The Biorefinery Project of the Future – Part 3 of 10 – adding renewable chemicals production

September 24, 2010 |

If we have learned anything from the stories of hot companies like Amyris, LS9, Gevo, Solazyme, ZeaChem, Algenol, or Cobalt Technologies, as well as exciting pure-plays like Segetis, Elevance, GlycosBio or Rivertop Renewables, it is the importance of producing chemicals or other bio-based materials first to generate revenues, before taking the company further down the cost curve and up in scale in order to make competitively-priced renewable fuels.

Not every company is going down this route. Among the most prominent of the pure-play fuel companies are groups like Sapphire Energy and Butamax, while companies such as POET have developed strong markets in bio-based products such as their Dakota Gold distillers grains without yet venturing into exotic plastics or chemicals.

The Backstory

In part I of our series, we outlined the beginnings of the Bioenergy Project of the Future, based on dozens of interviews on the future of technology, policy, rural communities, finance, and the demand for bio-based products and renewable fuels.

We outlined three principles for development: First do no harm. Less is more. Add ingredients slowly and stir.

In Part I, the product goal is to make and distribute ethanol (butanol is fine too) or biodiesel through the acquisition or construction of a first-generation ethanol (or biobutanol) plant. We not only have to demonstrate technological prowess in bioprocessing, we have to demonstrate financial and management acumen to all our stakeholders – the community, policymakers, lenders, and customers. As well as to begin to establish that eco-system of relationships in our community that will serve us later on, when we add-on riskier and more advanced second-generation features.

In Part II, the Bioenergy Project of the Future began a graduated series of bolt-ons, beginning with the collection of cellulosic biomass. No, we won’t aren’t adding the capacity to convert that into fuels just yet. That would be getting ahead of ourselves. First, we have to demonstrate that we can build a sustainable ecosystem around the harvest and delivery of biomass.

Part III – making renewable chemicals – the why and who and how

Small steps now, big steps later. From a purely chemical point of view, many renewable chemicals are just a well-understood step or two from fuel molecules – for example, the base chemical ethylene, used to make many of our basic bioplastics and chemicals, is just a step away from ethanol. Ethyl acetate and acetic acid are two in-demand chemicals which are chemically quite close to ethanol.

As Cobalt CEO Rick WIlson put it to us in the interviews that led to this series, “why make a $2 fuel when you can make a $5 chemical?” The answer lies in scale – the market for renewable fuels is a hundred times larger than any individual renewable chemical – but in our Bioenergy Project of the Future, we “add ingredients slowly and mix thoroughly” – in short, we walk before we run, and high-value, low-volume markets are well suited to smaller, early-stage markets.

In chemical markets, product is often measured in millions of pounds as opposed to millions of barrels (a barrel of oil weighs around 300 pounds), and 10 million pound per year plants can be quite sufficient for many chemicals – and even a 1 million pound plant can generate some meaningful revenue though rarely saturate a market. 1 million pounds – that’s around 140,000 gallons per year, smaller than some pilot-stage fuel plays and well within the range of a demonstration-scale fuel plant.

Building our community of upstream growers and downstream partners

But there is another reason to develop chemicals first, fuels later. In our Bioenergy project of the Future, we are building our community of upstream feedstock growers and downstream customers – and with renewable chemicals, we will find a more eager audience among the mid-size and large chemical companies than amongst many of the oil companies.

The chemical producers are customers of Big Oil, and they feel your pain. With natural gas as their largest cost component, companies like DuPont, BASF, and Dow are highly affected by price volatility in oil & gas. They are seeking a hedge, or a price control, against that volatility. As then-chairman of Dupont, Chad Holliday, told the Digest, “We would like to make products closer to our end-user markets.”

Whether it is adhesives, solvents, surfactants or other materials, there are strong reasons for chemical makers, as well as consumer-facing companies making everything from detergents to cosmetics, to partner with our Bioenergy Project of the Future.

For those reasons, and because of their long experience in forming and managing joint ventures with smaller technology-based companies, chemical companies can make excellent strategic investors for early-stage bioenergy companies. Dow with Algenol, P&G with LS9 and Amyris, BASF with Solix – these are just a few of the relationships that have already formed in the industry.

Though many of them begin with research collaborations, they can be extended to investments and board relationships, as well as providing access to end-user markets through licensing, long-term off-take agreements, or marketing partnerships.

