“Please note that ethanol made from corn is anything but ‘green.’ the pesticides and oil-based substances used to grow corn are draining [the] south and killing the Gulf. Corn is a disaster.”
– Anonymous

As I mentioned last week, ethanol proponents will argue the “true cost” of a gallon of conventional gasoline, which could even include the soldier protecting the oil field. And on the other hand, what additional costs are involved in corn-based ethanol production? Pesticides and fertilizers, to name a couple…

Here is an excerpt from an article posted by the Sustainable Products Corporation: “But what’s missing in this debate is a real understanding of the true environmental costs of how we manufacture products of all kinds. Take ethanol, for example. Closer examination of ethanol production reveals that the manufacture of pesticides, herbicides and fertilizers used to grow conventional corn to make ethanol create almost as much pollution as the MTBE it replaces. In other words, the things that go into making a ‘clean’ product can be horribly polluting.”

But for every problem, there could eventually be a solution, or at least a compromise…

“The company I am writing about is indirectly related to ethanol production. The company name is Startech Environmental Corp. (STHK: OTC BB) and its primary technology is a plasma converter system that was developed to essentially rip hazardous waste apart down to the elemental level. It is able to handle such things as: medical waste, outdated pharmaceuticals, PCBs, chemical agents, hazardous incinerator ash, Various biological wastes, sludge, paints and solvents, electronic industry waste, contaminated soils, asbestos, etc. It doesn’t break things down beyond the atomic level, so it is not a solution for radioactive waste.

“You are probably wondering what this has to do with ethanol. Using the plasma converter system to destroy unwanted waste produces large amounts of hydrogen as a byproduct. In fact, enough is produced that this process produces more energy than is consumed. This hydrogen can be used as is for fuel cells or can be converted to methanol, ethanol, etc. for use in internal combustion engines. The company has completed the research phase on its technology; it is my understanding that they are now moving forward to begin construction. They have contracts with several other corporations for installation of plasma converters. I believe as they move forward, we will find that this provides a solution for several problems at the same time.” — David

I think something like this could solve Anonymous’ problem with pesticides and corn. When people say “waste to energy,” you probably think of those nasty incinerators that burn your town’s garbage when the landfills become full. Basically, it’s a system that solves one problem (too much trash) with another (air pollution).

But this plasma converter seems to bring the basic idea of waste to energy to the next level. And a system that can create ethanol without using sugarcane, beets, corn or any other plant may be a more viable source of energy with fewer “hidden costs” like pesticides and land use.

Also, there’s an interesting explanation (complete with diagrams) on how the plasma waste converter works on Startech’s site.

“In response to your article regarding alternative energy companies, perhaps a back door play on ethanol can be found in Illovo Sugar (trades on the pink sheets as ILVOF.PK).”
– Anonymous

We’re seeing the price of sugar rise along with the popularity of ethanol…and this is no coincidence.

Here is an excerpt from a Jon Markman column on MSN Money: “The great thing about sugar cane as an energy source is that it is incredibly efficient. Many ethanol feed stocks — such as corn, wheat and beets, which are widely grown in the United States — require as much energy to grow and refine as they actually produce in energy. But sugar cane production actually results in a huge net positive energy gain — about 8:1 energy output to energy input. That’s especially so when it’s grown in the country in which it is used, so there is no energy or cost expended in transportation across oceans.”

Brazil has benefited from its multiple growing seasons and sugar production and has successfully converted to ethanol fuels. About 40% of all the fuel sold in Brazil is ethanol.

And yes, sugar is way up, but it is nowhere near its all-time high. Illovo Sugar, the largest African sugar producer, could be a cheap, smart sugar play. It trades on the Johannesburg exchange, and like Anonymous said, you can get your hands on shares via the Pink Sheets.

