Will Petrosun's Algae Biodiesel Grow on Investors?

by Tom Konrad Celluslosic Ethanol is all the rage . A less noticed, but significant "Biofuel 2.0" is biofuel based on algae. Follow the Biomass As I have consistently argued (see these recent articles on John Deere , Biogas , Cellulosic Ethanol vs Biomass Electricity , and Renewable or Green Diesel ) the people most likely to make money from biofuel are not the processors and distributors (who compete directly with petroleum or other fossil fuel-based products, and so have little pricing power ), but the producers of feedstock, which, like oil, is in very limited supply, and so they will have pricing power. When it comes to converting sunlight into biomass, algae is the most productive type of plant. According to this chart from Five Star Consultants , Biodiesel from algae has the potential to produce enough fuel to drive a Prius-type car 370,000 miles per acre per year (MAY), compared to 2,000 to 31,000 MAY for conventional biodiesel crops, while ethanol from switchgrass could produce 32,500 MAY. Furthermore, some strains of algae are as much as 40% oil by weight , leading to the hope of a large supply of oil which is much easier to convert into biodiesel than it is to ferment even corn (let alone cellulosic biomass) into ethanol. With an order-of magnitude advantage, it would seem that algae is the green wave of the future, and actually so productive that it could produce enough biomass feedstock for us to continue to drive our SUVs with our current reckless abandon. Theoretically , biodiesel produced from algae appears to be the only feasible solution today for replacing petro-diesel completely... In practice however, biodiesel has not yet been produced on a wide scale from algae, though large scale algae cultivation and biodiesel production appear likely in the near future (4-5 years). - Oilgae.com. Ponds or Reactors? There are two basic approaches to growing algae: open pond and closed reactor. The open pond method, which is what Petrosun Drilling (OTC: PSUD ) recently announced they are pursuing , involves growing the algae in open ponds of water, much like it grows in nature. Open ponds are clearly quite cheap, but they require a reliable supply of water to replenish that lost from evaporation (making them impractical in all but the wettest parts of the country (Petrosun's first farm will be on the Texas coast, and use saltwater, which helps with this problem.) The lack of temperature and weather control can further decrease yields from the theoretical potential. The other problem with open ponds is that it is impossible to keep other types of algae (a.k.a. weeds) out, meaning that high percentages of oil in the final crop will be impossible to attain. This means that biofuel produced from pond algae will require much more extensive processing to be turned into fuel. It's easy to grow pond scum, but turning it into something useful is harder. The other option is the algae bioreactor, one type of which (from Solix biofuels ) was referenced in the chart above. The Solix technology uses closed plastic bags agitated by rollers, has climate control with the use of controlled radiative cooling, and uses concentrated carbon dioxide emissions to enhance algal growth. (The best description of the technology is at Algae @ Work , a company which was started by Solix's former CTO seeking to apply the technology to carbon capture.) To me the bioreactor approach (Solix's technology is only one version) seems most likely to achieve the promise of extremely high yields, and even that is not without problems. Large scale bioreactors are complex systems. As such, they will be expensive and take great efforts to move from the lab to commercial scale. Ken Regelson , the author of the chart above, and he believes that Solix does not have "a prayer of achieving their expected yields per acre" but that he used the number from Solix because he has yet to get authoritative numbers from anyone else. What about Petrosun? I wrote this article because readers wanted to know about Petrosun Drilling (OTC: PSUD ), an oil exploration company that has been promoting their algae biodiesel efforts since September . Other than Petrosun, the only public companies I know of which are seriously looking into algae based biodiesel are large conglomerates: Boeing ( BA ), Chevron ( CVX ), Royal Dutch Shell ( RDS-A ) and Honeywell ( HON ), which can take the long view and have large research budgets to finance their efforts for as long as it takes. If you click through the company names to the news stories, you will note the common theme: These are all research stage projects. Petrosun has not filed even an unaudited quarterly report since March 2007 . Given that it is also promoting exciting technology, I detect the whiff of snake oil salesmen. Although readers are clearly interested in this company, until they begin to file current information, I don't consider it worth my time to investigate further. Petrosun's main product is much more likely to be snake oil than algae oil. Even if Petrosun does execute on its algae farms, will there be any first mover advantage? It seems unlikely to me; growing algae in open saltwater ponds will depend on access to suitable land near coastlines... later entrants who can acquire suitable land should be able to produce algae just as efficiently as Petrosun, since they do not seem to have any special technology or expertise. After all, the company is simply an unsuccessful oil exploration company with a algae farm division. DISCLOSURE: Tom Konrad and/or his clients have positions in these stocks mentioned here: HON. DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here .