POET, DSM form landmark cellulosic ethanol joint venture

January 24, 2012 |

Two titans form a monster JV, starting out with a $250M investment. How big, how fast could it grow?

In Iowa, Poet has teamed with Dutch-based Royal DSM to create a 50/50 joint venture called Poet-DSM Advanced Biofuels that will produce cellulosic ethanol and license the technology to other plants in the U.S. and globally.

DSM and POET will each hold a 50% share in the joint venture, which will be headquartered in Sioux Falls, South Dakota. The initial capital expenditure by the joint venture in Project Liberty will amount to about $250 million.

“We are going to make advanced biofuels a reality by 2013, said DSM CEO Feike Sijbesma. “Everyone is talking about advanced biofuels. Now, we are no longer talking, we are getting this done. It’s two leaders, with one shared vision, who will be first movers in a highly attractive, high-growth market.”

“This partnership has the potential to change the world,” added POET CEO Jeff Broin.

With the announcement of the new JV, POET said that it will not utilize the loan guarantee it was awarded by the U.S. Department of Energy (DOE). POET received a commitment for a $105 million loan guarantee to finance Project LIBERTY on September 23, 2011. Upon the closing of the joint venture, POET will officially decline the guarantee prior to drawing any funds.

The JV will first focus on Poet’s Project Liberty facility in Emmetsburg, Iowa and will later implement the technology in the 26 other ethanol facilities in the company’s network.

Last October, Poet had hinted that its cellulosic ethanol operations were poised to expand, when it tipped that between its cellulosic ethanol plant coming online as well as Abengoa’s and BP’s, commercial-scale production may ‘surge’ in 2013, opening the proverbial floodgates of the fuel whose use has been mandated since 2009 but was not available.

According to DSM, the joint venture is expected to be profitable in the first full year of production (2014) and to deliver substantial revenues with above-average EBITDA contribution in the medium/longer term. Sijbesma said that the JV would produce more than $100M in revenue from its first project, which would be priced competitively with corn ethanol.

The timing, feedstock and capacity

POET–DSM Advanced Biofuels will start complete mechanical construction and start production in the second half of 2013 at Project Liberty in Emmetsburg, Iowa. Project Liberty is based on work at the POET cellulosic ethanol pilot plant in Scotland, SD – as well as experience gained in baling, transport and store corn crop residue through the POET Biomass division.

The two partners will produce cellulosic ethanol from corn crop residue using enzymatic hydrolysis followed by fermentation. The initial capacity is expected to be 20 million gallons in the first year, growing to approximately 25 million gallons per year.

For now, said POET CEO Jeff Broin, the company will focus on corn cobs and stover, although it may undertake work on other feedstocks at a later time. For now, then, the scope of the venture is essentially limited to the US corn ethanol fleet of around 180 facilities, and a handful of other production sites in Canada and elsewhere around the world.

How big could it become?

In 2010, POET outlined its plans to produce up to 3.5 billion gallons of cellulosic ethanol by 2022 in a presentation at the National Press Club. This plan included:

– 1 billion gallons through added capacity at POET’s existing network of 26 corn ethanol plants.
– 1.4 billion gallons through licensing of the POET technology to other existing corn ethanol producers.
– 1.1 billion gallons based on new feedstocks sourced through POET Biomass and through joint ventures, using wheat straw, switchgrass and municipal waste as feedstocks.

The U.S. Environmental Protection Agency (EPA) and USDA have estimated that as many as 350-400 new bio-refineries will have to be constructed by 2022 to meet the volume requirement of 16 billion gallons/year of cellulosic bio-ethanol under the RFS. The proposed added capacity would account for 20 percent of the cellulosic ethanol required by 2022 in the Renewable Fuel Standard.

In noting that the US already produces 13 billion gallons of starch-based ethanol, Broin said that the US ethanol industry produces more energy for the US than Saudi Arabia.

Production costs and ethanol prices

In a press conference yesterday, POET CEO Jeff Broin said that the company cost of ethanol production was below $3 per gallon but did not elaborate further. in November 2009, the company projected a per-gallon cost of $2.35 at scale, down from $4.13 in late  2008. The company had said at the time that it expects to reach its $2 per gallon goal by the time the Project LIBERTY 25 Mgy plant opens in Emmetsburg.

Chems or fuels

Asked about the potential to produce bio-based chemicals at the plants that license the JV’s technology, DSM’s Sijbesma said that “in principle, these are two different routes, we have taken the bio-based approach, for example with out biosuccinic acid project in Italy.” but he cautioned that any consideration of other products for the JV would be down the line.

Onsite enzyme production?

DSM and POET announced that the venture would “most likely” feature onsite production of enzymes, featuring an enzyme cocktail designed and implemented using DSM technologies.

Expansion opportunity

POET-DSM Advanced Biofuels, LLC, intends to replicate and license the technology to additional plants to be built at the other 26 corn ethanol facilities in POET’s network and license it to other producers in the United States and the rest of the world.

POET’s Broin said that the venture could expand to as much as 1 billion gallons in capacity from the POET ethanol fleet alone, a network of 27 facilities in total (including Emmetsburg).

More on that loan guarantee

From the commencement of the project, POET said that it would require a federal government loan guarantee to cover roughly half of the costs of the project. With the formation

“The loan guarantee commitment from the DOE was an important milestone in our quest to commercialize cellulosic ethanol, and we are appreciative of the work they put into the due diligence process,” POET founder and CEO Jeff Broin said. “We believe that the joint venture with DSM positions us well to meet our ambitious cellulosic ethanol production goals, and thus the loan guarantee has become unnecessary.”

Creeping slowdowns at Project Liberty

In 2008, POET had expressed hopes that the production of cellulosic ethanol could come as soon as 2011, but by 2010 had slated Project Liberty to open in 2012. In April 2010, CEO Jeff Broin confirmed that POET expected to break ground at Emmetsburg, Iowa, by year end.

Problems leading to the slowdown? The slow loan guarantee process; as well as investing several seasons in the development of the POET Biomass capabilities. Rumors had come out of the DOE that there had been cost overruns on the project, the addressing of which may have also contributed to a slowdown.

Where will the gallons go?

Reporters in the press conference that followed the announcement pressed the CEOs for details on how all the growing volumes of ethanol will be distributed into the market. POET CEO Jeff Broin noted the approval of E15 ethanol blending by the EPA for some vehicles, but noted that “we will need to move to higher blends of ethanol,” noting programs to expand blender pump distribution but not announcing any new initiatives to this end. “With blender pumps, we see some movement, but we have more work to do,” he said.

Jobs, jobs, jobs

The Emmetsburg project includes 40-50 direct jobs, 180 spin-off jobs and 200 construction jobs. In noting the potential to license the technology to as many as hundreds of plats, he noted that tens of thousands of jobs could result from the activities of the new JV.

Greenhouse gas emissions, or lack thereof

The project is expected to deliver a 111 percent reduction in greenhouse gas emissions compared to unleaded gasoline – in other words, it will store carbon as well as fully recycle the carbon it will use, and by using byproducts from the cellulosic plant to produce energy for the adjacent grain ethanol plant, will materially reduce GHGs for the first-gen plant as well.

The bottom line

A landmark deal in every sense of the word. First, clearing the path on financing for Project Liberty. Second, proving an additional balance sheet going forward, to ensure that capacity can expand rapidly once the technology is proven out. Third, providing a clear path on the enzyme development and partnerships.

POET had outlined a grand vision, back in 2010, of 3.5 billion gallons of production by 2022. With this announcement, they have taken the most material step to date towards converting vision into reality.

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