When petroleum prices hit all-time highs in July 2008, so, too, did investments in renewable fuel technologies. Everyone seemed to have a potential solution to wean the world off of expensive oil. The U.S. Navy even outlined ambitious plans for greening its petrol-chugging fleet. Then reality got in the way (although the Navy has kept its plants intact).
Thanks to the power of hindsight, we know that many of the solutions offered to private and public investors in the mid- and late-2000s didn't live up to their lofty promises. As it turns out, it's awfully difficult to compete with the efficiency and scale of the oil industry, which has had over 100 years of iterations to further optimize operations. Good luck, start-ups.
But the economic and environmental allure of renewable fuels has kept the dream alive for well-funded teams and partnerships with a long time horizon. Much different from the corn-based ethanol industry that has erupted over the last 10 years, you may never believe where the future of biofuels is headed if Waste Management (NYSE:WM), Audi, and Total SA (NYSE:TTE) succeed.
In 2011 Waste Management made an equity investment in start-up Fulcrum BioEnergy and secured up to $70 million in financing to support the construction of a proposed next-generation biofuel facility using Fulcrum's technology platform. Why commit so much capital to a small company that was just four years old at the time? The answer: for the tremendous potential for value creation.
Fulcrum has developed a process that converts biomass from municipal solid waste, or MSW, into synthetic crude, which can then be upgraded into a range of hydrocarbon fuels and chemicals. Waste Management has a lot of MSWs. While it makes for a perfect pairing, how will this technology get off the ground?
The first facility, named the Sierra Biofuels Plant, will begin operations in late 2017. It will be built by renewable energy leader Abengoa -- owner of one of only three commercial cellulosic ethanol facilities in the United States -- which was awarded a $200 million engineering, procurement, and construction contract earlier this month. On an annual basis the Sierra Biofuels facility will convert 200,000 metric tons of MSW from Waste Management and Waste Connections into (ultimately) 10 million gallons of jet fuel that will be sold to Cathay Pacific Airways. The flagship facility is expected to pave the way for a fleet of North American MSW-to-fuel facilities sporting capacities of 30 mgy to 60 mgy.
Given the lack of successful outcomes in next-generation renewable fuels, investors have the right to be skeptical, or to at least take a "don't tell me, show me" approach to the commercialization of Fulcrum's technology. However, it is comforting that the company has secured over $175 million in federal loans and grants and the interest of a well-funded and aligned strategic partner in Waste Management. Should Sierra Biofuels be successful, then Waste Management could find a lucrative new revenue stream for the waste it collects daily.
Audi converts CO2 into drop-in fuels
Everyone loves to hate carbon dioxide, which is cited as the villainous driver of climate change. One of its main routes into the atmosphere is through the combustion of fossil fuels, so the logic seems to follow that we should limit the use of fossil fuels -- and quickly. But that's shallow thinking because it only sees CO2 as a cost, not as something that can be monetized. For instance, I've argued that CO2 has potential value as a chemical building block, and German automaker Audi seems to agree. Carbon dioxide is the primary input for its "e-Fuels" technology platform, which leverages a mixture of technologies relying on thermochemical process and living organisms.
The idea is to capture and purify CO2 emissions from some industrial process, then convert it into more valuable chemicals or fuels. It's awfully cheap and widely abundant -- after all, we dump nearly 10 billion metric tons of CO2 into the atmosphere every year -- which is perfect for feeding the massive liquid fuels industries. Where does the technology stand?
In late April Audi announced that it had successfully demonstrated the production of small amounts of e-diesel from water, CO2, and green power. The fuel is compatible with existing infrastructure and can be blended with petroleum-based fuels or used on its own. Costs weren't mentioned, although the process is very likely noncompetitive with petroleum-derived diesel at the moment.
In addition to the e-diesel route above, the automaker has partnered with synthetic biology companies Global Bioenergies (e-gasoline) and Joule Unlimited (e-diesel and e-ethanol). It's still very early, but utilizing CO2 as a chemical feedstock has a tremendous amount of potential. Don't fret if investing in Audi isn't on your radar. The automaker could spin out or license its technology to larger oil companies, while Joule Unlimited could go public within the next few years if it successfully commercializes its platform.
Big Oil eyes big gains in biology
Few companies have committed to renewable fuel technologies quite like French oil and gas giant Total, which, judging from its investment portfolio (link opens PDF), appears to have left no stone unturned in its global quest to expedite the arrival of the future of biofuels. One intriguing combination of technologies could result in renewable hydrocarbon diesel and jet fuels that are cost-competitive with petroleum-based fuels. Could it really become reality?
Considering that Total would need to join together novel processes for creating low-cost sugars and novel biotechnologies -- both of which have hindered previous attempts at next-generation renewable fuels -- the odds are stacked against it. But the company's long-term mind-set and investments in leading technologies could result in success.
Where would each critical piece of the equation come from?
- Low-cost sugars needed to drive down production costs could come from Renmatix, which owns one of the leading processes for extracting sugars from biomass. Total made a strategic investment in Renmatix earlier this year.
- Next-generation yeast strains could be supplied by synthetic biology pioneer Amyris, which in 2013 formed a joint-venture with Total aimed at commercializing renewable diesel and jet fuel. Amyris believes it can drive down production costs from $2 per liter at the end of 2015 to $1 per liter or less within the next few years -- likely relying on low-cost cellulosic sugars. Total beneficially owns 26% of Amyris, although it has yet to make a decision on the future of the JV.
This is all speculation at this point, considering low-cost sugars from Renmatix could be used in any of Total's renewable fuel projects. But drop-in, renewable diesel and jet fuel that is competitive with petroleum-based fuels could become reality sooner than you think.
Are futuristic biofuels investment-worthy?
There are many more "what-ifs" than certainty regarding the future of biofuels, which is evidenced by the distinctly different routes being pursued by Waste Management, Audi, and Total. At this point I wouldn't invest in any of the companies mentioned solely based on their ambitious plans for renewable fuels. Instead, stick to the fundamental businesses of each and know that, if successful, futuristic renewable fuels could drive potential growth opportunities later.