The Bloom Is Off (NPK-Produced) Algae Biofuel Development

Includes: TVIAQ, XOM
by: Durwood Dugger

Today my Google Alerts search for "algae oil news" produced two results one after the other:

1. Exxon's $100m Algae Investment Falls Flat

2. America's water resources enough for 25 billion gallons of algal fuel

It occurred to me that some people might be confused over the obvious contradictions of these two headlines. Having been a commercial algae (non-biofuel) producer for more than 40 years, I thought I might offer more of an inside perspective to explain what's actually happening (or actually not happening) with the algae biofuel development sector and the reasons why.

There have been some significant changes over the past year or so in alternative energy in general. For one thing the world is becoming much more aware of and sensitive to non-renewable resource utilization priorities. There was good news for solar and wind as costs have dropped dramatically and some suppliers are now on par with fossil fuel generation costs. There was some less than good news for biofuel producers and especially for the algae biofuel developers as a string of recent high profile companies and government science researchers have announced withdrawals (partial or complete) from algae biofuel development. This has left many would-be algae biofuel developers desperately trying to come up with a plan B - and a general public reading headlines and search results like above and simply wondering "What the - (your preferred word)?"

These changes in algae biofuel fortunes did not happen overnight as it might appear in the often biased energy media coverage. Nearly every in-depth economic (fiscal and physical) analysis - and especially mass balance analysis of the algae biofuel production process - has shown it to be both economically, environmentally and resource unsustainable and non-renewable at-scales significant enough to impact the U.S.'s energy deficits. Equally these analyses have shown that algae biofuels can't alter the US dependency on foreign oil (it might even increase foreign dependencies) because at-scale biofuel production is totally dependent on petroleum based and dependent NPK (nitrogen, phosphorus, potassium) fertilizers - same as our food production. Actually, the first alarms started going off as far back as 2009 when it became clear that our USGS (U.S. Geologic Survey) current methods of NPK fertilizer component resource/reserve evaluation have no on-site and or independent 3rd party verification beyond fertilizer company and or host country balance sheets, providing motivation for obvious bias and making current USGS - NPK resource assessments questionable - if not effectively baseless.

Any alternative energy developer tracking the economics of biofuel development research should have seen the recent sustainability credibility collapse coming for algae biofuels as the following (and other) pivotal information releases were made:

1.) Mass balance studies (several) concluding that algae biofuel development would be NPK dependent.

2.) Scientists have estimated that soon (if not currently already) 95% of human food production (with Asia now converting to NPK based agriculture) will be dependent on petroleum and or petroleum dependent NPK for its fertilization, farming and growth. Scientists have also estimated that the development of a significant algae (and or terrestrial biofuel industry) could use up to four times the NPK more than what is currently used for human food production and it would dramatically and negatively change even those 30 year assumptions for aforementioned stable NPK supplies for human food production as critical food production resource reserves and human population growth plots graph in opposite directions.

3.) The 2011 USDA announcement (United States Dept. of Agriculture) that the US is now importing 54% of its agricultural NPK components places NPK in the same negative foreign dependency strategic at-risk position as imported foreign petroleum has done for decades. If you think allowing the US to be in the position of depending on foreign oil for your SUV fuel - let alone our military defense needs have been a strategic blunder by our leadership - wait till you see the US population dependent on foreign fertilizer importation for our food production. Even though the US was the world's largest phosphate fertilizer producer a decade ago, we are second to China and we imported 16% of our phosphates in 2011 from... Morocco.

4.) The acknowledgement by the government science arms (National Academy of Sciences (NAS) and the NAS funded sub-component the National Research Council (NRC) that algae biofuels (and possibly by extension terrestrial biofuels) were unsustainable and non-renewable because of "unsustainable amounts of energy, water and fertilizer."

5.) Forward thinking big oil has in many cases directly supported algae biofuel development. Being good corporate citizens wasn't probably their primary motivation. When you understand how petroleum dependent NPK production is, then you begin to understand the economic motivation for big oil to support biofuels. However, big oil biofuel development hasn't fared any better than independent biofuel development. This week Exxon (XOM) announced that "it would be forced to restructure" its earlier 600 million dollar commitment in 2009 to algae biofuels after spending 100 million dollars on algae genetic enhancement research without success over the past three years. Which might be another way of saving face with its investors as XOM accepts the obvious and quietly withdraws from biofuel development - like so many other companies have done in the last couple of years.

It may take a while for those who remain embarrassingly invested in NPK based algae biofuel production to extricate themselves from their denial of the obviousness of the non-sustainability of both NPK and petroleum dependent biofuels. However, giants like Exxon spend more on advertising annually than they have spent on algae biofuels, so they are not significantly affected - though their stockholders and board members might want to review the scientific and economic competency of those who took them down the primrose path of algae biofuels. In the mean time, it might also be a great opportunity to short smaller public owned players whose efforts are dependent on unsustainable NPK usage.

Not all algae biofuel producers failed to see the economic and non-sustainability handwriting on the wall and many have abandoned biofuels as their primary target market (if not completely leaving the arena). Instead they have switched to higher value, but fractionally smaller specialty algae oil markets in nutraceuticals, cosmetics, and industrial specialty oils. Solazyme (SZYM) is probably the best-known example of algae biofuel companies refocusing on specialty algae based oils and chemicals. Most of these refocused algae biofuel companies still use NPK for their production efforts and will compete with food producers for NPK. Fortunately for food producers and food consumers, or unfortunately for NPK related producers and NPK based algae producers, these niche specialty oil markets are quite small compared to the fuel market size expectations with which the algae biofuel companies attracted their original investors. This increased specialty oil competition could mean that prices for many of algae lipid products like omega-3's, cosmetic oils and specialty industrial oils could be negatively affected by the influx of numerous former algae biofuel developers and their production. Whether these markets are large enough to support already existing non-algae specialty oil producers and now the new former algae biofuel producers is unknown, but it seems probable that increased supply and competition will produce lower prices, margins and a shake out of specialty oil producers. Again, think shorts.

While algae biofuel production using NPK may be literally "dead in the water" from an economic, environmental, and critical peak resource sustainability prioritization standpoint, algae biofuel companies generating algae biofuels and other products from wastes - such as sewage and CAFO (Concentrated Animal Feeding Operations - cattle, dairy, poultry, swine and aquaculture) discharges are largely unaffected directly by the NPK sustainability issues above. If anything they should be the focus of those investors who want to be truly socially and environmentally responsible. I suggest looking for the few companies that use algae to convert wastes into higher value products. Focus particularly on companies that produce algae from non-human waste sources because they have broader and higher value product options. Algae from waste - be it for biofuels for on-site energy use offsets, other additional income producing products, or in waste water treatment by simply capturing critical peak resources such as peak phosphates (phosphorus) are beneficial by preventing those wastes from ending up in and or damaging the environment. An additional potential opportunity you might want to follow is the progress of NASA (National Aeronautics and Space Administration) and its OMEGA (Offshore Membrane Enclosure for Growing Algae) algae biofuel from waste water project which is currently seeking private companies to utilize the results of its 10 million dollar algae from waste water development project.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Author is Pres. of BCI, Inc. and has been a non-biofuel commercial algae and aquaculture producer for over 40 years and has no financial relationships with either algae biofuel nor petroleum producers.