“I understand how ethanol can work if you can make it from sugarcane, or switch grass, or manure, or other waste, but how can it work in commercial agriculture growing crops that are traditional in the U.S.? The farmer has fossil fuel delivered to his farm at a cost, he prepares the field with fossil fuel, he plants using fossil fuel, cultivates with the same, fertilizes with, harvests with, and delivers with, then the crop is processed into ethanol with fossil fuel, and then it must be delivered into a marketplace with fossil fuel. After all that, there is still a positive gain in BTUs? I would sure like to hear the definitive truth on this issue.” — Ken

Well, Ken, Ethanol Across America, a non-profit education campaign of the Clean Fuels Foundation, has published just such a study to examine the energy balance of ethanol.

Here’s EAA’s take: Ethanol is unfairly criticized, like when all the energy attributed to grow a bushel of corn and process it is counted. The report calls ethanol a co-product of corn, and that means that the corn should only be charged with the energy that was used to turn it into ethanol. After all, corn is a commodity, and it’s probably not grown for a specific purpose — so it is grown due to overall demand and sold into broad markets.

And here’s another argument EAA takes on to battle the “balance of energy” argument: Assume a pile of coal has a latent heat value of 1 million BTUs, but it can be converted into a liquid fuel that can produce 500,000 BTUs. The liquid fuel becomes more valuable because you can fill your tank with it to make your car go. Unfortunately, the same cannot be said for coal.

The report goes on to say that if you limit the debate strictly to BTU’s — then the argument that ethanol production is inefficient is bunk. For instance, electric power plants using coal are only 35% efficient. Basically, any type of energy conversion results in a negative energy balance.

The age of cheap oil is over, and whatever “hidden costs” are mentioned to try and debunk whatever the new alternative fuel is, people will still need to get around, food will still need to be delivered to grocery stores, and planes will still need to circle the globe. Our best stab at the definitive truth is this: The age of cheap oil is over, and something(s) will need to come along and supplement and/or replace it.

“You might want to look at STKL. I primarily invested in this company because of its organic food. They are starting to get noticed because of their cellulosic ethanol technology… With the technology they have they don’t need corn to create ethanol, which solves one of the problems you brought up.” — Ron

Nice find, Ron. SunOpta Inc. (STKL: NASDAQ) basically deals in biomass conversion. They have a steam explosion machine that can process all kinds if wastes and vegetable matter including wood chips, sugarcane, cereal straws, and waste paper.

“In their natural state, these materials are not easily separated into their component parts. By processing with the addition of high-pressure steam, the StakeTech Steam Explosion System breaks the chemical and physical bonds that exist between the components of these materials, allowing their subsequent separation and processing into products and components that potentially have wide and diverse applications,” according to the company’s website.

The company is focusing its efforts on the pre-treatment of biomass for the production of ethanol, which has made it a hot commodity on Wall Street. In the beginning of January, the $472 million company traded for around $5.25. Now the price is up to around $8.30 thanks to some heavy volume.

“I have spent the last year intensely studying both ethanol and biodiesel. The reality is that both fuels will be needed to wean this country off our petroleum dependence.  But I think the case for biodiesel as a better fuel can be made.  Europe, India, and now China are putting major efforts to switching to biodiesel.  Here’s why. Biodiesel can be made out of any fat or vegetable food or non-food oil. The list is endless, and includes recycled and waste oils from various processes. Where ethanol grows only in the middle of the country, a company called Fry-O-Diesel is researching how to use the unlimited supply of trap grease and waste cooking oil.  California has 88,000 restaurants in its trade organization and that represents about 75 million gallons of waste oils. Biodiesel plants so far have primarily been soybean oil based so far but that will change over the next 5 years as these new technologies get perfected that can use whatever fats and oils are available.” — Kari, Biodiesel Council of California

In the long run, I think both ethanol and biodiesel will find their respective places in the market. But for the time being, ethanol has a greater chance of growing because the country is more prepared for it. A regular gas-burning car can run on the lower-concentration ethanol blends. So it’s a good start without having to go out and buy new hardware, so to speak. And flex-fuel vehicles that can run on higher concentrations of ethanol in gasoline are also carving out their niche.

Kari continues: “To truly deal with the reality of global warming we must lower our use of petroleum in all vehicles, heavy and light, and get the absolute best fuel mileage possible. Diesel-Hybrid technology has been used on trains for decades, it is just now being crossed over to vehicles in both the heavy and light classes.”

