KiOR starts making biofuel, but future still iffy

KiOR passes a key hurdle as its Mississippi plant begins producing biofuel – a cellulosic gasoline. But plenty of pitfalls lie ahead before KiOR's cellulosic gasoline is successful commercially. 

Last month KiOR announced the start of production of biocrude from its Columbus, Miss. KiOR CEO Fred Cannon stated in an earnings call that when the product shipped it would be "the world's first cellulosic gasoline and diesel fuel products." While I can immediately think of at least four other companies who previously made cellulosic diesel and/or gasoline – Choren, Rentech, Envergent, and  Community Power Corporation – we can forgive Mr. Cannon for this oversight in his excitement.

Some readers may recall that a year ago I argued that KiOR's then $2 billion market capitalization was much too high based on the technical risks, the value of competing companies, and the fact that ultimately it was more like an oil refiner than a high-tech company.

Since that column was published, the market cap of KiOR has plunged to $636 million. But now that production has begun, I have been asked several times whether my opinion of KiOR has changed.

Bear in mind that my view was never that KiOR had an unworkable or unscalable technology (although a number of incorrect or misleading facts about the company's process were widely reported). But my view was that they still had a very rough path to commercialization, and their value a year ago reflected the irrational exuberance that existed across the sector. I still believe that KiOR's odds for long-term success are long, but they have hired competent people to give them the best chance of making it.

 
Initial production is an important milestone, but other important milestones are ahead. Many pitfalls await, and most companies in this space will fail to navigate them. But their technology is legitimate. Further, the Department of Energy forecast earlier this year that while the current cost to produce gasoline from pyrolysis oil is well above the cost to produce gasoline from petroleum, by 2017 the cost of pyrolysis-based gasoline is projected to fall to $2.32/gallon.
 
Biofuels Digest reported that KiOR's projected production cost upon scale-up in 2013 would be $5.95/gallon. Further projections are that as they proceed up the learning curve and scale further that the cost of production would fall to $3.73 per gallon in 2014, and then to $2.62 per gallon at full-scale.

The company faces risks around biomass costs, natural gas costs (a very important input which becomes clear when one notices that reported fuel outputs of 11 million gallons per year have much greater energy content than the reported wood inputs of 500 bone dry tons per day), and their ability to raise additional funds that will be required for continued scale-up.

As a result, I think KiOR's share price will continue to be volatile. In the short term, continued incentives for 2nd generations biofuels will help ease their burn rate. But as long as government support of 2nd generation biofuels remains after the fiscal cliff dust settles, KiOR has a realistic chance of crossing the Valley of Death and becoming a company that could maintain a viable business.

– This article is a modified version of a story in Energy Trends Insider, a free subscriber-only newsletter that identifies and analyzes financial trends in the energy sector. It's published by Consumer Energy Report.