Technical Due Diligence Early and Often: The Best Insurance For Bioeconomy Investors

December 20, 2018 |

By Lorenz Bauer, PhD., Member of Lee Enterprises Consulting, Inc.
Special to The Digest

Many bioeconomy investors, while experienced with careful evaluation of marketing, supply chain, and legal aspects of due diligence, may be less familiar with scientific and technical evaluation of new technologies. Often only a cursory analysis is performed before making investment decisions. Appropriate technical due diligence can save investors millions of dollars and avoid significant embarrassment for the developers.  About 10 percent of projects make it from the proof of principle stage to commercial operation; in-depth evaluation of project technology in both the early and later stages can improve the likelihood of selecting a project that will succeed.

Unfortunately, there are many examples where insufficient technical assessment has led to a significant waste of time and money; critical flaws were discovered as the projects were moving to the commercial stage.  These war stories are not often publicized because of legal concerns; however, they do point out pitfalls in development that could have been prevented by in-depth technical due diligence by independent auditors.  Of course, not all projects have these types of gaps, but they show what can happen. The examples included in this article are from actual projects, however it was necessary to avoid naming specific processes and companies.

The first article in this series, Expanded Technology Readiness Level (TRL) Definitions for the Bioeconomy by Dave Humbird, introduced the concept and utility of technology readiness levels. Technical due diligence is required at all readiness levels when planning a new investment. It typically involves validation of the assumptions and data provided by the project development group and confirming the actual readiness level of the project. No one wants to invest in a TRL-1 or TRL-2 project that proposes a perpetual motion or other physical impossibility. However, thorough diligence is particularly critical during the transitions from TRL-6 (laboratory proof) to TRL-7 (integrated prototype) and TRL-8 (first commercial demonstration). These steps involve much higher costs and are riskier.

Several years ago a novel process for desulfurization was offered for a license that would revolutionize the industry. The developers had obtained more than $90 million in funding over several years and had commercial contracts for full-scale implementation. Investors included major players in the oil refining industry. The technical staff reviewing the proposal had some doubts about the fundamental science behind the process being transferable outside the laboratory, and as part of the due diligence effort, conducted a site visit to the demonstration plant.  During this visit, a feed provided by the outside team was processed.  A sample prepared in the morning was brought to the lab shortly before lunch. When the group returned from lunch, the sample was analysed in their presence. One of the outside team had covertly marked the first container showing that the samples had been switched during lunch. Needless to say, the group advised skipping this investment.  The process was not successfully commercialised.

While examples of dishonest behaviour are rare, less grievous examples of technology developers making technical errors or over-optimistic assumptions are more common. Many groups fail to perform on-site observations and monitoring of the demonstration experiments. Even when working with honest developers these observations can reveal problems with operations and procedures not apparent in written reports.

Groups often fail to close the material balance around the process completely and instead make what they consider logical assumptions about missing material. This mistake can be critical when considering processes producing fuels and commodity products where a several per-cent lost yield can change the process economics.

One example involved technology from a refiner looking to offer a process they developed for licensing. The process was demonstrated at the pilot plant stage and was selected for licensing to third parties. Over a dozen plants were already in the design phase when the demonstration data was presented to a group of outside researchers with process experience. Problems with yield calculations and the thermodynamics of the process were immediately apparent, forcing the cancellation of the contracts. These problems were missed by the management team that took the summary data from the demonstration plant at face value.

It is particularly difficult to close the material balance around biomass conversion processes because they typically require rejecting aqueous, light gases and tar by-products. Accounting for these products is critical for determining profitable sustainability. Often developers make incorrect assumptions about the missing material. Missing material may be assigned to product pools using the best judgement of the developer, and this can be a mistake. One major chemical plant design failed to account for 0.1% of the product, a liquid condensate that ultimately plugged a gas line and shut down the plant for several months while knock-out pots were added. When evaluating plant data, you should ask “where is the puddle” when the expected amount of liquid product is not recovered.

Part of the difficulty is related to the lack of appropriate analytical techniques. Analytic equipment and method development are often peripheral to the main thrust of the research program. It is often costly and requires skilled employees to monitor the results and perform quality control tests. There is also a tendency to over-rely on the best results and to find reasons to discount or dismiss unfavourable result data. There are examples of millions of dollars being spent trying to reproduce a single result that was most likely an outlier. This can be avoided by confirming the statistical significance of the experimental results. The scientific method requires that results be consistently reproducible. Reproducibility over time is a particularly important indicator of process stability.

