Crude oil, most affectionately known as "black gold," exists throughout the very fabric of our society in ways we so often overlook. Yes, petroleum serves as the base energy source for our cars and jets through gasoline and jet fuel. But when you begin to consider the idea of plastics, pharmaceuticals, fertilizers, lubricants, adhesives, paint, and etc., knowing that these things often have petroleum-based histories serves as a humbling reminder that our daily lives revolve around the free-flowing existence of black gold.
Yet crude oil's days are numbered. As the world pursues ever more dangerous environments in order to discover untapped reserves, the concept of Peak Oil begins to take a more realistic shape. Companies like BP (NYSE:BP) and Transocean (NYSE:RIG) know all too well the risks of exploring the deepwater frontier for abundant crude oil. Even Canadian oil sands leader Suncor Energy (NYSE:SU) would have to admit that such innovative sources of oil are coming at a much higher price and cost of efficiency than they once did. But if black oil is on the way out due to increasing costs passed down to industry, what's going to help alleviate the growing void?
One part of the solution is inevitably going to lie in the field of biotechnology. The completion of the Human Genome Project in 2003 ushered in a new wave of genetic technology. For the first time in history, the ability to adequately map out genetic pathways in an affordable manner allowed for advances in our understanding of how to manipulate the outputs of subjects on the nano-sized scale.
One such company to evolve commercial uses in this revolution is renewable oil maker Solazyme (SZYM). Through standard fermentation equipment, the company is able to produce triglyceride oils by using modified algae as it interacts with a sugar-based feedstock. In turn, these oils can fundamentally be applied in industrial uses that are otherwise reliant upon petroleum, plant oils, or animal fats. The company is already set up into multiple divisions geared at addressing the current markets of food, fuels, chemicals, and cosmetics. Where this company stands out, however, is in the fact that it's developed the ability to customize and fully tailor the outputs of its algae-based nano-factories.
Enter the next evolutionary step in sourcing oils. It is one thing for a company to create a value-added replacement for a product line getting ever rarer. This is the case in Solazyme's oils, which can mimic and even offer superior replacement oils used by industry reliant on petroleum. It's another thing altogether, when that company can create a steady supply of fit-for-purpose oil profiles that are not capable of being produced through other known processes.
On Monday, Solazyme revealed details of its new oil profile that is currently unable to be produced through conventional means. In one fine swoop, the company looks to utterly claim a competitive advantage in a market dominated by large players such as Monsanto (NYSE:MON), DuPont (DD), Syngenta (NYSE:SYT), and Dow Chemical (DOW). Through this one discovery alone, the company will be able to sport an oil profile with high oleic content and absolutely no polyunsaturates - a task that such companies have spent hundreds of millions of dollars and years of research to no avail.
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Solazyme is also proving the advantages of its own research capabilities. On its own website, Monsanto states that it typically takes $50-$100 million and 8 to 10 years for a single biotechnology product from concept to reality. In the company's own assessment of its new technology platform, Solazyme states that it only takes less than $5 million and 6-24 months to develop new oils up to a demo scale. The most recent presentation can be found here.
Quite ironically, further testament comes from Dow Chemical itself, who for all intents and purposes should be a rival to this budding company when it comes to developing oils. A week ago, the company officially signed a large offtake agreement with Solazyme, stating that it looks to buy millions of gallons of Solazyme's oil for the use in dielectric fluids. In this market that primarily sources its oils from petroleum-based sources, Dow's commitment validates the value of Solazyme's product over existing sources.
With all things considered, the rise of Solazyme's "green gold" found in its algae-derived oil profiles comes at a time when skepticism is fresh. To get a better sense of why the company's stock remains depressed, it might interest some to view my other article located here. Yet looking out a bit further, as oil prices remain likely to rise with time, so will the attitudes of investors looking for oil alternatives. As it stands, the opportunities remain scarce and companies like Solazyme stand at but a little over a year out from having meaningful production capacity come online.
Disclosure: I am long SZYM, RIG.