Over the next decade, a battle over the next generation of oil will be waged not in a Middle Eastern Gulf, but San Francisco’s Bay.

San Ramon, in a corner of the industrialized East Bay, hosts the headquarters of one of the world’s largest petroleum giants Chevron. And nestled between the city and Silicon Valley, rising startup Solazyme leads the development of biofuels from algae at its R&D facilities.

The International Energy Agency’s World Energy Outlook 2011 published in November forecast the demand for energy would increase by one-third between 2010 and 2035, with non-OECD countries accounting for 90% of that growth. Meanwhile, oil prices would rise to $210 by 2035 as the number of passenger cars soars to 1.7 billion, the report said.

Demand increase coupled with resource depletion has set the stage for the dramatic entrance by the nascent technologies offered by advanced biofuels.

Another IEA report, Technology Roadmap: Biofuels for Transport predicts that by 2050, biofuels could provide 27% of total transport fuel and contribute in particular to the replacement of diesel, kerosene and jet fuel.

David and Goliath

But unlike conventional petroleum products, biofuels cover a disparate range of technologies and feedstocks. Even among the market leaders Solazyme, KiOR, Gevo and Amyris, each technology is different. Companies like Genomatica and Synthetic Genomics are also classed as “biofuels” companies even though they target the biochemicals market by genetically engineering micro-organisms like E Coli.

Chevron’s market cap is $215 billion and Solazyme’s is $771 million – differential sums which pitch these companies in genuine battle of David versus Goliath as they competing for a slice of this pie estimated to be worth $185 billion by 2021.

But representatives on both sides prefer to present this contest as collaborative competition rather than direct confrontation.

As biofuel startups attempt to scale, they are more likely to end up standing on shoulders of the petroleum industry giant, rather than toppling incumbents: David and Goliath, rather than David against Goliath, they say.

“Collaboration is going to be the way that we are going to overcome the technology and economic hurdles that lie between advanced biofuels today where you have zero gallons produced and where we hope the business will be 20 or 30 years from now,” said Jeffrey Jacobs, vice-president of Chevron Technology Ventures biofuels unit.

Chevron Technology Ventures works across all three biofuels categories: first-generation biofuels such as conventional ethanol from food crops such as corn; second-generation biofuels from non-crop feedstock such as wood waste; third-generation biofuels from algae and other microbes.

Chevron does not make public the money it has invested in its internal R&D efforts, which it describes as “robust” nor does it dare say how many staff work on internal programs “for competitive reasons”.

Designing The Oil Future Through Partnerships

Des King, the president of Chevron Technology Ventures, said last year that it had invested nearly $200 million with 36 companies in its current portfolio, 25% of which are in 25% in cleantech. But the unit has not made a direct cleantech startup investment in two years, focusing instead on strategic partnerships and in-house R&D.

In 2008, the oil major struck a strategic partnership with forester Weyerhaeuser on its Catchlight Energy cellulosic biofuels projects. It also has several joint development programs with Solazyme, arguably the world leader in 3rd generation algal biofuels.

Solazyme views itself as an “oil designer and producer” rather than a fuels or chemicals company. Its technology uses sugar cane as a feedstock for algae which are genetically spliced to produce specific types of oils that can replace or enhance oils found in nature. These oils produce entirely new products that can be turned into anything from an olive oil substitute and high grade jet fuel used by the US military to cosmetics, soaps and industrial lubricants that are indistinguishable from their petroleum-based counterparts.

Harrison Dillon, chief technology officer, president and co-founder, of Solazyme, said: “Oil is a collection of molecules of different chain lengths and different branching structures. We don’t make one single product. Every single oil that went into these products is a specifically designed mixture of different oil molecules. If you take a company that makes butanol it’s butanol. You can turn it into some other stuff but it’s narrower. Ethanol you can basically make something you can drink or gasoline additive or polyethelene. Our technology can be applied to hundreds more products.”

Scaling The Heights

Diversity in the company’s business strategy has allowed it to stay not just a few steps ahead in the development of oil from algae, but years ahead, said Dillon. Solazyme now has production agreements with Chevron, Dow Chemicals, Qantas, Unilever and Ecopetrol, Colombia’s largest oil company.

Joint development agreements could see Dow purchase up to 20 million gallons of Solazyme’s oils in 2013 and Qantas will purchase up to 400 million liters of the jet fuel per year. But Solazyme has a long way to go to meet those levels of production from last year’s levels of 400,000 liters of renewable diesel and renewable jet fuel.

But partnerships with refiners Honeywell UOP and Dynamic Fuels allow Solazyme to scale quickly, said Dillon.

“We are not going to be better at or more efficient at refining oil into diesel fuel than a major oil company that operates refineries any more than we’re going to be better at making a bar of soap from oil than our partner Unilever. So our place in the value chain is really to design the oil to be optimally useful for each end product and supply that oil to our partners.”

