Is Cellulosic Ethanol Always the Bridesmaid?

I have a new set of predictions for ethanol technology, and so far my predictions on ethanol have been dead on. Cellulosic ethanol has been the thin film of the ethanol industry, always the bridesmaid. But perhaps, like with the breakthrough by First Solar (FSLR), its time is coming.

I have written extensively on the topic of ethanol and biofuels, including an early 2006 analysis of the VeraSun (VSE) IPO right before its pricing that predicted an appropriate price at the time in the range of $2.77 to $8.82 share. The business has grown since then, but EBITDA margins have slipped even farther than I predicted they would, but the forward PE has come right into line with my predictions way back then. After listing well above my range, the stock hit a high north of $30 before pulling back until it is finally in my original range, trading in the $7-8 per share range.

Nearly two years ago in mid 2006 I did another article on predictions for cellulosic ethanol:

My Predictions on the Ethanol Market:

1. The corn market will likely be able to handle significantly more corn based ethanol production through substituting corn from the animal feed market than is currently anticipated.
2. Cellulosic ethanol will come on line to replace a lot slower than anticipated - even when the technology arrives.
3. The early cellulosic plants will likely be residual based, perhaps corn stover from fields already producing for corn ethanol - NOT purpose planted fuel crops.
4. Cellulosic technologies that allow fuel switching and co-firing will have an advantage.
5. Because of the transport issues - cellulosic ethanol will be relegated primarily to vertically integrated plants like the biomass power industry for the near future (where the operator owns its own fuel supply). They will struggle to compete on price with corn based ethanol.
6. And if ethanol succeeds like DOE expects, our beef prices are headed up.

And then I wrote an article in late 2006 entitled “Are Ethanol Companies Risky Investments?” for AltEnergyStocks.com. The conclusion – yes, of course.

In the short run ethanol stocks are in a land grab phase ramping to meet demand, and some of these stocks may do well while demand still outstrips supply and the industry is still small, but when this dynamic changes – watch out as the margin pressure will be brutal, and could turn already aggressively valued stocks into a dot bomb style free fall as per gallon profits get crushed. So, make your profits while you can!

So here are my new cellulosic ethanol predictions:

Prediction #1 - Both market entry and market share for the next several years in ethanol will roughly be governed by this ranking on preferred processes (with some allowance for process that involve more than one), and given feedstock, scalability, yield, and transport issues, sugar cane and corn fermentation will remain the market and cost leaders for some time.

1. Fermentation
2. Thermochemical
3. Catalytic
4. Enzymatic
5. Wildcards

Roughly the farther down we go on this ranking the higher the risk of failure, the higher the current cost, the more difficult the scalability (if you swap #1 and #2), the higher the reliance on future technological advances, and the higher the requirements for vertical integration to make the economics work.Prediction #2 – As ethanol and biofuels scale into significant portions of our fuel supply chain, most of the profits will be made by energy, refining companies, and Ag companies, who are more likely to build rather than to buy when it comes to expansion.

Prediction #3 – Despite all protestations to the contrary, ethanol and biofuels will continue to be our highest cost liquid fuel for at least a decade, though at $100 crude oil prices, even a high cost fuel can be competitive. Note: As I have said many times before, on a fully integrated direct cost basis, gasoline from oil can be profitably found, manufactured and distributed down well into the sub $0.50/gallon range, depending on the nature of the resource base in question, where as even the lowest cost forms of ethanol today are well over double that.

Just because crude oil prices are north of $100 per gallon, does not mean that the COST of gasoline is higher than that of ethanol, it means that the PRICE of gasoline is high enough that the higher cost ethanol can be economically produced and sold. The implication is obviously that he who owns the reserves (either oil in the ground or corn in the field) will continue to do well.

Comments

[gridflash:]

The only thing that matters in the production of Cellulosic Ethanol is the cost of cellulosic sugar.
If you can produce cellulosic sugar cheaper than the world market price of raw sugar you can turn a profit. Fortunately we can.

2008 Apr 02 04:15 PM

[Lissa Tucker:]

Good article! I agree -- The ever-looming lynch pin to Cellulosic Ethanol development
is arriving at a cost-effective process of conversion. In addition, Wall St. and Main St. appear to be in "wait and see" mode due to the impending presidential election which will determine the direction of the RD/ROI for the sector. Best bet is to hedge: 1part cellulosic 1 part clean coal/shale oil development....then JUST ADD WATER and shake (not stir)....

2008 Apr 02 04:45 PM

[User 161183:]

I recall that several years ago, when I was much younger, gasoline could be bought at 5 gallons per dollar. And only a few years ago diesel fuel was under a dollar per gallon. Changes in the value of the dollar and inflation alone would have has escalated those prices by a large amount. Now with China, India, and other developing countries competing like mad for crude oil, only an unrealistic dreamer could even think about 50 cent gasoline. Those days are gone forever. I predict that cellulosic ethanol will play a much more important role in our energy future than the author realizes, as will biodiesel, diesel from fossil fuels, and who knows at this early stage of our energy revolution what else will come into play.

2008 Apr 02 06:08 PM

[Jeff Yang:]

why would we listen to someone who states $100 / gallon on oil... when it is $100 / barrel... :) obviously someone is not thinking right.. also he forgot to mention that if it wasn't for ethanol, it would be $150 / barrel since our oil supply would be 10% less and when OPEC decides to cut oil supply... it will be $200 / barrel... so do you want to be an idiot like him and put America future in the hand of OPEC? (not me) we all know that the day is coming when oil runs out in the OPEC countries... and the Iraq War is about oil.. add that cost to oil.. and we taxpayers are paying $20 / gallon of gas... (not funny).. and i haven't even started on inflation and DEPRESION 2

2008 Apr 03 10:38 AM

[cggrp2000:]

Based on complex models for market penetration, Sygenta and Mckinsey project a global market for cellulosic ethanol of 20-25 billion gallons respectively. In its basic scenario, Syngenta presumes that cellulosic ethanol will gain momentum as of 2015, and the entire biofuels market to grow at 14% per annum. In its optomistic scenario,it assumes an early technology breakthrough in cellulosic ethanol resulting in a global market of 45 billion gallons.
The worlwide production of cellulosic ethanol will amount to at least 16.5 billion gallons in 2020, if the targets set in the US, China, EU, Japan and Brazil are achieved.

