Developers of new advanced biofuels technologies are evaluating the entire energy production, service and delivery chains for commercial opportunities.
OriginOil’s ambitions are much larger than its small IPO from last year’s registration suggests, and the company claims it has pioneered technology that will revolutionize the service industry for advanced biofuels as Halliburton and Schlumberger had done in the petroleum and petrochemical industries.
Founded in 2007, OriginOil was backed by $500,000 in seed funding with a further $1.2 million raised since. Last year, it registered for an Initial Public Offering, with a modest target of $23 million in common stock.
“The potential is not to create a greener fuel but a more distributed form of energy,” said CEO
Riggs Eckelberry. “It would have a tremendous democratizing effect on our industry. Algae is a great candidate – it loves CO2 so generation sources could be sited anywhere. Over a period of 25 years, it will seed a revolution in energy generation. That’s the big goal and the promise.”
OriginOil is one of a flotilla of small startups with ambitious expectations that fuels of the future will come from genetically engineering microorganisms such as algae or E coli.
As the military marches towards lowering its carbon boot-print, powering the naval air and ocean fleets will become increasingly critical. Eckelberry estimates that the navy alone will require 8 million barrels a year in jet and marine fuels.
Presidential Attention
US President Barack Obama last week also gave the algae-to-oil industry a huge endorsement during engineering students at the University of Miami:
“We’re making new investments in the development of gasoline and diesel and jet fuel that’s actually made from a plant-like substance – algae… we could replace up to 17 percent of the oil we import for transportation with this fuel that we can grow right here in the United States.”
The algae market is forecast to reach $1.6 billion by 2015, from $217 million in 2010, according to the Algae Biofuels Production Technologies Worldwide Market Research Report.
OriginOil has focused on the downstream segment of the biofuels sector by developing the machinery to produce algal oil.
Eckelberry contends, however, that the real quantum leaps in advanced biofuels will come from startups that focus on algal technology.
“We’ll see market disruption in liquid fuels because the legacy players just don’t move fast enough. If you’re a legacy player you might be interested in algae but you’re busy drilling and exploring. You can’t rely on them for rapid action because it’s not their core business. It’s the same with waste water – companies in that sector are a great potential partner in algae but their core business is purifying water. The drive has to come from new players.”
Some oil firms have invested significant amounts in alternative fuels markets. Read more on Breaking Energy here.
Aurora – which focuses on omega-3s proteins, fish feed and biodiesel – is one such player with promise, he said. The company was founded in 2006 backed by $78 million in venture capital from Oak Investment Partners, Gabriel Venture Partners and Noventi Ventures.
Location Can Be Critical
However, the company’s demonstration algae farms are in Karratha, Northwestern Australia, because of the right combination of resources and climatic conditions, said Aurora’s CEO, Greg Bafalis.
“We looked in New Mexico, Texas and California and you would find elements that worked,” he said. “South Texas has a lot of CO2 and you can find land at a reasonable price but in the winter-time it gets below freezing and it rains a lot.”
Aurora grows its algae in open ponds located near the coast, which makes marine water supply easy to locate. Karratha’s port is also a hub for deliveries of offshore natural gas which is then liquefied.
During the liquefaction process, CO2 is extracted which can then be pumped into the ponds at Aurora’s demonstration plant. Using a byproduct from the hydrocarbon industry is a particularly synergistic business proposition as Australia introduces its carbon tax at $23/metric tonne, said Bafalis.
Aurora recently shipped 25 tons of “algal grain” back to its R&D processing facilities in Hayward, California. Commercial operations are scheduled to commence in the first quarter of 2014.
In many ways, the company is typical of startups in the advanced biofuels sector. Its founders were Berkeley University post-grads; one was a micro-biology PhD, and the other two were MBA students.
Ignore Feedstock At Your Peril
The process Aurora has developed uses a specific genus of marine algae, nannochloropsis. Bafalis said that the main advantage of its technology was its minimal feedstock requirements – CO2, sea water and sunlight all in plentiful supply in that particular part of the world.
He said that other companies like Solazyme with sugar fermentation technologies underestimated the impact of increased demand for feedstock at their peril.
“If you look at fermentation you’re taking a sugar and you’re feeding that sugar to algae in a dark enclosed vessel and making that algae grow and then separating out your products. It’s a viable business model as long as your products are more valuable than your inputs.
“It’s great when oil prices are $100 a barrel but if all of a sudden your inputs are higher, you’re in a negative margin. The ethanol business has seen that with corn prices. The biodiesel business has seen that with soybean and palm oil prices.
“Fermentation looks very good currently but if all of sudden everyone starts building fermentation plants and you end up sucking up 10%-20% of the sugar supply [then] you’re going to see the same kind of price spikes where those margins start to erode.
“Solazyme looks great right now. But I’m curious to see what their business model looks like if sugar goes to 35c to 40 cents per pound.”
Unlike many other biofuels companies, Aurora has not yet filed an S1 registration for an IPO but it has recently found a large strategic partner who prefers to remain confidential, Bafalis said.
“The current crop of algae companies are funded almost on speculative basis,” OriginOil’s Eckleberry said. “We will see a shake out but not so much a reduction, but a rotation or turnover of players as some companies run out of steam because they don’t have technology or funding and others come to the fore because perhaps they have a good angle on how to go forward.”
Not Exactly ‘Get Rich Quick’
Prospects of quick returns have faded since a flood of venture capital from a peak of $506m in Q3 2006, according to Cleantech Group figures.
Founder and partner Alan Salzman said that although his firm had done well from Solazyme’s IPO in 2011 and could do well from a possible Genomatica IPO this year, he said investors had to take the long view: “Our job is to invest in the inevitable. It’s a mistake to see it as just biofuels.
“If you take a 10 plus year time horizon [fossil fuel prices] are going to see a very significant rise in price. The military spends enormous amounts of money and lives transporting fuels to the frontlines so to generate fuels on site in bioreactors has a wholly different value than trying to make a replacement for stuff that goes in our gas tanks. At times some of the nuances of what’s going on get lost as people think these companies are just trying to make a replacement for gas.”
As a former dotcom entrepreneur, Eckelberry has had to adjust his expectations of his first energy industry enterprise. He said: “The sheer amount of time it takes to build out scale, I came out of the dotcom where you just wave your hand and it’s much quicker than building these energy activities. It just seems to take forever.”
But not all VCs are bullish on the sector in the very long term. Steve Jurvetson at Draper Fisher Jurvetson, said that even though his firm has backed companies like Synthetic Genomics and Genomatica: “Part of what attracts moth to the flame is that the markets are enormous. But fuel prices fluctuate wildly. For that and a variety of reasons I haven’t been that excited about jumping into the fuels space.
“If you think at a very abstract level if you have the ability to manipulate molecules with precision if you’re just going to burn it, whatever it is, it’s probably the least creative least value added thing you could imagine.”
