Answers to your questions about parity-priced, algae-based fuels

March 8, 2013 |

Propel Fuels - Eddie PadlaWondering when affordable algae-based transportation fuels might arrive at your local retail outlet?

Might be sooner than you think. Here’s the lowdown.

We’ve been hearing quite a bit of news this week here in Digestville about the strong demand for price-competitive algae fuels.

By far the biggest news is that sales of algae-based Soladiesel B20 — which was priced at parity with conventional fossil fuels for the purpose of conducting a month-long trial of algae biofuels — drove sales up 35% for the month at Propel Fuels outlets in the Bay Area where the tests were conducted.

That’s the good news. Now, we have to take into account that Solazyme and Propel generated a decent amount of publicity during the month-long trial, which may have accounted for increased sales — but surveys conducted with Propel customers confirmed that interest in algae-based biofuels is, well, pretty darn high. More on that here.

Further, we have to take into account that, unless Solazyme is interested in selling its product into the fuel markets at a considerable discount to the prices it can obtain for its tailored oils in other sectors, we may not see a whole bunch of algae-based fuel from Solazyme in the near future.

We’ll come back to Solazyme and its prospective customers and prices in a minute. Let’s stay with fuels right now — and answer your questions about what we can expect on the algae-based fuel front between now and 2020.

Answers to your questions on algae fuels and prices

Q. The Algae Biomass Organization just finished up a survey of its member producers on their expectations for 2020. Do they see competitive fuels on the way?

A. Yep, the latest ABO survey found that more than 90 percent overall (and 95 percent of producers) believe it is at least somewhat likely that algae-based fuels will be able to compete with fossil fuels by 2020; nearly 70% overall (75% of producers) believe it is moderately likely to extremely likely.

ABO-survey-1

Q. Let’s talk turkey. Are the producers in the ABO planning to increase capacity and putting their dollars where their hearts are?

A. Yes they are. 67 percent of algae producers said they plan to expand capacity in 2013.

Q. 67 percent of what? Are there any algae producers?

A. You might be surprised how fast the industry is growing. 470 algae industry contacts took this year’s survey, up from 338 the year before.

Fossil fuel prices and 2020

Q. What kind of prices are they looking at for 2020? In the ballpark compared to EIA’s expectations?

A. Just about spot on. 64 percent of those who answered the ABO question on fuels pricing (which was limited to actual producers), said that they expected algae-based fuels to cost $5.00 or less per gallon. It worked out to a median expected price of $4.00 per gallon. 40 percent of those who projected a price, put it under $3.00 per gallon.

Q. What is the expected wholesale price of fossil fuels in 2020, exactly, according to the Energy Information Administration?

A. Bearing in mind that projections are, er, projections — the EIA is projecting that wholesale prices in 2020 will be: jet fuel, $123 per barrel or $2.94 per gallon; gasoline, $154 per barrel or $3.69 per gallon; diesel, $163 per barrel or $3.89 per gallon.

Then and now

Q. Well, that’s all very bullish, But how does that compare to results from the past?

A. Survey respondents reported expectations in 2013 similar to those in ABO’s 2012 survey. Last year at this time, 69 percent of respondents reported that they believed it is moderately likely to extremely likely that algae-based fuels will be able to compete with fossil fuels by 2020. It’s a remarkably consistent result.

ABO-survey-2012

Q. But not everyone in the survey had such a rosy outlook. How many thought that fuels would cost more than market prices?

A. Many took a contrarian view. 37 percent of those responding on price thought that algae fuel would cost more than $5.00 per gallon

There’s a significant minority — around 37 percent of those responding — projecting that the price of algae-based fuel in 2020 will exceed $5.00 per gallon — well above the market price. In fact, 10 percent projected that the algae fuel price would remain north of $15.00 per gallon.

Other products and platforms

Q. That’s fine for fuels made from microorganisms — what about fuels made from microplants like lemna (duckweed)?

A. Glad you asked. A study just out from researchers at the Chinese Academy of Sciences and Princeton University found that “refineries using existing technologies can use duckweed to produce gasoline, diesel and kerosene at a cost competitive with oil when the fossil fuel reaches $100 a barrel.”

Q. What about other products that can be made from algae?

A. While 28% of producers indicated they are targeting fuels markets, there are many that also use algae to produce feeds (35%), nutritional products or nutraceuticals (28%) and fertilizers (18%).

Back to Solazyme and its prospects

Q. Bringing us back to Solazyme. Based on what we know about their strategy, costs and product opportunities, can we expect them to make fuel in large quantities any time soon?

A. Through 2015, certainly not — they are currently on a capacity-building spree, and simply won’t be producing in big, big volumes on a cost-competitive basis with fuels until they can eliminate the profit element from making tailored oils via tolling facilities.