The World’s Best Energy Investment

It’s already a major player, practically a blue chip. Yet it’s barely talked about on Wall Street. Why? Even BusinessWeek says this company “is not a household name, but maybe it should be.”

Alternative Energy Reader Comments was originally featured in the Penny Sleuth.

This company wants to lead the charge when it comes to liquid fuel conversion. And since I’m a relative novice in the world of gas-to-liquid (GTL) and coal-to-liquid (CTL) technology, I decided this particular company would be perfect to research.

The name of the outfit is Syntroleum Corp. (SYNM: NASDAQ). Syntroleum has developed technology that converts natural gas or coal into synthetic liquid hydrocarbons that are mostly free from contaminants that are commonly found in fuels made from crude oil.

The synthetic liquid fuel can be used by itself in traditional internal combustion diesel engines, which reduces emissions. Or it can be blended with traditional fuels to “upgrade” the fuel to burn cleaner.

And diversifying how the United States gets its energy is not just important now, Syntroleum claims, but it will also become vital in the near future. The U.S. Department of Energy predicts China will face shortages of 5.9 million to 8.8 million barrels of oil a day by 2015. This company realizes the tug-of-war that will ensue over the world’s limited oil supply, and like some of the ethanol and biodiesel companies we’ve looked at before, Syntroleum is looking to provide an alternative solution to crude-based products.

A New Way to Make Fuel

Syntroleum has the money it needs to fund operations for 2006-2007, but it has never built a commercial facility. One of the risks of a commercially-viable GTL plant noted in the company’s annual report is that some of the technology in use at Syntroleum’s testing facilities and other technologies being developed might not prove to be commercially applicable.

In other words, they can make the stuff but they might not be able to do it as efficiently as they’d like on a larger scale. Nevertheless, the company is moving closer to commercializing the product.

Syntroleum is involved in a joint venture with Bluewater Energy Services to develop and pay for the first ever air-based GTL plant that would operate offshore mounted on a barge. A feasibility study commissioned by the two companies expects up to 17,000 barrels of the product produced per day, along with 40,000 barrels of oil, according to Syntroleum’s annual report.

And while the company is still in the red, it has a strong cash supply that should carry it through its research and development stage.

Syntroleum reported revenues of $400,000 for the first quarter of 2006 from joint research development activities with the U.S. government and with licensees and from GTL fuel sales. Its net loss for the quarter was $12.9 million, coming to 23 cents per share — about the same as the net loss of 24 cents per share from the first quarter of 2005.

And with more than $60 million in cash, the company is well positioned to fund its research and development and demonstration plants until its first commercial plant is complete (it spent $6 million on research during the first quarter). Jack Holmes, president and CEO of Syntroleum, said that first quarter costs are in line with the company’s budget as the company focuses on reaching financial close on its first commercial plant by the end of 2007.

Risks and Rewards

With a price tag of $7.75 a share before the market opened this morning — and the company tallying a 77-cent loss per share — it is evident that many investors have faith in this company’s technology and its ability to successfully commercialize its GTL and CTL methods. So a volatile share price is what you’ll get from this $436 million company. Almost $10 separates the stock’s 52-week high of $16.50 with its 52-week low of $6.54. So any bit of good or bad news could greatly affect the share price until Syntroleum starts posting a profit, which would be in almost two years at the earliest once its first facility is operating.

And as was mentioned before, the company is still unsure if some of the technology used in making the synthetic fuels will be as effective in a large-scale environment. If Syntroleum finds it can’t turn much of a profit, it could be a long time before the technology is improved.

Aside from these obvious risks, there are a couple of redeeming qualities that you should check out:

First up is a contract with a behemoth in the oil industry. In 2004, the company signed an agreement with ExxonMobil providing Syntroleum with a worldwide license under ExxonMobil’s GTL patents to produce and sell fuels from natural gas or coal. The agreement also includes all existing ExxonMobil patents in these areas, as well as future patents for the next several years.

