Intrexon: Will its GTL business arrive in 2018?

The indictment was handed down this week in The Motley Fool, which averred:

Intrexon is…failing to learn the dangers of over-promising on manufacturing milestones. While investors have been told to expect the natural gas-to-fuels platform to be commercialized by 2018, real-world indicators essentially guarantee that won’t be the case — and hint that it won’t even be close…

1. Intrexon says it will go from proof of concept to commercial sales in as little as six years, or from pilot operations to commercial sales in as little as 33 months.

2. There are major regulatory obstacles that are unlikely to be resolved by 2018. The company’s fuel likely won’t qualify for subsidies under the Renewable Fuel Standard because the ultimate feedstock is a fossil fuel. That puts a significant amount of pressure on a never-before-attempted process to reach optimal performance in a record amount of time…

3. But the biggest obstacle isn’t theoretical economics; it’s thermodynamics…the solubility of methane in water, or the amount of methane you can cram into a given volume of water…Compared to methane, sugar — the carbon source used by most industrial biotech platforms — is roughly 88,000 times more soluble in water. That’s enough to wreck just about any other advantage that methane may have over more traditional feedstocks. [It’s] a very inefficient process — if it works at all. 

Ok, that’s the prosecution’s case. Let’s look at the defense.

Timeline to scale.

Compared to other ventures, moving from pilot to commercial scale in 33 months is fast, but not Ferrari-vs-golfcart fast. Amyris opened a pilot plant in November 2008, opened at demonstration scale in June 2009, and a commercial-scale facility in April 2011. That was 29 months.

What might be different here? What has Intrexon learned from others? There are four points of differentiation from ventures that have struggled with timelines in the past.

First, the Intrexon pilot is end-to-end. Not just a pilot of the core technology and a “Hail, Mary” that everything else will operate as expected on the front and back-end. That’s rare.

Second, the design process is a little more rigorous. Intrexon Senior VP for Energy Bob Walsh told The Digest, “we designed full scale and then downscaled to the pilot,.” Typical ventures design a pilot, then upscale to commercial and it’s cross your fingers time.

Third, the scale-up step from pilot to commercial may be smaller than you think. “The capacity of the plant could be considered demonstration-scale,” Walsh said, “but because the process is so efficient we actually make money at this scale, and so we describe it as a small commercial facility.”

Fourth, natgas is more forgiving as a feedstock. Theoretical yields (77% for isobutanol from methane, vs 41% for isobutanol via yeast fermentation of sugar) are higher, and the cost of the feedstock is lower on a BTU basis. Right now, it’s around $12.60 per MMBTUs for cane sugar vs $2.78 per MMBTU for US-based natgas.

Walsh told The Digest, “One of the challenges is starting with a sugar-based process. The economics are very challenging, and many companies have done brilliant work but are still at $10 a gallon, because of the cost of the feedstocks and the maximum yield. A lot of the issues are more about the economics than the science.”

The last point is worth noting as The Bottom Line in this case. The process could make money long before it optimized. That’s rare in the world of advanced fuels.

Regulatory matters.

The US regulatory obstacles that face isobutanol as a transport fuel at a federal level only matter so long as they are unresolved by 2018, they are needed to make the fuel economical, and the US Renewable Fuel Standard is the only regulatory pathway that makes sense. After all, fossil gasoline isn’t qualified under the RFS, and sales are just fine.

So let’s look at those factors.

First, timelines. We have something like 30 months until 2018 is history, and though isobutanol has to go through Tier 1 and Tier 2 testing to qualify under the Clean Air Act — Tier 1 vehicle emissions testing is already underway. Then the production facility and pathway would have to be registered under the Low Carbon Fuel Standard.  There aren’t any timeline issues here. I mean, really.

Second, are mandates needed? According to Intrexon, based on current natgas and gasoline prices and the expected economics of the system, there’s a 50% margin for the fuel right now, without carbon credits. It will come down to whether costs are stable and the system performs — right now, no need for mandates or subsidies.

Third, what about the RFS? We expect that it would all be swallowed up into the California market, where natgas-based fuels are fine and jim-dandy under the Low Carbon Fuel Standard. California could care less about the feedstock, they care about the reduction in carbon compared to fossil gasoline, and according to Argonne National Lab, “natural gas emits approximately 6%-11% lower levels of GHGs than gasoline throughout the fuel life cycle.”

Bottom line, regulatory obstacles are only obstacles if Intrexon doesn’t take care of the “business as usual” aspects of registering a new fuel.

