On October 13, 2011 I paid a visit to Solazyme’s headquarters in San Francisco. For those who are unfamiliar with Solazyme, they produce oil from genetically modified algae. The company was founded in 2003 by two college friends, Jonathan Wolfson and Harrison Dillon. I had previously visited with Dr. Dillon at the 2009 Pacific Rim Summit on Industrial Biotechnology and Bioenergy in Honolulu. Harrison is Solazyme’s Chief Technology Officer, and he filled me in on some of what the company was doing at that time.
This time I was going to have a chance to interview Solazyme CEO Jonathan Wolfson. A lot has happened since that meeting with Harrison in 2009. Solazyme has delivered hundreds of thousands of gallons of algae-based fuel for testing to the U.S. military (which I wrote about here and here). I don’t believe any other algal oil company can make that claim. They also took their company public earlier this year, and raised nearly $227 million with the IPO. Solazyme had also announced that they were diversifying away from a primary focus on fuels and into chemicals, nutritional products, and into skin care products.
How Solazyme’s Process Differs From Common Algae Production
Most algae is commercially produced from either open pond systems or in photobioreactors (PBRs). An open pond system is usually an artificial pond. These often take the form of a raceway system in which water is constantly circulated around the raceway by means of large paddlewheels. Open pond systems are relatively simple, and capital and operating costs are lower than for other algae systems. However there are disadvantages to this approach. Variations in the weather can stunt algal growth. Wild strains of algae can invade and overtake strains that have been developed for high oil yields. Evaporation in closed ponds may necessitate the addition of fresh water to maintain level. Finally, light penetration beneath the surface of the ponds is minimal.
A PBR is a reactor that contains algae, water, and nutrients, but is transparent to allow light to reach the algae. The primary advantage of the PBR is that contaminants are easier to control. Therefore, a high oil-yielding strain of algae could be grown without the likelihood that it will be out-competed by wild strains. The big disadvantage is that capital costs per barrel of oil are prohibitive.
Both open pond systems and PBRs are ultimately limited by the amount of light that can be utilized by the algae. A third algal production system utilizes heterotrophic algae — and that is Solazyme’s approach. These algae must receive nutrients and a supply of food, but are not dependent upon solar energy as is the case with autotrophic algae. Instead of ponds or PBRs, these algae — which have been genetically modified in Solazyme’s case — do their work in industrial fermenters. The conditions in the fermenters can be controlled and changed rapidly as needed, and the algae can produce oil at far greater concentrations than in the other types of reactors.
The interview took place with Jonathan Wolfson, co-founder and CEO of Solazyme, and Jeff Webster, who is Solazyme’s recently hired Chief Operating Officer. Jeff had been recently hired from Tyson, where he was involved with Tyson’s renewable energy efforts. The interview started with a short discussion of the partnership between Tyson and my former employer ConocoPhillips to commercialize a green diesel process. I expressed my annoyance that Congress had effectively killed the project by attempting to pick technology winners (or perhaps by simply caving to the biodiesel lobby).
Jonathan began the discussion of Solazyme by talking about how he and Harrison had first kicked around a number of ideas in the mid-90’s before deciding to try producing hydrogen from algae. He said that Solazyme was ultimately formed from these efforts in a garage, and some of the early ideas — like producing hydrogen — were unsuccessful. To hear Jonathan (and previously Harrison) describe their early work conjured up images in my mind of Bill Gates and Paul Allen, working together to create Microsoft, or Larry Page and Sergey Brin working together to create Google.
After some trial and error, they found an idea that they felt would work: Production of fuel from algae grown in fermenters. They felt that there were a couple of major advantages to doing so. One is that fermenters are hundreds of times more productive than algae grown in open ponds. The second is that the oil concentration in the algae can be pushed to 80%, while in the wild most algae have an oil content below 10%.
The key to the high production is that algae have a logarithmic growth phase in which they rapidly produce biomass but little oil, but when starved of nutrients they shift into an oil production phase. In a fermenter, it is easy to push the growth phase until sufficient biomass has formed and then change conditions to induce the oil production phase. This can be done in two days in a fermenter, but would be much more challenging to accomplish in an open pond system.
I had been under the impression that Solazyme’s algae were producing hydrocarbons, but Jonathan clarified that the algae produce triglycerides, which are a category of lipids. Vegetable oils, such as soybean oil, canola oil, palm oil, and olive oil, are also lipids consisting largely of triglycerides. The figure below, taken from my Renewable Diesel Primer, shows the general form of a triglyceride, used in that example to produce biodiesel and glycerol, a byproduct.
