Algae Bloom

REVIEW SUMMARY
Company. Algenol Biofuels
Industry. Alternative energy
Key. Building refineries takes time and millions of dollars.

Algenol Biofuels has been in business for five years.

Total sales to date: $0.

At first blush, Algenol's story appears to be typical of the “green” environmentalist hype that's sucked in millions of dollars from investors and government with dreams of displacing fossil fuels. Countless “green energy” companies have come and gone over the decades, the victims of exuberant claims.

But Algenol's founder and CEO, Paul Woods, is no neophyte when it comes to building energy companies. The 49-year-old entrepreneur retired to Bonita Springs after he built and sold two energy companies in his native Canada. The first was Alliance Gas Management in Toronto, which Woods took public in 1997 when annual revenues hit $100 million. The second was United Gas Management, a $75 million company he sold in 2000.

Today, Woods continues to move ahead with plans to build a refining company headquartered in Bonita Springs that will use algae to generate ethanol for 85 cents per gallon, or about half the cost of petroleum today.

Big money is backing his efforts. Woods says an undisclosed Asian energy company recently pledged $100 million for Algenol to build out a 30-acre test facility in Bonita Springs in south Lee County. If the facility is as successful as Woods says it will be, that company might license the technology to build four large-scale facilities at a total cost of $3.4 billion.

Woods and his partners, including a Mexican heir to the Corona beer family, already have invested $70 million into Algenol. They've landed $10 million in incentives from Lee County and another $25 million grant from the federal government. Valero Energy Corp. is a partner.

Woods isn't deterred by the fact that Algenol might not start making sales until 2013 because he says it takes years and huge financial resources to build refineries. Frozen capital markets and the federal government's uncertain energy policies have hampered his efforts, he says.

But the recent $100 million investment by the Asian energy company in Algenol and the successful $200 million initial public stock offering by competitor Solazyme are encouraging. “We're building value, and one day we'll want to be paid,” Woods says. “An exit, or maybe a partial exit, within two to three years would be nice.”

Raising green money
The details of Algenol's ethanol-from-algae production are secret, but the company's facility is essentially a farm where algae grow outdoors in sealed containers. Water and carbon dioxide are pumped into the containers, which are made of clear plastic to let sunlight to come through. The algae grow inside these containers, converting carbon dioxide to ethanol. The ethanol is then sucked out of these sealed greenhouses and shipped to distributors.

But to finish building out the 30-acre Bonita Springs test facility, Woods needed another $50 million. When he started pitching the investment to U.S. institutional investors last year, he found them to be surprisingly difficult. He suspects that it wasn't so much about Algenol's technology as it was concern about the global economic outlook. “They just wanted to nickel and dime you,” Woods says. “They'd say: 'How about we give you a quarter of it?' They're afraid to spend money.”

Then, an Asian energy company offered to make a $100 million investment, double what Woods was asking for. Although he says he was disappointed that they weren't American investors, Woods says he wasn't about to turn the Asians away. “Hell, yes, I'm going to take that,” he says.

Woods says the Asian investor asked to remain confidential because the company doesn't want publicity about its investment. “Almost all of it is going to be spent here,” Woods says.

If Algenol can produce ethanol for 85 cents a gallon on a commercial scale at the Bonita Springs facility when it's built out at the end of 2012, the Asian investor may build four new refineries at a cost of $3.4 billion. “They think they can make it 10 cents cheaper,” Woods says. “It's all predicated on us meeting productivity goals.”

For example, Woods says Algenol can produce 4,000 gallons of ethanol per acre, compared with 400 gallons per acre of ethanol from corn. “We're 10 times as efficient,” he says. Once a full-scale facility is built, Woods says it could pay for itself in a year.

Besides ethanol, Woods says Algenol is exploring using the technology to make plastics. Still, he's cautious about getting sidetracked by other uses. “We don't want to green wash the business,” he says.

Woods says he considered going the route of the initial public offering, but preferred the private route because he only has to answer to a handful of investors. Rival Solazyme recently raised more than $200 million in the public market.

Woods took Alliance Gas Management in Canada public in 1997, but he notes that securities regulations make IPOs difficult. “It is a ginormous pain in the ass,” he says. Plus, he says the new Asian investor has the balance sheet to invest in future plants, eliminating the need to raise more capital. “I don't have to go back to the market,” he says.

Still, Woods says he's frustrated that he couldn't persuade American investors to back his enterprise. “I'm embarrassed for Americans,” he says.

Some of that cautiousness by American investors may be due to the gold-rush aspects of the biofuels industry, according to industry analysts. “Algae's ultimate threat is over-hype,” writes McKinnon Lawrence, an analyst for Pike Research, a firm that tracks clean technologies, in a recent report on the industry. “The industry has been both bolstered and hurt by scale-up claims derived from ideal laboratory conditions. It lacks the metrics and large-scale projects to substantiate claims.”

Not waiting for Washington
Woods says Algenol's success isn't dependent on Washington's subsidies or energy policies, though he says he wants a level playing field with petroleum companies. That's because Algenol's ethanol facilities could be built anywhere in the world and would still be competitive with petroleum even accounting for transportation costs, all things being equal.

For example, if it can produce ethanol in the Sonoran Desert of Mexico, as it plans to one day, Algenol could ship the fuel to California for about a penny per gallon.

But Woods says persuading investors to build ethanol plants in the U.S. without knowing which way the political winds blow is impossible. “There's no way I'm going to get the money to build facilities in this country,” he says.

Woods gets agitated when he discusses the challenges of building a refinery in the U.S., something that hasn't been done since the 1970s. “Do we really want them built outside the U.S.?” he asks. “Do we really want to keep giving money to the Saudis?”

Woods says he used to lobby for Algenol and his industry in Washington frequently, often finding a receptive ear with U.S. Sen. Bill Nelson (D-Fla.). But Woods says he hasn't traveled to the Capitol in two years. “It's just a high-school food fight,” Woods says. “It's so partisan.”