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Oil Price Threatens Biofuel Firms

Falling oil prices could cause some alternative-fuel startups to fail.
December 5, 2008

The price of oil has dipped to levels that could be far too low for many advanced-biofuel startups to succeed, especially those that attracted investment this summer, while oil was well above $100 a barrel. Tight credit markets will also make it difficult for advanced biofuel companies to move ahead with plans for scaling up technologies and building commercial-scale production plants.

Attempts at developing alternative fuels in the 1980s largely failed after oil prices plummeted, and the recent drop in oil prices has many concerned that something similar could happen today. On Friday, the price of oil had fallen to $40.81 a barrel, down from a high of $145 in July. Those earlier high oil prices led venture capitalists to invest in many companies that would require high prices of oil to compete, says David Berry, a partner at Flagship Ventures. This summer, he says, “people were very happy to say, ‘We’re targeting $80 a barrel for oil, and we think we’re going to make a ton of money.’”

This September, at the EmTech08 conference, Berry predicted that if oil prices were to fall, many of these companies could fold. His own company, Flagship Ventures, has invested only in biofuel startups whose breakeven requires oil prices of $45 or lower. “When we thought about investments, we said we’re not going to make a single investment in something that has its break-even point above $45 a barrel,” he said, speaking in September. “In that way, we think we can be pretty insensitive to what the price of oil will be over time. If the price of oil falls to $60 or $50, from our perspective, we’re going to sit here and say, this is where we thought things might end up.”

Berry now says, however, that most of the companies that Flagship has invested in will still be able to hit the break-even point with oil prices lower than $45. One of these companies, Boston, MA-based Mascoma, could still make a profit with oil at $20 a barrel, says Bruce Jamerson, Mascoma’s CEO, but only because current government incentives help them compete with gasoline. These include a $1.01 subsidy for every gallon of advanced biofuels, fuels made from nonfood crops, as well as federal regulations that require oil companies to sell certain amounts of advanced biofuels.

In the long term, both Berry and Jamerson think oil prices will be higher. Anticipated production cuts from OPEC would likely keep oil prices above $50, Berry says. “If you look at the price points that OPEC has put pressure on, that has ranged between $50 and $80. And so that gives that range some reasonable set of legs.”

“I don’t think that the oil prices are going to stay this low for a long time,” Jamerson says. “My view is it will probably fluctuate between $75 and $100 a barrel, once we get past the intense part of this downturn.”

Even at those prices, some biofuel startups may be hard pressed to compete. This summer, Berry says, “about $200 to $300 million was going into algae companies. And algae has long been shown to have a break-even point between $90 and $120 per barrel of oil.”

Jamerson is more concerned about tight credit markets than oil prices. Mascoma is still years away from commercial production, so, as with other advanced biofuel companies, today’s prices don’t have an immediate impact. But Mascoma is still working out the financing for a large 40-million-gallon ethanol plant in Kinross, MI. This month, it will start production at a smaller $20-million facility near Utica, NY, that will produce 200,000 gallons of ethanol annually. To save cash, the company recently laid off 10 percent of its employees and is slowing down orders for equipment and decreasing travel budgets.

Jamerson, however, remains optimistic. Concerns about financing are “tempered by increasing optimism about support for renewable fuels from the new Obama administration,” he says. After the current recession, he says, “Advanced biofuels will be one of the first sectors to come back.”

Addendum: Jamerson adds that Mascoma’s ability to compete with oil at $20 a barrel is assuming optimized production 3 to 4 years from now, not initial costs, and it depends on credits for offsetting greenhouse gases. He also says the company could compete at these levels only temporarily, and not if oil prices stayed this low for the long-term.

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