The process that Solazyme uses to make fuel is different from the process shown above. They are using a process like that used in the short-lived COP/Tyson venture, which is to hydrogenate the triglyceride. In the figure above, R1, R2, and R3 refer to hydrocarbon chains. For instance, R1 might be a twelve-carbon chain, which if removed would be a hydrocarbon in the diesel range. This is exactly what the hydrogenation process does – snips off those “R” chains as hydrocarbons which are chemically identical to hydrocarbons found in conventional gasoline or diesel. Hence, the product is superior in performance to biodiesel, which has some properties that limit how much can be blended with conventional diesel. And instead of glycerol, the byproduct of this process is propane.
So the Solazyme process for fuel production involves the production of algae, and they then extract the oil in an old canola facility. The oil is next hydrotreated in a tolling arrangement using UOP hydrotreating technology to remove the oxygen and produce hydrocarbons. (Incidentally, in addition to being a major provider of technology and equipment for the oil industry, UOP is well-positioned to have a key role in both triglyceride to fuel production and pyrolysis oil to fuel production).
Jonathan informed me that their triglycerides can be tailored to have very specific chain lengths without too much variation, and as such they are actually worth more as triglycerides than they would be if they were converted into fuel. Thus, my interpretation is that until they saturate that market they are unlikely to devote the bulk of their efforts to fuel production (and it explains why they diversified into consumer products).
I asked about the scalability of the process, and was told that it is linearly scalable. In other words, a 7-liter fermenter performs at the same rate as a 75,000-liter fermenter. However, when I inquired about building a facility the size of an oil refinery — my example was a billion gallons a year which is equivalent to 65,000 barrels per day (a smallish oil refinery) — I was told that this would not be possible due to logistical issues (an issue I have discussed in relation to cellulosic ethanol). Jonathan felt like a 100 million gallon per year facility might be achievable, which is about the size of a corn ethanol plant.
One potential knock on Solazyme’s process is that they feed sugar to their fermenters. Sugar conjures up inevitable food versus fuel arguments. So one of the things I asked was whether they had any success in using cellulosic feedstocks to produce algal oils. I was told that they have used around 8 different cellulosic feedstocks — such as bagasse and beet pulp — as the source of sugars for their algae. This process is similar to that of cellulosic ethanol; the sugars are released from the cellulose prior to feeding them to the algae.
Regardless of whether cellulosic feedstocks had worked, I don’t view a sugar requirement as a deal breaker. After all, I consider sugarcane ethanol to be a potentially sustainable source of fuel (in tropical locations with ample rainfall) because sugarcane isn’t that hard on the soil and the residue provides heat for the ethanol process. There is the potential with sugarcane ethanol to produce food and fuel, which is an ideal situation. If instead of using yeast to ferment sugar to ethanol, you used algae to ferment sugar to oil, I think that can also be a potentially sustainable way to produce fuel. And in fact, Solazyme has teamed up with Bunge to build a facility in Brazil.
I have long been intrigued by Solazyme’s process. They have demonstrated that they can deliver respectable quantities of oil from algae, and they estimate that they can produce oil in a built-for-purpose commercial plant at below $3.44 a gallon. That isn’t competitive with oil at current prices, but is far below costs cited by other algal oil producers. Diversification into other markets will help to ensure that Solazyme remains in business even if oil prices remain too low for their fuel to be competitive.
So how much is Solazyme worth? In a previous essay, I wrote that I didn’t believe KiOR is a $2 billion company. So is Solazyme a $550 million company (its market cap at the time of this writing)? Solazyme’s closing price on the day of its IPO was $20.71 — which gave it a market cap of over $1 billion — but it presently trades at $9.27. In fairness, this plunge has not been limited to Solazyme; other cleantech companies with IPOs this year like Gevo and Amyris has also seen their values sharply decline in recent months.
On the one hand, I believe that Solazyme will still be in business in ten years. On the other, whether they are a multi-billion dollar company is likely to depend on oil prices. I could be wrong, because I just don’t know about the potential market of the non-fuel businesses that Solazyme recently entered. I don’t know how much they would be worth if their primary market was production of algal oils for cosmetics. Obviously, that is a much smaller market than for transportation fuels, but one that undoubtedly has much higher profit margins.
The bottom line is that I am convinced Solazyme has a workable technology, so from a technical due diligence point of view I believe the company is solid. The market cap is going to be determined in large part by the new markets they are entering, with a strong potential upside if oil prices move sharply higher (or if we continue to subsidize next generation fuels). But before investing in the company, I would want to have a much better understanding of the scale and potential profits of their non-fuel businesses.
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