PULP & PAPER MAGAZINE: Investors focus on opportunities in cellulosic ethanol production

Political and economic forces turn new biofuels into a promising opportunity for the forest products industry

May 2007
By Don Sorenson, James Reed and Dewitt Patterson

For players in the pulp and paper industry, this decade hasn't been filled with the financial returns that support growth. Demand and prices have been stagnant, and we've seen surplus capacity, both in production infrastructure and wood supply. As a result, many of the largest companies in the industry restructured their operations, including continued consolidation, in an effort to reduce cost and increase profitability. Growth in the US market just wasn't there, and in a capital-intensive market, the industry has struggled to attract financial investments.

But political and economic forces have united to bring a new kind of opportunity to the US forest industries in the form of cellulosic ethanol. In the US, we consume more than 140 billion gal/yr of gasoline. While corn to ethanol production has the potential to increase to more than 15 billion gal/yr, it will only replace a small percentage of the total gasoline demand. Cellulosic ethanol will be produced from non-food feedstocks, and it has the potential to displace more than 30% of the US domestic gasoline consumption.

For many months now, the potential to turn cellulosic ethanol into an economically viable industry has attracted hundreds of millions of dollars in investments from a wide variety of venture capitalists, government agencies and new research programs. More than 20 companies have been formed to explore opportunities in various pieces of the cellulosic ethanol marketplace, and the field has attracted funding from such investors as Vinod Khosla, a founder of Sun Microsystems, who now heads his own venture firm, Khosla Ventures.

And one of the biggest proponents is the president of the US. President George W. Bush said in his 2007 State of the Union address that he had set a goal of reducing gasoline use in the US "by 20% in the next 10 years." And when he concluded the energy-related section of his speech by declaring, "We must continue investing in new methods of producing ethanol, using everything from wood chips, to grasses, to agricultural wastes," he turned the brightest possible spotlight on cellulosic ethanol.

Big money was already moving toward this opportunity. And now, so is big government. The next few years will see a furious race to turn cellulosic ethanol into a great investment. These developments offer the forest products industry the kind of new opportunity it hasn't seen in decades.

Before President Bush declared the beginning of his "Twenty in Ten Initiative" in January, the US Department of Energy (DOE) had already set a goal of meeting 30% of the nation's gasoline demand with "biofuels, primarily ethanol," by the year 2030. To meet this goal of 30% by 2030, we'll need around 45 billion gallons of ethanol per year. Cellulosic ethanol from non-food feedstocks will attract political and financial support that will surpass other forms of ethanol in the near future. Conventional wisdom simply says: "Stay out of the food-to-ethanol debate."

Cellulose Must Pay Its Way Out of the Woods

Cellulose is nothing new to the pulp and paper industry. Cellulose is defined as the fibrous, woody and inedible portions of plant matter or biomass. It is in everything from grass and sawdust (forest residuals and waste products) to wheat straw and soybean hulls (agricultural residuals and waste products). It is even found in industrial and municipal solid waste streams.

The Forest Products Laboratory in Madison, WI, a branch of the US Department of Agriculture's Forest Service, is looking at cellulosic ethanol as a way to address another practical need: thinning forests to prevent the outbreak of wildfires.

"A lot of that biomass is in small trees, too small to do anything with, and species that aren't very good for products. So part of our focus is to figure out what to do with that material so it can pay its way out of the woods," said the lab's director, Chris Risbrudt, in a February interview with the Wisconsin State Journal. "That's one reason we spent $1.3 billion fighting forest fires (last) year in the Forest Service; because nature is trying to remove that biomass and get back to the amount it should have. If we thin it to prevent or reduce the impacts of wildfire, it costs us $1,000 per acre because we're not making many products out of that stuff. We're trying to figure out how to make products out of that so we can reduce the cost of thinning national forests down to zero."

Opportunities, Advantages, and Threats

For the forest products industry, some of the possible business opportunities that should be available for consideration are:

1. Co-locate an ethanol facility with an existing paper mill to sell utility services and purchase residual lignin for boiler fuel
2. Co-locate an ethanol facility with an existing pulp mill to reduce recovery-boiler loading and increase pulp production
3. Redevelop scuttled pulp mill assets and restart as a new business

The industry could also see advantages in adoption of such technology as follows:

1. Brownfield development should be lower cost than other cellulosic sites
2. Could provide improved steam and power balances
3. May increase raw material supplier's efficiency and reduce cost per ton
4. Could improve the integrated asset's financial performance

Despite these advantages, threats to this business opportunity do exist, including:

1. Could increase or create volatility in wood-resource pricing
2. Ethanol selling prices are susceptible to gasoline price volatility
3. New ethanol conversion technology may reduce margins

Investments Public and Private

Whether the demand is coming from consumers or government legislation, money is following it. And some of the investors, particularly Khosla, are publicly declaring that their investments are part of a broader moral and political crusade to wean America from its dependence on foreign oil. In January, Khosla posted an entry on his blog that began, "To win the war on terror, we must first stop funding terrorists with our oil money. Let's instead use our money to fund a war on oil."