Intrexon vs thermodynamics

The problem of methane-based bioreactors is really more about mass transfer rates and only in the vaguest sense a problem of thermodynamics; the latter is primarily a study of energy and especially useful in the conversion of one type of energy to another.

Consider the boiling of an egg. There’s heat transfer, and that’s the world of thermodynamics. But there isn’t any mass transfer to speak of, the egg stays in the shell. Conversely, consider dropping an egg into cake batter at room temperature. There’s mass transfer but no heat transfer to speak of.

Now, a friend notes:

Even bugs cannot violate the laws of thermodynamics – energy input will be required to convert methane to methanol and then onward to the fuels.  The bugs typically do this by converting some of the methane to products and some of the methane to energy.  The minimum amount of energy needed is set by the thermodynamics (the so called perfect or 100% efficiency process) and the actual amount is set by this level and the efficiency of the organism.

However, I think we have enough information on the overall efficiency of the system from the published claim of Intrexon that they’ll generate 14 million gallons of isobutanol from 3.5 billion cubic feet of gas.  The industry may wanly desire some peer-reviewed, 3rd party confirmation of those yields, but it’s easier to get confessions out of hardened criminals than deep-dive data out of early-stage ventures.

With that let’s nudge the “biggest obstacle [ is] thermodynamics” notion gently to the side, and address the more specific problem of mass transfer, or diffusion.

“Gas–liquid mass transfer is generally recognized as a barrier in the Bio-GTL process because limitations are inevitable at several points of the diffusion process,” observes this report published in Biotechnology Advances two years ago. “Solution? Much effort has gone into the design of bioreactors,” the authors contend, “that can provide a higher mass transfer coefficient by generating more gas–liquid interfacial area from smaller bubbles.”

So, there are two problems here. First, can mass transfer rates be improved? With that improvement comes smaller reactors, less steel in the ground, less capex.

Second, are these desired improvements, or ones that are required for financial feasibility? It would be a great thing, for example, for the Cleveland Cavaliers to play basketball even better than they do — but it is not a required improvement in order to win the NBA championship, since they just won it.

Let’s look at improvement, first.

It comes down to reactor design and limits in reactor capacity. But it’s not settled science. As you can see from this report on syngas and ethanol fermentation,  a group from Iowa State led by Robert Brown improved bioreactor productivity rates 53% in 2014.  A group from South Korea generated a 67% gain in cell growth rate for the methanotroph Methylosinus trichosporium using a new reactor design. In 2014, Calysta reported an 8X improvement in “performance over traditional fermentation technologies in a high mass transfer bioreactor.”

Bottom line, we can expect dramatic improvements in mass transfer rates, and we should. Reactor designs are improving all the time. We might expect Intrexon to take advantage of these real-world improvements, by and by.

Now let’s take up the question of whether improvements are required in order for financial feasibility, or simply a good improvement that reduces capex and makes a winner into even more of a winner.

At the end of the day, slow mass transfer translates into larger reactors and a bigger physical footprint. But is footprint efficiency the same thing as feasibility?

Let’s consider the example of wind vs. nuclear power. As NEI reported last year, “Wind farms require up to 360 times as much land area to produce the same amount of electricity as a nuclear energy facility.”

OMG, stop all wind energy, the footprint’s inefficient, deploy nukes!

Uh, no.

What matters is economic feasibility, and if wind energy producers can offer an affordable price, which utility customer cares a hoot about the physical footprint compared to nuclear power, at the end of the day?

“Gasoline is a dog’s breakfast,” Intrexon’s Walsh told The Digest. “It’s price, in the end, that matters to refiners. They put a blendstock into their linear programming models, and the goal is to create a fuel as cheaply as possible.”

Intrexon’s design is proprietary, so we don’t precisely know the details of the design, and aren’t likely to any time soon. So, The Digest asked Walsh straight out whether there was any issue relating to mass transfer, in terms of reaching the stated rates of productivity and the economics of the system?

“I can clearly state that we are not mass transfer limited,” said Walsh.

Can we rely on Intrexon to deliver?

Ultimately, the investor is the judge. Is it worth the risk? If TMF has beaten down the stock a little with it’s analysis, you may find it’s available on the cheap, and the upside may well justify the risks of scaling industrial biotech.

As Yogi Berra says, “it ain’t over until it’s over,” so let’s take a wait-and-see attitude. On the other hand, when we look at the hard data and talk to the principals, we don’t see any pressing need to take an alarmist position here. We’re giving Intrexon the benefit of the doubt.