There’s no success in bioenergy without the financing in place to build commercial-scale plants, and as BIO’s Brent Erickson told the Digest, “The DOE does not see itself as a deployment agency…and I am not sure if the USDA is either.” R&D funding, and even funding for as much as 80 percent of the cost of a demonstration plant, can come from the US federal government and foreign governments can provide similar levels of assistance – Canada does, for one. But the most we have seen granted to an individual project is around $50 million, and it is easier to raise $12 million for a 20 percent cost share of a $60 million smaller-scale chemicals plant, than to raise $40 million for a cost-share on a $200 million commercial-scale renewable fuels project.

Here’s another thing. Government assistance usually ends at the first demo plant, if its available at all, and after that we are on to the debt markets for project finance. In cases where renewable fuels projects have stalled in the Valley of Death between pilot and commercial-scale, it is usually the lack of debt financing that is at the heart of the problem. No bank, charging seven or eight percent interest, has much ability to tolerate a lot of project risk, and first-of-kind technologies that cost $200 million have risk all over them. Loan guarantees help, but smaller projects that make high-value products can help build the balance sheet and de-risk the project at larger scales.

We are also building our grower relations and our community relations, and chemicals and bio-based plastics offer us a graduated means of scaling up our intake of cellulosic biomass. We have two choices in feedstock – we can make chemicals from starches and sugars like corn or sugarcane, or we can commence working with the cellulosic biomass that we started collecting in Step 2.

In the Bioenergy Project of the Future, we will do a little of both. The balance between our price in the market and our cost of conversion will dictate how much cellulosic biomass we use. In our project, we will be adding a technology for converting cellulosic biomass via a licensing arrangement. Sure, we could develop our own technology, but that will slow our progress to market, and one thing we are not short of in bioenergy are exciting cellulosic technologies available for licensing or partnership.

We could choose a gasification partner like Coskata or Range Fuels, a microbial fermentation route such as with Gevo, Dupont Danisco Cellulosic Ethanol, Mascoma or Qteros, or a catalytic aqueous phase reforming technology as Virent has developed. Our partnership will depend on the strategic fit, availability and price with potential partners. It also will depend on feedstock and the technology fit. Some partners work elegantly with bolt-ons to existing ethanol plants. Some will have a good track record in their pilots and demos with our feedstock.

They might also work with our material waste streams or lower value co-products. Do they have technology for converting our distillers grains into higher-value feeds of bio-based materials? Or, can we find a partner who can assist in extracting corn oil prior to biochemical processing? That oil stream will have value in the biodiesel, food or feed markets.

In this phase, we surely hope to make money in renewable chemicals from the get-go, but since we have built our Bioenergy Project of the Future on a solid first-generation foundation, we have a revenue base in the tens or hundreds of millions of dollars that early-stage companies can only dream of. We also have learned much in the management of hedging, grower relations, and optimizing yields in a commercial-scale execution that make us lower-risk options for our strategic technology partners and investors.

In our project, we will begin with some organic acids – glucaric, adipic, formic, and acetic acids are just a few that are being pursued by early-stage ventures right now, several available on a licensing or partnership basis. Established markets are available, and we’ll be learning a lot about the nature of strong off-take agreements in negotiating our entries into our markets of choice, We’ll benefit from that learning later on when we are working on larger-scale contracts.

As we develop financing to enter these new markets, we’ll be slowly scaling up our feedstock intake from our family of growers. We’ll also be participating in our local economy by offering our excess process heat and steam, carbon dioxide, or distillers grains, to end-use customers who may co-locate in our area.

Or other companies may be attracted to our location because of the opportunity to share infrastructure. Perhaps the local water company needs to add more capacity and water pressure for fire safety as a town or municipality builds up industrial tenants for its business park. This happened in Newton, IA, and Renewable Energy Group provided land on its 32-acre biodiesel plant site for the water company to erect a new tower, bringing added capacity and safety to all.

Also, as we bring more sophisticated capacity to our project with the addition of cellulosic conversion, our hiring increases and changes character. New hires bring families to the community and in many cases highly-educated spouses to the local job market. That gives the local economic development group much more to work with in helping to bring the next company to town. In this way, our Bioenergy project of the Future is becoming the base for rural economic revival, and the counties and states that recognize that, not to mention federal legislators, will be working hard to support our growing positive impact on the community.

In part IV, on Monday, we’ll look at the addition of renewable fuels, as we expand capacity, and all through next week we will begin to have the scale and strength to add even more exotic capabilities that add value to our project, our community and to the transition to a bio-based economy. Stay tuned as we build our enterprise out.

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