Last August, engineered biology conglomerate Intrexon (NASDAQ:XON) and domestic energy leader Dominion Resources (NYSE:D) announced an exclusive agreement to "explore the potential" for cheap natural gas to be converted into isobutanol, a next-generation fuel blendstock. The partnership seeks to combine core strengths of each company. Specially, it offers a way for Dominion Resources to diversify and monetize its vast natural gas reserves in the Marcellus and Utica shale regions, while Intrexon will have the potential to create tremendous value from applied biology.
Intrexon has kept investors excited about the potential for its methanotrophic platform (that's biology-speak for "using methane as a cellular energy source"), which, arguably, it has positioned as its second most important project, after its widely followed tools for combating the Zika virus. The intrigue is only growing stronger after a recent announcement that the pilot plant for the technology is finally operational. While there's a long way to go before the natural gas-to-fuels platform contributes to the top line -- the company is eyeing commercialization in 2018 at the earliest -- investors are right to keep a close eye on developments. Here's what you need to know.
Isobutanol from methano-what-a?
Research into the topic can go off the rails pretty quickly for individual investors. "Methanotrophic" probably isn't part of your daily vocabulary, while simply looking for information about isobutanol can get confusing if articles or specs don't specify which of the four versions of butanol is being discussed.
Let's begin from square one. The idea being explored by Intrexon and Dominion Resources is relatively simple: Feed methane found in natural gas to engineered microbes that churn out isobutanol. Here, methane replaces the sugars from agricultural crops that are traditionally used by industrial biotech platforms as the carbon source for their microbes.
While this may sound like crazy science fiction, gas-eating bacteria were among the first organisms to bust onto the scene on Earth -- beating media-friendly algae by nearly 1.7 billion years. Other companies such as LanzaTech and Industrial Microbes are developing gaseous carbon platforms and technologies, so Intrexon isn't alone in its approach.
Isobutanol > ethanol
Intrexon and Dominion Resources are interested in isobutanol's potential as a next-generation fuel blendstock. Why? It's a better renewable fuel than ethanol in almost every category that matters (except, of course, production capacity). Here's a head-to-head comparison between the first- and second-generation fuels:
- One gallon of isobutanol contains 83% of the energy of one gallon of gasoline. (Intrexon cites an incorrect figure of "98% energy density", but this is an error from an external scientific paper.) That's much better than ethanol, which contains only 66% of the energy of one gallon of gasoline.
- Isobutanol is federally approved to be blended with gasoline in concentrations of up to 16%, compared with just 10% for ethanol. So while the United States currently blends roughly 13.5 billion gallons of ethanol into its gasoline, it would have a capacity for nearly 21 billion gallons of isobutanol. And you would get better fuel economy to boot.
- While ethanol likes to draw water in from its surroundings, isobutanol does not, which means it won't ruin your engines (large or small) and can be transported in pipelines off-limits to the first-generation renewable fuel.
- Isobutanol has a lower vapor pressure than ethanol, which reduces costs for refiners blending renewable fuel mixtures.
Sounds like a slam dunk, right? Well, isobutanol is a better renewable fuel blendstock than ethanol, but it faces its own set of challenges.
If you thought navigating the term "biobutanol" was confusing, consider the minefield of state and federal regulations. Although certain federal regulations currently approve isobutanol for blend rates of up to 16%, safety testing is still under way, and companies with over $50 million in annual revenue are not allowed to sell it thanks to a tiny provision in the Clean Air Act (makes sense). There is also no approved isobutanol manufacturing pathway that qualifies for subsidies under the Renewable Fuel Standard, which is necessary to give refiners incentive to use the renewable blendstock. In other words, Intrexon and Dominion Resources will have to:
- Apply through the U.S. Environmental Protection Agency for a methanotrophic isobutanol pathway to be recognized, and
- Lobby to have isobutanol recognized under the Renewable Fuel Standard.
There's still a question as to whether or not Intrexon's isobutanol will even be considered renewable, since the ultimate feedstock is a fossil fuel. Either way, these approval processes can require years of testing and paperwork from multiple agencies and industrial partners. It also requires the company to be operating at a substantially larger scale than its current pilot plant supports, which is an obstacle in itself. The scale-up of a methane-to-isobutanol bioprocess has some serious technical obstacles that have yet to be overcome. Thermodynamics may very well keep Intrexon from realizing its vision. I'll explore each of these hurdles in more detail in a future article.
Luckily, Intrexon and Dominion Resources are hardly the only game in town -- and that's actually great news for investors. BP and DuPont have been investing in renewable isobutanol since 2004, which led to the formation of a 50-50 joint venture, called Butamax, in 2009. The pair have been operating at pilot scale since 2008 and opened a demonstration-scale facility in 2010, although they're taking a more traditional approach by using agricultural sugars and "standard" fermentation. Butamax has been instrumental in pushing regulators to consider renewable isobutanol as a gasoline blendstock, which will allow Intrexon to piggyback on those efforts. In the end, I wouldn't be surprised to see the quartet join forces and lobby the EPA on isobutanol.
What does it mean for investors?
Isobutanol certainly has its advantages over the current king of renewable fuels: ethanol. But commercialization of Intrexon's technology still faces significant regulatory and technical hurdles. Therefore, despite the internal target of 2018, I would be surprised if Intrexon has commercial operations by the end of the decade. Assuming the company can successfully scale its platform, however, the potential for isobutanol is vast once regulatory pathways open up. After all, America grew into a world-leading producer of ethanol and biodiesel virtually overnight once incentives were in place across the supply chain. For now, let's wait to see if Intrexon moves beyond pilot scale.