ALTERNATIVE FUELS - THE STATE OF THE INDUSTRY

Again, welcome to our inaugural issue. We hope you’ll find this and subsequent issues valuable and informative.

Juice has been in development for almost five years now. Initially our intent was to cover the whole vast field of alternative energy, but, given its expanding scope and complexity, that seemed ultimately unwise. From our present perspective, the category of alternative fuels appears sufficiently vast and daunting to absorb all of our editorial efforts for the foreseeable future. So why alt-fuels, and why now?

A lot of the answers to these questions and a lot of what we’re about can be gleaned from the extensive primers on this Website as well as from our editorial calendar. And if one requires even a modicum of expertise in this area, a reading of those same primers is a good way to acquire it. But for those who are impatient, we can provide two very good reasons here as to why alternative fuels are important today and why they will become vitally important tomorrow.

Declining Fossil Fuel Reserves

Of course, fossil fuel reserves have been declining from the moment they were first tapped, but today we’re reaching the point where the production levels as opposed to the total reserves in the ground are apt to decline shortly for at least two such resources, conventional oil and conventional natural gas. Since demand for these fuels is not declining, and indeed ramping ever upward, the need for substitutes will become acute—we believe, within a few years. The alternative fuels industry will attempt to fill the gap.

Global Climate Change

The scientific consensus is that concentrations of carbon dioxide are increasing in the atmosphere, and that that increase is responsible for the indisputable rise in air temperatures we are experiencing. Obviously, there are dissenters, but this is the scientific consensus. We believe that this consensus along with the increasing amount of evidence supporting it will eventually prompt efforts on the part of governments to limit CO2 emissions. Such constraints will favor many though not all purveyors of alternative fuels.

Our Alternative Fuels Universe

We strive for inclusiveness in our approach to the industry because without it we cannot provide valid competitive intelligence. Someone who is making biodiesel, for example, should know what the gas-to-liquids people are doing and vice versa. Someone seeking to harvest oil shale should know what the tar-sand folks are about. The end user markets are ultimately the same for all liquid, gaseous, and solid fuels regardless of their origin or the processes used to produce them. Units of energy are units of energy, and the price per unit of energy is the major determinant in the marketability of both alternative and conventional fuels. To be sure, other factors enter into the attractiveness of any particular fuel—combustion characteristics, lubricity, emissions, engine deposits, ease of storage, toxicity, etc., but pricing is paramount.

Very generally, alternative fuels may be divided into those produced from unconventional fossil fuel sources and those derived from biomass. One also has mixtures of the two as well as fuels synthesized directly from the elements, but these two key categories obtain across most of the range of available products.

Some alternative fuels such as liquid petroleum gas, and, to a lesser extent, methanol, have been well established within niche markets for years. Most of the others are at best emergent rather than well established. Biodiesel and ethanol appear to be the best positioned for building their respective markets today, with synfuel from natural gas experiencing rapid growth as well. All of the other candidates, including butanol, mixed alcohols, bio-gas, pyrolysis oil, bio-synfuel, DME, and so on, either have fairly limited presence in the market today or virtually none at all. At the same time, none of these other contenders can be discounted entirely because the processes for producing them are still evolving and may eventually reach the point of cost competitiveness with conventional fossil fuels.

Even the better established alternatives, for the most part, are only on the cusp competitiveness today, and that, coupled with lack of comprehensive distribution networks and difficulties in using the fuels in conventional power plants, hold these alternatives back.

Alternative fuels play in many different markets including transportation, heating, and electrical generation, in other words, in most of the same markets currently occupied by conventional fossil fuels. Of those markets, two, transportation and electrical generation, are paramount. Transportation is currently a very difficult market to call since several alternative fuels are vying for acceptance including methanol, ethanol, heavy alcohols, synfuel, di-methyl ether, liquid petroleum gas, and hydrogen. In large-scale electrical generation, on the other hand, we see only a few insurgents on the horizon, namely syngas, unconventional natural gas, and waste coal.

The Role of the Incumbents

Established producers of fossil fuels might be expected to exhibit foursquare opposition to alternative fuels. The reality, however, is much more complicated than that, and incumbent attitudes, as well varying from company to company, tend to differ according to what segment of the industry they occupy.

The larger petroleum companies, for the most part, have some involvement in alternative fuels. Shell, British Petroleum, and Chevron-Texaco have been particularly active in setting up alternative energy divisions and acquiring intellectual property in this area. Exxon-Mobil, almost alone among the majors, has exhibited official hostility toward alternative energy, but even that company has embraced alternatives to the extent of advocating on-board hydrogen reformers as the automotive technology of the future.

