Prior to publishing the previous essay, U.S. Navy Pays Big Bucks for Biofuels, the editor for Consumer Energy Report asked why I didn’t go with a more descriptive title like “U.S. Navy Pays $425 per Gallon for Biofuels.” I told him that the reason I didn’t is that the source clearly said that some of the money was for R&D, and there was really no way to know how much. The information given for the second contract didn’t indicate that there was any R&D money involved, and the calculated price was much lower. Still, I considered that there were some other details of the contract that weren’t public, which is why I just said “Big Bucks” instead of specifying a cost in the title.
To me there were two key takeaways from those contracts. One was that whether the real price the navy is paying for fuel is $425 or $133 or $67 per gallon, the costs are clearly not yet down in the range that some of the hypesters claim. That doesn’t mean they will never get there, but they aren’t there yet. I have seen numerous claims algal fuel at $3 or $2 or even lower per gallon. If that was the case, then the navy wouldn’t need to throw in R&D money to get the fuel they need. They would just contract with the companies who can make it for $3 a gallon.
But the second takeaway was that regardless of what the real price was, Solazyme is actually delivering decent quantities of fuel. As I have written before, their approach is different than most, and I am not betting against them being eventually successful. (Ironically, I have defended their approach at times against some of their critics).
Following the previous essay, I received an e-mail from Solazyme CEO Jonathan Wolfson who wanted to clarify the details around the navy contract. The main takeaway was that because of the R&D focus, the costs weren’t really as high as I (and others have) suggested. He also discussed their approach and some of their milestones (100,000 gallons in 2010 — I am unaware of another algal fuel company that can make this claim).
His e-mail is published in full below, with his permission.
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Hi Robert,
I don’t believe we have met [RR note: That is correct; but I did meet with Solazyme’s President and CTO Harrison Dillon at last year’s Pacific Rim Summit], but I have been reading and enjoying your blog for quite some time. In your most recent post: U.S. Navy Pays Big Bucks for Biofuels, you spend some time commenting on Solazyme’s work with the U.S. Navy and the costs associated with those projects. One of the reasons that I have been a frequent reader of your blog is because of the incredibly sophisticated understanding you have regarding technology viability, scalability and risk assessment. That said, I wanted to take a moment to address your summary paragraph regarding our work with the Navy. You wrote:
“$8.5 million for 20,000 gallons comes to exactly $425/gallon. $200,000 for 1500 gallons is $133/gallon. What does this mean? I believe that it means nobody else could deliver the quantity and quality of fuel the navy was looking for at a cheaper price. Oddly enough, Wolfson is also quoted in that article as saying they “are quite close” to their target of $60 to $80 per barrel. If that’s the case, why is the navy paying hundreds of dollars per gallon for the fuel?”
I wanted to clarify that the $8.5 million contract is actually an R&D contract that also includes a fuel delivery. Since that funding is directed to R&D and includes a delivery of fuel, it is inaccurate to divide the contract price by the number of gallons delivered to get to a dollar per gallon figure (as done above). We also announced a new contract with DoD and the Navy in September following on the heels of the successful delivery of the 20k gallon contract, which is also an R&D contract and includes a delivery of 150,000 gallons of fuel to the Navy. That contract is valued at a little over $10 million, but like the previous contract is not dividable into a per gallon price because of the R&D focus. Even though these contracts include R&D, you should also assume that the actual fuel production cost (which we do not publish), is currently above commercial costs. Based on your writings, I am sure you would understand that currently we are tolling both the fermentation and downstream equipment to do this work. The tolling includes substantial profits for the facility owners, along with higher pricing for raw materials, and the equipment we are using, which was build decades ago to run other processes is not sized appropriately for a true “fuels scale” plant. These realities lead to higher than commercial costs. When I made the comment about being near our target of $60 – $80 dollar per barrel production cost, I was referring to our current productivities and process, running in an appropriately sized fit-for-purpose plant, sited at a feedstock source.
I know you appreciate how difficult it is to try to bring new technology to the world, and unlike many other companies in our space, Solazyme has dedicated many years and many millions of dollars to actually scaling-up our technologies and producing real volumes of “in-spec” fuels. Even in our current limited tolling situation, we will produce over 100,000 gallons of fuel and oil in 2010 and substantially more next year. In fact, I don’t know of other companies in this area that even discuss production volumes.
Solazyme is both a for-profit endeavor and a labor of love, and as I am sure you can guess, our current technology was informed by repeated failures before success. In order to run a company like Solazyme, I need to be an eternal optimist (remembering that Harrison Dillon and I started Solazyme in a garage), but we have also been very pragmatic about hiring the best and brightest scientists/engineers, admitting when we and our science were wrong, and in the process developing a technology that really works, both in scalability and economics. The scalability and large scale production economics have been tested, tested again, retested, then challenged again before being validated by some of the most sophisticated industrial fermentation companies and engineering firms in the world. I realize how competitive and political the energy industry is – but focusing on pre-commercial production costs is misleading.
Thanks again for the blog and keep up the great work.
My best regards,
Jonathan