Butanol Comes on the Scene

Corn Ethanol Gives Up the Throne, Part One

Written by Green Chip Stocks
Posted October 19, 2007 at 8:00AM

On the plane to the Platts Cellulosic Ethanol and 2nd Generation Biofuels Conference in Chicago, I was seated next to a student from North Dakota State University. He was on his way home from an interview in Hagerstown, MD sponsored by the Oshkosh truck company.

I later learned he was a computer engineering major, and that he hoped to design electrical and sensor systems for the trucks manufactured by Oshkosh. Me, being a proponent of clean energy, asked him if he'd looked at any jobs in the renewable sector, as it promises to be an area of fast and sustained growth.

He told me that he had looked, and was actually quite well versed on the topic. You see, in the Midwest, as he said, ethanol is king. And wind isn't too far behind.

In fact, he knew of a few wind turbine manufactures around where he lives and said wind farms are sprouting up all over the place. He also said that as a part-time job while in school, he works as a locomotive mechanic.

Rail, as you may know, is the way most ethanol and ethanol feedstocks are transported, with many production facilities located along major lines. The trains pull right next to the biorefineries and unload thousands of tons of corn. The final product, ethanol, is transported the same way, only in tanker cars instead of grain cars.

I couldn't believe an undergrad student knew more about the renewable energy scene than many of the adults I talk with. At any rate, I was off to discover new investment opportunities and strategies for Green Chip readers. Little did I know that some of my seatmate's insight would also prove relevant throughout the conference.

New Possibilities with Biofuels

If corn ethanol is king, I have a feeling there is about to be coup.

There were a few new technologies discussed at the conference that simply put corn ethanol to shame on multiple fronts.

One of them, which you may have heard of, is biobutanol. This fuel is primarily being developed by Dupont (NYSE: DD) and BP Biofuels (NYSE: BP), and can be fermented from biomass using a process discovered all the way back in 1916.

In fact, the process used to make biobutanol was standard practice until low-cost production of hydrocarbon-based fuels from petroleum became more economical. Now, with the price of oil hovering near $90 a barrel and increased concerned about climate change, biobutanol is once again looking favorable.

I don't want to spend too much time on the science--and I don't pretend to be an expert--but a quick overview is probably in order. Butanol can be made from fossil fuels, but it can also be made from biomass. When made from biomass it is called biobutanol.

Ethanol, as we know it, is produced by fermenting sugars with yeast. In the production of biobutanol, fermentation still occurs, only it's done using a special bacterium instead of yeast.

The problem has been that when using this bacterium, only about 2% final fermentation product is butanol, which must then undergo an energy intensive distillation process to be purified. And there is no point in producing a fuel that takes more energy to create than it possesses. But as the process is improved, logistics are enhanced, and feedstocks are diversified, biobutanol will eventually come onto the scene in a big way. And that's where the promising investment opportunities are going to be.

Benefits of Biobutanol

We'll start with energy content. As my colleague Chris Nelder always says, "Show me the BTUs." So, here they are, on a per gallon basis:

Methanol 83,000 BTUs
84,000 BTUs
110,000 BTUs
115,000 BTUs

That's not too shabby, especially for a non-petroleum energy source.

There are also infrastructure benefits. Unlike traditional ethanol, which cannot use the existing fuel distribution infrastructure, biobutanol can. That's because it is less corrosive and will not separate in the presence of water.

And biobutanol can be used without modification in existing internal combustion engines, allowing it to be blended at any rate with gasoline and essentially eliminating the need for flex-fuel vehicles.

If you're not sold yet, biobutanol can also be blended with diesel, can be produced using either fermentation or gasification, and can be made at existing ethanol plants.

But because it has a similar chemical structure to gasoline, it also burns the same--meaning there are emissions, including carbon dioxide. There is, however, no net gain in carbon emissions because the CO2 emitted when burned is equal to the Co2 absorbed by the feedstocks during growth.

Opportunities in Biobutanol

Just because companies with blue chip status are mainly pursuing this fuel doesn't mean there aren't other ways to profit from it. Although right now, some of the ways to profit during this early stage of biobutanol development may only be through indirect plays.

There are still many challenges to overcome before this fuel can be a commercial success. But if this phenomenon grows the way Susan Ellerbusch, VP of Global Biofuels for BP says it will, you'll want to get in on this thing any way you can.

According to Susan, biobutanol could be being produced at a rate of 195 billion gallons annually by 2030. That much fuel would be enough to displace up to 24% of domestic gas and diesel demand.

For that to happen, $700 billion would have to be invested by 2030. That comes out to $30 billion annually. With that kind of investment, a 100 million gallon plant would be built of retrofitted every 4-5 days. And if you think that's impossible, consider China, where new 500 MW coal plants are being commissioned at the same rate.

So as I see it, the way to play this thing right now is through rail, construction, and biotechnology companies that will be responsible for transportation, the building of plants, and the production of increased yields of energy crops, respectively.

Maybe that young man from the plane should just continue to work on locomotives. He'll certainly have job security as this new wave of biofuels really takes root.

I just got back from the conference, and have not had the time to dig through all the companies and assess the charts and financials. But rest assured, I most certainly will.

In the meantime, check out a chart of rail company CSX Corp. (NYSE: CSX), whose rise the past few years seems to be synchronous with ethanol's. I'd be willing to bet this trend continues in the next few years.

Rail Company

And check out Monsanto Co. (NYSE: MON), who I suspect will also reap the benefits of a new biofuels boom. Along with a few other companies, Monsanto is working with plant genetics to increase harvest yields and drought and frost tolerances in energy crops.

Hot Biotech Company

Make sure to check back next week, when I will unveil additional ways to profit from biobutanol, as well as discuss some of the other opportunities and technologies I discovered during my trip.

Until next time,

nick hodge