Monday, May 10, 2010

"Valero Invests in Algenol: What’s Going On?" (VLO)

From Greentech:

After becoming the third-largest ethanol producer in the U.S. through acquisitions, Valero continues its diversification.

The announcement this week that Valero and Algenol had established a joint development pact should hardly be surprising given the penchant for both companies to create partnerships. It also represents another example of Valero taking baby steps into advanced biofuel platforms, operating at either pilot or demonstration-scale.

Valero is one of the largest petroleum refiners in the United States. Globally, it owns 5000 retail and branded wholesale petroleum retrofits. Its entrance into the biofuels arena occurred in 2008 and 2009 when it bought the bankrupt assets of the second-largest U.S. ethanol company, VeraSun, for less than sixty-seven cents per gallon of installed capacity (see Has Big Oil Finally Gotten Serious About Biofuels?). Considering that a new plant can cost four times that amount, Valero got a good deal.

Given that Valero is a petroleum refiner -- and is required to blend increasing amounts of ethanol per requirements under the "Renewable Fuels Standards" provisions of the Energy Independence and Security Act (see EPA Issues Renewable Fuels Standards), Valero has an incentive to procure a stable supply of ethanol. The company is now the third-largest ethanol producer in the U.S. with production capacity of 1.1 billion gallons. Additionally, as a refiner, Valero is eligible for the $0.45/gal blender's tax credit (see The True Cost of Corn Ethanol). It's not surprising that in the 1Q 2010, Valero's ethanol division is reporting profits of $57M.

Valero has also made a series of bets in advanced biofuel platforms with qualitatively different processes:

With its purchase of VeraSun, it inherited shares in one of the leading second-generation cellulosic ethanol companies, Qteros. Qteros utilizes a unique bug called the "Q Microbe" that breaks down the fermentable components of non-food feedstocks. Afterward, the company's C3 ("Complete Cellulosic Conversion") process simultaneously decomposes and ferments the biomass into ethanol. The ability for a microbe to express all of these enzymes naturally represents a significant cost savings compared to other second-generation technologies. While Qteros does not intend to be a Build-Own-Operator, the revenues that it generates from licensing its platform will be the cherry on top of the great deal Valero made when it bought VeraSun.

Valero also participated in the $34M Series B round for the hybrid bio-chemical/thermo-chemical cellulosic ethanol company Zeachem. Among the most unique second-generation approaches, ZeaChem's technology fractionizes biomass into C5 and C6 sugars, from which they are sent to ferment into acetic acid (without CO2 as a byproduct). Because the process does not create CO2, its carbon efficiency is much higher than traditional fermentation processes. Acetic acid is reacted with hydrogen to create the biofuel (ethanol). Then, lignin taken from the fractionization process is used to create a syngas that will eventually provide steam and fuel for the entire process. Zeachem claims that it can obtain 160 gallons of ethanol per bone-dry ton. It is difficult to assess whether this deal with work out for Valero. If the yields that Zeachem purports are accurate, they will be among the leaders of the industry and have a lower cost profile than many other second-gen producers.

In addition to first- and second-generation ethanol technologies, Valero has made a series of investments into "drop-in" biofuel companies. It was lead investor in an undisclosed equity round in "green gasoline" pioneer Terrabon. Terrabon uses a proprietary technology called "MixAlco" that is advantageous as a platform because it requires neither enzymes nor high heat/pressure for conversion. The company is feedstock-agnostic and uses microorganisms that produce a mixture of carboxylic acids. After calcium carbonate is added to the fermentation process, the acids are neutralized and carboxylate salts are formed. The next steps involve concentrating and drying the salts so they can be thermally converted into alcohols (e.g., butanol, propanol, etc.), which can be further refined into renewable gasoline, diesel, or jet fuel. Terrabon currently operates a 100,000-gallon-per-year demonstration facility and expects to achieve commercialization at a 220-tons/day plant near Houston, TX that is capable of producing 5 million gallons per year.

Prior to the Algenol announcement, Valero's only known algae investment was in leading photo-bioreactor technology company Solix Biofuels. There are many within the industry who believe that algae will only succeed if certain elements, like light, temperature, nutrients, PH, and carbon dioxide, are controlled within enclosed settings. Solix operates an advanced pilot-scale facility and is utilizing an engineering approach to reduce the steps between growth, harvest, dewatering, drying, extraction, and refinement. Although Solix created quite a stir in 2008 when it announced that its per-gallon cost was around $33/gal, our recent conversations with the company indicate that costs have come down significantly (see Biofuels 2010: Spotting the Next Wave). Similar to Qteros, Solix does not plan to be a Build-Own-Operator, but rather will position itself as a technology enabler. Given the larger market for "drop-in" fuels compared to ethanol, if Solix can crack the cost code and appreciably scale-up, Valero's investment will pay handsome dividends -- but that's a big "if" at this point.

Which brings us to Algenol.

Algenol Biofuels is developing algaculture systems that result in blue green algae secreting ethanol in 50'-by-5' "soda bottle" photo-bioreactors. The company is currently developing two projects in Texas and Florida that have faced a number of permitting problems and delays, though in early 2010, Algenol received a $10M grant from the Lee County Board of Commissioners, which came on top of $25M obtained from the Department of Energy....MORE