Companies are shifting from biofuels to renewable chemicals.
Understanding the role of oxygen in their technology is key to sorting potential winners and losers.
Effective use of oxygen is powering top picks in the sector like Solazyme and BioAmber.
There was a time in my life when I thought I would never again hear anything as hook-filled, driving, lust-laden, and repetitive as "My Sharona," but then the chatter about "opportunities in renewable chemicals" came along.
These days, "renewablechemicals" seems to have become a single word, used in biobased investment meetings in response to any question that cannot be safely answered with "Brazil."
What's disruptive in your business model? renewablechemicals. How do you expect to make money? renewablechemicals. Why should I invest in you? renewablechemicals.
How to pronounce it? Like Dustin Hoffman pronouncing "Judge Wapner" in the motion picture Rain Man. About as often, too. RenewableCHEMicals definitely, definitely renewableCHEMicals. Definitely.
The big switch from fuels to chems: Is it for everyone?
Now, it may have occurred to you to wonder, why are so many biobased companies aimed at chemicals instead of fuels these days? Companies like Solazyme (SZYM), Amyris (NASDAQ:AMRS) and Gevo (NASDAQ:GEVO) that were part of the synthetic biofuels revolution, but mostly talk about flavors, fragrances and specialty chemicals these days.
You might have gathered from the newswires that advanced biofuels companies are finding it tough sledding to build first commercial plants. And, you may have heard, or surmised, that factors are at work such as energy policy wobbling in the US and EU. And you'd be right: those are key factors.
But there's a more important one, and it has to do with the one thing you can't find in a barrel of petroleum. And that's oxygen.
You see, petroleum is just really, really old biomass - time and pressure have squeezed out all the oxygen and made a soup of the remaining hydrocarbons. But virgin biomass still has all that oxygen - as much as 40 percent by weight. When making a drop-in hydrocarbon fuel molecule from biomass, you have to blow off all the oxygen, and the cost per ton rises accordingly because the feedstock is being inefficiently utilized.
It's one of the reasons so many companies have pursued ethanol as a fuel application - plant sugars contain all the molecules need to make alcohols, whereas petroleum needs additives (and, therefore, extra processing steps).
The organic acids and oxygen
But consider the organic acids. One well known example is acetic acid, which is better known as vinegar (a watered down acetic acid product). But there's a zillion of them - often with exotic names like dodecaneodioic acid (OTCPK:DDDA), erucic acid, succinic acid and levulinic acid. They're hugely important as chemical building blocks, and have direct functions too - and sell for double the price of fuels, and sometimes much more.
So, here's the trick: Organic acids contain oxygen. To make them from petroleum you have to add in the Os, whereas biomass brings the oxygen along. Saving a process step, and an extra input.
The Bryan Principle
Paul Bryan is the former manager of the Department of Energy's Biomass Program - from which ethanol, algae, drop-in biofuels and other biobased technologies have garnered R&D leadership and support. Today, he lectures at Berkeley, and one of his favorite topics is understanding how oxygen can dramatically change the opportunities for companies in this space.
Take for example, his Focus Diagram, in which he compares the production of organic acids and fuels, using biomass and petroleum.
You can see right away why biosuccinic acid - well, it's a winner, making it from biomass. In fact, the oxygen problem is one of the reasons why so little succinic acid has been produced over the years, even though the molecule is an excellent building block from which to derive synthetic rubber, spandex, packaging, fibers, de-icers, coolants, tires and footwear - to name a few applications.
And in the wave of early-stage industrial biotech companies that went public in 2011-13, which is the only one whose stock has hung on to its opening day price? BioAmber (OTC:BIOA). And what does BioAmber make? Biosuccinic acid.
Another reason for BioAmber's success? The company is avowedly pursuing a strategy of aggregating strategic partnerships that bring investment, off take and financing relationships, sometimes all three. The partners work together on new applications that can drive new markets.
It's different from the conventional biobased fuels strategy, where mandates are used to create market certainty, and drive financing (or rather, don't) and drive engagement with downstream obligated parties (or rather, don't).
More on that here in "Why are all the traffic lights turning green for BioAmber?"
Companies to watch?
There are a number of companies working in the organic acid area that are utilizing the oxygen found in sugars or cellulosic biomass. And generally, they start with the potential for strong advantages over hydrocarbons as a feedstock. Especially as the target molecules get more complex and they develop one-step procedures by which they train engineered microbes to make them. (When we say "bigger," think "more carbon molecules.")
It's one of the reasons why Solazyme has remained a hot pick among analysts. At my recent ABLC conference that Biofuels Digest organizes in DC each year, both Raymond James' Pavel Molchanov and Cowen & Company's Rob Stone named Solazyme as their top pick for the space.
That's not just because Solazyme can make great jet fuel and biodiesel - which it can. Primarily, the near-term opportunities for SZYM are in complex, long-chain triglyceride oils, which are another oxygen-laden molecule. As Solazyme CEO Jonathan Wolfson notes, triglyceride oils are one of the most popular oil molecules on earth, in terms of demand and the variety of applications.
Another company that makes an oxygen-laden product set - aside from the aforementioned BioAmber - is Gevo. If that company can stabilize its production system and finish off its complex legal difficulties with the BP (NYSE:BP)-DuPont (NYSE:DD) JV known as Butamax, it might well go far, very far - producing high-value isobutanol from corn sugars.
If you've been spared the Gevo-Butamax drama, here's the 411. The two companies have been locked in a lengthy patent battle over who owns what in sugars-to-biobutanol. It's been the Montagues vs. the Capulets, and there's more background here in "The Biobased Montagues and Capulets now starring in The Battle for Biobutanol."
Comers to watch for future IPOs?
There are some comers to watch out for among the private companies, in case they hit the IPO trail. Rivertop Renewables, Verdezyne, Genomatica and LanzaTech all have strong capabilities in making molecules that contain oxygen, are cost-competitive with petroleum-based products, and are green.
The Bottom Line
Focusing on technologies that utilize the oxygen found in biomass - well, that's not the only way to make money in the biobased sector. Plenty of companies have come along with strong business cases for drop-in hydrocarbon fuels - and companies like Amyris have developed a process to make the complex hydrocarbon known as farnesene via a one-step procedure, and they have oil major Total (NYSE:TOT) backing them strongly both for fuels and chemicals applications.
But when you look at the sector, ask yourself, are they using the oxygen in biomass? If they are, they can transport biomass greater distances (cost-effectively), and build larger plants with better economies of scale. So, they have a better chance of competing with incumbents - especially if they are making complex molecules that are not easily made from a barrel of petroleum.
And that can make renewableCHEMicals a winner. Definitely.
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.
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