Exxon $600 Million Algae Investment Makes Khosla See Pipe Dream

Inside an industrial warehouse in South San Francisco, California, Harrison Dillon, chief technology officer of startup Solazyme Inc., examines a beaker filled with a brown paste made of sugar cane waste. While the smell brings to mind molasses, this goo, called bagasse, won’t find its way into people-pleasing confections.

Instead, scientists will empty it into 5-gallon metal flasks of algae and water. The algae will gorge on the treat -- filling themselves with fatty oils as they double in size every six hours, Bloomberg Markets magazine reports in its July issue.

Down the hall, past a rainbow of algae strains arrayed in Petri dishes, Chief Executive Officer Jonathan Wolfson shows off a gallon-size bottle of slightly viscous liquid. After drying the algae, wringing out the oil and shipping it to a refinery, this is the prize: diesel fuel that Wolfson says is chemically indistinguishable from its petroleum-based equivalent and which has already powered a Jeep Liberty and a Mercedes Benz sedan.

“We’ve produced tens of thousands of gallons, and by the end of 2010, I hope I can say we’ve produced hundreds of thousands,” Wolfson, 39, says. “In the next two years, we should get the cost down to the $60 to $80-a-barrel range.”

The cover of the July 2010 issue of Bloomberg Markets magazine shows a photo of algae growing in Sapphire Energy's lab in San Diego, on April 13, 2010. Photograph by Charlie Nucci/Bloomberg Markets via Bloomberg Close

The cover of the July 2010 issue of Bloomberg Markets magazine shows a photo of algae... Read More

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The cover of the July 2010 issue of Bloomberg Markets magazine shows a photo of algae growing in Sapphire Energy's lab in San Diego, on April 13, 2010. Photograph by Charlie Nucci/Bloomberg Markets via Bloomberg

At that price, Solazyme’s algae fuel would compete with $80-a-barrel oil.

In Japan, the U.K. and the U.S., green energy advocates and some well-heeled investors are obsessed with perfecting a way to turn the scum that coats ponds, lakes and fish tanks into a substitute for gasoline, jet fuel and diesel.

Huge Payoff?

Algae, mostly single-cell photosynthetic organisms that usually elicit a “yuck,” can yield 30 times more oil than crops such as soy. Algal oil doesn’t need much processing before it can power a car, truck or jet engine, says Matt Carr, a policy director at the Biotechnology Industry Organization, a Washington-based advocate for biotech companies.

Algae have advantages over producers of other so-called biofuels. They don’t compete for land with a crop that feeds people and animals. Corn-based ethanol, the first viable biofuel, produces just two-thirds as much energy as gasoline and corrodes pipelines and car engines, says Anthony Marchese, a mechanical engineering professor at Colorado State University, who is taking part in a $48 million Department of Energy research project.

Supporters say algae overcome these disadvantages while eating twice their weight in carbon dioxide, reducing what some scientists say is a leading cause of global warming.

“The potential payoff is huge,” Carr says.

Gates Jumps In

Microsoft Corp. co-founder Bill Gates and Venrock Associates, the Rockefeller family’s venture capital firm, along with the U.K.’s Wellcome Trust Ltd. and Chicago’s Arch Venture Partners, have poured $100 million into Sapphire Energy Inc., which is trying to produce gasoline from algae.

U.S. President Barack Obama talked up alternative fuels during his 2008 campaign, vowing to push for the country to use 60 billion gallons of advanced biofuels such as algae and cellulosic ethanol made from wood chips or grasses by 2030. The DOE has provided more than $185 million in grants for algal biofuels.

The U.K. government-funded Carbon Trust, which aims to trim carbon emissions, is providing 8 million pounds ($11.7 million) to nine universities for algae research. In Japan, Toyota Motor Corp., the world’s largest carmaker, and oil refiner Idemitsu Kosan Co. may join a research program with the University of Tsukuba, northeast of Tokyo, to turn algae into fuel.

