Shell, Iogen, and Cancellation in Manitoba: Answers to Your Questions

Shell and Iogen cancel their long-contemplated Canadian cellulosic ethanol project, and announce 150 layoffs.

“Uh… had a slight weapons malfunction. But, uh, everything’s perfectly all right now. We’re fine. We’re all fine here, now, thank you. How are you?”

In Canada, Shell and Iogen announced that they will not pursue the jointly owned 23 million gallon Iogen Energy cellulosic ethanol project in southern Manitoba.

The announcement, according to the partners, “will lead to a smaller development program at Iogen Energy and a loss of 150 jobs,” although Iogen Corporation will continue to employ approximately 110 people at its Ottawa headquarters and “plans to expand its line of offerings with new technology for the production of advanced and cellulosic biofuels.”

OK, everyone take a breath for a minute. The industry is not going away.

Meanwhile, Canadians and fermentation fans, don’t get out the funeral garb just yet. Wisconsinites and thermocatalytic fans, don’t strike the Virent victory song, for a moment. There are a lot of dimensions to this story, a lot of questions that are being asked. Let’s go through them one by one.

(Note: In order to protect the identities of a number of observers who prefer to remain in the background, we have blended the following narrative into a seamless authorial voice).

Is Shell exiting biofuels?

No. “The strategy remains the same,” said Shell spokesman Peter Snowdon by telephone from London yesterday, “though the tactics may change as the market evolves.”

Keep in mind. Shell announced just a month ago that it has built a next generation biofuels pilot plant at Shell’s Westhollow Technology Center in Houston, to produce drop-in biofuels rather than ethanol. It uses a thermo-catalytic process technology licensed from its commercial partner Virent, which is similar to the process being used at the Virent pilot plant in Madison, Wisconsin.

Who’s panicking at this point?

Well, some Canadians, so far, it appears. “The whole environment now is just not right for any form of renewable energy really,” Bill Cruickshank, an Ottawa consultant and former official at Natural Resources Canada, told the Globe and Mail. “The focus on the tar sands is just unbelievable. What frustrates me is the lack of a big plan to meet our targets from Canada.”

Which scene in Star Wars does the panicking and nervous reassuring remind us of?

HAN SOLO
(sounding official) Everything is under control. Situation normal.

INTERCOM VOICE
What happened?

HAN SOLO
(getting nervous) Uh… had a slight weapons malfunction. But, uh, everything’s perfectly all right now. We’re fine. We’re all fine here, now, thank you. How are you?

INTERCOM VOICE
We’re sending a squad up.

HAN SOLO
Uh, uh, negative. We had a reactor leak here now. Give us a few minutes to lock it down. Large leak… very dangerous.

INTERCOM VOICE
Who is this? What’s your operating number?

(Han blasts the comlink and it explodes.)

HAN SOLO
Boring conversation anyway. (yelling down the hall) Luke! We’re going to have company!

When did we first know that 2012 was a make-or-break year for Iogen?

In June 2010, the partners “announced a further investment in Iogen Energy, for the purpose of accelerating the commercial deployment of Iogen Energy’s process for making cellulosic ethanol from agricultural residue. As part of the ongoing joint development agreement between Shell, Iogen Corporation and Iogen Energy, Shell made a significant incremental commitment to fund research and development activities at Iogen Energy until mid-2012.” At the time Iogen was using its R7 technology – the purpose of the new funding was to develop and demonstrate the R8 and R9 technology releases that were aimed at significantly reducing the capital and operating costs per gallon of cellulosic ethanol.

Did R8 and R9 fail?

In persuading the partners to go forward, yes.

Is Iogen dead?

No. Iogen is hurt. The company marches on.

Is Iogen’s technology viable?

“We think the technology is viable,” confirmed a Shell spokesman in an emailed statement that was widely circulated yesterday.

What does this mean for Codexis and Virent?

For Virent, that’s easy. Shell is proceeding with Virent, and the technology may well go far. We’ll know more in the next two years, but certainly there will be less competition around Shell’s hallways for attention and capital.

For Codexis, more complicated. As Raymond James energy analyst Pavel Molchanov writes, “to be crystal clear, Codexis is not directly involved in the bilateral agreement between Shell and Iogen Corp. But there are two possible derivative implications for Codexis – a narrow one and a broader one. The narrow one is that this news may have an effect on Shell’s biofuel efforts in the near term. Iogen’s technology platform specialized in pretreatment of cellulosic feedstock, and it appears that a new pretreatment partner will need to be brought in.

“The broader issue is that this news may indicate hesitation on the part of Shell vis-à-vis commercialization of cellulosic biofuels. To be sure, the bulk of Codexis’ recent comments about cellulosic work with Shell have centered on Brazil rather than Canada, but if Shell is reluctant to pursue commercialization in Canada, that may carry read-through for Brazil, as well. It is unclear what Shell’s motivations are at this point, but it is certainly disappointing to see the cancellation of the Manitoba project.”

There are three ways to look at this for Codexis.

Door number one. Good news, in a straightforward way. They like Brazil more than Manitoba, and are going forward there, and focusing more and more on bagasse.

