“Can’t Anyone Here Play this Game?”
Although most of the stocks are well below their IPO price, bankers claim that the industrial biotech boom (over fifty venture-funded private companies) continues, with several more filings in process. As a whole, the technology offers the prospect of energy and specialty chemicals from renewable resources, but the route from crops/biomass to competitive products is still complex and expensive. Barriers to a successful business model include extremely high capital intensity (3-8x the most capital intensive oil refineries), especially at the pretreatment (non biotech) steps, expensive enzymes/fermentation, and often messy cleanup/recovery out the back end of the process. The consequence is that most ventures are working to produce chemicals whose values are much higher than transport fuels, which can be competitive with petrochemical products based on $75-$100 oil. The effort to use cheaper biomass to get to sugar and final products continues to be a frustrating one. None of the companies I’ve examined are likely to be profitable before 2014, although significant risk management is underway – off-take agreements are guaranteeing volume sales and, where necessary, locking in feedstock costs, leaving process improvement as the real wildcard. These days, the equities seem to be trading on firm (not letter of intent) customer agreements and any progress toward managing the volatility of their feedstock needs. It also appears that product cost estimates for the first commercial manufacturers, across a range of biomass (non food) inputs are at least $3/gallon — emphasizing that, absent generous cellulosic subsidies, the sector is not yet ready to deliver cost competitive renewable fuels.
One potential exception – although very speculative – is KIOR. The firm believes it has a catalyst system which, within a mini-version of an oil refinery process, will “crack” wood chips/biomass to a “biocrude” oil that can be blended for conventional gasoline. The approach has NOT been proven outside the laboratory, and the first (one-third commercialize) demonstration plant is in construction, for a mid 2012 startup. The process will be much more capital intensive than any of the other biotech efforts, but, if successful, might produce gasoline-quality product under $1.75/gallon from a renewable resource. The outlook appears binary — risky, but Interesting!