High Prices Creating Brighter Future for Alternate Fuel

Abstract: High oil and gas prices, currently increasing the profits of petroleum producers, may result in more competition down the road as products from alternative fuel developers become more attractive on a cost basis while still carrying a 'green' cachet.

Analysis: High oil and gas prices, while pinching the wallets of millions of North American businesses and consumers, are creating opportunities for companies trying to come up with alternative fuels.

The sector received a boost from President George W. Bush's State of the Union speech last week, where he outlined spending $1.2 billion over five years to develop technology to produce, store, and distribute hydrogen for use in vehicles with fuel cells.

Fuel cells are still hot in Canada, although the buzz among investors has cooled considerably with the three-year decline in tech stocks. Companies such as Vancouver's Ballard Power and Calgary's Global Thermoelectric stand on the leading edge with their respective work in proton exchange membrane and solid oxide fuel cells.

Biomass fuels, usually derived from agricultural or forestry waste, are also attracting attention. Iogen Energy, for example, last year received a C$29 million investment from petroleum giant Royal Dutch/Shell Group.

Privately owned, Ottawa-based Iogen focuses on bioethanol, a high-octane alcohol formed by fermenting sugars found in plant fibers such as wood and straw. The firm's goal is to mass produce bioethanol, which could be blended with gasoline to produce a more environmentally friendly fuel. An earlier investor in Iogen was Petro-Canada, one of the country's largest integrated firms.

Another Canadian company experimenting with biomass took a step forward this week through a new research agreement. DynaMotive Energy Systems, a public company based in Vancouver, will work with the University of British Columbia, the province's largest educational institution, to prove BioOil can fuel lime kilns in the pulp and paper industry. The research will build on experience gained from almost two years of operating a 10-tonnes-per-day pilot plant in a Vancouver suburb.

A thick brown fluid, BioOil is produced through a "fast pyrolysis" process, a patented technology DynaMotive calls BioTherm. On a volumetric basis, BioOil has 55 percent of the energy content of diesel oil and 40 percent by weight.

To describe BioTherm briefly, biomass feedstock is sent into a bubbling fluid-bed reactor, which is heated to from 450° to 500°C with no oxygen. The feedstock is vaporized into gases and char, which are spun through a cyclone where the char is removed. The gases are quenched into BioOil and the noncondensed gases are recirculated to fuel approximately 75 percent of the energy needed by the pyrolysis process.

Depending on the feedstock, conversion yields about 60 to 75 percent BioOil, 15 to 25 percent of pure char (which can be used by the briquette industry), and 15 to 20 percent of noncondensable gases.

The environmental benefits of BioOil are attractive, for a number of reasons. DynaMotive takes a waste product from a renewable resource and turns into a usable fuel. The company says BioOil is carbon dioxide neutral when combusted because plants absorb the gas when growing. But it has no sulfur dioxide emissions when burned and has about half of diesel's nitrogen oxide emissions.

Economics are a harder nut to crack. The firm has set the benchmark at producing BioOil at an equivalent to C$5 per gigajoule. While such a price once would have been totally uneconomic, given that it was only a few years ago that Canadian producers received less than C$2 per gigajoule, it's not far off the C$4.28 per gigajoule that Canadian spot prices have averaged in the new millennium. Many analysts expect spot prices to stay around C$4.75 per gigajoule in 2003 and 2004, unless a war with Iraq causes the North American economy to tank badly, because of declining production and rising consumption.

If the surge in gas prices, which have not gone below C$5 per GJ in Canada since late November, can be sustained, DynaMotive's product is competitively priced--even if the environmental benefits are assigned no publicity or economic value.

The latter point is one that may cause some difficulty for investors when it comes to evaluating DynaMotive's prospects. The U.S. has opted out of the Kyoto protocol while Canada's implementation strategies are, to put it politely, still quite nebulous. The federal government has established an incentive plan to encourage wind power but it generally has left other alternative energy sources twisting in the wind. If either Ottawa or Washington decide down the road to provide incentives to buyers of green fuels, that would significantly enhance the outlook for DynaMotive.

This is not to say the Canadian federal government isn't already helping DynaMotive. The company's ability to draw on almost C$5 million, part of a C$8.3 million technology partnership arranged with Ottawa, is going to be a major source of revenue in 2003. The firm lost US$1.1 million in the three months ended Sept. 30, 2002, the most recent data available, and has no commercial revenue coming in from BioOil.

DynaMotive has found supporters outside of federal politicians and officials. UMA Engineering, a respected Canadian company with more than 1,000 employees and decades of experience in engineering and managing projects, has signed a memorandum of understanding (MOU) to develop commercial pyrolysis facilities based on DynaMotive's technology. And a large United Kingdom finance group, Rotch, has signed an MOU to participate in two joint ventures with the Vancouver-based company.

If DynaMotive and its partners can clear the economic hurdle when scaling up the technology to a commercial plant of 100 tonnes per day, the future of BioOil looks promising. DynaMotive estimates Canada's forestry companies alone produce more than 18 million tonnes of waste per year, with 6 million tonnes either burned or land filled. The waste could be used instead to produce 20 million barrels of BioOil per year.

Now that would truly be unconventional oil production.

Associate Editor: Robin Beckwith