I was only partially surprised to read in MIT's Technology Review that Amyris, a biotechnology company developing renewable diesel and jet fuel from sugar cane, was backing away from the biofuel market to pursue more lucrative products. Fuels are a highly competitive, low-margin business, and it's hard enough to make money refining them even with established technology and a ubiquitous feedstock like crude oil. This is a great, under-appreciated challenge facing every company that seeks to produce new, greener fuels from biomass using processes that haven't yet reached commercial scale or are only just arriving there. The key is either to produce something for which customers will pay better-than-commodity prices, yielding a high margin per gallon, or on such a vast scale that you can survive with a thin margin.
When I listened to the replay of the investor call Amyris held last week, I picked up some nuances missing from the Technology Review article. Confining its biofuels efforts to joint ventures with Total and with Cosan, a large Brazilian sugar and ethanol producer, probably makes sense for Amyris for many reasons. However, the discussion of value vs. volume segmentation on the call pointed to the need to attain a scale in fuels that would likely be beyond the wherewithal of a firm its size, investing on its own. As it is, the total cane ethanol production of its Brazilian partner Cosan--via the latter's JV with Shell--is still less than the throughput of all but a handful of US oil refineries, and only about one-tenth the volume by which Shell's Motiva joint venture is expanding its Port Arthur, TX refinery. Biofuel refineries needn't reach that scale--they probably couldn't due to the limitations of their feedstock logistics, in any case--but they still need to crack the challenge of repaying big capacity investments while making low-margin products, in addition to any technical challenges they face.
Last week I ran cross a clever plan to circumvent this challenge, in conjunction with meeting the 36 billion gallon per year US Renewable Fuel Standard (RFS). Jim Lane of Biofuels Digest proposed a scenario for meeting the 2022 RFS target using mainly existing corn ethanol and biodiesel facilities. He suggests converting the former to produce higher-value biobutanol, and then capturing and converting their CO2 emissions--after correcting a typo that pegs them at 90 million lb. per year instead of 90 billion lb.--into additional fuels using algae or solar energy. Mr. Lane gets full marks for ingenuity and for coming up with a pathway that doesn't depend on the widespread adoption of E15 and E85 ethanol blends that the public hasn't embraced and might never. However, in my view it relies too much on promising but unproven technologies and on the durability of a price premium for butanol in chemical markets that would be completely swamped by fuels-scale output. I'd expect any shift from ethanol to butanol to proceed only about as far as it took to crush the price differential between butanol and wholesale gasoline.
The advance biofuels industry has made enormous strides in the last decade and proved that you can start with biomass or even CO2 and produce fuels that are chemically identical or otherwise broadly compatible with the petroleum-based fuels that remain the world's primary source of energy for transportation. What it hasn't yet achieved is to prove that it can do so at a cost that competes with that of oil, even when the latter is over $100 per barrel, notwithstanding the cumulative trillions of cubic feet of rhetoric asserting that it can do so as soon as it scales up. The experience of companies like Amyris, which is refocusing its wholly-owned activities on high-margin speciality products, rather than fuel, and of cellulosic dropouts like Range Fuels, reminds us just how hard this will be.