The Promise of Algae Fuel Rests on Big Oil

In the world of big oil balance sheets, Exxon’s (s XOM) decision to invest $600 million into an algae fuel deal with startup Synthetic Genomics is kind of like oil finally agreeing to take algae out on a date. While it’s definitely a first step in a relationship, who knows how long they’ll be dating or if they’ll ever get married? When it comes down to making algae fuel cheap enough to produce at a scale on par with petroleum, however, it’s becoming increasingly clear that big oil will play a fundamental role.


During a recent trip to the lab of algae fuel firm Solazyme — one of the leaders in the space, founded in 2003, with almost $80 million in venture capital backing — the startup’s CEO Jonathan Wolfson told us “We will likely commercialize our technology with a big oil partner.” Wolfson added “it’s delusional to think that companies with that amount of scale and trillions of dollars of infrastructure won’t play a key role.”

Solazyme already has a development deal with oil giant Chevron,(s CVX) announced back in January 2008, which likely helped pave the way for the newer deals between Exxon and Synthetic Genomics, as well as BP and algae developer Martek. Wolfson says that he expects Solazyme to be able to commercialize its technology in the 2012-2013 time frame, with a production cost target at $60 to $80 per barrel. The company is looking outside the U.S. — including sites in South America — for its first commercial plant.

At this point, Wolfson says the company can’t yet produce algae fuel at a low enough price to bring it to commercial and petroleum fuel scale — an admission I found pretty refreshing considering a lot of the algae fuel hype in the industry. But Solazyme is darn close to those metrics, says Wolfson. Currently the company is already producing thousands of gallons of algae fuel in pilot phases (see photo) and is in the process of commercializing algae-based goods like cosmetics, soaps and foods.

But of course the key hurdle to scaling up to commercial phase is the sheer cost of building a commercial-scale plant — “over $100 million,” says Wolfson. And given the economic climate over the past year, it’s been very difficult to raise project financing for such risky and expensive projects. That’s one obvious way for an oil company to get involved: put up the commercialization capital. Another way oil companies can aid algae fuel developers is lending their existing infrastructure. Solazyme makes a renewable diesel product that can be used in diesel distribution and pumps, so clearly piggybacking on big oil is a lot less capital intensive way to deliver fuel than building those networks on its own.

Something’s gotta give — despite what all the media attention, eager startups and investors in the algae fuel industry would lead you to believe, there are no companies I’ve heard of that are producing and selling algae fuel at a commercial scale yet. Robert Rapier suggests as much in a piece called Renewable Fuel Pretenders this week, which is similar in theme to my idea of biofuel makers as “chronoptimists,” or someone who constantly underestimates the time it takes to complete a task (chronologically optimistic.)

The devil is in the details for producing algae fuel economically at a commercial scale, and at this point the details are screaming that it’s just way too expensive right now to produce at a similar scale to the petroleum fuel industry’s millions of barrels. If algae fuel is ever going to get to that scale, it’s looking like that big oil will lead the way.