Early stage project developers often fail to recognise all of the issues associated with feed collection, pretreatment, and handling. Likewise, the costs of product separation and purification are also critical. In one case, a process was well on its way to commercialization when it was realized that the commercially available feedstock had a small percentage of an impurity that poisoned the catalyst. The feedstock provider had claimed that this impurity would not be present. An entirely separate pretreatment process estimated to double the cost of the production plant would have been required. As a result, the project was cancelled after spending millions in development funds.

Detailed product quality issues must also be examined.  The products from a process must meet potential customer standards for its end use purity and compatibility. There are examples of parts-per-millions of contaminants significantly altering product handling requirements. This is particularly true when aromatics and potentially bioactive components are involved. In one example, a costly new analytic technique needed to be developed capable of evaluating a part-per-billion of a particular contaminant suspected to be present by regulators.

Biomass-to-chemical and fuels projects present special concerns because of the often unique properties of the feed and product. Many different chemicals currently made using petrochemicals were developed as a replacement for originally biomass-derived products. For example, petrochemical-derived acetic acid has replaced fermentation as a source of acetic acid. This is because the petroleum-derived products cost less and have higher purity. As a result much of the technology used in processing biological systems into bulk chemicals has been lost.

Chemical engineers familiar with petrochemical processes are often not experienced with handling heterogeneous solids and biomass conversion products. Assumptions based on prior experience are often incorrect. There are several examples of plants costing millions that failed due to feed handling problems. Biomass tends to form sticky gums that clog equipment. The common approach of heating them to lower their viscosity does not work for these materials because they behave like cornstarch and not tars or heavy oil.

Many companies have established a phased approach to technical evaluation. A modified version of this gated approach can be applied to technical due diligence. While technical due diligence should be conducted at each Technology Readiness Level, projects in early stages might only require the first two phases:

  1. Initial screening involves a brief study of the technology and how it fits in the current landscape regarding IP and solving the problems faced by similar technologies.
  2. The second phase is a more detailed evaluation by at least a core team that develops a list of pros and cons and questions concerning the process.
  3. In the third phase, a team is assembled with the skill sets required to address the issues identified in prior stages.
  4. The fourth stage is a detailed review of the data provided by the developer by the entire team.
  5. The fifth phase involves an on-site visit including question and answer sessions with the development team and observation of operations, if possible.

After completion of the study, a report is prepared to cover the topics shown below. Additional subjects may need to be added depending on the technology.

Technical due diligence is best conducted by a team of reviewers with complementary experience and skills to reduce the chances of missing key factors. Reviews are the best conducted at the demonstration site with the development team available for questioning. Multiple members of the developer’s team should be question including lab and plant staff rather than relying on a single management source.

Finding reviewers with the technical background and experience to perform these types of audits is difficult. It’s important that they have served as senior individual contributors for many years, are not overly opinionated about solutions and architectures, have broad experience, are intellectually curious, have seen both successful and failed technology development ventures, and think pragmatically. Experience in the bio-economy and biomass conversion is critical because of the unique issues surrounding processing these materials. The ability to explain technological assessments to a non-technical person is also important so that potential investors understand the basis for any conclusions. Clients need to carefully review the resumes of experts selected for the evaluations: Because many biotechnology projects are significantly smaller in scale than other chemical plants they may be considered good training opportunities for less experience personal by some service providers.

Biomass conversion processes have not had high commercial success rates. While some of the problems can be attributed to higher production costs and the lower price of oil, several high-profile projects have failed due to technical issues that were not foreseen by the project teams. The purpose of technical due diligence is to reduce the risks for investors and aid the development team. An experienced evaluation team can spot gaps in the developers’ work product and make suggestions for improvement. They can serve as relatively low-cost insurance that the best technologies are chosen for investment. Lee Enterprises is committed to the successful implementation of bio-economy projects to promote long-term sustainability. This can only happen if investors are convinced that the projects will be successful and earn a return.

About the Author

Lorenz Bauer is an independent consultant affiliated with Lee Enterprises Consulting.  He is a process development specialist with experience with biomass conversion, renewable chemical, catalysis and petroleum chemistry with over 30 years of experience evaluating and developing new technologies. As a consultant, he has evaluated over 130 projects for investors, government (DOE) and university technology offices. He earned his PhD from Washington University. An inventor of 29 patents, his past projects have ranged from hydroprocessing, food additives, off-gas treatment, upgrading unconventional feeds and waste recycling. Several of these technologies were commercialized. Most recently he worked on fast pyrolysis of biomass and upgrading products to fuels and chemicals. Larry is also Six-sigma project management black belt. The opinions expressed herein are those of the author, and do not necessarily express the views of Lee Enterprises Consulting.

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