Investing in Biofuels

Feature Story

Building plants and developing breakthrough technologies require the proper financial commitment

By Keith Reid

The biofuels push is being driven by a variety of factors. There are commercial and industrial pressures, political pressures, ecological activist pressure and the general pressure from the population to simply ‘do something” about our current energy dependence. However, once you move past the push, there has to be a pull from those looking to develop new technologies and production facilities, and that pull requires cold, hard investment capital. FON has asked an expert in this area to comment on a few of the issues facing biofuel investment.

Bernays T. (Buz) Barclay is a partner in the Energy and Power Practice and the Climate Change Practice of the North American business law firm Torys LLP. He founded the Energy Venture Fair conference series, now in its seventh year, and is a member of the Board of Directors of the New York State Environmental Business Association.

FON: There is a lot of buzz currently around all areas of biofuels. Just how strong is the support for biofuel initiatives among politicians?

Barclay: Biofuels enjoy a tremendous amount of interest among policymakers, both the local ones that you would expect and some that you would not expect. The environmental sustainability policy is really originating at the state level across this country. There is some interest at the federal level, certainly, but the states have been taking the lead and not just in California, but also in New York and other states like Minnesota. Not all of the states, but at least 25, certainly, and the states where a lot of people live. The focus has not just been on environmental accountability, but responsible and sustainable investing for the future.

I used to say that the power industry was probably the most important industry in most states because it touches the health and welfare of all citizens, but it turns out that the fuels industry touches everybody – from the farmers and through the rural areas to the city from small commercial operators to the largest industrial operators that use fuel for a myriad of uses.

FON: Aside from agricultural concerns, what other groups are helping promote biofuel initiatives?

Barclay: U.S. automakers have been increasingly and heavily supporting biofuels, and they have been putting their money where their mouth is by developing strategies to help promote the success of the biofuels industry. Aside from the fact that they are in a highly competitive business, they are great business people and great entrepreneurs. They offer their support not only in our state, but across the country, and that is something that is a huge boost to the potential viability of the biofuels industry.

I’ve seen in my career the early attempts to get more ethanol in gasoline as a substitute for lead, along with MTBE. And in each of those cases, you’re basically up against large oil companies who are not chemical companies, and it’s very natural; they would not want to sell chemicals ‘ they want to sell oil. That doesn’t make them bad people, but it’s something that hasn’t been able to be overcome. But when the automakers are looking to develop strategies for their future competitiveness based upon the availability and success of alternative fuels, I think the oil companies will not be far behind. And that’s going to be the case with the Japanese (automakers) and the Koreans and others who want to do business in this incredible American market that we have.

FON: What are potential biofuel producers looking for as they develop their business plans?

Barclay: They are not clamoring for a bunch of federal subsidies or other benefits ‘ not that they wouldn’t be appreciated ‘ but that’s not what we’re hearing at conferences. They’re concerned about trying to develop technology so that they can overcome some of the issues such as the impact of alternative fuels on the delivery system versus petroleum products. We are hearing the need for state support to get past structural issues when you work to build a competitive alternative fuels industry.

FON: How fast is biofuel technology developing today?

Barclay: There is a lot of tech investing going on in the biomass area right now, and that is one of the most intensive areas of work and one where both venture capitalists and some strategic investors are looking at it as a great technology investment. Not dot-com or that type of tech, of course. We have been successful in our practice both here and in Canada, where we have a major tech industry practice in awakening the biotech investors’the guys that usually think in terms of medical devices. We’ve said that biofuels is biotech. There is not so much in the revenue department, so it’s research and development, and that is the way it typically is in the biotech industry. You have a tremendous amount of investment in R&D, and they don’t really know how to invest in a company that has revenues and profits. So, we are getting questions from those types of investors who would like to be involved, and some of them are involved in biotech for reasons other than making enormous amounts of money. They are involved because they think it’s a responsible area of investment. Some of the media in Canada, at least, has picked that up from us.

Bernays T. (Buz) Barclay
FON: Is a reliance on corn and other food crops for the feedstock only a temporary stepping stone in biofuel production?

Barclay: You can’t prove that by me. Being born in Iowa, it’s hard to convince me that there is not enough corn. But on the biomass side, I think that there are a number of emerging technologies coming to us from other industries that are going to be brought into play. We are going to see the real breakthroughs in areas like switch grass and cellulosic biofuels.

It’s very typical that in the early days of R&D you are going to be stuck trying to improve what you’ve got, but the breakthroughs come in from completely different industries. They could come from the steam industry or specialty chemicals. I have a client in Canada that is really focused on what its technology can do in the specialty chemicals business, and I have been saying to them ‘Look, this is a brilliant thing to bring to the biofuels business.’ And they respond by noting that is not what they are aimed at. My response is fine, but maybe we ought to talk to somebody in the biofuels area that can licensure technology and bring it over because it looks incredibly energy-saving? As you approach the azeotrope (a liquid mixture of two or more substances that retains the same composition in the vapor state as in the liquid state when distilled or partially evaporated under a certain pressure), it takes more and more energy to get past it in the chemical process, and there is going to be a breakthrough on it. Whether that comes from something that’s already invented being used in another industry or whether it comes from more R&D in the biofuels industry proper ‘ I don’t know. But there will be a number of breakthroughs and then you’ll have the cellulosic alternative.

FON: Are there any near-term solutions to some of the transportation concerns with various biofuels?

Barclay: One thing that I am seeing is that in some projects they are transporting the corn rather than transporting the ethanol. They bring the corn of the facility that is located in the area where they are going to be using the finished product and use what would be waste products, such as excess steam, and make it available to other industrial processes to keep things more efficient. Because the offtakers (i.e. suppliers and buyers who enter into a long-term purchase agreement) for the product is the hard part, whether it’s corn or ethanol. We did an ethanol project in Ontario where there are very good subsidies for building new ethanol plants, and I still don’t think it would’ve been done except for the fact that a major Canadian petroleum company was willing to buy the output for a long period of time. It wasn’t a huge project and was maybe more of an experiment than anything else because it wasn’t a huge project, but that made a big difference in the finance ability of the project.

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