Cellana and Neste Oil ink key offtake pact for algae biofuels

Making Gold from Green?

A multi-year deal between Neste Oil and Cellana may point to the future of commercializing algae biofuels.

Will the hybrid product, hybrid technology route be a winner?

In California, Cellana announced that it has entered into a multi-year, non-exclusive, off-take agreement with Neste Oil for commercial-scale quantities of Cellana’s ReNew Fuel algae oil feedstocks for biofuel applications. Cellana expects to be able to produce algae oil on a commercial scale from late 2015 onwards.

The partners did not reveal specific pricing or volumes, except to say that the price of algal oil would be competitive with other biofuels raw materials used by Neste, and that annual volumes would be in the thousands or tens of thousands of tons — and given that Cellana’s commitment to develop “commercial algae facilities throughout the world with a total capacity of at least 100,000 metric tons of algae biomass per year” suggests that Neste will have the offtake options for Cellana’s algal fuel oil for some time to come.

The agreement is contingent on Cellana’s future production capacity and on compliance with future biofuel legislation in the EU and US, among other factors.

Cellana technology and its geographies

“The real value-add is in the upstream algae production,” Cellana CEO Martin Sabarsky told the Digest. “We have a hybrid, in that we use closed photobioreactors to create the innoculum and then grow the algae strains in our ponds.”

Sabarsky contends that a key factor in making ponds work is in achieving the right production balance between production in the closed systems and the volume of algae produced in the bioreactors – balancing the high-yields and contamination control in closed systems with the low-costs of pond systems.

“If you are in continuous PBR production and continuously adding to the ponds, you can minimize the residency time to days, or a week or two for a single strain. It’s too soon for contaminations or pests that take you down,” Sabarsky said. “We’ve demonstrated that now with diverse strains. With filtration and some amount of sterilization into the PBRs, we become that consistent farmer, with yields higher and costs lower.”

It’s important to see algae farms as just that – farms, albeit with a very, very tiny crop, and one that needs unusual amounts of oversight to keep healthy. Though the techniques and lands used are vastly different compared to, say, raising corn — the issues of seeding costs, managing the growth cycle, crop protection, harvest, fractioning the product for maximum value, and application development to drive market sizes — well, they are really the same issues.

It’s aquaculture, which is different. Seeds come in the form of innoculum grown in closed PBRs, and ponds are innoculated instead of using seed-drills on dry land. We speak of batches instead of crop seasons. We talk of using low residency time, instead of herbicides, to keep the weeds away. Because the crop cycle is days not months, innoculum is added continuously and harvesting is also continuous. Like a farmer using the latest combines from John Deere, Cellana is plugging into established harvesting and dewatering technologies.

Cellana’s choice to use a hybrid pond/PBR system is driven by process economics. “If you can make it work, the sunlight is free, and you get better economics using photosynthesis,” Sabarsky said.

“In our case, we are looking to prove out in Kona that by using flue gas from diesel power generation, we can also knock out the big CO2 costs, and also in our case we don’t lose any CO2 through the release that you see in fermentation. And, in this case we are using strains that use brackish or salt water, so the freshwater use is negligible, and of course we can utilize coastal desert areas that are not only cheap but don’t compete with land to grow food, or grow sugars.”

“The idea is that, putting it all together, you can beat any competing system’s output on sustainability, and meet it on price,” Sabarsky added.

The product set

In Cellana’s case, they have used fractionation to drive markets. In the case of grain agriculture — there’s a multi-product stream including starches (carbs), oils, cellulose (fiber) and protein — and markets such as ethanol, biodiesel, food processing and feed have been opened up. In an earlier phase of algae development, there was more emphasis on a 1-2 product stream such as “fuels only” or growing algae to produce target neutraceuticals such as DHA. There have also been feed/nutraceutical models using oils and proteins.

In the case of algae oils competing with fish oils, Sabarsky notes that “when you talk about marine algae, it’s only source of EPA and DHA. Fish oil is algae oil that accumulates in the fish; it’s not natively produced; it’s the algae oil that’s been aggregated by the food chain as lillte fish eat algae and big fish eat them. But you also get mercury dioxins and PCPs, for example, accumulating in the bigger fish, so there are costs and problem from a marketing point of view. With algae, you can cut out the middlefish.”