2008 Apr 03 02:33 PM

[ericp:]

Cellulose ethanol has materials constraints also when and if the technology becomes commericially viable. Will dedicated cellulose
crops replace food crops in the Midwest if viability is demonstrated?
Present ethanol production displaces very little petro use. Ethanol's
heavy use of assorted petros merely provides a change in appearance and location of the combustion of petro products rather than a change in quantity. The idea that ethanol from corn decreases petro use is simply false.

2008 Apr 03 07:26 PM

[Ross Fischer:]

Presently corn farmers burn 0.85 gallons of diesel to make 1 gallon ethanol. The refineries then burn 0.25 gallons equivalent energy of coal or natural gas. Add in fertilizer and insecticides, both petroleum dependent products and you quickly are using more energy than is made from the whole process. 1.28 gallons of fuel to make 1 gallon of ethanol from corn. $18 billion dollars in subsidies is all that keeps corn based ethanol working. Stop burning food for fuel. Cellulose ethanol has to be the way this technology goes.

2008 Apr 03 10:07 PM

[ethfarmer:]

If ethanol isn't going to work whether it be from corn or cellulose then tell me why big oil is spending so much money fighting it. If it truly won't make a difference then why spend so much. If I was big oil I'd say the hell with it. Seems to me they're a little scared of ethanol and after watching them get so uptight when the senator from South Dakota was asking them questions the other day I thought it was pretty funny. When asked for documentation about food vs fuel not one of them could come up with any facts or figures. None of them had done a study on it. Cocky SOB's. Big lying going on in our White House with BUSH/CHENEY in bed with BIG OIL. Thank God where about to elect a new president and just hope like hell its a democrat or it will be the same old bull shit. In fact, I sure as hell hope it Obama or it will be Bush/Clinton/Bush/Clin... 24 years of ......... Of course, McCain will be in bed with big oil too. He says he against big oil now but I saw a speech that he gave last summer and he was all for big oil then. Just changing his tune a little bit now and says he supports ethanol/alternative fuels to get votes. Hell, I wouldn't buy a 70 year old car and sure as hell ain't voting for a 70 year old to be president. Jesus, they've done studies and it's a known fact that people get demenia after 70. Yea, he's a war hero and needs to be honored for that God Bless him but that doesn't mean he should be President.

2008 Apr 04 02:31 AM

[nerfer:]

User161183 - I think Mr. Dikeman was saying that processing oil into gas adds 50 cents per gallon, not that the final cost would be 50 cents. You still need to add the raw cost of the oil into the final cost. At least, that's the explanation that makes the most sense, since as you state, we won't see 50 cents/gallon at the pump ever again.
People here aren't really talking about peak oil, but we're at the onset of it now. That's why OPEC isn't raising their production quotas, despite record high prices (about 5 years ago they said $35/barrel was their target, otherwise people would pursue alternatives and conservation). They can't raise their production (stability in Iraq/Nigeria would help, however), so I would not be surprised to see $130/barrel by the end of the year. Any price drops will last less than 1/2 year, as it continues its relentless climb.
Hopefully the next president will be a lot more open to R&D and incentives for cellulosic ethanol, as that will be our only possible route to some degree of economic stability and avoiding utter dependence on OPEC in the next decade.
Cellulosic ethanol may take some cropland, but it doesn't have to be the high-maintenance, rich soil that corn requires with heavy pesticide and fertilizer requirements. Switchgrass for instance can be grown on non-irrigated acreage even in dry climates. If we can use lumber/tree leftovers from logging and construction, that would be another big source free of current crop production. But conservation will be an essential component of future plans. No passenger vehicle should get less than 30 mpg, for starters. We've got a serious problem and it takes hard answers sometimes.

2008 Apr 07 11:31 AM

[schmeaupeque:]

Ross Fischer's calcs are a bit off. If you get 2.8 gallons of ethanol per bushel of corn and you grow 200 bushels of corn per acre, and you use his .85 gallons of diesel per gallon of ethanol, then a corn farmer with 1000 acres would need almost a half million gallons of diesel oil to plant and harvest her crop. Assuming it's a typo, it's the kind of mistake that if left alone leaves a needless bad impression and smacks of a bias

2008 Apr 07 02:12 PM

[CCHanderson:]

I do see the dim light getting brighter for cellulose based ethanol. I have been following the field testing / production side of the movement. I see several new species of grasses that are far superior to corn and possible yields up to ten tons per acre (wet biomass). I was checking some of the gate prices in the TVA and prices were approaching 50$. The production cost is much lower than other crops and it is a perennial (1 planting). There is a strong University coalition behind cellulose and I think its going to make it mainstream. As far as supply and demand goes you cant make a logical distinction between corn based ethanol and cellulose. Many of the buffer strips already in place will be replanted with a variety of
"super grass", and the rest will come from class 3-5 lower producing fields. I think CBE will be like any agricultural based technology... slow to roll out and long standing. I see many additional feeder markets developing from this including coal and electricity. Below are some interesting links.

U of I
miscanthus.uiuc.edu/

Treehugger.com
www.treehugger.com/fil...

2008 May 29 01:47 AM