Second is the strength of the company’s patents and management. Kenneth Agee founded Syntroleum in 1984 and is still with the company, serving as chief technology officer and chairman. He is credited on many of the company’s patents, as well. In all, Syntroleum has 127 patents issued and pending. Agee obviously sees the potential in this technology and is willing to see it through…

Wasting Natural Gas

GTL technology could help eliminate a lot of unnecessary wasting of natural gas across the globe. Many oil companies burn off unwanted natural gas in order to extract crude. The process is called flaring, and it’s a nuisance and an environmental concern. Natural gas is flared because there is a limited market for it in the warmer climates where it is found and it is difficult to ship overseas to viable markets.

To get a good look at flaring problems in Nigeria, you can check out this National Public Radio write-up.

And Syntroleum has a stake in Nigerian oil as well. The company recently acquired two locations in Nigeria with discovered oil and gas reserves, and also claims to be in the process of buying more. Drilling of the first well will happen sometime around September.

And in November, the company signed two memorandums of understandings that will hopefully allow a GTL plant in Papua New Guinea. Syntroleum is looking to develop about 50,000 barrels per day GTL plant as part of an industrial complex dedicated to gas-based industries near Port Moresby.

Talks with Egyptian Natural Gas Holding through one of Syntroleum’s licensees to construct another GTL plant are also in the works. So, the company continues to seek out opportunities to commercially develop its technology.

There are two main reasons Syntroleum thinks it can succeed better than traditional GTL technology. The first is that its conversion process does not require pure oxygen, making it safer and more cost effective. This in turn helps to contribute to its second advantage: cheaper operating costs, opening the door for smaller plant sizes, including mobile plants that can be mounted on barges.

All of this hopefully ensures that Syntroleum’s commercial plant — which is designed to produce just 17,000 barrels a day — will be economically viable.

Coal

Syntroleum is also exploring ways to commercialize coal to liquid (CTL) technology. The company notes that the largest coal reserves in the world are located in the United States, Russia, India, China and Australia.

However, a lot of the coal in these reserves is expensive to get due to environmental concerns and how far some of the reserves are located from coal markets. And although the company’s CTL program is not as close to commercialization as its GTL technology, it is making progress.

In November 2005, Syntroleum signed an agreement to conduct laboratory-scale demonstration of its catalyst technology with coal. “This program is targeted at advancing early adoption of our proven FT technology in coal-to-liquids,” according to Syntroleum’s website.

And Syntroleum and Sustec AG, a private company based in Switzerland, have an agreement that provides for exclusive joint business development of projects integrating Sustec’s gasification technology with Syntroleum’s technology.

“The joint venture is aimed at converting coal and other carbonaceous materials such as petroleum-coke, residual fuel oil and biomass into ultra-clean fuels. Each company will own 50 percent of the joint venture,” announced Syntroleum. Jack Holmes, president and CEO of Syntroleum said, “We have long considered Sustec as the state-of-the-art leader in gasification technology. We believe this combination can now offer a truly unique and very compelling technology value proposition to the coal industry… Integration of coal gasification and FT technologies is increasingly being sought after in the United States, China, Australia and elsewhere. This joint venture presents a rare opportunity for companies pursuing investments in this important energy industry segment to access the complete technology package required to develop coal energy in an environmentally-friendly way.”

And Syntroleum throws some more convincing stats in the mix: According to a BP world energy review, the world’s 2004 coal reserves were estimated at more than 909,000 million tons. That’s a lot of coal that could be converted to clean fuels.

Analysis

Syntroleum is moving full steam ahead on its GTL projects, and coal shouldn’t be too far behind. It’s still a speculative pick, but the management is dedicated, the technology is in demand, and the price is right.

In its annual report, Syntroleum executives claim that its technologies can be cost effective assuming that oil prices prevail in the $35-$40 per barrel range, so with oil likely to remain much higher, the company should be able to adequately capitalize on its commercial efforts.

If you were to buy the stock between $6 and $8, you would need to buckle up for some price fluctuation for the next year or longer. I don’t think this is the kind of investment that is going to skyrocket in the next few months. However, through all the risks, Syntroleum could become a real player in the alternative fuel world if and when it starts turning a profit.

Other Alternative Energy Technology was originally featured in the Penny Sleuth.