Shell takes stake in Virent; re-ups with Iogen through 2012; Shell and its Biofuels Babies in review

June 8, 2010 |

It was about a year ago that Shell jettisoned all of its wind, solar and geothermal desires and focused its renewable energy development strategy around biofuels.

The second tangible fruit of that decision appeared this week with the news that it will re-invest in Iogen Energy, and has made a “significant incremental commitment” to fund R&D activities at Iogen Energy until mid-2012.

Right after that, Shell and Cargill announced that they will pour $46.4 million into Virent.

Sometime in the next 2-3 years, we’ll see first cellulosic ethanol plant to pass 50 Mgy in production, and if the first one past the post happens to be Iogen announcing that they have reached 71077345 gallons in annual capacity, there will be some symmetry in it; one of the old jokes of ancient calculators was that typing in that number and turning the calculator over revealed “SHELL OIL”.

Shell’s behind five investments in total: where are they with their babies?

Shell and its biofuels babies

Iogen
Iogen Energy is currently operating its Ottawa demonstration plant on a continuous basis using the proven R7 technology release.  Over the last 12 months, Iogen Energy has produced more than 170,000 gallons of cellulosic ethanol from wheat straw using its R7 technology.  Shell’s additional funding will be used to develop and demonstrate Iogen Energy’s next two major technology releases, R8 and R9, which will significantly reduce the capital and operating costs per gallon of cellulosic ethanol. Iogen Energy, a 50-50 joint venture between Shell and Iogen Corporation has been producing cellulosic ethanol from wheat straw at its Ottawa demonstration plant since 2004.

Digest’s take: Something’s missing in Iogen’s ROI picture, else scale-up would already have happened. Our estimate is that the operating costs are fine, else the project would have been shelved. The problem appears to lie in amortizing the capital costs, which has seen Iogen acquire a laser-like focus on organizing effective public sector support. If the US or Canadian governments announce a major revision in loan guarantees and/or investment tax credits, look for an early announcement from Iogen on moving to commercial scale.

Virent

In March, Virent and Shell announced the successful startup of the Virent “Eagle” demonstration plant, producing 10,000 gallons per year of biogasoline, a drop-in renewable fuel.

This morning, Shell announced that it has taken an equity stake in Virent and begun a joint technology program.

In total, Virent closed a $46.4 million third round of funding in which Shell and Cargill deepened their commitment to Virent’s technology platform.  The investment agreement also expands an existing research and development collaboration with Shell for the production of biogasoline to include diesel fuel.  With its new equity stake, Shell will also have a seat on Virent’s board.

The financing follows a March 2010 milestone in which Virent announced the successful start-up of the world’s first biogasoline production plant.  The Virent demonstration plant can generate more than 10,000 gallons per year of premium biogasoline product and increases confidence in the commercial viability of the technology.

The “Eagle” project represents a 100X scaleup from the company’s previous bench level, and utilizes sugars derived from biomass, passed over over catalytic process, similar to oil refinery. Virent CEO Lee Edwards said that the company is using primarily sugarbeet sugar, and has tested cane, corn in the pilot plant as well; at bench level, the company has also tested sugars from non-food biomass.

“This investment demonstrates Shell’s confidence in Virent’s catalytic biofuel production processes,’’ said Luis Scoffone, Vice President of Alternative Energies at Shell. ‘‘The expansion of our joint technology programme to include research into the production of diesel from plant sugars offers considerable potential and complements Shell’s wider biofuels portfolio.’’

“Virent is proud to deepen our strategic relationship with Shell with their equity investment and expanded research collaboration”, said Lee Edwards, Virent president and CEO. “Shell is a global industry leader who adds resources and expertise to our research and scale-up plans, which now include research to convert plant sugars directly into diesel fuel.”

“Virent has a competitive advantage from our strong relationships with two premier, global companies, Shell and Cargill.  Their significant capabilities and expertise across the value chain will be essential to accelerating deployment of Virent’s BioForming technology at commercial scale,” said Lee Edwards, Virent president and CEO.  “I am especially gratified that our accomplishments to date have resulted in a $46.4 million funding round, which is well above our initial $25-40 million objective.”

Digest’s take: Shell’s equity stake says just about everything. Cargill’s increased investment says the rest. Demonstration scale data is just coming in now; but if Virent goes to 1 Mgy, it will go far.

Cosan

Ethanol giant Cosan, whose assets were recently tied up in a $12 billion venture with Royal Dutch Shell, reported $2.35 billion in Q1 2010 revenues, up 87 percent over Q1 2009. Overall, the group reported a 139 percent increase in sugar revenues after world prices hit new highs in the wake of Indian sugar crop failures.

Digest’s take: Shell isn’t in Brazil for the joys of the sugar business, not ultimately as solely a renewables play in the ethanol space. Ethanol is an affordable, sustainable route to increasing domination of an important fuel market (Brazil), with tempting M&A economics caused by huge debt loads in the sugar/ethanol sector.

Cellana

Royal Dutch Shell and HR Biopetroleum created a joint venture in December 2007, called Cellana, to construct an algae-oil production facility to produce feedstocks for biodiesel.

Digest’s take:
A remarkably quiet development given the hoopla over algae, and Digest sources say that there’s tension between Cellana management and Shell over Shell’s approach to “helping” the design process.

Codexis

In April, Codexis (CDXS) raised $78 million in its IPO, selling 6 million shares at $13 each. The $13 price was at the bottom end of the $13-$15 range targeted by the company and gives the company a $509 million market capitalization. The company posted a $20 million loss in 2009, on revenues of $83 million, eight years after its original 2002 spin-off from Maxygen (MAXY).

Digest’s take: The first renewables investment by an oil major in some time to manage an IPO, so definitely chalk this one as a winner, though a disquieting post IPO downward shift to sub-$10 pricing is noted.

The bottom line

You are up against, to give an example, a $400 million internal upgrade to an off-shore platform that is using known technology to produce a known return, for the production of oil and gas that the company is entirely comfortable with,” an industry executive recently told the Digest, requesting confidentiality. “Even if you pass through that, investment is on a stage-gate process, and they are really, really serious about internal controls and hurdles. ”

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