Many companies have tried their hand at cultivating photosynthetic algae in massive outdoor facilities -- a list that includes well-established multinationals such as ExxonMobil (NYSE:XOM) and hopeful start-ups such as Sapphire Energy. Unfortunately, despite the influx of investment, few have had success. Although many venture capitalists are focusing on more modular processes than those conducted in open ponds or runways, outdoor algae cultivation remains the Holy Grail of chemical manufacturing. The size and volume could, theoretically, lead to near-zero production costs over time. See the potential?
Exxon and Synthetic Genomics went back to the drawing board last year to incorporate genetic engineering into their approach -- rather than relying on wild-type algae strains -- while Solazyme (NASDAQ:TVIA) pivoted long ago to algae that do not require sunlight for growth. Solazyme's approach is paying off in a significant way, but that doesn't mean photosynthetic algae processes are destined to the dustbin of history. One unlikely company has increased its ownership of a transformative photosynthetic algae technology from 35% in early 2011 to 60% this quarter. The technology could significantly lower American manufacturing costs, diversify product lineups for a wide-range of companies, and put algae back on the map. Can Green Plains Renewable Energy (NASDAQ:GPRE) succeed with its ambitious plans for BioProcess Algae?
Meet BioProcess Algae
BioProcess Algae is a start-up focused on developing a large-scale process for cultivating photosynthetic algae biomass for fuels, chemicals, animal feed, fish feed, nutraceuticals, and whatever other products are conjured up in the future. The company's Grower Harvester photobioreactor production system is supported by 33 patents and takes advantage of immobilized biofilms, or the slimy buildup of cells, to better control its process and lessen the likelihood of contaminants emerging. It's a modular system that can be scaled as large as needed -- and it's unlike anything you've ever witnessed.
Remember that whole "learning from failure" thing? Yeah, well, you'll notice that the phase 1 and phase 2 projects look drastically different. Earlier endeavors focused more on proving the process and biological kinetics of the algae than serving as a blueprint for future production facilities. But you get the idea.
But why the heck is the nation's fourth-largest ethanol producer meddling in algae? While BioProcess Algae needs large amounts of light, it also needs large amounts of CO2 -- at concentrations much higher than available from our ocean of ground-level air -- and heat for economic production. Therefore, the company will need to co-locate algae production facilities with industrial facilities that produce large amounts of CO2 and waste heat. That makes the Shenandoah, Iowa, ethanol facility of Green Plains Renewable Energy a good place to start. Similarly, the company's algae production process shares many similarities with wastewater processing technologies every ethanol producer is closely familiar with.
Everything seems to be shaping up for a breakthrough in algae technologies -- including a $6.4 million grant from the U.S. Department of Energy -- but can Green Plains Renewable Energy and BioProcess Algae really succeed where so many others have failed?
The current five-acre phase 3 facility at Shenandoah had several successful harvests in late 2013 -- perhaps the reason Green Plains Renewable Energy increased its ownership stake? -- but still needs to reach production goals before the decision to build a 400-acre farm is made. However, a 400-acre farm wouldn't necessarily be a requirement to showcase the technology for licensing to other industrial facilities.
Why would other industrial facilities be interested in building a Grower Harvester farm? The reason is simple: to monetize carbon dioxide waste streams. You probably think that CO2 is just an unfortunate byproduct of an industrial process, whether the combustion of a fuel or the gas emitted during fermentation, which will be costly to clean up. But that doesn't consider the entire industrial process.
You should think of CO2 as an input cost that is dumped into the atmosphere. Why? Chemical manufacturers and fermentation experts buy petroleum and sugar, respectively, as carbon feedstocks. The same applies for any industrial facility that requires energy from fossil fuels where carbon is not a feedstock, but combusted to create energy for the process to produce goods. For example, Ford building an automobile. Manufacturers make their chemicals or widgets using the carbon input, produce CO2, dump it into the atmosphere, and move on.
Well, that "C" in "CO2" was purchased upstream in the process. The manufacturers own that carbon. They paid for it. Why let it flutter off into the atmosphere when they can use it in another closed-loop process and make more goods to sell? Essentially, BioProcess Algae allows manufacturers to get more bang for their buck when it comes to cost of revenue. It may require an up-front investment to build the algae farm, but it pays off in a significant way in the long run.
The opportunity is not bulletproof. There's no guarantee that the phase 3 facility at Shenandoah will be successful, which would mean a 400-acre facility would never be built, which would make BioProcess Algae just another algae company that didn't quite make it. There is also a growing list of potential competitors for bolt-on, co-location thermochemical and biological process facilities to choose from. Perhaps BioProcess Algae doesn't possess the most attractive product lineup for the largest industrial facilities.
And, despite owning 60% of the company, Green Plains Renewable Energy cannot consolidate its investment into its own balance sheet. I would expect that to change, either with a buyout or altered joint venture terms, but it's a major drawback at the moment.
BioProcess Algae is not developing a far-fetched production method based on flimsy dreams and "what ifs?" The technology is rooted in scientific realities and leverages knowledge of well-known concepts, much like the current efforts of Exxon and Solazyme. Of course, that doesn't guarantee success. The five-acre facility at Shenandoah still needs to reach production goals to ensure the process will enable economic algae cultivation before a 400-acre farm is built, which will take at least two years and more than $60 million. However, if successful, BioProcess Algae could provide a great growth opportunity for Green Plains Renewable Energy and its investors. It may not be a reason to invest today, and it won't make you rich anytime soon, but it's certainly an opportunity to keep an eye on.