Biocrude could soon be cheaper and more efficient than traditional crude oil.

One of the challenges for fuel derived from biological materials is the impact it can have on machinery and pipelines, leading to competing technical fights over the proportion of fuels like ethanol that can be shipped or used in the US transportation industry.

A company called KiOR is now starting to commercialize its production of hydrocarbon blendstocks, which can be “dropped” into the current transportation fuels infrastructure such as car engines, pipelines and gas stations.

Their technology allows biomass to be converted into renewable crude oil, which in turn can be processed into gasoline, diesel or fuel oil blendstocks.

“KiOR is special in two ways – the product that it makes is biocrude,” said Pavel Molchanov, an energy analyst for Raymond James.

“This is a hydrocarbon just like crude oil and it is interchangeable with petroleum,” says Molchanov.

One advantage of biocrude is that unlike ethanol, it does not need a 10% to 15% “blend wall” and instead could be combined with conventional gasoline and diesel fuels at various percentages, a company spokesman said.

Don’t Eat It

The Pasadena, Texas cellulosic fuels producer also does not use feedstocks that are derived from food and instead uses woodchips, switch grass, bark after a forest is logged and other agricultural waste.

“It’s a very unique platform in two respects – they can use virtually any feedstock and they can make virtually any refined product,” said Molchanov.

The company can produce so many products because they are using “cellulosic biomass in a thermal chemical process,” he said.

“Within seconds the biomass is turned into a liquid hydrocarbon or renewable biocrude,” said Molchanov.

Some companies are experimenting with other creative ways to produce oil from biological matter, including OriginOil that is creating oil from CO2-eating algae. Read the story: Feed Me With CO2.

Ramping Up

KiOR started construction on its first commercial scale production facility in Columbus, Mississippi earlier this year. The plant can process up to 500 bone dry tons (BDT) of Southern Yellow Pine feedstock per day and is expected to start producing more than 11 million gallons of fuel annually during the second half of 2012.

In the second half of 2012, the company also plans to begin construction of its first standard commercial production facility, which will be designed to process 1,500 BDT per day. The first standard commercial production facility will be in Newton, Mississippi.

The company plans to build a total of five facilities in Mississippi and has received a $75 million loan from the state. Three of the plants are expected to be completed within the next five years.

The company’s demonstration plant in Pasadena, Texas has produced over 32,000 gallons of renewable crude oil from woodchips.

No Practical Limits

For the past four years, the company has been refining its catalyst system to churn biomass into hydrocarbons. KiOR has received funding from Vinod Khosla, the founder of Khosla Ventures, who also helped created the company.

The company went public in June on the NASDAQ exchange and now has a market cap of $1.4 billion.

In May, FedEx Corporate Services, agreed to buy fuel from KiOR’s Columbus plant after it starts production in 2012. Hunt Refining, which has refineries in Alabama and Mississippi, also signed an agreement to purchase renewable gasoline and diesel blendstocks and fuel oil.

Catchlight Energy, a 50-50 joint venture between the subsidiaries of Chevron and Weyerhaeuser, signed an agreement to provide forestry-based feedstocks for the Columbus plant. Catchlight is also a customer of KiOR and signed a fuel offtake agreement in May.

“It’s exciting because this company is not limited to one specific output,” said Molchanov. “It does not have to compete with ethanol. It has no practical limits.”