Exxon’s Bet

Exxon Mobil Corp. threw its weight behind algae in July 2009. The oil giant, often a target of environmentalists for dismissing concerns about global warming, is investing $600 million.

Exxon is working with La Jolla, California-based Synthetic Genomics Inc., a company founded by J. Craig Venter, who in 2000 mapped the collection of human genes. Venter’s team is working on changing the genetic code of some algae to make it easier to extract the oil.

“We spent two years evaluating all kinds of biofuels, assessing their scalability, technical challenges, environmental impact and commercial viability,” says Emil Jacobs, Exxon Mobil’s vice president of research and development. “Algae had the best potential,” he says, noting that it doesn’t compete for land with food crops.

Operative Word

Potential is the operative word. No one has produced enough algae fuel commercially to run a family’s SUV, let alone make a dent in the more than 200 billion gallons (760 billion liters) of gasoline, diesel and jet fuel that the U.S. uses every year.

The Carbon Trust is funding research to make 70 billion liters by 2030, equivalent to 6 percent of current global diesel use. To do that, algae ponds would have to cover an area larger than Wales or New Jersey, says Ben Graziano, technology commercialization manager at Carbon Trust.

Algae proponents differ on growing methods. Open ponds, the choice of most researchers, rely on photosynthesis. Algae grow and fill with oil as they use sunlight to convert carbon dioxide into sugar and chemical energy. Ponds, though, can get infested by pesky, low-oil native organisms or become the targets of microscopic aquatic creatures.

Solazyme is trying fermentation, producing its algae without light in metal vats. This requires adding sugar or other feedstock before the algae are dried and the oil extracted.

While people may curse the algae that pop up unbidden in their swimming pools, the organisms are expensive to produce commercially because electricity, water and chemicals all cost money. Today’s estimates range from $400 to $600 to produce one barrel of algae oil.

‘Billions of Dollars’

“It may take billions of dollars to set up the infrastructure,” says John Benemann, a biofuels consultant who worked on a 17-year DOE algae study. Companies would need thousands of acres of ponds, pipes to feed in carbon dioxide and fresh water and a link to refineries.

“I don’t know of an oil company that is quaking in their boots worried about algae,” Benemann says.

Chevron Corp. fits that category. Although the second- largest U.S. oil company has a deal with Solazyme to produce algae fuels and funds university research programs, it doesn’t see algae taking over the world.

“Global energy demand is going to increase 40 percent by 2030,” says Jeffrey Jacobs, vice president of Chevron Technology Ventures. “It is not feasible for biofuels to replace conventional fuels.”

Investments Climb

Silicon Valley pioneer Vinod Khosla is among the biggest investors in green technologies. His Khosla Ventures has bets on cellulosic ethanol company Range Fuels Inc. and LS9 Inc., which designs microbes to produce nonpolluting biofuels.

Khosla says algae fuel is a pipe dream.

“We looked at two dozen algae business plans and have not found one that was a viable plan,” says Khosla, speaking from his Menlo Park, California, office.

Ever since the Organization of Petroleum Exporting Countries shocked the world with embargoes and price increases in the 1970s, companies and investors have searched for fossil- fuel alternatives.

In 1978, with drivers fuming over gasoline lines, the Aquatic Species Program, part of the DOE under President Jimmy Carter, studied making diesel-like fuel from the lipids that algae accumulate in their cells. After 17 years, the group concluded that algae couldn’t compete with oil that then averaged about $20 a barrel. President Bill Clinton closed the program in 1996.

Congressional Mandates

Now, green-energy advocates say climate change makes the quest for petroleum alternatives imperative. In the first quarter of 2010, venture investments in clean energy jumped 83 percent from a year earlier to $1.9 billion, San Francisco- based Cleantech Group LLC says.

“With a focus on global warming, we are seeing investors showing interest in a broad range of clean technologies,” Cleantech President Sheeraz Haji says.

