5 Rules for Thriving in the 2011-12 renewable fuel markets

December 1, 2011 |

Focused on RFS, RIN, or VEETC? Have no idea what RMN, ATM, GDD, STT or LCW stand for?

Amyris and Total do, and they are getting down the street towards serious scale. Are you?

Yesterday’s Digest looked at the theme of getting stronger through beefing up management teams and raising cash, cash and more cash.

As our friend Brian Westlake commented yesterday: “It’s what Sukharno said in Indonesia back in ’65. It’s the year of living dangerously. For the weak, disaster. For the strong? Well, for those who bulk up on the management team, and raise, raise, raise, raise money, it could be better than a good year. It could be a vintage year. To the victors belong the spoils. So now is not the time to be sentimental, now is the time to get strong any way you can.”

But there’s, of course, another route to going big, staying strong. Amyris and Total exemplify the trend, with their announcement of agreements to expand their current R&D partnership and form a joint venture to develop, produce and commercialize a range of renewable fuels and products.

So, Total will continue to provide R&D capital to Amyris – $105 million in capital for a $180 million program – aimed at to accelerating the deployment of Biofene, and bringing the next generation renewable fuels to market at commercial scale.

In addition, Total and Amyris have agreed to form a 50-50 joint venture company that will have exclusive rights to produce and market renewable diesel and jet fuel worldwide, as well as non-exclusive rights to other renewable products such as drilling fluids, solvents, polymers and specific biolubricants. The venture aims to begin operations in the first quarter of 2012.

Here’s what Total said

“The creation of the joint venture and the implementation of the new renewable diesel R&D program are two more major steps forward for Total, which is aiming to become a key supplier in renewable fuels,” commented Philippe Boisseau, President of Gas & Power at Total. “It will strengthen Total’s position in the global renewable diesel market, which is projected to nearly double in size to 32 million tons in 2020 from 17 million tons in 2010.”

Here’s what Amyris said

Well, they were pleased and delighted naturally.

“With this expanded relationship and Total’s vast distribution network, as well as Total’s stated commitment to invest in production units, we expect to be able to co-develop products and, ultimately, deliver a global supply of sustainable renewable fuels at commercial scale,” said John Melo, President & CEO of Amyris. “This is an ambitious undertaking ideally suited for our two companies.”

The 5 Rules

It satisfies the three of the five rules for  surviving and thriving in renewable fuels for 2011-12.

1. RMN. Raises Money Now.
2. ATM. Accelerates the product towards the commercial market.
3. GDD. Gets a downstream daddy, with skin in the game, to assure investors that the technology has real promise based the say-so of people who know, and has the distribution network to tap that market.

(The fourth? STT. Strengthen the Team. Get people in now, at the board and senior management ranks, who understand how to move to scale, and how to capitalize that effort. The fifth? LCW, Lowest Cost Wins – you better have the lowest-cost fuel, because you’ll need that margin. Not low-cost, compared to, say, fossil fuels. Lowest Cost.)

It’s not completely unrelated to the partnerships that Codexis has developed with Shell and Raizen – except they are on a more certain path on #2, ATM, accelerate to market.

That 32 million tons

Interesting how Total is looking at the renewable diesel market. 32 million tons by 2020. That’s 8.5 billion gallons, translating it into the volumetrics of, say, the Renewable Fuel Standard. Now, renewable diesel refining has been running at higher capacities that, say, cellulosic ethanol plants. Neste’s renewable diesel plant in Singapore runs at the 250 million gallon range.

Even at that scale, you need 34 manufacturing facilities built by 2020, which means commencing planning on the last of them by no later than, say, 2016-17. At the 130 million gallons scale of the Valero-Darling Diamond Green Diesel plant planned for Geismar, Louisiana – that’s 65 projects.

The Bottom Line: open markets

Total thinks renewable diesel is a breakout market. Now, there are some significant players – say, Codexis’ Alan Shaw, who believe that there is no way to make money refining cane syrup into diesel fuel (unless you simply give up on the profit opportunities of selling cane syrup, and sell it to yourself at cost) because you lose too much of the mass in converting carbohydrates to hydrocarbons. Others have privately agreed.

In which case, the winner will be the one whose magic process can convert the cellulosic fraction of, say, sugarcane, to renewable diesel. Bringing, potentially, Codexis into the game. Not to mention LS9, who is working on just such a program. To name a couple.

The Bottom Line: mandated markets

On the other hand, there are the mandates, that may well create a market at a higher-than-market price. By 2020, the EU is scheduled to be at 7 percent renewable fuel content, and the US is supposed to be passing the 15 percent figure by that time.

That’s Total’s focus, for sure. They see the opportunities to have at-scale, lowest-cost renewable fuels to serve those markets in coming years.

The Bottom Line: foot soldiers and foot-draggers in the transition to sustainable fuels

Let’s look beyond the Totals and, say BPs.

Obligated parties have, in a number of cases, completely foot-dragged in developing technology, feedstock, and markets for those fuels.

Their hope? Starve the markets of production capacity, except pilot-scale plants that produce tiny amounts of fuel at astronomic prices, then convince the governments that the technology is not real, or at least completely unaffordable.

Will governments fall for that gambit? Or, rather see it as the obligated parties’ problem that they had more than a dozen years to get ready for the 2020 mandates. If, knowing their obligation, they chose to invest in, for example, lucrative opportunities in shale oil, their problem.

If the governments stiffen their resolve – they will have to find a way to resolve the potential that obligated parties will continue to avoid substantial investment in renewable fuels, and will continue on a strategy of ensuring that renewable fuels are unaffordable to the paying public, as a way of forcing the government’s hand.

Alaska Airlines showed how the gambit works this week, when they bought renewable jet fuel out of a pilot plant and paid $17 per gallon, and then loudly and publicly complained about the price. Imagine how the game will be played out in 2020, if renewable fuels continue to be starved of investment, and mandated transport fuels cost $17 per gallon in 2020.

$17 fuel? The reaction will look like Occupy YourLocalFuelRetailer.

Which brings us back to The Mission

1. RMN. Raise Money Now.
2. ATM. Accelerate product towards the commercial market.
3. GDD. Get a downstream daddy, with skin in the game.
4. STT. Strengthen the Team.
5. LCW. Lowest Cost Wins.

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