Biofuel firms must partner or perish, say report

On heels of Virent, Shell’s demonstration plant start-up comes advice from Lux

BY GREENING OF OIL STAFF

The day after Virent Energy Systems and Shell announced the successful start of production at the world’s first demonstration plant that converts plant sugars into gasoline and gasoline blend components, rather than ethanol, Lux Research released a report that say in order to compete

commercially with petroleum, biofuel producers will have to partner with mega corporations in order to get what they need to do business in the real world—specifically, huge amounts of cash, engineering support and help in developing distribution networks.

“Biofuels have narrowed their cost and performance gap to petroleum with help from academic labs and venture partners (what happened to government subsidies?) ,” the Boston-based research and analysis firm said in a March 24 press release about its report, Aligning Contribution: Partnering Strategies in Biofuels and Biochemicals. “But a final and significantly more daunting hurdle now confronts biofuel developers: Competing on scale with the multi-trillion dollar petroleum industry.”

Clearing that hurdle will take “enormous injections of cash, engineering support and help in developing distribution channels—all resources that corporate partners are better equipped to provide,” Lux said. Biofuel developers and corporations that “hope to own a share of the biofuels market over the long run will need to form smart partnerships today.”

In its research for the report, Lux, which describes itself as providing “strategic advice and on-going intelligence for emerging technologies,” analyzed criteria by which developers and corporations measure prospective partnerships, based on 30 “in-depth confidential interviews” with biofuel developers and prospective corporate buyers.

Developers “cannot hope to commercialize their technologies without buyers, and buyers will not have access to innovations without tech developers,” said Samhitha Udupa, a research associate at Lux, and the report’s lead author. “But there’s often a disconnect on how to value innovations. Developers believe their product flexibility, unit cost projections and company's maturity are key to driving value, while corporations find these factors unimportant.”

Four partnership models

The report identifies the following partnership models:
• Symbiosis, which Lux identified as a partnership that “occurs when technology developers bring and share—to a practical degree—a demonstrably

superior innovation to the partnership while corporations contribute heavily to synergistic applications, and tout their partner to others in the field.”

• Predator/prey, a relationship in which “a hopeful developer aims to vertically integrate for added value, while a predatory corporation injects a little cash and reaps the public benefits of ties to the developer.”

• Parasite/host, in which “developers take the corporation's name and money, but hand over little more than patents, drawing resources out of the corporation while returning little value.”

• Peaceful coexistence, a partnership in which “developers and corporations employ a ‘wait and see’ attitude with each other, as both sides see the relationship as little more than an exchange of goods.”

“Achieving scale—on the order of $100 million per biofuel plant—is a significant impediment to the success; and even the survival of technology developers,” Udupa said. “As more developers approach this stage in their development, it will be harder for them all to survive, and harder for prospective buyers to distinguish the potential winners.”

They will have to find “corporate partners or leave the dance floor,” the firm said.

Virent, Shell deal unveiled two years ago

Madison, Wis.-based Virent chose to stay on the dance floor.

The biofuel developer and Shell’s new demonstration plant in Madison, which turns sugar beets into a gasoline substitute compatible with existing engines and oil pipelines, is the latest step in a joint biogasoline research and development effort that was announced by the two companies in March 2008.

The new plant has the capacity to produce up to 38,000 litres, or 10,000 U.S. gallons, per year, which Virent and Shell said will be used for engine and fleet testing.

In a teleconference with reporters on March 23, Virent CEO Lee Edwards told reporters that at current crude oil and biomass costs, Virent’s catalytic-conversion is “competitive.”

Shell isn’t the technology’s only backer. Both Cargill and Honda have equity stakes in the privately held Virent.

Major shift from corn-based ethanol

Virent’s process is a sea change from the current crop of biofuels, the dominant in the United States being corn-based ethanol, which cannot be moved through oil pipelines because it is too corrosive. Equally important is the fact that no more than 10 percent of a gallon of gasoline can be ethanol by law, a limit set to prevent engine problems.

Not only does Virent’s process create biofuels that can be safely used in higher concentrations in conventional gasoline existing engines (up to 50 percent), but it has a higher energy content, comparable to premium gasoline, making it more fuel-efficient than ethanol. It can also be stored and transported in existing oil industry infrastructure, Virent and Shell said.

Virent’s patented BioForming platform technology can use sugars from nonfood feedstocks such as corn stover, wheat straw and sugarcane pulp, as well as from wheat, corn and sugarcane, which is a political plus in a world where many people do not have enough to eat.

“Moving from lab-scale to a demonstration production plant is an important milestone for biogasoline,” said Luis Scoffone, vice president of alternative energies at Shell. “There is some way to go on the route to commercialization, but we have been delighted with the speed of progress achieved by our collaboration with Virent.”

“The successful start-up, which was on-time and budget, demonstrates the potential for scalable, commercial manufacturing of premium, high quality renewable fuels. Renewable fuels that provide the high performance, reliability, and lower emissions are now closer to reality as a viable alternative for transportation fuels from crude oil,” Edwards was quoted as saying in the press release.

In the conference with reporters Edwards said Virent is also working on making diesel and jet fuel with its catalytic-conversion technology, which produces a biogasoline that he said is already cost competitive with ethanol and with conventional gasoline at current crude oil prices.
Edwards said planning work on a 100-million-gallon-a-year commercial-scale plant is expected to get under way at Virent later this year.

Links of interest

Lux Research
www.luxresearchinc.com

Virent Energy Systems
www.virent.com

Shell
www.shell.com/aboutshell

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