Algae Biofuels Skeptics Emphasize Need for Realistic Outlook and Business Discipline

10/14/09Follow @bvbigelow

When the organizers of the annual Algae Biomass Summit convene to begin planning for next year’s event, they might consider renaming it the Algae Biomass Smackdown.

It might be more accurate, considering the air of skepticism that seemed to pervade some of the sessions I attended during the three-day conference that was held last week in downtown San Diego. Bear in mind that in September 2008 we learned that Bill Gates’ investment arm, Kirkland, WA-based Cascade Investment, was participating in a $100 million secondary round of funding for San Diego’s Sapphire Energy. About 10 months later, ExxonMobil disclosed that it was investing $600 million to develop algae biofuels, including at least $300 million through a partnership with Synthetic Genomics, the algae biofuels startup founded by human genome pioneer J. Craig Venter.

To many observers, both of these announcements were indications that serious investors with the scientific resources to do serious due diligence had determined the credibility of algae biofuels technologies.

So it seemed like John Walter of San Antonio-based Valero Energy was going against the grain when he urged the algae industry to “get away from some of the outlandish claims that are out there.” He cited as an example startups’ claims that they can produce 1 million gallons of biofuel a year from 5 acres of algae. In his comments, which came during a panel discussion of “critical end-users,” the Valero executive also urged the algae industry to report actual “dry-weight yields per square meter” instead of estimating harvest yields in various ways. And he urged algae-based startups to make realistic estimates of how much capital will be required to reach pilot plant production levels of 1 million gallons a year.

“The money needed to get to the 1-million-gallons-a-year demonstration level is now orders of magnitude greater than what we heard in previous funding requests,” Walter said. (Sapphire Energy, by the way, said in April that it expected to be able to produce 1 million gallons a year of algae-based diesel and jet fuel by 2011.)

Events like this often include some outliers, a curmudgeon or two whose dyspeptic comments are highly quotable, but not necessarily realistic. But Walter’s views were echoed by other speakers at the summit, including Bill Barclay of Maryland-based Martek Biosciences, who said two-to-four-year timelines for algae biofuel production are “too optimistic.” Based on his experience in developing nutritional oils from algae, Barclay pronounced that algae-based biofuels are at least 10 years away.

Ultimately, algae-based feedstocks must compete with conventional petroleum crude on price. As Robert Rachor of FedEx told the audience, “If you guys are going to give us gasoline at $8 a gallon, we’re going to be in real trouble. The passenger aircraft industry is going to lose $11 billion this year—and they have access to [aviation] gas at $2 a gallon.”

During a panel discussion about financing, venture capital, and investment opportunities in biofuels, Arama Kukutai of San Diego-based Finistere Ventures referred to “bridging the credibility barrier” and described algae as an “unproven crop.” He told the audience, “We’re less interested in science projects than we are in commercializable technologies.” (Yet Kukutai also acknowledged, “We will continue to see venture interest in this space. We’re certainly interested.”)

Another speaker participating in the investment roundtable discussion, Mark Warner of the Harris Group, noted that unlike algae-based biofuels, the industry already had substantial experience in commercializing corn-based ethanol technologies. When the time came to finance ethanol plant construction, Warner said, “There was real data on how much corn you need, how much natural gas. It wasn’t based on projections.” He added that banks also were familiar with the technologies needed to make corn-based ethanol technologies and therefore were willing to provide the necessary financing to build production plants. And with the ethanol plants, Warner said, “There was somebody with a credible balance sheet who was willing to say, ‘If we build it and something isn’t right, we will make it right.’”

The absence of such business gravitas may be what concerns skeptics like Valero’s Walter—along with the fact that algae biofuels are simply at a very early stage of technology development. So I thought it would be useful to pass along a number of Walter’s “conditions for investment” in biofuels startups. He says you’ll see the same criteria on any Department of Energy grant application:

—A full identification and realistic accounting of all known resources necessary for [an algae biofuels] project to become fully operational.

—Demonstrate clear rights to the patents and other intellectual property necessary to implement the business plan.

—A detailed business plan, based on a working financial model with adequate research into algae-biofuels markets and competition.

—Fulfillment of all permitting requirements.

Such basic criteria may simply represent a level of business discipline that many entrepreneurs pursuing green dreams are not yet ready to embrace. One thing I noticed during the session on investment opportunities was that the session taking place next door had attracted a far larger crowd. It was at least twice as big, with people standing in the back of the room and along the side walls. The subject was “General Topics in Science and Technology,” and it prompted me to think a lot of aspiring algae entrepreneurs are just trying to figure out this new technology.

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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  • Jake

    Interesting article, Bruce. This could be a pretty stringent test for biotech where there’s little or no hope of making a high value product. I read one estimate that there are about 60 companies pursuing algal biofuel, but I wonder if there will be a big shake-out as these guys use up their early funding.

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  • anonymous

    We have spent over $2.2 billion dollars on algae research for the last 35 years and nothing to show for it. The problem is as long as the algae researchers can say we are 3-5 years away, its too expensive and they need more research they get the grant money. The question you need to be asking is “Does the US really want to get off of foreign oil or do we want to continue to fund the algae researchers at the universities”.