Alas, today I had intended to put up my book review of Amanda Little’s book Power Trip, but I left the book on my desk in the office and I need to review some notes first. So that should be posted for my Thursday column. If you haven’t noticed, I have fallen into a pattern of putting up a new column each Monday and Thursday. Because there is always a lot going on in energy, I generally have three or four decent choices for these new columns.
This week, I was sent a guest column on nuclear power called Fukushima a stake through nuclear industry’s heart. I had initially decided to run it, but had a change of heart. The reasons are that I think the tone of the essay invites hostile responses. It is also extremely anti-nuclear, and I don’t want this blog to become known as an anti-nuclear blog. To be honest, I have had many of the same thoughts as the author since Fukushima — that is to say that I think this is going to be a devastating blow for the nuclear industry — but I still want this blog to be a place that we can debate the issue free of hostility and hyperbole. So, I decided that a link to the essay would suffice.
Then there are always short stories that are perfect for our Energy Ticker, but which might be a stretch as the basis for a column. So I decided to pluck some of the more interesting stories of the past few days and write some commentary on those. The themes I will cover below are Solazyme’s IPO, booming E85 sales, a story that predicts $5 gasoline for this summer, and a new breakthrough in the generation of hydrogen from ethanol that stuck me as humorous.
Thoughts on Solazyme
Solazyme Inc., the developer of oil products from genetically modified algae, jumped 15 percent in its first day of trading on increasing demand for renewable sources of fuel and specialty chemicals.
The company rose $2.71 to $20.17 in Nasdaq Stock Market trading, after being priced late last night at $18. South San Francisco, California-based Solazyme sold 10.975 million shares, raising $197.6 million, according to a regulatory filing.
The demand validates the technology used to convert organic material into biofuels and specialty chemicals, said Pavel Molchanov, an analyst for Raymond James & Associates Inc.
“The science in their process works,” Molchanov said today in a telephone interview.
I would disagree with Mr. Molchanov that the demand validates the technology. We have seen plenty of demand that was based more on hope and hype for any number of technologies, and we have seen many companies rise to extremely high valuations, only to come plummeting back to earth. However, I do agree with his last statement. The science works. One thing that distinguishes Solazyme from many other companies in this sector is they have produced significant quantities of renewable hydrocarbons — reportedly 100,000 gallons in 2010.
I have written about Solazyme here a number of times, going back over two years. At the Pacific Rim Summit in Honolulu in 2009, I sat down for a visit with Solazyme’s President and CTO Harrison Dillon and got to ask him a number of questions about Solazyme. Over time I have developed a favorable view of their approach; it makes sense on many levels and avoids many of the challenges of conventional algal fuel production attempts.
Critics will respond that their fermentation approach is sugar-based, and sugar requires land and therefore also sets up competition with food. My response to that is that sugarcane offers many income opportunities to farmers in developing countries, and as is the case with ethanol production one doesn’t have to necessarily use the refined sugar. When I visited an ethanol plant in India in 2008, they extracted and produced sugar for sale, and then used the leftover molasses as the feedstock for the ethanol plant.
I believe this is the sort of model for future biofuel production. It is an income source for farmers, and can produce food and fuel without heavy reliance on fossil fuel inputs. I have long been on record in support of the sugarcane ethanol model, primarily because it isn’t heavily reliant on fossil fuels. I think Solazyme’s model could work in exactly the same way (except hydrocarbons are easier to separate from water than is ethanol). The biggest questions will be whether they can get the production costs of the fuel down, as well as whether there are limits to the scalabilty of the process. On the costs, their recent movement into other consumer products will help spread out the capital and operating costs so that they aren’t borne solely by the fuel.
There are reports that Solazyme can now produce fuel for $3.44 a gallon. I remain skeptical on that front, and have yet to see that number in context. I wouldn’t be surprised to learn that this is a projection for their oil, which still must be refined into fuel. However, if they can produce fuel at that price eventually — and they have good IP protection around their process — the company could be grossly undervalued at present.