Solazyme has also purchased a former brewery in Peoria, Illinois, its first semi-commercial scale production facility. Fermentation is already under way and downstream processing equipment will come online in the second half of this year. It also entered into a joint venture framework agreement with agribusiness giant Bunge which is on track to start production on 100,000m tonnes of renewable oil from cane sugar in 2013.

United also flew its first US commercial flight on algal biofuels last November and plans to buy 20m gallons a year of renewable jet fuel from 2014.

The Serendipitous Mistake

But like any classic Silicon Valley startup, Solazyme’s mistakes have led to some technology breakthroughs and serendipitous discoveries, said Dillon.

“Solazyme was one of the first algae biofuels company to come into existence and we spent the first two years growing algae in ponds and it didn’t work – not cost effectively,” he said. “We went back to our investors and said we told you that this was going to work cost effectively and we now have realised it’s not. But we’ve observed that algae can not only grow in the sun but it can also consume sugar and make oil.”

With a PhD in genetics and training as a patent lawyer, Dillon is perfectly positioned to identify the value of Solazyme’s intellectual property – with more than 200 patents already to date – and know how to protect it from competition.

Solazyme is over half way through a 566,000 liter order for the military. In 2011 alone, it delivered 407,000 liters of fuel to the Navy and is working on additional contracts now.
Navy Secretary Ray Mabus has committed the Navy to a 50% reduction in the use of fossil fuels by 2020. The target includes nuclear but biofuels are a serious part of the future energy mix.

Secretary Mabus last year told the National Clean Energy Summit in Las Vegas:

“Why should our military be concerned about this? The answer is pretty straightforward: We buy too much fossil fuel from potentially or actually volatile places on earth.

“Every time the cost of a barrel of oil goes up a dollar, it costs the United States Navy $31 million in extra fuel costs.

“We’re getting close to a tipping point on energy. Where one form of energy we’ve been using for a long time will suddenly change.”

“I think we’ll be a big component of that [change],” Dillon said. “If you look at the history of energy, the navy pioneered a lot of this. Navy pioneered the transition from wind to coal, the Navy transitioned coal to petrol, Navy pioneered nuclear. This is just another example of the military driving tech development for security reasons. They’ve done this many times.”

The Cost Of Change

But homegrown oil does not come cheap. At the end of last year, the Navy signed a $12 million contract to purchase 450,000 gallons of advanced biofuels. The cost per gallon will work out at $15/gallon versus $3.97/gallon for conventional jet fuel.

Costs will decline rapidly as production volumes rise, said Dillon. “The military is pretty smart,” he said. “They’re not going to buy something that’s going to be indefinitely expensive. So they would only do this programme with us once we convinced them that we have a viable path to being cost effective compared to biobased fuels.”

Support for the advanced biofuels industry will also continue through mandates under the Energy Independence and Security Act 2007. EISA’s Renewable Fuel Standard requires transportation fuel sold in the US to contain a minimum of 36 billion gallons of renewable fuels, including advanced and cellulosic biofuels and biomass-based diesel, by 2022. The RFS mandates blending of 36 billion gallons of renewable fuels by 2022, of which only 15 billion gallons can be produced from corn-based ethanol.

President Barack Obama and Steven Chu announced $800 million for new research on biofuels in the American Recovery and Renewal Act 2009 better known as the stimulus. Last August, Obama continued his administration’s commitment to biofuels with $510m in federal funding to support contracts with advanced biofuels companies.

Scale of Challenge Prompts Slate of Solutions

Solazyme and companies like it have huge ambitions to leverage the power of military procurement to accelerate development of advanced biofuels just Department of Defense budgets did in the past for the semi-conductor industry.

“We’re leveraging billions of years of evolutionary optimisation to make oil,” said Dillon. “When they first discovered petroleum people asked John Rockefeller are you going to replace whale oil? They didn’t really understand how big it could get.”

But the descendents of Rockefeller’s original oil empire are not concerned that their Achilles’ heel in technology or execution will be exposed any time soon.

You can’t schedule innovation. Miracles just don’t happen.” – Chevron’s Jacobs

Chevron’s Jacobs said: “In our business, we have taken conventional refining techs quite a few times from the lab bench to commercial deployment. On average, that can take 8-10 years and $1 billion to the first world-scale production facility.

“People who thought that the small tech companies were going to displace hydrocarbons probably did not appreciate the scale of the business and the difficulties in building production facilities at scale and rapidly growing them into what is a fast growing market demand for transportation fuels on a global basis.

“In the energy space what you’re going to find is not a single technology breakthrough but a suite of technologies. There is not going to be one big next thing that will transform the energy landscape. But there is going to be a series of smaller black swans that will contribute to the world’s ability to meet demand for energy.

“As our scientists are fond of saying: you can’t schedule innovation. Miracles just don’t happen.”