The other reason for oil dependency

When thinking about the rising price of oil, folks in cleantech tend to think in terms of transportation fuels and what can be done to replace them with renewable and clean sources of energy. And with good analysis from the likes of UCSD’s Tom Murphy showing that in 2004 oil production slowed and failed to increase much despite prices tripling, finding alternative fuels is key. But what most people don’t realize is that a chunk of the crude oil that goes into an oil refinery doesn’t end up anywhere near a car’s fuel tank. It ends up making chemicals.
A higher margin product
In 2011, the global market for petrochemicals was worth over $3 trillion, approximately the size of the entire U.S. government’s budget, and the feedstock for producing those chemicals is petroleum.  About half of that market is commodity chemicals that are low margin, but the other half is higher margin specialty chemicals like polymers that comprise plastics or substrates for pharmaceutical manufacturing.
The biofuels industry is working on producing transportation fuels through a process whereby a carbon feedstock like woodchips or sawgrass is fed to microbes to produce oil. But most of the biofuels companies that IPO’ed last year have been crushed in the market, and Amyris recently decided to scale back its biofuels production in favor of what else but manufacturing the specialty (and higher margin) chemical squalene.
So as some biofuels companies try to pivot toward specialty chemicals, which are lower volume and smaller market but with better margins, it’s worth taking a look at the potential to use microbes to manufacture chemicals from a feedstock other than oil.
Finding the right bio-chemical
I recently caught up with Charles Eggert, the CEO of Boulder, CO based OPX Biotechnologies, a bio-chemical startup that has raised $65 million from a number of VCs including energy focused Altira Group and cleantech friendly Mohr Davidow. OPX Bio is targeting the $10 billion global market for petro-acrylic, an ingredient in everything from paint to diapers, by generating the first biologically produced acrylic, so called “bio-acrylic.”
Eggert is unsurprisingly bullish on the bio-chemical market. He points out that while a less of the oil going into a refinery comes out a petrochemical than comes out a fuel, petrochemicals have much greater value in the market. Specialty chemicals have disproportionate margins and value, which is what makes them attractive. He also takes some solace in the fact that the massive scaling issues that have hampered biofuels are somewhat less of an issue for lower volume specialty chemicals and that many common chemicals from pharmaceuticals to amino acids are already produced biologically.
On the cleantech end, biochemicals are renewable, presuming you can access a widely available feedstock whose growth doesn’t harm the environment and doesn’t compete with the food supply as corn based ethanol does. But more importantly the process of using microbes to produce biochemicals doesn’t require heat and pressure, which are both needed in petrochemical processing. The bacteria that OPX uses operates near room temperature. Eggert says that producing bio-acrylic results in 75 percent less greenhouse gas emissions versus producing petro-acrylic. Additionally, large companies like Procter and Gamble have ambitious pledges, like targeting the replacement of 25 percent of all petroleum based materials with renewable materials by 2020. P&G is a significant buyer and seller of specialty chemicals for everything from detergents to cosmetics, and the option to by greener bio based chemicals could be an attractive option.
For a feedstock, OPX is currently using sugar, either from corn or Brazilian sugar cane. But ultimately the industry will need a non-food based sugar, often referred to as cellulosic sugar, which is derived from biomass materials like switch grass or energy cane.  Multiple companies, from BP to DuPont, are working on building large scale plants that can derive sugar from biomass sources.
Eggert told me that at commercial scale, making bio-acrylic is cost competitive with petro-acrylic. OPX will need to build a commercial scale plant and prove that it can get the same yield it’s produced at smaller scale, the critical scaling hurdle that every biochemical or biofuel company faces. It also has a joint development agreement with Dow Chemical, the largest U.S. producer of petroleum based acrylic, which Eggert reports is seeing demand from its customers for renewable biochemicals.
The building of a final production plant can often run a couple of hundred million dollars. “It’s not cheap,” says Eggert. “Which is why you need to make sure your process, your microbe, your engineering design are as efficient as they can possibly be.” And for the benefit of the biochemicals industry, let’s hope that the scaling goes faster and more smoothly than it’s gone for biofuels.