The large plant engineering companies, such as Aker Kvaerner, Haldor Topsoe, Halliburton, Uhde High Pressure Technologies, Mitsubishi Heavy Industries, and Mahler Advanced Gas Systems, who currently play major roles in the petroleum and chemical production industries, can, by and large, already claim projects and products devoted to alternative fuels of one sort or another. With so much construction of alternative fuels plant facilities taking place all over the world, it pays to get a piece of the action, and so the majors are now very committed.

Many large chemical companies, including Archer Daniel Midland, Monsanto, Cargill, and Dow, are now very active in alternative fuels production and/or research. This trend will continue into the future.

Coal companies are perhaps the most enthusiastic of the incumbents toward the prospect of increased use of alternative fuels. Coal is by far the most abundant conventional fossil fuel resource, and currently stands as the largest single energy source for generating electricity, but, at the same time, utilities using coal fired generators have come under increasing pressure to lower their emissions of green house gases and local pollutants. A move toward coal gasification and the use of syngas in lieu of powdered coal would go a long way in deflecting such criticism.

The coal industry also relishes the prospect of entering the liquid fuels business with coal derivatives. The technologies for producing such derivatives are fairly mature, and the economic case for using them is stronger than ever now.

The transportation industry appears to be ambivalent toward alternative fuels. In the past the auto manufacturers have effused and enthused over hydrogen, but the depth of their commitment toward this problematic fuel is uncertain. Aircraft, marine, and railway manufacturers have generally been lukewarm toward alternatives as have makers of motorcycles and scooters.

The Financial Community

Most of the larger investment banks and venture capital firms have energy divisions today, and often alternative energy sections within those divisions. They’re also numerous venture firms that specialize in alternative energy investment.

Investments in alternative fuel companies and projects are now in the billions per annum and will increase rapidly in the years to come, but the amount of capital going into the industry may prove inadequate to support the kind of expansion that is needed to make the alternatives mainstream. Alternative fuels production plants must generally be large to be economically viable, and large means capitalization in the tens if not hundreds of millions of dollars per individual plant. In the special area of coal based synfuel, which we deem one of the most promising industry segments, investments of upwards of one billion dollars appear to be required to launch plants capable of competing with petroleum refineries.

Entrepreneurial Endeavors

The most exciting and encouraging aspect of alternative fuels today is the large amount of entrepreneurial activity occurring within it. We have identified hundreds of recently founded companies engaged in the production of fuels or feedstocks, or, alternately, offering manufacturing equipment, engineered biological agents, intellectual property in regard to processing, or plant engineering expertise. Collectively they represent a startling range of technologies and product niches, and thus an extensive range of business opportunities as well. While we believe that, as in most industries, the majority of alternative energy startups will fail, we also believe that the industry will be marked by a diversity of fuel sources in the future.

We’re also seeing a major push to develop new fuel crops in order to expand the production of biofuels. This will be one of the more interesting areas to watch, because the economics of many of the new crops remain unproven.

The Governmental Dimension

Almost all governments today heavily regulate combustible fuels, and such governmental involvement is apt to increase in the future. Not only will governments be under increasing pressure to abate greenhouse gas emissions, they will also be urged to foster the development of alternatives as conventional fossil fuel sources become more constrained. We believe that the correct public/private sector model has still to evolve and that until it does so, the industry will remain immature.

Corporate Consumers

Alternative fuels currently power many private fleets in order to receive carbon credits in various forms. Such credits do not represent real market forces or a groundswell of corporate acceptance of alternative fuels. Alternative fuels manufacturers ultimately must compete on the basis of price, and, at such time as they can, the growth of the industry could become explosive.

The Attitudes of the Public

The public at large will ultimately determine the fate of the alternative fuels industry. While public concern about global warming has been growing throughout the developed world, a strong consumer market for alternatives has yet to emerge, and we are not seeing forthright public support for governmental policies that would encourage such a market to develop.

Generally, the biodiesel segment has come the closest to developing a real marketing campaign on behalf of its products, but the focus on purely environmental benefits tends to be limiting. We believe that really successful marketing approaches will first appear in small niche or boutique markets and only gradually extend to larger market segments.

Expanding Alt Fuels Universe

The one near certainty regarding the alternative fuels space is that it will continue to grow very rapidly. The current surge is not a false start as were premature efforts of the seventies and eighties. But it is rather too soon to pick winners and losers among the many competitors crowding the market today.