The U.S. Congress wants to speed the switch from fossil fuels. The Energy Independence and Security Act of 2007 calls for refiners to use 36 billion gallons of biofuels in gasoline blends by 2022. That’s triple the current amount, which is mostly in the form of corn-based ethanol. Fifteen billion gallons would be starch-based ethanol, with the rest from sources such as algae and switch grass.

The U.S. military, which accounts for about 80 percent of the federal government’s energy demand, is exploring biofuels after spending more than $20 billion on jet, diesel and other fuels for its fleets in 2008.

Cutting Oil Imports

The Defense Advanced Research Projects Agency, the Pentagon’s venture arm and the outfit that’s credited with developing the Internet, is funding a $35 million research program to find a way to make jet fuel from algae that costs less than $3 a gallon by 2013.

“The attraction of algae is that it fills the need to develop renewable energies and cut foreign oil imports,” says George Santana, director of research at Greener Dawn Corp., a San Diego-based firm that promotes renewable energy. “To replace foreign oil, you need to fill up your tank with biofuels.”

Exxon Mobil says it may take as long as 10 years before any algae biofuel reaches motorists. That hasn’t stopped the company from covering itself in green colors.

Soon after signing the deal with Synthetic Genomics, Exxon ran ads featuring a scientist named Joe Weissman: “We are making a big commitment to finding out just how algae can help meet the fuel demands of the world,” Weissman tells the TV viewer.

‘Pays Off Politically’

While Exxon’s $600 million investment is the largest of its kind in algae, it’s infinitesimal for a company that brought in $301.5 billion in revenue last year and plans to spend $28 billion on oil wells, floating platforms and refineries this year.

“For Exxon, the algae bet pays off politically; it helps their public relations and their image,” says Robert Bryce, author of “Gusher of Lies” (PublicAffairs, 2008), a book about the ethanol industry.

Philip New, who heads the alternative fuels unit at BP Plc, says investments in algae’s potential may never be recouped. BP is investing in ways to make ethanol from sugars, which he says offer greater promise.

“We looked at algae and the numbers do not make economic sense,” New says. “Ours is not a greenwash.”

Exxon spokeswoman Cynthia Bergman says the company’s investment and partnership with Synthetic Genomics show Exxon is serious about algae.

BP’s Oil Spill

BP, which is at the center of a massive oil spill in the Gulf of Mexico, has run ads touting its alternative energy investments. In 2000, the London-based company changed its logo to a green, yellow and white sunburst.

BP has poured $500 million into a joint venture called Tropical Bioenergia SA to produce Brazilian ethanol from sugar cane. It has also invested $112.5 million in Verenium Corp. of Cambridge, Massachusetts, to research producing ethanol from agricultural waste and saw grass.

Netherlands oil giant Royal Dutch Shell Plc has investments in ethanol made from sugar cane. In February, it entered a $12 billion joint venture with Brazil’s Cosan SA Industria & Comercio and plans to produce 5 billion liters a year. (For a story on working conditions in Brazil’s cane fields, see “Ethanol’s Deadly Brew,” November 2007.)

“Second-generation biofuels may take another decade,” says Luis Scoffone, Shell’s vice president of alternative energies. “Cost of production will be a factor in determining which technologies win.”

‘Expensive to Produce’

Even so, Shell hasn’t written off algae. It’s building a research plant with HR BioPetroleum Inc. on Hawaii’s Kona coast near commercial algae farms. Here, oblong ponds grow algae for nutritional supplements such as omega-3 fatty acids and protein powders.

Although advocates say that most algae need only sunlight, carbon dioxide and water -- including saltwater -- to grow, the reality is more complicated. Algae are less productive below 15 degrees Celsius (59 degrees Fahrenheit). In the heat, the organisms require constant refreshing. Most ponds have electric paddles to circulate the algae-filled water.

