DuPont bets on billion-dollar ethanol industry

Source: By Karl Baker, The Delaware New Journal • Posted: Monday, August 31, 2015

Scientists at the DuPont Experimental Station have developed a new fuel that could soon replace ethanol at gas pumps and bring in billions of dollars.

And now, with a patent dispute settled, DuPont and its partner BP can focus on convincing ethanol plants to convert to producing its product, bio-butanol, and take a big share of the more-than-$20 billion U.S. ethanol market.

DuPont and BP have spent 11 years and hundreds of millions of dollars on the project, in which they tinkered with the genes of yeast and created a new oil-producing organism.

The result is a company called Butamax Advanced Biofuels, which owns the bio-butanol-producing yeast patents. The new fuel is filled with 25 percent more energy-per-gallon than ethanol, but unlike its biofuel cousin does not have the potential to harm a engine’s fuel system in a damp environment.

“Eventually, we see biobutanol replacing ethanol in the gasoline market,” said Jan Koninckx, global biofuels director at DuPont. “DuPont and BP’s benefit comes through Butamax.”

But to get it to a gas station, Butamax needs to convince ethanol producers that the higher BTUs of biobutanol would translate into more profits than ethanol provides. Enough that they will invest millions of dollars to convert their plants.

“The basic concept that we’re commercializing is offering ethanol producers the opportunity to become (bio)butanol producers,” said Paul Beckwith, CEO of Butamax.

Biobutanol is produced when the sugars of a plant are fermented in the bowels of yeast. Like its biofuel cousin, the result can be mixed with gasoline, said Beckwith, and satisfies the government-mandated renewable fuel standard.

It “gives you the benefits that ethanol creates, it’s a renewable product,” said Adam Schubert, strategy and regulatory affairs manager at Butamax. “But it does it in a form that works better in cars.”

Beckwith, a former vice president at BP, said his scientists first determined that the idea could make money in 2008, when their miniscule oil producers began to transform plant matter into fuel with little loss of its mostly corn-based raw material, he said.

“The reason DuPont was the right partner for BP was because of that biotechnology capability that sits here in Wilmington,” said Beckwith. “We’re the pioneers of this technology, the process for producing bio-based isobutanol was invented by DuPont.”

That last point, though, has been fiercely contested in recent years.

Since 2011, much of Butamax’s cash has been used to fund a brutal paternity fight, of sorts. Butamax and its rival, Gevo Inc. of Colorado, had been engaged in a patent dispute, with more than 30 cases filed in federal court. Each company accused the other of pilfering the patents of their proprietary genes.

“Gevo and Butamax were bleeding each other dry with their relentless lawsuits,” said Pavel Molchanov, an energy analyst at Raymond James in Houston.

The latest chapter of the fight was set to play out in a Wilmington courtroom, this week, but on Monday, Butamax announced a resolution.

The companies reached a settlement that would allow “both to develop markets for butanol without crossing paths,” said Schubert. He would not disclose whether any sum of money was part of the agreement, but said that the company’s goal of pumping its biofuel into gas stations by the end of 2017 remained intact.

“It is a wise thing for them to work together,” said Molchanov. “This agreement puts an end to the legal fees.”

According to the details of the settlement, Butamax will receive a royalty if Gevo, or a facility that uses its oil-producing organisms, sells bio-butanol for the production of “on-road” gasoline or for chemical applications. Butamax, or Butamax-licensed biofuel producers, will pay Gevo if its bio-butanol is used in jet fuel or marine gasoline.

“We’re happy with the outcome of the settlement,” Schubert said.

DuPont’s Butamax investment comes at a time when it is searching for a home run. After successfully defending itself from activist investor Nelson Peltz’s attempt to join DuPont’s board, the company has been wounded by disappointing earnings and allegations of a poor safety record.

The company’s sales have dropped 11 percent in the second quarter from the same period in 2014. In addition, four of DuPont’s six businesses posted earnings decreases during the quarter.

Jim Butkiewicz, chair of the University of Delaware’s economics department, said the company’s last big hit was its Stainmaster carpet fibers, a product unveiled in 1986.

“It’s been a while since they’ve had a big success story,” he said. “They need to get back to higher value-add products. It would go a long way to diminishing the recent criticism.”

DuPont has traditionally focused on chemicals and fibers, but has recently expanded its presence in the biotechnology market. The shift, however, may not immediately impact the company’s bottom line.

“Any new product development may take a quite a while before you start seeing its effect on earnings,” Butkiweicz said.

In defense of motors

Joe Crowley, of Port Penn, knows engines, in his day job he is an auto mechanic.

Earlier this month, he and his daughter were launching his skiff in his hometown to drop crab pots onto the muddy bottom of Delaware Bay.

His outboard motor chugged and sputtered as he turned the key at the center steering station of his open-topped boat.

