Landing partners with deep pockets will be critical for many developmental stage biotechnology companies looking to take their disruptive platforms to the next level. We're not talking measly partnerships here (although those are important too). We're talking major investments. Unfortunately, the prospects for megadeals have taken a hit over the last year. Several well-established energy companies have dropped or distanced themselves from the list of financiers for budding industrial biotechnology companies.
Big oil isn't abandoning renewable technologies altogether, but many companies have pivoted their focus away from genome hacking and toward more familiar industrial technology. While funding hasn't necessarily dried up, the nascent industrial biotechnology industry could sure use a little more confidence from global energy leaders. With all of the potential behind bio-based chemicals investors may be left wondering: "What gives?"
Brute force vs. finesse
The oil and chemical industries are dominated by thermocatalytic processes, or those that use high heat and pressure to drive chemical reactions and produce useful products. This is the "brute force" approach. Industrial biotechnology, which utilizes biocatalytic processes, sits at the other end of the spectrum. These platforms use biological pathways in microbial cells -- bacterial, fungal, viral, mammalian, floral, and algal -- to turn chemical feedstocks into useful chemicals. This is the finesse approach.
A general lack of understanding of how cells interact with genetic tweaking, the shear forces inside a massive bioreactor, and other industrial variables is the biggest problem facing biocatalytic technology. That makes using the methane and ethane found in natural gas as chemical feedstocks a pretty sexy idea. Nat-gas is cheap and the processes involved -- or those very similar to it -- have been commercially viable since World War 2.
The shorter list of unknowns for thermocatalytic technologies makes returns more certain, which is an important factor to consider when writing eight-figure checks. It also doesn't help that the massive amounts of natural gas beneath our feet are currently much easier to access than the cellulosic sugars in agricultural wastes. Much like us individual investors, big oil is seeking to mitigate risks and maintain a clearer picture on their potential returns.
A zero-sum game?
Valero (VLO +0.61%) was the first major refiner to get into the ethanol business and now owns 10 refineries. The company has kept a broad focus with its renewable energy portfolio, although the largest investments are in thermocatalytic companies such as Enerkem and several ventures producing biodiesel. Valero's small partnership with algae fuels company Algenol shows that while the company acknowledges the potential, it is still hesitant about throwing much weight behind more advanced biotechnology ideas. The rest of the industry isn't much different.
Early last year Shell (NYSE: RDS-A) quietly announced that it had built a drop-in biofuels facility using a thermocatalytic process licensed from partner Virent. It proceeded to cut direct ties with industrial bioenzyme manufacturers Iogen and Codexis (CDXS +3.85%), which many people believed were the front-runners for the company's plans in biofuels.
BP (BP +0.76%) followed suit in October by canning a cellulosic ethanol plant in Florida. The biorefinery was expected to utilize biocatalytic technology from Verenium, but decided to use the money on "more attractive investments". BP is still developing the technology, but plans to license it out to willing participants from now on. It is, however, the leading energy company backing Cool Planet Energy Systems, a developmental stage company building a modular thermocatalytic platform to produce carbon negative fuels from biomass.
ExxonMobil (XOM +1.67%) went all-in on developing algae technology with Dr. J. Craig Venter's Synthetic Genomics. A (brace yourself) nearly $600 million investment exploring the possibilities of industrial biotechnology's holy grail turned sour earlier this year as the companies stated that the technology they were trying to develop is "probably further than 25 years away". Ouch.
Foolish bottom line
When some of the biggest names in energy have less-than-stellar news to report about industrial biotechnology, it is easy to see why many investors are down on the industry. On one hand, you have to admire their efforts and acknowledge that they are making the safer investments. On the other hand, you could accuse them of being too focused on the short term.
Bio-based fuels and chemicals are stuck in a catch-22. The technologies need more funding to develop, but aren't attracting funding because they need to develop. One day soon these sustainable petroleum alternatives will make it to the market. Hoping to catch the wave by investing in big oil companies may not be your best bet.
