The Best Peak Oil Investments, Part V: Algae

In part I of this series on Peak Oil investments, I looked at Biofuels and Biochemicals as a substitute for petroleum based transportation fuels and chemicals.  I concluded that the best such investments were investments in biofuel feedstocks, but one such feedstock I didn't mention was algae.  

The Promise of Algae

If you need to own your own feedstock to be a profitable biofuel company, you can either grow it, or make use of the waste from some other economic activity.   The potential of biofuel from waste is inherently limited by the waste currently produced, and the amount of available waste is likely to fall over time as the economy becomes more resource-efficient because of rising commodity prices.  While I think compaines that control waste streams care good investment opportunities, waste is inherently limited when it comes to replacing oil.  It's the very limitation of waste as a resource that makes it a good investment.

If you grow your feedstock on good agricultural land, you will be giving up the opportunity to produce valuable food.  If you grow hardy non-food crops on marginal land, you will probably have very low yields.  For instance, Jatropha has long been heralded as a non-food crop that can produce oil for biodiesel on marginal land, but the best Jatropha yeilds are produced on well-drained soil with ample fertilizer and rainfall or irrigation.  Since most arable land and available water are already in use, the potential for additional biofuel production from conventional crops is limited.

Many observers herald biofuel from algae as a way to thread this needle.  Algae grown in open ponds is likely to produce 5,000-10,000 gallons of oil per acre per year, while companies using bioreactors have made claims approaching 10 million gallons per acre.   The higher-end claims for algae in bioreactors are either pure fantasy, or would require vertical farms with artificial light, but a 100,000 gallons per acre per year (1/100th of the high-end claims) is generally considered achievable.  For comparison, Zeachem is aiming for 2,000 gallons of ethanol per acre of sugarcane per year, one of the most productive conventional biofuel crops.  Corn produces less than 500 gallons of ethanol per acre per year.

The potential of a hundred times improvement in fuel yields over conventional crops keeps people excited about algae.  On paper, such yeilds would allow algae to replace oil in our economy.  Actually achieving these yields is tricky.  Open ponds have problems with contamination by wild algae, and evaporate enormous amounts of water into the atmosphere.  They also need to be fed with carbon dioxide and nutrients to achieve good yields, without so much stirring that the algae (which prefer still water) are disturbed.  Bioreactors help solve the contamination and water evaporation problems, and can allow more surface area for light absorption and algal growth.  But bioreactors cost much more than open ponds, and require more maintainance and attention to keep them at the proper temperatures and light levels.  Like open ponds, they need to be fed CO2 and micronutrients to achieve optimal growth without creating too much turbulence for the algae to grow.
Yes, But

One of the greatest dangers for Alternative Energy investors is confusing great technological potential with great investment potential.  I recently argued that solar stocks are not a good long term investment because of extreme competition and a rapidly evolving technology.  The same arguments apply to algae companies, most importantly the the point about rapidly evolving technology.  While solar technology got its start in the 60s and 70s, algae research began only in the 1990s.  We still don't know what sort of bioreactors will end up being economic, which types of algae will work best, and what the best ways to extract the oil from the algae will be.  This is an extremely immature technology, and as such, it is unlikely to be a profitable sector for investors in public companies.  With over 200 startups working on algae, only four of which are public (see below), the most likely winners are private companies.   Many of the winners have not even been incoprorated yet. 

That said, I think that bioreactor companies will probably dominate the industry over the long term.  In the short term, open ponds probably have an advantage, because they require less technological development and lower capital cost, but their long term potential is limited compared to bioreactors.  Open ponds are only practical in areas with abundant water, and these locations will likely be suitable for other forms of farming.   High-productivity algae farms will need to be located near a source of carbon dioxide, such as a power plant, and be in sunny locations.  These conditions will probably favor the bioreactors, which can be located in dry, sunny locations. 

Stocks

Here's a quick list of the publicly traded companies I know of that are working on algae, and what they do:

Green Star Products, Inc. (GSPI.PK).  Green Star's primary business seems to be selling continuous flow biodiesel reactor technology.  This is not a great business because it's currently hard to sell biodiesel for more than the cost of the inputs needed to make it.  They have also developed a formulation of micronutrients that they think are excellent for increasing the productivity of certain algae strains.

OriginOil, Inc. (OOIL.OB). Origin has developed a process using electromagnetic fields to extract oil from living algae without killing the cell.  If they can make it work at reasonable cost, this technology should be a real boon to the industry.  Unfortunately, the company is losing money hand over fist, and does not have revenues or cash to speak of.  Since the company will have to keep raising new money from investors for the foreseeable future, the stock will almost certainly continue to fall until it can begin to fund its operations internally.

PetroAlgae, (PALG.OB). PetroAlgae is attempting to commercialize an open pond "microcrop" technology (they are working with other small aquatic plants such as duckweed as well as algae.)  Yields will likely be relatively low for algae because they do not add carbon dioxide to the process, and they will have to cope with large water losses from evaporation.  Like OriginOil, PetroAlgae has no revenues and will need to raise money soon to continue operations.  On March 5, the company privately sold stock at $8 per share, despite the fact that its shares are currently trading for around $22 on the open market.  I can't imagine why the stock has climbed since it went public in 2008 at around $3.  If you can find shares to borrow, this looks like a stock to short.

PetroSun Inc. (PSUD.PK).  Back in September 2007, PetroSun made a splash as the first public company to try to commercialize algae for biofuel.    I was skeptical at the time, and said so in March 2008.  My skepticism now seems justified, since now their website has a couple mentions of algae, but the catfish farms they converted into algae farms in 2009 are not mentioned, and their only projects and prospects are traditional oil and gas projects.  The stock is down to $0.045 from $0.16 since I panned it in 2008.

Conclusion

Algae has great promise for producing liquid fuels in sufficient quantity to replace petroleum, and it can do so without using excessive water or farmland.  That potential, however, is fairly far off.  The technology is capital intensive and far from commercialization, a combination almost certain to make investors in the public stocks poorer rather than richer.  If and when fuel made from algae is available in significant quantity to make a dent in our thirst for fossil fuels, it will probably have been developed by companies that public investors cannot currently buy.  Stock market investors should wait until this industry matures from its current infancy to something closer to adolescence.  Buyers of the current batch of infant companies are likely to suffer the fate of other new parents: many sleepless nights.