“It gums up real easy,” he said. “It didn’t happen before” ethanol came into existence.

With the 10 percent ethanol mix in gasoline, his fuel “goes bad” faster than it should, Crowley said. It is best to drain the gas out of the fuel line and the tank, he said, if the engine won’t be run for long periods of time.

In the winter “I got to make sure all of the gas is out of there. I didn’t do that on my RV, and now I got to replace my [fuel] injectors,” he said. “In your car, you use it every day, you burn it right out so it’s gone and you just fill it up once again.”

If biobutanol avoids this problem, Crowley said, he’d be glad to try it out.

After a few more engine revolutions powered by the starter, Crowley’s motor rumbled to life, and he swiftly backed the boat away from the dock and toward the open expanse of Delaware Bay.

Crowley’s assessment is in line with the National Marine Manufacturers Association. In June, that organization published an endorsement of the new fuel after a five-year evaluation of a 16 percent biobutanol-to-gasoline mix in marine engines.

“Biobutanol does not phase separate in the presence of water like ethanol,” the NMMA said in a press release. “An engine won’t run on the ethanol solution, which sinks to the bottom of the tank and is highly corrosive.”

The NMMA is worried that a law mandating that 36 billion gallons of renewable fuel be blended with gasoline by 2022, will mean high concentrations of ethanol in gasoline. Biobutanol could supply the necessary liquid fuel for those future standards, the release said.

“It is important to find fuel sources that are not only renewable but also safe for all engines and consumers who may use them.”

Worth the cost of conversion?

Before Butamax or Gevo microbes can supply fuel for the maritime, airplane or vehicle markets, they need to demonstrate that biobutanol can be produced on a large scale, say industry analysts.

“The tech works great with beakers in a laboratory,” said Jerrod Kitts, a biofuel analyst at the Linn Group in Chicago.

Butamax has invested “hundreds of millions” of dollars in the development of biobutanol, since 2004, said Schubert. But millions more are needed to transform the production line of an existing commercial ethanol facility. Butamax has sold a biobutanol license to a plant in Lamberton, Minnesota, Schubert said, and that facility could be the first to convert its operations from ethanol to biobutanol.

But whether Butamax’s commercial origins are in Lamberton or elsewhere, initial success is critical. Butamax can only hope for most ethanol producers to convert their facilities if they see another operating successfully, Schubert said.

“Before someone’s going to buy a license from us and retrofit their own plant, they’re going to want to see the technology at commercial scale first,” he said.

The Minnesota plant has a “theoretical” capacity to produce 44 million gallons of biobutanol, Schubert said, and its conversion would cost “a fraction” of the roughly $110 million price tag to build a similar ethanol plant.

Kitts is skeptical the technology can make fuel in the competitive biofuel market. He points to a similar Gevo-owned plant, also in Minnesota, that has seen less than stellar results.

“They had to shift some of their biobutanol production to ethanol” to remain financially solvent, he said.

The problem, said Kitt, is that biobutanol costs more than ethanol, and oil companies that are creating full blends are reluctant to increase their costs, even if it means more energy will come out of a gallon of fuel.

“It’s a desirable product if they can get the costs down,” he said.

Oil refineries pay about $1.45 per gallon for ethanol today. They would pay 15 percent more for biobutanol, Beckwith said, noting that it packs more energy.

Acquiring the cash to convert future ethanol plants might be a challenge as outside investors are cooling on the technology, said Kitt. That can be disastrous for any new product that has yet to find a steady market. For Gevo, a publicly-traded company, investor apathy would make it challenging to raise money by issuing new stock.

Butamax could be vulnerable too, Molchanov said. BP has divested $10 billion from many of its non-core business operations, including biofuels, during the past year, he said, as its cash flows dropped alongside oil prices.

“The industry is going into a very challenging phase as we reset to a lower price environment,” the company said in its 2014 annual report, published last February.

A barrel of oil sold for less than $40 during the previous week, its lowest price since 2009.

“BP, until the past year, was willing to invest in the development of biofuels,” Molchanov said. Now, “oil companies have to find ways to cut costs.”

From his vantage point, Beckwith said he hasn’t seen any shift in the oil giant’s commitment to bio-butanol.

“BP is still very much committed to Butamax, as far as I know,” he said.

Kitts said that Butamax is certainly on a more solid foothold than Gevo, as it doesn’t have to negotiate the ebb and flow of the equity market, and because they have a Delaware behemoth supporting them.

“Butamax shouldn’t have capital issues” he said, “because it has DuPont behind it.”

When asked whether the recent settlement between the companies could mean an upcoming DuPont purchase of Gevo and its patents, Kitt said that a buyout would make sense. Gevo’s stock price dropped 99 percent since a peak in 2011.

The details of the settlement, Kitt said “create two pieces that fit together well.”