Door number two. Good news in a roundabout way. Iogen could be tough to work with, Shell is tightening its portfolio, and didn’t see the results in Manitoba working out, in having two enzyme technologists in bed on the same project. They’ll watch and see the results from the Codexis-Chemtex partnership, in Italy, on someone else’s dime, and if it works they will find a way to commercialize the solution in Brazil, and possibly elsewhere.

Door number three. Good news in a Machiavellian way. Codexis is now a company in the Shell orbit without a pretreatment partner or a go-to-marklet strategy in fuels. They may buy out some freedom in fuels – if not a full buy-out like they did in chemicals, at least a wider freedom to operate (with Shell retaining a ‘most favored nation’ costs status vis-a-vis the technology). Or, they may be acquired out of the Shell orbit entirely, should Shell decide that the thermocatalytic path is the right one for bagasse. Several companies might well be hotly interested in getting control of Codexis’ cellulase enzymes for their own cellulosic strategies.

What does this mean for Canada?

Combined with Enerkem’s IPO withdrawal, it’s been a rough news week for Canada and advanced biofuels. Will that result in some rethinking at SDTC – which launched a newt-gen biofuels fund a few years back but has not pulled the trigger on many large-scale commercial grants? Time will tell. For the meanwhile, emphasis may well fall back on opportunities farther upstream, in feedstock development for energy crops. Think Agrisoma, Pond Biofuels.

Is Shell sharpening its portfolio?

Uh, yeah. They exited Cellana, the algal biofuels JV with HR Biopetroleum, not so long ago.

Is there a trend amongst the oil majors these days??

Specifically, exiting the model of forming JVs with vastly smaller biofuel companies, and participating solely through funding applied research, strategic investment to move technologies closer to commercialization, and then taking them commercial not through JVs but through owned and operated entities?

Yep. BP has taken out its JV partner in Brazilian biofuels at the Tropical Bioenergia plant. Shell built its own plot plant using Virent technology. Total is staffing up quickly in California as it moves to commercialize the Amyris technology now under the Total USA Energy brand.

Have tar sands mania has created a more permissive environment for Shell in Canada, to wind down renewable energy projects?

There’s no direct evidence to that effect, but its a fair theory. Whether that’s what’s motivating Shell – harder to say. Probably not.

What really changed in the world since 2003-04 when Iogen’s pilot plant first opened as the hope of the world in cellulosic ethanol?

Back then, there was way more uncertainty about fracking, about tar sands, about deepwater drilling. There were higher expectations for a stable renewable energy strategy, particularly for biofuels and especially for advanced biofuels.

What about the political winds theorem?

Specifically, that oil major companies could have been enthusiastic in 2004, and more bullish in 2008, and then going the other way in 2012, with more regard for the policy environment for their other technologies than the technology pathway for biofuels?

That’s a viable theory with some evidence to support it.

So this is about natural gas, and tar sands?

Well, let’s not get carried away. Is it fair to say that the uncertainties on fossil-based technologies were resolved faster than the uncertainties for cellulosic ethanol technologies.

But the uncertainties are different, so there’s some apples vs oranges in this. It’s entirely fair to say that Shell has lost appetite for the first to market, big commercial plant strategy, spending $500 million (along with partners, and whatever debt could be raised) for a 23 million gallons plant, or $22 of capital for every gallon of capacity.

What does this say about the path from demonstration to first commercial?

Demonstrations are vital, but they don’t resolve all the uncertainties. Take the Abengoa project in Kansas, for example. It’s widely thought that Abengoa has consciously over-engineered the project (by their own standards), driving up the cost, because they know from experience in bringing up technologies that there are uncertainties that can only be resolved at full scale. The over-engineering is in order to ensure that they have an operating plant after all the uncertainties are resolved.

Should biofuels companies seek partnership with chemical companies first?

Specifically, is it fair to speculate that chemical companies, which have more experience these days with bringing forward novel technologies and molecules, and generally build smaller plants, are better first commercial partners, and oil majors are more ideal for massively scaled, further iterations?

Interesting point. Technically, there’s merit to that argument. From a capital structure point of view, that might be a fantastic structure if you can find a way to make it happen. If.

You can make a case that the oil majors may in the end take the view that they should be finding alternative models in fostering advanced biofuels than getting deeply involved in JVs with small companies like Iogen, based primarily on biotechnology fit rather than capital or engineering philosophy fit.

Why is there industry panic? Wasn’t there broad skepticism over whether the Iogen’s project would ever go forward?

Yes, there were a lot of skeptics, especially after industry veterans like Jeff Passmore left the company in the past couple of years. Here’s the thing, when majors get out it is not always an easy thing to manage how the door slams. And door slams disturb people for good reasons – especially those who are trying to win stable policy support. They take the view that any major exiting a long-in-process project could be taken as a sign that the industry is not destined to be a viable part of the large-scale energy strategy. So they worry, perhaps excessively.

Is this a test of the Pendulum theory of advanced biofuels?

Yep.

What is that?

It’s a version of “Date, then Hate”, or Billy Martin Theorem, for those who remember the 1970s and 80s Yankees. That technologies are initially received with credulous rapture, usually based on who is investing in what, and then castigated by their supporters to somewhere in the circles of Hell, after disappointment invariably ensues because no project can sustain the hopes that are unreasonably heaped on it.