Implicit in plans by ExxonMobil (NYSE:XOM) to tame overall production levels for 2014 is a need to refocus on higher-margin fuels that may be threatened by developments from companies like Amyris (NASDAQ:AMRS), Solazyme (NASDAQ:TVIA), and Darling International (NYSE:DAR) that are developing competitive, renewable bio-based products. While biofuel companies will not be taking over at the pump anytime soon, they may have the capacity to slowly chip away at Big Oil's specialty chemical divisions.

Gas is too cheap
At its Brotas plant, Amyris has met production milestones demonstrating the ability to produce over 2 million gallons of its renewable farnesene product, Biofene. While 2 million gallons annually is impressive in the biofuel world in terms of production early on in a company's development, the volume pales when compared to ExxonMobil's daily production volume, with annual production equating to just over 1/100th of the daily output of the oil behemoth.

As notable as Amyris' recent production growth has been, so has its ability to bring farnesene production costs down to around $4 per liter (or around $16 per gallon). Nonetheless, with hopes to become cash flow positive in 2014 and profitable in 2015, it is clear that selling the farnesene solely as a transportation fuel for well under the $16/gallon production cost is not the path to take. Simply put, at this point Amyris cannot exclusively produce renewable diesel or ethanol and expect to make a profit. However, as Amyris has shifted from cane-based ethanol to renewables ingredients used in cosmetics, flavors and fragrances, and other consumer products, it has seen a corresponding increase in gross margin from 33% in 2012 to 53% in 2013.

Solazyme has likewise chosen to pursue high-value products created from low-cost, plant-based sugars as opposed to initially chasing after the enormous transportation fuel market. While long-term plans include breaking further into the fuels sector, the company is seeing revenue growth and expanding opportunities by marketing its Renewable products as high-value (aka higher margins) nutrition and personal care product to replace animal- and petroleum-based products that currently dominate the market.

Darling International is yet another example of a company with grand visions to expand deep into the transportation fuel industry, in this case via its Diamond Green Diesel venture in partnership with Valero Energy (NYSE:VLO). The renewable diesel product can be used more interchangeably with petroleum-based diesel than many plant-based products yet still fulfills Renewable Fuel Standard (RFS) requirements as a biomass-based diesel. The potential for Diamond Green Diesel is big, but in the meantime Darling International relies on sales of specialty products produced for customers from a myriad of industries to help maintain positive earnings.

In the meantime
While there are several other issues at hand for biofuel companies, the need for a profitable, high-margin product has become abundantly clear via the recent struggles of KiOR, which has radically missed earnings estimates and has shut down plant operations due to an inability to operate at or near nameplate capacity. While the base technology is the biggest determinant of a biofuel company's success, the ability to produce and sell a product that generates revenue is dependent on more than just the base technology.

As production capacity and efficiency of bio-based products expands, production costs for biofuel companies will continue to drop. Production costs for most of these companies, with the exception of some ethanol producers that have been able to refine their process over a much longer time period, will not drop low enough in the near future to make bio-based fuels a major concern for Big Oil due to an inability to produce transportation fuels at the needed volume and cost to appeal to American consumers. Non-fuel, bio-based products, on the other hand, will remain the best option in the short-term for Solazyme, Amyris, and other related bio-companies to gradually gain a share of Big Oil's profits.

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