KiOR Seeks $1B DOE Loan Guarantee

Khosla-backed, bio-crude startup, KiOR, is seeking a $1 billion loan guarantee from the Department of Energy. While it’s far too early to say if the term sheet announced Thursday will lead to such a large-scale financial backing for the Houston-based company, landing it would help it move toward its plan to build multiple plants to turn wood chips and other plant waste that would crank out 250 million gallons per year of next-generation biofuels.

KiOR’s ambitions certainly are big, compared to the loan guarantees the DOE has awarded to biofuels so far. Late last month, the DOE awarded loan guarantees totaling $571 million for cellulosic ethanol startup Coskata, waste-to-energy company Enerkem and Diamond Green Diesel, a joint venture from oil giant Valero (s vlo) and Darling International (s dar). KiOR is seeking nearly double that amount for itself alone.

In early Januar,y the DOE issued a loan guarantee commitment of $75 million to INEOS Bio and its partner New Planet Energy — less than a tenth of what KiOR is asking for. It should be noted that at least three biofuel companies backed by Vinod Khosla’s fund, including Coskata, Range Fuels, and now KiOR, have scored loan guarantees (Range Fuels’ was from the USDA).

KiOR has operated largely in stealth mode since 2007, when it was spun out of a company called BIOeCON as a joint venture with Khosla Ventures. Khosla provided the company’s $1.4 million Series A round. KiOR later on raised $40 million as part of a planned $95 million Series B round of funding.

Another KiOR backer is the State of Mississippi, which agreed in August to loan KiOR $75 million to help it build five biofuel plants in the state. KiOR was reported to expect to invest some $500 million into those projects at the time. Thursday’s announcement from KiOR cited plans to build four plants — two in Mississippi and the others in Georgia and Texas — capable of a combined 250 million gallons per year production.

KiOR’s Innovation

KiOR’s “Biomass Catalytic Cracking Process” uses a catalyst originally developed to help the oil industry break down heavy crude oil into more easily refined products for the oil industry. It turns out that the same catalyst can be used to aid the process of pyrolysis, or super-heating organic matter in the absence of oxygen to break it down into a substitute for crude oil.

While traditional pyrolysis yields a low-grade, tarry substance that’s hard to refine, KiOR says its catalyst both lowers the operating temperatures and yields a higher-quality end product that can more easily be refined into a variety of fuels. The key is oxygen, which is hard to completely remove from the pyrolysis process. KiOR’s catalyst helps get rid of more of it, according to a recent article by Vinod Khosla on the subject, allowing the company to convert a wide array of mixed woody wastes into a product that’s a lot like crude oil, but without the sulfur content.

That’s a very different approach than most of the biofuel processes out there today, which seek to convert various sugary or cellulosic feedstocks into substitute fuels such as ethanol or biodiesel. KiOR’s “renewable crude” product, on the other hand, could be fed into existing oil refineries, potentially making the transition from laboratory-scale to mass-market production much easier.

KiOR also uses a well-understood industrial process widely used to make products like PVC, charcoal and coke (a less-smoky version of coal, not the soft drink). That could be seen as a much more reliable prospect for would-be investors than using bioengineered microorganisms to convert sugars or biomass into fuel-like substitutes, or converting algae into biofuels— techniques that have yet to prove their commercial viability.

Indeed, Vinod Khosla said at a May event that KiOR might be better seen as a competitor to crude oil producers such as Venezuela or Iran. While there’s an obvious political angle to that particular list of oil-producing countries, it does get at the key differences that separate KiOR from most of its peers.

What remains to be seen is how KiOR’s process will perform at larger scale. As of May, the company was producing about 15 barrels of renewable crude per day at its Houston plant — a far cry from commercial-scale production.

The biofuel industry has certainly seen its share of struggles in making the leap from laboratory to commercial scale. Last month, Range Fuels shut down its plant after making only one batch of cellulosic ethanol, adding weight to complaints by critics that the company has misrepresented its technology’s potential.

The industry’s failure to meet production targets has also forced the federal government to drastically downscale its goals for next-generation biofuels. The Environmental Protection Agency initially set 100 million gallons as the 2010 target for cellulosic biofuel, but the EPA cut that to 6.5 million gallons. It appears that the industry might have produced less than 1 million gallons last year.

For more research, check out GigaOM Pro (subscription required):

Image courtesy of Jhapeman via Creative Commons license.