons of gasoline consumed each year in this country, with demand coming primarily from the commercial vehicle market, according to the Energy Information Administration.

According to this passage, the diesel volume in the U.S. is around 46 Billion+ gallons and there’s not 1Billion gallons of capacity (mostly through smaller, more dispersed producers). This says to me that there isn’t enough investment in this area. There are good reason for it – the demand is sparked mostly by governmental programs like bus systems wanting to be more green or like the State of Minnesota requiring a 2% biodiesel blend in all diesel sold in the state. Some individual companies/organizations are acquiring capacity for their own fleet uses.

This article also mentions that diesels, more prevalent in Europe, could be coming to America. This means a shift of some of the fuel mix to match a potential shift in the car mix. This may also mean that there isn’t enough investment in this area.

New Types of Investments Needed
The real problem with biodiesel is the availability and efficiency of feedstock. Tryglycerides – palm oil, rapeseed oil, soy bean oil – are better sources of biodiesel than fatty acids (animal fat). But their’s still a cost to all of them. You have to plan the crop balance – to manage the food price increases that we’re seeing with corn prices. They have to build-out crushing/extracting capacity. And yes, it can be pipelined. But all of that said, it’s still a hard sell. A great opportunity would be to invest in more efficient sources of biodiesel such as algae (Good Technology Review Article on Algae).

Won’t play in Cleveland
The article also notes the following:

Jeff Lipton, managing director of Jefferies Group investment banking, said he expects to see biodiesel companies go public.

“The reason why investors are more interested in biodiesel as an opportunity (is that) it works in the existing infrastructure,” Lipton said. “You can pipeline it. You can store it. You can put it into a vehicle that takes diesel.”

Ethanol can’t be easily piped, although the fuel also fits into existing gas station infrastructure. But concerns have recently emerged that increased blending of gasoline with ethanol, which produces smog, could clash with a federal mandate, now under discussion, to tighten emissions controls.

While it is true that biodiesel mostly works with existing infrastructures (there’s still some incompatibility with rubber materials used for gaskets and hoses in some diesel engines, but those are easily managed and don’t pose an expensive transition cost). But as it stands, biodiesel is only used in a mixture. The reason being that it has some significant detractive bulk properties. The most obvious being its freezing point.

To the left is a picture of some biodiesel I had for a project while at Stanford (don’t ask my why I had biodiesel in my apartment). The bottle on the left is biodiesel at room temperature. The bottle on the right is the same stuff but has been in my freezer for 30 minutes. As you can see, it’s yellow sludge with the consistency of a 7-11 Slurpee. That won’t fly in Cleveland or Detroit. My freezer temperature is a nice winter day in the midwest. I’ve heard of people in the south – Arizona for example – use this stuff just fine. I’ve even heard of people using fuel tank heaters (which sounds a bit half-baked of an idea to me). But this is a serious hurdle for making this a robust fuel choice – all other issues not withstanding.

Biodiesel is usually mixed in quantities less than 20% (B20) in order to avoid these bulk effects. But that’s a serious barrier to using B100 – B21 and could limit biodiesel demand to just 20% of that 46Billion gallon diesel demand potential (9.2billion – still way below current capacity). Some good research on an additive to lower the freezing temperature (that isn’t poisonous to the environment or be made of moon rocks) would also be a gold mine for this industry if you’re looking for new investment opportunities. There are some more issues to biodiesel that are worth discussing/analyzing that I will try to tackle at another time.

***

Wikipedia has a great information on Biodiesel and some of its facets:
http://en.wikipedia.org/wiki/Biodiesel

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Chevy Volt: Changing the Context

GM’s Chevy Volt concept car is a remarkable step forward in automobiles.

I am a big skeptic in the long-term viability alternative fuels (a big surprise given the context of this blog). While they are paramount for the near term, they are merely an incremental improvement and don’t address the green house gas emissions (I will have another post that talk more in-depthly about this).

At the end of the day, for our planet to meet its automobile demands and green house gas reduction needs, an incremental solution like biofuels is not going to cut it. As long as we’re still burning hydrocarbons for fuels, we won’t stem the tide on human-contribution to climate change (I will have more to say about this as well).

What is needed, I think, is to change the context for personal transportation. Technologies such as the Volt concept give a glimpse as to what this different context could be. Carbon bonds are the most energy plentiful, high-energy bonds available to us. Or in other words, there’s no better fuel than oil/gasolines (again, more to say about this later).

The Volt comes with an all electric drive train. It plugs in to get its initial boost of charge with a 40 mile range. It has a fuel tank that, after the initial charge has depleted, generates electricity for the drive system. This additional feature has a 600 mile range (giving a net range of 640 miles). This is a remarkable efficiency improvement and begins to decouple the fuel requirement with the overall drive train. In this sense, any fuel could be utilized. Gasoline, E85, biodiesel, or a fuel cell.

This platform gives engineers two ways to improve our energy consumption. First, improving the electric drive train could provide even more range (particularly with some of the light-weighting technology improvements which seem to be picking up speed). Could we get to, say, 1500 mile ranges with the same tank? An interesting challenge.

The second axis for improvement is creating a more diversified fuel opportunity. As it stands, the auto company has to stay with one primary fuel platform – gasoline (sometimes diesel) – to develop their products. They need only one to get some level of scale for their cars. But, given some technology enhancements, the OEMs could continue to develop electricity production platforms around any fuel that is appropriate. Any car could be made to scale with the electrical drive train and have a (presumably) lower-cost option on the fuel system. Meaning, the fuel system may be a feature that could be forecasted and installed at the production facility like any other feature – color, transmission, interior materials.

This presents some great options for consumers. I could envision a world when LPG, biodiesel, gasoline, and E85 all have equal billing at a gas station making the market more competitive (europe already has this for the most part). The big oils ought not be the only ones with “tank space” at the filling station.

The Volt even looks cool. I could almost envision the exterior morphing into a 2008 Chevy Camero. I’d be excited to get one.

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