KiOR Passes A Major Hurdle; Still Faces Several More

Jul.24.12 | About: KiOR, Inc. (KIOR)

KiOR (NASDAQ:KIOR) investors were overjoyed to learn today that the EPA has granted the company Part 79 registration for its cellulosic gasoline product, judging by the fact that the share price is up more than 13% at the time of writing. This is a significant milestone as it makes KiOR the first U.S. company to receive EPA permission to sell cellulosic gasoline domestically. (Cellulosic gasoline is different from cellulosic ethanol in that, as the name suggests, it is chemically identical to petroleum-based gasoline and avoids many of the fuel equipment and infrastructure limitations encountered by ethanol.)

Part 79 registration is required by all fuel and fuel additive producers before they can sell their product within the U.S. In a nutshell, it is a seal of approval from the EPA with regard to the product's impacts on public health. Today's news removes some uncertainty from the cellulosic biofuels industry, as there has been no guarantee until now that cellulosic gasoline is capable of satisfying the requirements of Part 79. It is very important news for KiOR simply because the company would not be able to sell its main product in the U.S. without the EPA's permission, which it now has. That said, this simply means that the EPA will allow KiOR to compete with petroleum refiners; whether the market will allow it to compete successfully is another matter entirely.

KiOR still faces two major hurdles on the road to long-term economic feasibility, both of which it will need to overcome. The first is the establishment of a binding cellulosic biofuel mandate under the RFS2, without which cellulosic biofuel producers such as KiOR cannot expect to compete economically with petroleum refiners in the near term. It is not guaranteed that this will occur in 2012, as there is a good chance that the EPA will either bow to "Big Oil" pressure and voluntarily waive the mandate as it has in the past, or be forced to do so by either the courts or Congress.

The second hurdle is the achievement of high gasoline yields from biomass feedstock, without which KiOR will not be able to generate the low gasoline production costs needed to compete with petroleum refiners in the long term. I shall remain skeptical that these yields are possible until I either see them generated via catalytic pyrolysis on a commercial-scale basis or reported in the peer-reviewed literature, as the yield data that I have seen is much lower than will be needed.

Today KiOR cleared an important regulatory hurdle. It still faces equally daunting policy and scientific hurdles that must be surmounted before the company can achieve economic feasibility, however. Investors in the company can let out a sigh of relief, but further celebration isn't warranted by today's news.

Disclosure: I am long KIOR.