“Open ponds need a lot of water, a lot of electricity,” says Robert Rapier, chief technology officer at Kamuela, Hawaii- based Mercia International, a bioengineering holding company. “Algae are expensive to produce.”

Enormous Projects

Jason Pyle, CEO of Gates-backed Sapphire Energy in San Diego, says the challenges of algae are like those in farming: increasing yields and protecting crops from pests. Sapphire plans to build a 300-acre (120-hectare) plant in New Mexico, which will be completed in 2013. The company says it’s a first step toward producing 1 billion gallons of diesel and jet fuel by 2025.

“These are large projects and take enormous amounts of time and capital,” Pyle, 38, says.

Not far away, Exxon Mobil is building a research facility at Synthetic Genomics headquarters. By the end of next year, the oil company plans a 10-acre site filled with ponds and clear containers called bioreactors, intended to speed up growth. The key is getting different algae strains to work beyond the lab, Exxon’s Jacobs says. To commercially produce algae-based fuel will require billions of dollars.

“If we can pull it off, it will have a significant impact,” Jacobs says.

Freshman Dreams

About 500 miles to the north, Solazyme cofounders Wolfson and Dillon, 39, are sidestepping the challenges of algae ponds. The pair met in 1989 at Emory University in Atlanta and discovered mutual interests in the outdoors and the environment. During that freshman year, Dillon, who was studying biology, and Wolfson, a political science undergrad, agreed to form a biotech company one day.

That off-the-cuff promise began to take shape in 2003. The two raised money from friends, family, New York-based Harris & Harris Group Inc. and Berkeley, California-based Roda Group and started growing algae in open ponds. They wound up with little to show.

“We tried direct photosynthesis but couldn’t figure out how we were ever going to take it to a commercial scale,” Wolfson says. “There were too many problems.”

The two went back to investors. This time, they focused on algae that grow in the dark, as in swamps. Standing in front of a whiteboard, Wolfson explains the process in layman’s terms:

“We put algae in a tank and feed them sugar, such as sugar cane waste, and they make oil and we take the oil out. There’s a lot of science involved, but it’s a bit like making beer.”

‘Green Sludge’

Every few months, Wolfson’s team mails 10-milliliter vials containing millions of frozen algae cells to one of three plants for fermenting. At the Cherokee Pharmaceuticals LLC site in Riverside, Pennsylvania, which used to make antibiotics and food additives, scientists mix a teaspoonful of algae stock with water, cellulosic waste like the bagasse in Dillon’s beaker and such trace elements as potassium.

The tanks keep the brew at about 30 to 40 degrees Celsius. After a few days, there are enough cells to fill a 75,000-liter fermentation tank. By making modifications that Wolfson declines to discuss, the algae convert the sugar into fatty lipids.

“We end up with a green sludge that has a high percentage of oil content -- over 75 percent,” Wolfson says. He won’t divulge how Solazyme extracts the oil except to say that the sludge goes into standard plant-oil extraction equipment similar to that used for soy or canola oil.

‘Silver Buckshot’

Solazyme, which has raised $76 million from VCs such as New York-based Braemar Energy Ventures and Menlo Park-based Lightspeed Venture Partners, has a contract with the U.S. Navy to provide 1,500 gallons of jet fuel. It also received $8.5 million to deliver 20,000 gallons of fuel for Navy ships.

Wolfson says he needs $150 million to build a commercial plant to produce 100 million gallons a year. He predicts that algal oil will cost $60 to $80 a barrel within 12 to 24 months.

“We don’t have a business in fuel until we are at parity with fossil fuels,” he says. “There is no silver bullet for our problem of replacing fossil fuels; maybe a silver buckshot.”

Fans of algae are betting that the tiny organism can produce giant strides for going green.

To contact the reporter on this story: Kambiz Foroohar at kforoohar@bloomberg.net.

To contact the editor responsible for this story: Michael Serrill at mserrill@bloomberg.net.

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