Oil price predictions are all over the map. So, how are biobased businesses coping when no one quite knows what’s up with the incumbent?
Amyris, Cellerate and Propel Fuels are three ventures showing the way(s) forward.
If you think oil prices are on a rollercoaster this year, consider the world of oil price predictions.
In January, Moody’s projected an oil price rally to $80 by year end. In February, Citigroup forecast an oil price drop to $20 a barrel and ‘the end of OPEC”. In March, CNBC personality and Gartman Letter author Dennis Gartman projected $15 a barrel oil this year. In April, the Energy Information Administration projected that an Iranian nuclear deal could cause a fall of $5-$15 a barrel in oil prices. In May, the EIA projected 2016 Brent Crude at $60 and 2017 at $70. Meanwhile, the July futures quote for Brent crude closed at $63.80 today.
All of which reminds us of screenwriter William Goldman’s admonition about Hollywood that “nobody knows anything.”
Or, as our candidate for “most interesting thinker in the financial markets”, Salient Partners’ Ben Evans, who pens a twice-monthly letter, Epsilon Theory, wrote last week in “Sometimes a Cigar is Just a Cigar”:
We need more predictions about the Fed or oil prices like we need an asteroid to crash into the Earth. What we need is an investment and allocation STRATEGY for whatever comes down the pike.
So, what exactly are industrial biotech companies doing about a world of $80 oil, or $60, or $20, or $15. Let’s highlight three trends.
Amyris: Changing outcomes via the product mix
At some stage, Amyris’ Obercommand compared the $12/gallon near-term production price of farnesene and the oil price outlook and, ahem, revised their fuel-centric strategy. The result has been a proliferation of new-product JVs and joint development agreements, one of which we highlighted yesterday with news on base oils from Novvi, a JV of Amyris and Cosan aimed at the lubricants market.
This week, Amyris will officially launched its Biossance brand, bringing the company directly to consumers for the first time in a new product strategy reminscent of Solazyme’s success with its Algenist line of products sold via QVC, Sephora stores and elsewhere.
Amyris’ lead Biossance product, the Revitalizer, is a moisturizer that will be sold exclusively at Biossance.com. Amyris CEO John Melo touts that “We’ve experienced strong sales from our private launch and have received very positive consumer feedback from our early consumer testing where 600 women were introduced to the concept and 151 women used the product.” He noted that 92% liked the product after trial, 73% would buy the product after trying it, 70% thought it is better than products they typically buy, and 78% would tell their friends and family about it.
In a promising development, Amyris is hooking up with three beauty, fitness, and wellness experts − Candice Kumai, Vicky Vlachonis and Nitika Chopra — for a customized 30-day challenge on July 1st called the Embodied Project. Details are a little sketchy at present, the the tie-in with Kumai (Iron Chef America), Vlachonis (Goop.com, Women’s Health Magazine) and Chopra (host of the talk show, “Naturally Beautiful” on Z Living) — well, that’s a welcome development in the transition from the long-held industry strategy of letting everyone else do the talking about the new products of the advanced bioeconomy.
Melo says that “The goal of this program is to create brand awareness among our target consumers, build a community of health-minded consumers wishing to try the product, drive word of mouth referral, and establish positive consumer experience reflecting our core company values.”
Cellerate: Changing outcomes at the processing plant
At some stage, a group of industry executives looked at the (great tasting, less filling) balance sheets around the renewable fuels industry, saw a series of $100-$300 million price tags for greenfield cellulosic biofuels projects, and thought there might be a market for a much more “capital-light” strategy for getting advanced fuels into production.
Along those lines, last year Syngenta and Quad City Corn Processors formed Cellerate, tipped as “a revolutionary new technology that can be added to an existing ethanol plant to help ethanol plants convert corn kernel fiber into cellulosic ethanol.”
The data is promising that Cellerate packs a triple punch for the bottom line.
Specifically, according to QCCP CEO Delayne Johnson, the technology can enable plants to increase production by up to 6 percent, increase the protein content of dried distillers grains to as much as 40 percent and increase total yield of distillers corn oil up to 1.6 pounds per bushel.
“The biofuels industry now has the technology available to create 2 billion gallons of cellulosic ethanol – all from the same kernel of corn,” Johnson added. “The combination of Cellerate and Enogen corn enzyme technology is allowing us to produce advanced and cellulosic ethanol that qualifies for D3 RINs while decreasing natural gas usage, increasing ethanol throughput and reducing energy consumption. QCCP is proud to be one of the first companies to issue D3 RINs. We look forward to higher D3 RIN requirements as new production comes on.”
Propel Fuels: Changing outcomes at the pump
At some stage, industry noted that E85 ethanol was being described as a “failed fuel” in oil lobby circles because average per-outlet sales were running 3,000 gallons per month. Keep in mind that the average gas station distributes something like 120,000 gallons per month, according to the Association for Convenience and Fuel Retailing. That’s about a 2.5% share at the pump.
Now, premium fuel and mid-grade aren’t huge winners, either, representing 6.1 percent and 8.9 percent, respectively — and the share has been falling consistently for the past 20 years.
Propel and the State of California took a new approach — the world’s #3-ranked fuel market (after the “rest of the United States” and China) has been growing and growing in E85 sales. Primarily by having renewable fuel specialists do the selling. Propel, as a matter of fact, has 70 percent market share for E85 in the Golden State.
Result? California sales have grown from 43,500 gallons per year per outlet in 2006 to 140,585 in 2014. That’s just shy of 12,000 gallons per month, or a 10% share at the pump taken against the national per-store sales average. Beating out both mid-grade and premium.
Propel’s results? According to this white paper, Propel is doing three times the California average, or around 35,000 gallons per outlet per month.
So let’s re-cap, visually, by calculating these per-store E85 sales against the average per-store sales for gasoline. (Note: the NACS figures are based on a national average, not based on a store-by-store comparison — so use these for illustration purposes, actual share at the pump could vary based on the actual per-store sales of given outlets).
Here’s the per-store market share for business as usual.
Here’s the per-store market share for California as usual.
Here’s the per-store market share for Propel as usual. And they say a picture is worth 1,000 words.
The Bottom line
Renewable technologies developers are discovering three lessons to compete with low-cost oil.
1. Don’t compete against lower-cost oil, or higher-cost oil. Compete against always-cost oil, because oil is always going to cost too little, or too much, for someone else’s idea about how you will find a market. which is to say “compete against carbon”. The customer who chooses to focus on carbon cost, which is to say the entire product experience, instead of commodity cost, that’s your customer. The price-taker isn’t your customer, but he or she isn’t Nike’s, Apple’s, or Starbucks’ either — to name some good companies to keep company with.
2. Keep the entry price low. You never know who might become a customer.
3. Don’t trust anyone from the old economy to sell your new bioeconomy product.