Wednesday, July 1, 2009

A cleantech revival? Or bubble?

Recently Bill Luby at VIX and More highlighted the revival of the cleantech group, at least relative to oil & gas energy stocks. Paul Kedrosky also pointed out that a United Nations Energy Programme report indicated that renewable energy investment (at $140 billion ) had surpassed fossil fuel investment (at $110 billion) in 2008.

Are these signs of a cleantech revival? Or bubble?

Algae as a case study
To answer that question, I would like to tell you the story of an email I received from a friend, who is an enthusiastic supporter of algae as a readily available alternative to petroleum-based energy sources.

To be sure, algae oil does have promise as an alternative fuel source. It can be grown relatively easily. Scalability and resource utilization is less of an issue when compared other biofuels. It can be relatively energy efficient.

Anyway, my friend emailed me this announcement and he breathlessly added that this may be the antidote to any potential Peak Oil problems. In part, the announcement read that a company called Algenol Biofuels was announcing a algae to ethanol solution, using sunlight and seawater. The company also stated:

[It] will produce ethanol at a rate of over 6,000 gallons per acre per year.

Doing some back of the envelope calculations, this comes to 16.4 gallons per acre per day. Assuming that they put together a 10,000 acre facility, this amounts to 164K gallons per day. There are 42 gallons in a barrel, but a barrel of oil produces about 23 gallons of gasoline. Using the 23 gal/bbl equivalent, a 10,000 acre facility produces about 7K barrel gasoline-equivalent from this technology.

Epsilon production
7,000 barrels a day of production wouldn’t even show up on the map of oil production. It’s what quants call epsilon, the miniscule error term that appears at the end of many equations.

Even if the company was to put together a very large parcel of land of 500,000 acres, which is roughly the size of the State of Maine, and they had sufficient access to seawater, this would amount to about 360K of barrel equivalent of oil production per day. While that represents a very large find (let’s remember that we are taking up Maine), it is still a blip in oil production. Saudi Arabia, by contrast, can produce about 10-11 million barrels a day.

In other words, even if we assumed that the infrastructure, power, transportation and technology problems were solved, you need to use this technology on an area 30 times the size of Maine to replace Saudi Arabia.

Correction: If you devoted an area the state of Maine to this technology, you would produce about 15 million barrels a day.

Cleantech breakthrough, revival, or bubble? You tell me.

If it were to be a bubble, recognize it as such and understand that bubbles depend on the Greater Fool theory. By all means play the bubble if you want, but don't wind up being the greater fool.


macwhat said...

Your area calculations are off, I believe.

1 sq mile = 640 acres
Area of maine = 33,414 sq mi (per wikipedia)

acres in Maine = 640 x 33,414


Unknown said...

I agree with the first comment: the State of Maine is about forty times larger than you stated. Thus Maine alone would more than replace Saudi Arabia.

Cam Hui, CFA said...

I stand corrected. If you took over the entire state of Maine for production, you would produce about 15 million barrel equivalents a day.

Feanen said...

Why would algae have to completely replace oil to not count as a bubble? The better question is how much cash flow could be generated by the technology. CME has ethanol futures at about $1.70/gal right now. That means that 6000 gal/year will generate about $10k/year in cash flow. The 10k acre facility would be able to generate about $100M/year. It would take a 100 acre facility to generate $1M/year. According to the USDA, the average mid-size farm is 605 acres and the average large farm is 2,180 acres. Expecting a startup to have a facility bigger than a midsize farm seems unreasonable, so you can cap their revenue at about $6M/year, at least for the first few years.

Unless their costs are extremely low, they will not be generating very much profit. Their website seems to be completely missing any kind of information about costs, so it is difficult to estimate what kind of profit they could generate.

One advantage this has it that you don't need good soil, which means you can run these facilities in the desert. You just need a way to seal the water in so that it won't all evaporate. It should be relatively easy to get very large with this sort of operation, since you can buy land that isn't useful for any other purpose and sea water is cheaper than potable water.

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