The Algae Bears give their Growl

This week, Pike Research released a report projecting the growth of algal fuel production to only 61 million gallons per year by 2020. Interestingly, the Pike Group projected an overall value of $1.3 billion, or more than $20 per gallon. Hmmm.

Here’s a summary of the Pike findings.

Hurdles to commercialization indicated by the group? Production costs, and access to nutrients, water, and private capital are cited by the group.

Overall, its the most bearish assessment of algal fuel growth that has come “along the Pike” in some time. It depends on the failure of the commercialization plans of Solazyme, Algenol and Sapphire Energy – all of which individually have projected reaching commercial production in excess of 100 Mgy ranging from 2013 through 2018, and presumably excludes or discounts success in allied microcrops such as lemna, such as are being explored in commercialization work at PetroAlgae and in R&D work at other companies.

Are there near-term barriers for small-scale water, nutrients, capital

Since both Sapphire Energy and Algenol utilize abundantly available brackish water and Algenol expects to use abundantly available waste CO2 (and PetroAlgae uses ambient CO2), we are not convinced that access to either represents any kind of a material barrier for the first several hundred million gallons of algal fuels produced in this decade.

Further, if Pike Research has determined that there is a market for $22 per gallon algal fuel, the Digest’s sources say that there is absolutely no problem in sourcing private capital.

Price outlook for algal fuels

It is the rate at which production costs will fall that seem to be a decisive factor. But what is the true cost of algal fuels?

In today’s market we have only a few data points, primarily the $800,000 purchase order from the US Navy for around 20,000 gallons of algal fuel for test purposes, which came out to $424 per gallon according to Rear Admiral Philip Cullom, director of the navy’s sustainability division. Precise figures for the costs of the 150,000 gallon order follow-up placed by the Navy with Solazyme are reported to be “under $100 per gallon”.

But that’s today, for small quantities of a precision fuel – the military has its own tight specs. What about tomorrow?

Demand outlook for algal fuels – US Navy

The Navy has set a target of deriving 50 percent of its overall energy consumption from renewable resources by 2020, or which 16 percent is expected to come from nuclear power. Leaving a big chunk from other renewables, which will also power a 10-ship (plus submarines) Green Strike Force carrier group by 2016, which will commence testing in 2012.

How much algal-diesel blended fuel can a non-nuclear carrier consume in a year? Around 35 to  50 million gallons, depending on the intensity of its operations. FFG-7 class Frigates use 1.3 million gallons, while the Navy’s proposed Littoral combat ship will consume1.5 million gallons each, according to the Congressional Budget Office. Cruisers use as much as four times as much, but far less than the fuel-munching carriers.

Overall, we expect a Green Strike Force, if using nuclear submarines and a non-nuclear carrier, to use as much as 100 million gallons of fuel per year, or 50 million gallons of renewable fuels.

Overall, the Navy consumes 1 billion gallons of fuel per year – about half of this in the form of JP-5 jet fuel and the remainder in diesel (DESC does not typically report fuel buys by branch of service, so the diesel is an estimate). With the Navy’s 50 percent renewables target, that gives us 500 million gallons in available demand by 2020 – even assuming no other sector buys advanced, drop-in biofuels, or even any other branch of the service.

By the way, here’s a great, free overview of Naval fuel spending, from the US Department of Defense, via the Digest’s Biofuels Information Zone.

Whether this will consists of algal fuels – or other – is an open question that comes down to production cost. So what do we know about parity projections? Solazyme projects that they will be at parity with $80 oil by 2012/13, and may be at parity with $60 oil.

So we see no reason whatsoever to not think in terms of 50 percent of the Navy’s demand for renewable fuels being supplied via algal fuels. For now, they are only ordering camelina- and algal-based fuels, and production is expected to grow quickly on the camelina side, but slower than algae because of the process of trialing and establishing acreage with contracted farmers – and also, we have to consider that every gallon of camelina based fuel currently in planning is currently pledged to the US airline industry.

A 250 million gallon annual order for algal fuel from the Navy may well be completely supplied by Solazyme, or the Navy may spread the joy to firms such as Sapphire Energy or others as they emerge. For now, we expect Algenol’s focus to remain on the production of ethanol, so their ramp up would not likely make them a candidate for participating in Naval diesel fuel contracts.

Our take: Bulls Rule, Bears Drool

But for sure, our conclusion – just on the Navy numbers and the projections we are seeing out of Solazyme on production cost – suggest that Pike’s numbers are off – way off. Their overall market value of $1.3 billion is much closer to the mark, in the Digest’s view. But we do not see any reasons for dialing down algal fuel annual production to under 100 million gallons per year by 2020. It requires too pessimistic a view of the progress of companies towards commercialization.

We remain bullish on algal fuels – and even on the low side see algal fuels reaching at least ten times the Pike figures in annual production by 2020. The companies themselves are expecting even larger volumes – and if we decide to count lemna-based microcrop fuels, there are reasons to be even more bullish.

Our verdict: Two marks out of five for the Pike report, which expresses too much irrational inexhuberance – but does offer a useful (if extreme) cautionary brake on the enthusiastic projections of the companies, as have been reported by the Digest. Plus, they have provided some excellent fodder for algal fuel naysayers.