E85 Sales on the Rise
As the price of gasoline climbed by 90 cents per gallon during the first quarter, sales of cheaper E85 ethanol blend rose by 27 percent during the same period over the fourth quarter of 2010, the Iowa Renewable Fuels Association said.
According to the Iowa Department of Revenue, sales of E85 by Iowa retailers reached 2,645,038 gallons during the first three months of this year. Compared with the first quarter of 2010, E85 sales were up 64 percent in 2011.
In addition to Solazyme’s approach, I believe E85 in the Midwest can provide a sustainable model for future biofuel production. On the other hand, E85 that is exported far from the source of production? Not so much, for reasons I detailed in E85 Case Study: Iowa.
Per the story above, E85 sales reached 2.645 million gallons in the first quarter. On an annualized basis, that would amount to 10.6 million gallons. However, Iowa uses 1.6 billion gallons of gasoline annually — 150 times the level of their E85 consumption. Thus, my contention is that there is an enormous potential market in the Midwest that has barely been tapped. So instead of trying to spend billions on a pipeline to move that ethanol out of the region, it would be a far more sensible energy policy to promote E85 demand in the Midwest. It would be far easier and less expensive to build out E85 infrastructure in the Midwest than to attempt to make the entire country compatible with E15 or E20.
Let’s first conquer the Midwest, then we can worry about exporting ethanol out of the area.
$5 Gas This Summer?
Goldman Sachs’ crystal ball is proclaiming that oil will soon soar to $135 a barrel, and likely have service stations jacking up fuel prices to $5 a gallon in New York just like the summer of 2008 that preceded the recession.
Indeed, analysts say Goldman and the other oil trading giant that also has the might to move prices, JPMorgan Chase, have already placed their energy bets for the summer. JPMorgan predicts oil hitting $130 a barrel in the coming weeks.
On this, I disagree. You can mark me down as one who does not believe fuel prices — except in perhaps isolated incidents — will hit $5 this summer. I was asked about this on a radio station just over a month ago; whether I thought the claims of $5 to $6 gasoline this summer had any chance of materializing. That week (April 26th), West Texas Intermediate traded at $113 a barrel. I responded to the question that I thought oil at that price and under current market conditions was in a speculative bubble, and I expected oil and gasoline prices to correct down before summer. In fact, $113 turned out to be the most recent peak for WTI, which has since corrected back down to under $100 a barrel.
However, there are lots of things that could change that equation in a hurry. A hurricane in the Gulf of Mexico or additional instability in the Middle East could easily run oil prices up to $130 a barrel. However, I don’t believe under the current market fundamentals that is likely to happen this summer. It will happen, just not yet. I think this is the nature of the oil markets in these times of tight supply and demand. Oil races ahead of itself, driven in part by speculation. Then a correction comes, and oil is driven down (sometimes quickly again, with the help of speculators). Important to note that when oil hit $147 a barrel in the summer of 2008, Goldman Sachs’ crystal ball said we were headed to $200 a barrel. I said at that time that oil had gotten ahead of itself. By years’s end it had plummeted into the $30’s.
Hydrogen from Ethanol
The amount of hydrogen and energy generated depends on the amount of catalyst used and the area exposed to solar radiation. Researchers have generated up to 5 litres of hydrogen per kilogram of catalyst in one minute. If 9 kg of catalyst were put in an ethanol tank and exposed to sunlight and the hydrogen generated were used to power a fuel cell, 3 kW of electricity would be obtained, an amount similar to that which is used in a home.
I had a chuckle when a reader recently sent me this story. Scientists have taken ethanol and used it to produce hydrogen. That’s academically interesting, but by no means the first time it was been done. The reason the story made me chuckle is that the way most ethanol is produced today relies heavily on natural gas. Most hydrogen in the world today is produced via natural gas through a hydrogen reforming process. So instead of natural gas to hydrogen, this breakthrough would be natural gas to ethanol to hydrogen. That led me to jokingly respond “What’s next? Scientists Create Ethanol From Hydrogen They Created From Ethanol?” Someone is probably working on the grant proposal right now…