Q. Aha! Solazyme is making products at astronomic, above-market prices!

A. Not so fast, pilgrim. Solazyme’s tailored oils serve a wide range of markets, all of which have far higher prices for oils than the fuels market.

Q. Huh?

A. Well, take their Myristic oil platform. The global market is in the 150,000 metric ton range, and prices are north of $3,000 per metric ton.

Q. In gallons, please.

A. There are around 300 gallons of oil per metric ton — so that puts the price at right around $10 per gallon — or $420 per barrel.

Q. Why would Solazyme ever make fuel if it can realize $420 per barrel for its tailored oils, elsewhere?

A. Well, Solazyme is planning to make an awful lot of oil — and, pardon the pun, will saturate the market in some of its high-priced markets before long.

Q. How much capacity are they building?

A. Between 120,000 and 400,000 metric tons at their first two commercial facilities in the US (Clinton, Iowa) and Brazil (Moema, Minas Gerais).

Solazyme

Q. What other platforms might they serve before turning to fuels?

A. Well, again — they might well make tailored oils for the fuels markets, and at competitive prices — before they maximize sales in other markets. It all depends on the customer demand.

But they are definitely targeting an oleic platform (prices in the $1,800-$3,000 per ton range, with a market north of 1 million tons per year), a lauric platform (prices in the $1,500-$2,500 per ton range, with a market north of 3 million tons per year) and the cocoa butter market (prices in the $3,600+ per ton range, with a market north of 1 million tons per year).

Q. Cocoa butter?

A. Yep.

Q. Under what scenario might they make fuels before getting all the sales they can in those high-price markets?

A. All goes back to customer demand, doesn’t it? In their 2011 IPO, they indicated that, even at that time, they could foresee producing tailored at a cost of $3.44 per gallon based on taking their top-producing production strain (at that time) to commercial scale. There’s every reason to believe they have knocked down the costs since then.

Q. Meaning that they could produce profitably for the fuels market, too.

A. Exactly.

Aviation biofuels and algae

Q. What about jet fuel?

A. You might ask Qantas. As soon as Solazyme (or anyone else) can produce at parity prices for them — you bet they’ll jump in with orders.

Q. How much demand is there, among airlines, for alternative fuels at parity prices. I mean, like demand right now.

A. Think of it this way. HEFA fuels are generally used in 50 percent blends, and members of the Sustainable Aviation Fuel Users Group represent roughly 42 percent of global airline traffic. Given that there is about 60 billion gallons of jet fuel demand out there per year, orders would go as high as 10 billion gallons pretty much the first minute that anyone could supply in those kind of quantities, around the world, at parity prices.

Q. But you don’t see that happening any time soon.

A. Once again, depends on your view of soon. Certainly there won;t be much renewable jet fuel produced in 2013 excepting test quantities. 2014, we expect a British Airways project with Solena to come online — so commercial-scale quantities should start to flow as soon as that plant is up to full production. For other airlines, fuels will flow according to how much they have invested in building capacity in partnership with the producers. Naturally, equity partners will get priority on shipments.

Q. Back to algae fuels. Realistically, will we see parity-priced algae fuels at the pump before 2020?

A. You saw them already at the pump in the Solazyme/Propel pilot project. I’ll die of shock if Propel wouldn’t like to retail some more of that fuel — you can’t beat a 35 percent jump in sales in terms of delighting shareholders and customers. It all depends on whether Solazyme — or other producers — can spare the capacity.

Here in Digestville, we do expect that Solazyme will target a certain amount of production for the fuel markets — and just like the barrel of oil, they can be expected to sell those cuts of their overall production at market prices. It makes good business sense to build demand for the product — even though we might reasonably expect the distribution to be limited to, say, the US West Coast where companies like Propel are building the retail base.

Algae fuels, ancient and new

Q. So you don’t see a world of $15 algae fuel?

A. Who would pay $15 for a gallon of algae fuel — excepting for testing and demonstration purposes? No one would.

Q. The US Navy did, didn’t they?

A. For testing and demonstration purposes only. They’re going to pay commercial prices, they expect, when they order commercial-scale volumes.

Q. So all that kerfuffle about $15 algae fuels raised by Republican presidential candidates last year — what about all that?

A. That was Presidential campaign noise — noise, we might add, that didn’t win anyone a Republican nomination much less a gig in the White House.

Q. The public saw through it?

A. Who knows? They voted, in the end, for “President Algae” and his all-of-the-above energy strategy.

Q. Will algae fuel be a biggest story than, say, unconventional oil and gas?

A. Unconventional oil and gas is the wonder story of the decade — but keep in mind that it is all algae fuel. Fossil fuel is 60 million year old algae. But it’s good to know that we are producing some more — and with lower net carbon emissions. Algae-based transportation fuel is engine of modern civilization, and you can’t make enough of it.

 

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