Falling natural gas prices and the bio-based opportunity

Think that falling natural gas prices mean bad news for bio-based technologies? Don’t bet on it. There’s opportunity in there.

On the chance that you were engaged in interstellar travel, or cryogenically frozen, over the past two years – US natural gas prices and global oil prices have completely decoupled, for the first time in living memory. For a long, long time, a barrel of oil cost just around 10 times the cost of a million BTUs of natural gas, or about 70 percent more on a BTU basis.

Today, a barrel of oil is available at 50 times the cost of a million BTUs of natural gas. In addition to oil prices rising, primarily as the result of Middle East tensions and rising demand from developing countries – there has been, in the US, a massive drop in natural gas prices owing to the impact of new technologies for liberating gas from shale.

For chemical plants that utilize natural gas as a feedstock, it means opportunity, and they have responded vigorously. Yesterday, Dow unveiled plans for a new, $1.7 billion, 1.5 million metric ton steam cracker in Freeport, Texas that will start producing ethylene in 2017, part of a $4 billion investment by the company in expanded US production in response to falling feedstock prices.

Only last month, Shell announced a strikingly similar, $2 billion project in Pennsylvania, while Chevron Phillips (a JV of ConocoPhillips and Chevron) is planning a project in Texas, Formosa Plastics has announced a $1.7 billion project for Texas, along with a liquid natural gas project announced by Freeport Development. LyondellBasell and Occidental are also looking at major projects along the Gulf Coast.

Falling feedstock prices?

That catalyst for economic activity should be a watched carefully by bio-based growers, whose technologies currently are scheduled to produce liquid fuels and chemicals at prices competitive with anywhere from $30 oil to $100 oil. Nothing is scheduled to compete with $20 oil, which is where oil prices were the last time natural gas was available for $2 per MMBTUs, back in 2002.

Many have described the divergence between natural gas and oil as a temporary phenomenon that will return to equilibrium because of a slowdown in development of gas projects. But high oil prices encourage more drilling, and natural gas is a by product of those projects, Fully 75 percent of the increase in US gas production this year is expected to be a consequence of increase oil drilling, according to Bloomberg Business Week.

The key takeaway from falling natural gas prices

Processing technology investments follow cheap feedstock, and transformational processing technology is a liberator of value by unlocking low-cost feedstocks that were previously untappable.

One of the reasons why technologies from the likes of Enerkem, Terrabon, INEOS Bio and Fulcrum, that utilize zero-cost municipal solid waste, remain highly prized, and may push the Enerkem and Fulcrum IPOs over the finishing line this spring.

Problem there is abundance of aggregated feedstock. Generally speaking, the projects contemplated by the developers range from 10-30 million gallons, and that is generally a function of the transportation cost for the feedstock, which generally must be brought in by truck, barge or rail.

For biofuels, it reminds that feedstock yield intensification is an absolute must for expansion – both in providing lower overall costs (while providing sufficient return to the grower), and in providing larger concentrations of biomass that will make larger projects more feasible. Larger projects have lower technology costs – and attract more attention from end-use fuels and chemical companies who, on the whole, have been generally underwhelmed by the scale of proposed biofuels operations.

Other potential winners in the bio-based space from high oil prices and falling gas prices?

Outside the North American market

From the EU to Asia, gas and oil prices remain largely in their traditional relationship. There, consumers should be expected to demand diversification away from oil as a strategy to limit price volatility and combat emissions.

Many first generation ethanol plants.

The more modern plants use natural gas – and a lot of of it, to provide the process heat for ethanol production. Lower natural gas input prices, lower ethanol prices. That simple.

LanzaTech

As the company says, “our patented, wholly-owned microbe that uses gas feeds as its sole source of carbon and energy for fuel and chemical production. Our microbe is feedstock agnostic and [can use] steam reformed methane that is rich in hydrogen.

Sundrop Fuels

In Colorado, Sundrop Fuels announced that they have agreed to purchase about 1,200 acres of land near Alexandria, Louisiana to build their first plant.  Using forest waste and hydrogen from natural gas, their plant will produce up to 50 MGy of renewable gasoline.  The plant will cost $450 to $500 million to build and will be financed in part through the sale of tax-exempt Private Activity Bonds.

The biofuels plant will salvage wood waste from renewable forests in Central Louisiana and adjacent regions and use that biomass as a feedstock. Sundrop Fuels also will extract hydrogen from abundant supplies of Louisiana natural gas, combining the hydrogen in a proprietary reactor with carbon extracted from wood waste. The result — up to 50 million gallons of fuel a year — will represent the world’s first renewable green gasoline that’s immediately adaptable to existing pumps, pipelines, engines and transportation infrastructure.

Siluria

Last October, we reported, “In California, Siluria has attracted $20 million for a technology platform to convert methane to chemicals, plastics, and fuels. Siluria’s Series B financing was led by the U.K. based  Wellcome Trust, joining Siluria’s founding investors Alloy Ventures, ARCH Venture Partners, Kleiner Perkins Caufield & Byers, Altitude Life Science Ventures, Lux Capital, and Presidio Ventures in this Series B.”

Siluria’s technology? Researchers Erik Scher and Alex Tkachenko of Siluria Technologies in San Francisco stated that the metals coating the virus form a nanotube structure they refer to as a “hairball”, giving the catalyst a greater surface area, which enhances the reactions.  This conversion happens at temperatures 200 to 300 below current steam cracking methods, greatly reducing the energy needed by current technology to produce ethylene.  This attempt to commercialize a bio-technique of forming nanostructures is based on Dr. Angela Belcher’s work at M.I.T, where she leads the Biomolecular Materials Group.  Her lab is currently researching a number of uses including biofuels and hydrogen production for fuel cells.”

Glori Energy

Glori Energy’s mission is to sustainably and efficiently recover oil trapped in reservoirs using existing oil wells through the deployment of its microbe-based Activated Environment for Recovery of Oil (AERO) System. AERO enhances production from waterflooded wells by stimulating a reservoir’s naturally occurring microbes to improve water sweep and oil mobility. Waterflood technology injects water into reservoirs to release additional quantities of oil that were unrecoverable during primary recovery. Conventional waterflooding only extracts a fraction of all discovered oil, leaving the majority underground. The AERO System provides a new, viable option to recover this trapped oil with minimal new footprint or investment.

The Bottom Line

Last month, we urged observers of the bio-based space to think beyond green, to think about the opportunities in the Olive Economy – where the new green meets the old brown. This week demonstrates that chemical producers, for one, will put their capital to work if they see real, transformational shifts in feedstock opportunities.