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Ethanol from Wood Chips—via Termites?

Biotech companies, with the help of grants from the Energy Dept., seek new ways to make biofuel from sources other than corn starch and sugarcane

From Standard & Poor's Equity ResearchCould a solution to the world's energy crisis be found in the guts of a Costa Rican termite? What about in cow manure? Or maybe secreted by a certain species of fungi?

As fanciful as they may seem, these very questions are being researched by a number of biotech companies looking for new ways to make ethanol and other biofuels. What termites, cows, and some fungi have in common is the ability to break down cellulose—made up of long chains of glucose molecules that comprise the bulk of a plant's mass—into simple sugars that can be fermented into ethanol, which is used as a gasoline additive.

Almost all the ethanol made around the world is now derived from either corn starch or sugarcane. That's why many companies are looking for ways to break down cellulose instead. If successful, they would be able to use that technology to lower production costs dramatically—by using items such as corn stalks, wood chips, or even landfill waste—and gain access to a much larger supply of feedstock.

"Corn ethanol, generally, is not considered an attractive long-term opportunity," said Chris Somerville, director of the Energy Biosciences Institute at the University of California-Berkeley, in a February presentation on the future of biofuels. "The emerging opportunity is to convert cellulose to ethanol," he said. "We're beginning to see an infusion of new ideas into the field."

Investors should note these are early-stage, speculative investments. A ready market for ethanol made from cellulose could exist beginning in 2010, when Congress will require the oil industry to begin blending "cellulosic ethanol" into gasoline in rapidly increasing amounts. Many companies—some with the help of grants from the U.S. Energy Dept.—are now working on meeting that demand.

A Proprietary Enzyme

In February, 2008, the Energy Dept. awarded $33.4 million in grants to four companies to further their research into developing enzymes—proteins secreted by every living being that act as catalysts for biological processes—that can break down cellulose into fermentable sugars. Among the winners is Boston-based Verenium (VRNM, recent price $3.39, 3 STARS), which claims to be the first publicly traded company with "end-to-end capabilities" to make cellulosic ethanol. It makes both a proprietary enzyme that converts plant matter to fermentable sugars and owns a demonstration plant (now under construction) designed to produce 1.4 million gallons of ethanol from sugarcane stems and leaves.

Verenium took part in an Energy Dept. study of the Costa Rican termite aimed at shedding light on how termites break down wood into simpler sugars, and has found a promising microbe in cow manure. Verenium is also working on cellulosic ethanol for a consortium of companies led by chemical giant DuPont (DD, $46.83, 3 STARS), which is conducting extensive biofuel research.

Another winner was Copenhagen-based Novozymes, the world's largest maker of industrial enzymes—including some used to make corn ethanol. A scientist from Novozymes recently published a paper reporting encouraging results from the study of Aspergillus fumigatus, a mold spore commonly found in wet hay. This spore is known to secrete a substance that breaks down cellulose. Novozymes expects to begin generating profits from its products for cellulosic ethanol beginning in 2011. Divisions of European chemical makers Royal DSM and Danisco also received grants for developing new enzymes for cellulosic ethanol.

Several other publicly traded companies have won DoE grants related to cellulosic ethanol and are currently building demonstration facilities for their chosen processes.

Bluefire Ethanol got $40 million from the DoE in February, 2007 to help it build a plant on a landfill in southern California that will produce 19 million gallons of ethanol per year from waste using concentrated sulfuric acid. Pacific Ethanol (PEIX, $4.53, 3 STARS), the largest corn ethanol producer in the western U.S., won a $24.3 million Energy Dept. grant to build a cellulosic ethanol facility at its existing ethanol plant in Oregon using a process of steam and added oxygen to pre-treat the biomass. A similar process is being developed by SunOpta (SOY.TO), Canada's largest distributor of natural foods. Alico (ALCO.O), a Florida-based orange and sugarcane grower, won a $33 million Energy Dept. grant for a new plant using yard and agricultural waste.

Using Beetle-Killed Trees

Other grant winners include British Columbia-based Lignol Energy (LEC.V), which got $40 million from the Energy Dept. to build a plant in Colorado that will process waste wood from trees killed by a beetle infestation. Lignol uses a solvent-based pre-treatment to break up cellulose. The plant would be operated by Calgary-based Suncor Energy (SU) and probably located at Suncor's Commerce City (Colo.)-based oil refinery. A unit of Spanish construction company Abengoa (ABGOF.PK) is also building a cellulosic ethanol facility in Kansas with the help of a $76 million Energy Dept. grant. Abengoa is the largest ethanol producer in Europe, and plans to convert corn stalks and other agricultural waste to ethanol.

Eventually, organisms may be developed that can convert cellulose into a better fuel than ethanol, which can be difficult to handle because it absorbs water, and for which there is only a limited infrastructure. "We feel pretty optimistic it's going to be possible to engineer organisms to produce biodiesel and biopetrol—fuels that actually resemble our current fuels that are very high density; efficient fuels for which we have a huge infrastructure," Somerville said.

Scully is a reporter for Standard Poor's Editorial Operations .

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