1.1 There are multiple pathways for obtaining either drop-in biofuel or specialty biorenewables, the next step from the now outdated first-gen biofuel production of ethanol or blended fuels. The corrosive nature and the requirements for government regulatory mechanisms to create an artificial market has caused innovators to look at increased premium margins in eating into the lucrative downstream petchem applications.
1.2 Innovation in process flows looks at enabling production efficiency and effectiveness to give competitive advantages, although IPs are still a valuable source of building a competitive business model ala Lanzatech. For investors, it is necessary to validate claims of competitive advantages, as market domination of a particular biogreentech production material gives de facto or de jure standards to a market searching for an alternative to O&G dependence. Securing significant market access is good, and one that is not naturally dependent on an artificially induced market driven by government regulatory mechanisms and subsidies.
1.3 Having said that, at the infancy stage, it is perhaps impossible for alternative biogreentech products to achieve cost parity to that of the fairly established supply chain in using the conventional O&G pathways. Add into the mix possible lowering of costs with newer techniques of fracking for shale gas and the scenarios get a little bit dimmer. Supply side enhancements may keep oil prices within a lesser volatility range from previous decades arising from the changing geopolitical interests of the US. (ie I do expect the US to stop eyeing other oil-producing countries as military chessboards) Previous volatility at peak oil prices provided some impetus to the alternative markets and there will be some weakening of willpower to the 'alternatives' lobby.
1.4 Having said that, the gas 'boom' driven by shale gas may actually assist KIOR, Amyris, Gevo(?) that can utilise cheaper gas to drive its production. Sensitivity may vary, as cost structure stacks up highly for the feedstocks, and the 10&-20% lower variation in gas pricing may not necessarily be an effective game-changer for the alternatives to lower product pricing and maintain much-needed margins.
1.5 Snide remark that it has been over 40 years of renewables lobbying to displace the oil majors, and the domination has been even more entrenched now that the oil majors have added their capacity to absorb variability in oil prices in maintaining supply to economic demand requirements. Won't be easy to displace the oil majors, eh? So, what was that with Shell co-investing in Codexis and then deciding it's no big deal to reprioritise when the macro-drivers change?
2. Regulatory story
2.1 The questions then are: how long and how much will it cost the government to maintain support before the alternatives gain self-sufficiency? Interesting that Bio lobby has bent over in praising the US Congress with whatever they are coming up with in terms of RFS, no matter how uncertain the regulatory outcome will appear.
3. Investing story, and national interests
3.1 How would a small, open economy deal with these changes? Government support should lrgely be based on economic growth driven by enhanced environmental sustainability. But that's too naive. Other economic spinoffs, multipliers need to be formulated before supporting these industries. What of potential benefits to existing corporate ventures, or NOCs?
3.2 It is quite possible that the innovations will continue and will come from the traditional powerhouses say the US due to ability to sustain the early-stage technological breakthroughs. The downside for say Malaysia is how do you then tap into that market while incurring increased risks of currency outflow, potential limited displacement capability wrt O&G downstream industries, feedstock supply and pricing issues and even in the case of Gevo, scaleup technology risks?
3.3 It is quite possible to look at the investments and come to a conclusion that NOCs are the only sort of players able to undertake the huge capacity and financial risks in this sort of venture, leaving the VC/PE investor as the means to access and assess the feasible biogreentech venture for the NOCs to consider.
3.4 Then it comes to what sort of IRRs will make sense, in light of potentially lower or stagnating suppport for these industries. What sort of capacities are required to bring these investments to commercial markets? In the current depressed state of the advanced biofuels share prices due to a lack of direction from the US regulators, shouldn't this be an opportunity to advance using the depressed pricing by averaging down costs, or is this doubling-down potentially giving the investors an even more severe outcome than what it is currently?
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