So in the Cellana model, the highest value product, the Omega-3 fatty acids, are initially extracted. Then the fuel oil. Then the residual protein and carbs are loaded into a feed product.

ReNew Omega-3. Cellana’s ReNew Omega-3 consists of high-value Omega-3 nutritional oils that are extracted from ReNew Algae, primarily EPA and DHA. These Omega-3 oils are essential fatty acids that are made naturally only by algae from marine sources. Cellana’s ReNew EPA and ReNew DHA products enable producers to Cut Out The Middle Fish and supply renewable, more sustainable, and vegetarian Omega-3 products without contributing to potential overfishing or exposure to fish-based pollutants such as mercury, dioxins, and PCBs. Product samples are currently being evaluated by potential customers in the nutraceutical and functional food industries.

ReNew Fuel. Cellana’s ReNew Fuel consists of fuel-grade crude oils that are extracted from ReNew Algae. ReNew Fuel has been successfully tested by major energy companies, as well as by large-scale producers and refiners of petroleum-based fuels and biofuels from crop-based feedstocks. Algae-based biocrude applications provide renewable, sustainable, and economic feedstock alternatives for transportation fuels, particularly jet fuels for commercial and military aircraft.

ReNew Feed. Cellana’s ReNew Feed consists of the high-protein algae meal that remains after oils have been extracted from ReNew Algae. ReNew Feed leverages algae’s ability to provide an alternative, more sustainable, high-protein feed source for the aquaculture and animal feed markets. Multiple largescale feeding trials for finfish, shellfish, pigs, chickens, and cattle, among other species of farmed animals, have been successfully completed or are underway in the United States, Europe, and Asia, involving more than 5 metric tons of ReNew Feed. This collectively represents one of the largest and most extensive set of feeding trials involving algae meal ever conducted in the world.

Expansion horizons

The Cellana plan is to replicate the base design already established at its Kona demonstration. It’s an 11-hectare module that can produce 350-600 tons (dry weight) of algae per year.

On expansion option is to build out more capacity in Kona, which is the fastest option — the strains are known, the environmental, technical and regulatory issues are known and already managed for — so risks are comparatively low. The issue is available land and price. “It’s not the cheapest place to do this technology compared to the Middle East or Asia,” notes Sabarksy, “but it has the least technical risk, so we’re looking really hard at Kona.” Cellana believes it could add 50-100 acres and build a $30-$40M project there.

In addition to Kona, the company has established other (undisclosed) locations along the US Gulf Coast, and may also do projects in the Middel East or Asia depending on the ultimate investor set.

“If we go with Kona, we’ll have that phase one in under two years. If we go, for example, to the Gulf Coast, it will be more like 2016,” Sabarsky said, “and we would start with a sub-$100M project, and acquire options on more land to eventually build out, potentially, to thousands of acres.”

Investors and investing

From an investment point of view, Cellana said that it has received the most interest from the larger private equity firms interested in one-stop shopping where they can work together at the predeployment stage and then have the option and intent to put in the equity component for commercial-scale farms. “It’s impossible for smaller funds, such as the VCs, to do that” Sabarsky said. “The strategic customers are more receptive looking at corporate relationships in terms of offtake. They are less interested in investing in capex, but they liek the pharma model where they support R&D to test and confirm findings, and take a strategic role thereby that helps to capitalize on the way to becoming a customer, without becoming an investor in putting steel in the ground.

By sector? Sabarsky sees the “fuel guys backing away from investing in capex, and scaling back in R&D. Clearly we’ve seen that in the wind-down of our own Shell relationship, and Shell has pulled back elsewhere as well. The interest from the strategics that has been the strongest has been more towards the Omega-3 market.”

By geography? It’s a global mix, though we seen a lot of interest from Asia and the Middle East in terms of capital – they have proven more risk tolerant in the post-crash period.