To win that war, Khosla continues, "We need cellulosic biofuels." His investments in more than a half-dozen companies working on cellulosic ethanol suggest that he is willing to put his money on the biofuels market.

More recently, such private investments have been followed by government grants. In late February, US Energy Secretary Samuel Bodman announced that DOE will invest up to $385 million in six biorefinery projects over the next four years. Those projects "when fully operational ... are expected to produce more than 130 million gallons of cellulosic ethanol per year," according to the DOE's press release about the grants.

"These biorefineries will play a critical role in helping to bring cellulosic ethanol to market, and teaching us how we can produce it in a more cost effective manner," Bodman said of the grant recipients. "Ultimately, success in producing inexpensive cellulosic ethanol could be a key to eliminating our nation's addiction to oil. By relying on American ingenuity and on American farmers for fuel, we will enhance our nation's energy and economic security."

State governments have looked at cellulosic ethanol as a vehicle for economic development. One of the recipients of the February DOE grants is a company called Range Fuels Inc (funded in part by Khosla Ventures), which announced in early February that it would build a cellulosic ethanol plant in Soperton, GA, a small town surrounded by the pine forests common to southeastern Georgia.

Jill Stuckey, director of alternative fuels for the Georgia Environmental Facilities Authority, told The Atlanta Journal-Constitution after the announcement: "We have 24 million acres of forests -- that's a lot of feedstock for cellulosic ethanol and a climate suitable for other feedstocks. The potential is huge. It will just take a little time."

It seems clear that it won't be long before every state with significant forest acreage gets in on the act.

Figure 1 - Cellulosic ethanol has long-term advantages over ethanols using feedstocks like corn.

The Role of the Forest Products Industries

The fact remains, however, that cellulosic ethanol is for now more expensive to produce than corn ethanol. This could change fairly quickly, though, if the right resources are applied to the problem. The forest products industries can and should play a significant role in driving the needed technological advances that would make cellulosic ethanol economically viable.

Major paper producers are already forming partnerships and exploring solutions. International Paper is a major supporter of a research project at the State University of New York's College of Environmental Science and Forestry, which came up with a new process to remove the polysaccharide xylan from wood to produce ethanol.

And engineering firms such as AMEC, which has a long history of working with the forest industries, are working hard to find ways to drop the production costs of cellulosic ethanol. In February, AMEC broke ground on a cellulosic ethanol demonstration plant owned by one of its clients, Celunol Corp (which in mid-February announced a planned merger with Diversa Corp) in Jennings, LA. AMEC is providing both engineering and construction management support on the plant.

The leaders of Celunol, which, like Range Fuels, is funded in part by Khosla Ventures, believe this demonstration facility will produce the answers needed to take cellulosic ethanol production into the realm of economic feasibility.

"It has become clear that we need to look to new feedstocks and technologies to increase the sources of supply of ethanol to meet the nation's rising demand for clean automotive fuel," Carlos Riva, Celunol's president and CEO, said during the groundbreaking. "The pilot plant we have inaugurated here illustrates the technical feasibility of producing ethanol on a high-yield basis from low-cost crops and agricultural residues. We expect that the demonstration facility we are constructing will validate the economics of this process on a much larger scale. We believe that a successful demonstration here in Jennings will mark the last major step before the full-scale commercialization of this exciting new technology can begin."

It's clear that cellulosic ethanol has long-term advantages over grain-based ethanol. Every new technological innovation improves yields and brings costs down. Many of those technological breakthroughs have come from new companies such as Celunol. But it's equally clear that existing forest products companies have a role to play. They have the surplus capacity and infrastructure that can be put to use in an emerging and potentially quite profitable marketplace.

Many of our best colleges and universities have ongoing research programs to develop the optimum feedstocks and technologies required to lower the conversion cost to compete with the price of gasoline. The term "energy crop" will soon become part of discussions with local growers as they migrate to the higher-yield raw materials. The cost of a gallon of ethanol made from cellulosic material could eventually be lower than a gallon of ethanol made from corn or gasoline from a barrel of oil. The further development and deployment of the cellulosic material to ethanol in large production facilities have the potential to provide significant supply to the E85 (a motor fuel blend of 85% ethanol and 15% gasoline) pumps that are now in place at more than 1,000 gas stations across the US.

If there was ever a time to act, it's now. The political and economic stars have aligned behind cellulosic ethanol. With the right partnerships between forest industry companies, technology providers and engineers, cellulosic ethanol can have a positive effect on the economic prospects of the pulp and paper industry.

And, ultimately, on America's dependence on foreign oil.

DON SORENSON is vice president, consulting and technology, power, forest and infrastructure; JAMES REED is business manager, biofuels; DEWITT PATTERSON is commercial manager, engineering and project management, AMEC, Atlanta, GA.

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