Oil to the Rescue: Valero Backs Mascoma

For next-generation biofuels to make any type of dent in the fossil fuel industry, oil companies will have to get on board, and here comes one to the rescue for the struggling cellulosic ethanol sector. Cellulosic ethanol startup Mascoma announced Thursday morning that oil giant Valero (s vlo) will invest $50 million into the construction of Mascoma’s delayed commercial-scale cellulosic ethanol plant in Kinross, Mich, and Valero will also potentially enter into an off-take agreement for the plant’s ethanol. In addition, Valero has made an equity investment into Mascoma.

Six-year-old Mascoma has long been one of the more promising cellulosic ethanol startups. Lux Research went so far as to give Mascoma “top chef status” in a biofuel ranking report last year, citing Mascoma’s “strong financial support from investors,” and “potentially cost-cutting” process for breaking down cellulose and fermenting the sugar with a single microbe.

That strong investor support includes close to $100 million (before Valero) from a long list of investors including Khosla Ventures, Flagship Ventures, Kleiner Perkins, VantagePoint, General Catalyst Partners, Atlas Venture, Pinnacle Ventures and car company General Motors. In addition to private funds, Mascoma has received numerous grants from the DOE totaling more than $30 million and also state grants from New York and Michigan of over $30 million.

Still, with all that support, Mascoma’s commercial-scale ethanol plant in Kinross was originally planned to begin construction sometime in 2009, with cellulosic ethanol production starting perhaps by 2011. Now, according to the release this morning, the facility will break ground in 2011. Pretty much every cellulosic ethanol company has had to delay commercial-scale production due to a variety of factors like the economy, and an inability to get the manufacturing costs low enough.

The Environmental Protection Agency didn’t include Mascoma in its short list of cellulosic ethanol producers that would produce fuel in 2011 — that list included Range Fuels, DuPont Danisco (s dft), Fiberight, KL Energy, and KiOR. Though the EPA says that many more companies, including 20 plants, could produce potentially 300 million gallons of cellulosic ethanol in 2012.

Valero has turned out to be one of the more aggressive oil firms in biofuels. The oil refiner took stakes in algae fuel maker Solix Biofuels, and cellulosic ethanol maker ZeaChem, and also bough up the the corn ethanol plants of bankrupt ethanol producer VeraSun. Other oil companies that have shown an interest in biofuels include Exxon (s xom) (and its Synthetic Genomics deal) and BP (s bp), which bought up Verenium’s biofuel business.

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