Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Algae oil: just a niche, in time

Part 2 of 2
Part 1 of 2

In my last post, I mentioned scaleable as a possible problem area in the algae oil sector. I also mentioned Robert Rapier, who has a great deal of experience in biofuel. He brings up the same point in his essay, Renewable Fuel Pretenders, on The Oil Drum. Most "pretenders" sincerely believe that they have "cracked the code," he writes, and that they are not pretenders, but contenders. But Rapier notes this:

"What I have discovered in many of these cases is people often believe this because they have no experience at scaling up technologies. They might have something that works in the lab, but this can instill a false sense of confidence in those who have never scaled a process up."

Scaling often requires the solution of a number of technological problems, some small and some large. In the same essay quoted above, Rapier also notes that "the potential for success falls rapidly as the number of needed [technological] breakthroughs pile up." He asks us to imagine a new technology with "a 25% chance of achieving commercial viability in the next 20 years." For all three hurdles to be cleared, there is only a 1.5% chance of success. Since algae fuel, he contends, has multiple technological hurdles, the chance for success, even in five or ten years, is not strong. Perhaps this explains the plethora of methods still being attempted. Not enough hurdles have been cleared to narrow the race track down to one or two, maybe three, lanes.

Many bets have, however, been placed on photobioreactors -- a closed environment where CO2, nutrients and lights are controlled within glass (usually) tubing. The problem, like almost any prototype, is that the energy, or, in this case, the costs are still too high to produce a biofuel that can compete with fossil fuels. Rapier cites an analysis by PhD graduate Krasen Dimitrov in which he examines the technology and processes of GreenFuel Technologies (now defunct) and asserts that production costs (just production costs, mind you) for algae oil would be about $853/bbl or $20.31/gal. About eight or nine time where gas sells now.

In addition to Dimitrov’s analysis, Rapier cites a report commissioned by the British Columbia Innovation Council to assess the possibility of an algae fuel industry in B.C. The report looked at three methods of producing algae biofuel -- photobioreactors, open ponds (called raceways because of their shape), and fermentors (that is, devices using fermentation). They came up with the following estimates for the cost of production:

Photobioreactors -- $93.23/gal

Open raceways -- $49.54/gal

Fermentors -- $ 9.03/gal

Even at nine bucks a gallon, we're not yet in the ballpark, because the estimate is just for the cost of production. No marketing, no distribution, no health insurance packages (in the U.S., anyway), no social security payments, and so on and so on. In short, none of the normal operating costs of a business -- just production. And as for bioreactors, they are going to need an almost impossibly steep curve down to become viable in the near future. Rapier contends that there can be some cost improvements, some economies of scales, but that the main elements of production are basically fixed costs -- things like building material, machinery, and land -- and not subject to much in the way of improvement.

Despite pessimism among many experts, everybody seems to unanimously wish it wasn't so that competitive algae fuel is maybe 10 or more years down the road. Maybe their gloom is not quite so warranted. After all, Exxon did invest $600 million into an algae fuel deal with Synthetic Genomics in July 2009. There have been other big deals with traditional oil companies as well as venture capitalists.

Katie Fehrenbacher of Earth2Tech seems to hold out hope that technological breakthroughs, scaleability and commercial production can be eased on down the road with Big Oil's big money. Commercalizing algae fuel technology is very expensive, Fehrenbacher writes, and the only companies with that much money and an infrastructure which can be used by the new industry is Big Old Oil. And with commercial algae fuel plants estimated at a cost of over $100 million, scaling up also becomes the domain of Big Oil. If algae fuel is for real, then Big Oil isn't going to care whether the fuel coursing through its refineries, pipelines, trucks an ships comes from biomass trapped underground eons ago or microalgae.

So that's one possibility. The second set of possibilities comes from Robert Rapier. He posits three situations in which he believes algae fuel could find a profitable niche. The first is the case in which "the oil is produced as a by-product." Algae, for instance, can be used in pet food or as a base ingredient in cosmetics. If a company begins business primarily to cultivate algae to produce products like these, and the oil is simply a by-product of the main production process, then we may have something profitable. The reason is that the costs of production would be mainly covered by the consumer product.

The second situation is what Rapier calls the "wild card," the approach being used most notably by Solazyme. First, the company plays around with the genetics of algae to get better oil yields. Then, it uses a fermentation method in which the algae is raised in closed tanks and fed sugar. In my last post, I mentioned a study by the British Columbia Innovation Council in which they reported that fermentation as a means of algae oil production topped bioreactors and open raceways by coming in at $9.03/gal for the costs of production. That was 10 times cheaper than bioreactors and five times cheaper than open raceways. According to Earth2Tech, venture captialists and Chevron have invested $76 million in Solazyme.

The third situation, reports Rapier, is one in which algae oil production is just one step in a more complex flow chart of energy processes. I'm not sure if W2 Energy's operations are what Rapier has in mind here, but I think they, and companies like them, have found a niche that can be profitable. On my blog, I wrote how W2 Energy signed a deal to convert old tires into fuel products and energy that could be sold to the power grid. I also wrote about their deal to do the same with municipal waste in Laurel, Md. A look at their process flow chart shows the biomass converted into a gas during the plasma phase. Leftover CO2 from that operation is then fed into bioreactors which produce algae. The algae is then fed back into the plasmatron to create more gas and fuel products. As I've described, they fit this operation on the bed of a tractor trailer and can chain them together to scale up. It ain't fancy but at least W2 Energy is doing some real business that seems to have a better chance of making profits sooner, than some pie in the sky 20 years from now.



Disclosure: No positions