The business model

The Europeans have been trying to go green for decades,” Sabarsky said. “The pressure has been there for some time, but the challenge is that green costs too much. Environmental sustainability is not the issue, it is the economics, so in the 2-1/2 years since Shell you will see that the technology is quite similar to what we had then. What has changed is the business model. We have been selecting the strains that make the right quantities we need, the balance of Omega-3s and algae oil that we need, so we can sell all of each fraction and get enough from the higher-value products to support the lower-margin ones that provide the volume.”

“The criticism of this model is you can’t scale infinitely compared to the opportunities in the fuel-only or fuel-and feed models. That’s a fair comment, but let’s not make perfect the enemy of good. This model can scale to north of a billion gallons with this model, we believe, over 10 years — we think the new applications will be there in years 11-20, and a different model will emerge.”

There’s precedent for that thinking. Petroleum was commercialized in the 1870s, initially to use kerosene as a whale oil substitute for the lighting market. That market has all but disappeared. Later, along came marine diesel in the 1900s, gasoline for automobiles in the 1910s, and plastics and chemicals in the 1940s — all markets that were generally unimagined at the time.

Neste’s technology and the Cellana relationship

“Neste is as forward leaning a company as you will ever find among traditional refiners,” Sabarsky said. “They are already the #1 refiner in renewable diesel, and simply are seeking more renewable feedstocks to diversity. They’ve got a lot of capacity in Singapore and Rotterdam. I am impressed with them, having lived through the Shell experience. Most partner have been focused on FAME biodiesel, but I like renewable diesel better. You have no problem with infrastructure, storage, engines, and so on. You have the problem of technology and its cost, but they
already have the hydrotreaters, and are looking for volume of renewable feedstocks.”

Reaction from Neste and Cellana

“Cellana is honored by Neste Oil’s commitment to this commercial off-take agreement, as they are the world’s largest supplier and distributor of renewable diesel,” said Martin A. Sabarsky, Cellana’s Chief Executive Officer. “We look forward to working closely with Neste Oil to ensuring the success of this new customer relationship.”

“We want to support R&D efforts on new, sustainably produced raw materials and increased production of algae oil, which is one of the most interesting future alternatives in this area. Studies have already shown that algae oil can be used successfully in our NExBTL process,” says Neste Oil’s Senior Vice President, Technology, Lars Peter Lindfors. “The off-take agreement with Cellana allows us access to commercial-scale volumes of cost-competitive algae oil in the future. This new agreement fits very well with our strategy aimed at extending the range of feedstocks we use for NExBTL renewable fuel.” Samples have shown that Cellana is able to produce algae oil suitable for renewable fuel production by Neste Oil.

“This agreement supports Cellana’s three-product biorefinery business model and will allow Cellana to accelerate its remaining off-take agreements for animal feed and Omega-3 nutritional oils,” said Michael J. Kamdar, Cellana’s President. “The off-take with Neste Oil, together with the remaining agreements for animal feed and Omega-3 nutritional oils that Cellana plans to sign, will contribute to Cellana’s development of commercial algae facilities throughout the world with a total capacity of at least 100,000 metric tons of algae biomass per year.”

The Bottom Line

Cellana has to build capacity and reach scale – that’s essential to this agreement having value. Financing a first commercial is no picnic.

Having said that, the pivot to the hybrid of Omega-3s combined with the fuel markets is a clever one — where you get the higher values as a sweetener to unlock the higher volumes — thereby getting the economies of scale that make algae oils competitive. Cellana believes that there model would work up to as much as one billion gallons – and obviously they have done the techno-economic math — so that’s a pathway to scale, and we’ll also give them credit for running their Kona demonstration long enough to have assembled the data they need to show financial partners that the technology works.

One wild card is geography – are the strains and productivity rates available, for example, in the Gulf Coast that match the numbers achieved in Kona — will sites and strains be available for comparative results in Asia and the Middle East. Let’s hope so. A 40-hectare module might prove the least complicated route to a first commercial, but unlikely to provide sufficient revenue to make the company cash flow positive and open up the broader project finance markets to make a strong expansion effort financially feasible.

More on Cellana here.

More on Neste Oil here.