Xconomist of the Week: 5 Questions with Sapphire Energy CEO Jason Pyle

12/1/11Follow @bvbigelow

November was a big month for news in the algae-based biofuels sector.

On November 7, roughly four months after renewable fuels were approved for use in commercial aviation, United Airlines flew passengers from Houston to Chicago aboard a Boeing 737-800 powered by a mixture of algae-based jet fuel and conventional, petroleum-based fuel. Two days later, Alaska Airlines started 75 passenger flights (with its sister airline, Horizon Air) using a biofuel blend made from recycled cooking oil.

Ten days later, a decommissioned Navy destroyer arrived at the Naval Surface Warfare Center in Port Hueneme, CA, following a 17-hour cruise from San Diego, powered by a 50-50 blend of algal biofuel and a standard, petroleum-based military fuel.

A day later, Microsoft founder Bill Gates called for a massive boost in federal R&D funding for biofuels and other emerging energy technologies. In a guest editorial published in the May 18 issue of Science magazine, Gates urged the government to more than triple its funding for new energy technologies—from about $5 billion a year to $16 billion annually. Even during a time of economic crisis, Gates says it’s imperative to protect America’s interests.

Gates has moved to reshape the energy industry personally, by investing in several cleantech companies, including Sapphire Energy, a San Diego-based startup developing algal biofuels (although it wasn’t behind any of last month’s news).

Amid this fusillade of alternative energy news, I was eager to put a few questions to Jason Pyle, Sapphire Energy’s CEO and a San Diego Xconomist.

Xconomy: What is the next big milestone for the algal biofuels industry?

Jason Pyle: As an industry and at Sapphire, we’ve spent the last few years on R&D and proving that crude oil replacements like green crude from algae are possible and will scale with proper investment and government support. Although we’re still a few years away from reaching full commercial readiness, as an industry we’re scaling up at a pace that would be considered inconceivable by traditional oil and gas companies. Reaching commercial scale is critical. The next big milestone for Sapphire Energy is to complete construction and begin operating our commercial demonstration plant in Columbus, NM.

X: Do you see algal biofuels moving into aviation first, or does another sector make more sense to you?

JP: The great part about where Sapphire Energy finds itself as a producer of crude oil replacements is that demand for crude oil continues to rise significantly. Over the next 25 years as developing nations use more and more crude oil and we stretch the limits of the crude oil resource, all of the leading experts are projecting a 35-million-barrel-per-day gap between supply and demand. The U.S. military recognizes this gap as a major destabilizing issue—and as a serious strategic military issue in the years ahead—and is preparing our nation to not have to confront its consequences.

The U.S. military is making investments in the development of these technologies for strategic reasons because they understand a simple fact: that those nations who control energy resources maintain strategic advantage over those who do not. So soon, we will see the U.S. military as the leading customer for crude oil replacements. As pressure rises on the commercial airline industry (which uses most of the jet fuels in the world) to reduce carbon emissions in Europe, you also will have a market ripe for green crude. Jet and diesel distillates produced from green crude will be in demand for years to come.

X: The U.S. Department of Agriculture (USDA) said last month it would guarantee 80 percent of a $54.5 million loan to Sapphire Energy. How important is that to Sapphire?

JP: The USDA and its loan guarantee program is critically important from a capital and strategic perspective to our company. Given the state of the capital markets, the USDA loan guarantee program was a critical element in our ability to secure financing to commercially demonstrate large-scale algae cultivation for crude oil replacement processes. Strategically, partnering with the USDA supports Sapphire’s contention that algae production is a new form of agriculture production. The USDA partnership is the first step in a process to bring large-scale commercial algae agronomics and the all-important resources of the USDA to the table.

X: Has Sapphire been affected by the controversy over Solyndra’s bankruptcy filing? What’s your perspective on questions that are being raised generally over government support for renewable energy in general, which was the focus of this recent story in The New York Times.

JP: I don’t know the specifics of what happened at Solyndra. But fortunately for Sapphire, those issues didn’t have any real impact other than to raise the public profile around the USDOE loan guarantee process, which led to articles like The New York Times piece.

I might add the Department of Agriculture loan program is very different from the Department of Energy loan program. The USDA loan program has been around since 1936 and is rooted in the Rural Electrification Act that funded thousands of municipal governments and farmers to bring electricity to rural communities. Another form of energy I might add. This investment catalyzed a series of changes in rural America that raised farm income, increased education, and made possible the construction of a process to produce, store, transport, and export food and products throughout the world. Today, American agriculture is one of the largest U.S. exporters. It’s hard to imagine its enormous success without the government stepping in and saying that “electrification in rural communities is good for all of America, and therefore we are going to help these communities build it.” The USDA is trying to do the same thing today with crude oil replacements under a partnership with the U.S. Navy and Department of Energy. The USDA knows production agriculture is a key component of the supply chain to produce these fuels and its resources and expertise needs to be brought to bear. Who is better to do that than the USDA?

Today, the USDA manages a portfolio of direct loans and guarantees of approximately $114.7 billion and has been in this business for at least 75 years. The USDA portfolio makes it one of the largest lenders in the United States. The due diligence process the agency puts companies through is serious and exhaustive.

Now lets look at USDA’s track record. Of that $114.7 billion portfolio, as of June 2011, the department had a delinquency rate of about 2.72 percent for direct loans and 3.61 percent of all receivables that include all direct loans and loan guarantees. Compare that delinquency rate to the private sector as reported by the Federal Reserve bank and you’ll see they have a delinquency rate about 5.97 percent, or almost two times that of the federal government’s portfolio. I think it’s clear whose record is better. The USDA has done a good job here. The returns to our nation can’t be overlooked.

I firmly believe loan guarantees and federal support are an absolute necessity to transition this nation to crude oil replacements and make our nation more energy secure. Alternative fuels are not a “nice to have,” they’ll soon be a “need to have.” Private industry, especially in this economic climate, can’t do it alone. There is healthy venture capital interest to fund the strongest science in our space. But venture investments must be augmented by government funding to reduce private capital risks, and to speed new technologies to market.

Since the industrial age, energy acquisition and a timely transition to viable new energy sources and systems has been one of the most important elements of strategic planning that we rely upon our government to provide. Once a technology proves out commercially, the market can and will easily take over. The payback potential to our citizens and our government is enormous.

X: How has Sapphire’s business strategy changed since the company was founded, particularly in terms of financing industry-scale production?

JP: Our core mission has not changed—to create a domestically produced, environmentally friendly, replacement for crude oil. Sapphire Energy is synonymous with U.S. energy security. We’re solely focused on crude oil replacements. But with the current economic climate, we have adjusted our funding strategies and timelines. The process will take longer, and the government’s future involvement is in question.

What should not be in question, though, is our nation’s need to be leading the world in developing replacements for crude oil. The data doesn’t know politics, and it doesn’t lie. The world needs a lot more crude oil. Energy security is not just someone’s bumper sticker, it’s a very serious global problem and one the United States needs to win.

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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