Question of the week

Are biochemicals a viable alternative to petrochemicals?

Kleiner-backed biofuel startup Renmatix comes out of stealth

Kleiner Perkins has another biofuel and biochemical company up its sleeve. On Tuesday, a Kleiner-backed startup called Renmatix, which makes sugar from biomass that can be turned into biofuel and biochemicals, came out of stealth during an event in King of Prussia, Pennsylvania.

Today in Cleantech

I’m guessing that if you polled self-described “green” advocates about their least favorite green technology, biofuels would be at the top of the list. Out of all the forms of renewable energy, biofuels are the most controversial from an environmental perspective, mainly because every drop now available to global markets comes from food crops like corn, sugarcane and soy. It would be nice if cellulosic biofuel — the stuff made from non-food plant materials — could step up and provide at least a fraction of the potential market. But that just hasn’t happened the way the industry and its government backers have hoped. In fact, commercial-scale cellulosic ethanol production is so far behind schedule in the United States, the Environmental Protection Agency has had to slash its targets twice, from an original hope for 100 million gallons by 2010 and 250 million gallons by 2011 to a bare 12.9 million gallons by next year — and even that pathetically small figure will be a challenge for the industry to manage. Looks like we’ve got awhile to perfect cellulosic biofuel’s technology, and the business model, and the feedstock issues, and all the other problems that have limited its development to date.

Today in Cleantech

Looks like algae that grows in the dark is a hit on Wall Street. At least, that’s how Solazyme’s IPO today seems to be turning out, as the algae-to-biochemicals and biofuels company saw its shares rise 20 percent, from their opening price of $18 per share to as high as $21.64, in early trading today. That adds up to about $197.55 million raised so far, compared to the South San Francisco, Calif.-based company’s initial plans to raise about $100 million. It appears that investors including The Roda Group, Braemar Energy Ventures, the Fiddler Group and Lightspeed Venture Partners will be seeing a healthy return on their bets. That wasn’t unexpected, necessarily — previous biofuel IPOs, such as Gevo and Amyris, have done quite well as well. But as one of the first credible algae biofuel companies to seek the support of the public markets, Solazyme serves as a special case. It should be noted that it’s also special among its other algae-to-biofuel contenders, in that its  algae are genetically engineered to grow in the dark in closed bioreactors while fed on sugar — much different than most algae companies that are seeking to grow algae in open ponds using sunlight and naturally occurring carbon dioxide. Now Solazyme will need to execute on its plans to supply algae oils to partners such as Dow Chemical and Sephora for various industrial and consumer products purposes, as well as seek a path to large-scale production for fuel, the biggest plum in terms of future markets — and the hardest to tackle in terms of low-cost production.

Today in Cleantech

We’ve got some ambitious plans from Khosla-backed “renewable crude” startup KiOR to report on. This morning, the Houston-based company announced it has a term sheet for a Department of Energy loan guarantee of — wait for it — $1 billion-plus to help it build multiple plants to produce up to 250 million gallons of biofuel per year. A term sheet is just an opening salvo in the long process of landing a DOE loan guarantee, so we’re waiting to see what comes next. Still, it’s a huge amount to request — the last round of DOE biofuel loan guarantees added up to $571 million total for five separate companies, to give a point of comparison. KiOR’s approach to the biofuel challenge is quite different — instead of bypassing the traditional oil refining process with cellulosic ethanol, biodiesel or algae-based biofuel, the company says it can add a catalyst to improve on the well-known industrial process of pyrolysis — super-heating organic matter in the absence of oxygen — to yield a bio-crude product that can be dropped into existing oil refining infrastructure. That could cut out a lot of the headaches associated with brewing and transporting ethanol that can’t run through existing oil pipelines, or adding cold-sensitive biodiesel to truck fuel