How Many Big Dogs?

1. How Many Big Dogs? Considerations of a Mature Algal Fuel Industry

2. Acknowledgements • The author would like to thank Greg Brown , Doug Lynn, and Lou Olgaard at the Center for Excellence in Hazardous Materials Management (CEHMM) in Carlsbad, NM for their kind support and their contributions to the ideas in this report. • The author would also like to thank CEHMM for hosting a visit to their facilities in Atoka and Carlsbad, NM.

3. How Much Crude Oil? • The US imports an average of 3.5 billion barrels of oil annually (10 year average from EIA data). • The average price was $48.93/barrel in 2009 real US dollars. • Roughly speaking, this means crude oil is a $173 billion a year industry. • If bio-crude could be substituted for this quantity at the average 10 year real price then the potential market for bio-crude would be $173 billion annually.

4. How Much Gasoline? • The total US supply of gasoline over the past 10 years has averaged 3.273 billion gallons per year. At an average real price of $2.24 per gallon that implies a gross industry size of $7.326 billion annually.

5. How Much Diesel? • The US supply of Diesel fuel averaged more than 1.451 billion gallons per year over the past 10 years. At the average real price of $2.34 per gallon that results in a gross market value of more than $3.390 billion annually.

6. Relative to the US Economy

7. How Much Land and Water? • If algal based biofuel replaces petroleum crude oil, the amount of land and water that would theoretically be needed to produce the 3.5 billion barrels (634 billion liters) of crude oil can be calculated for different yield rates.

8. Hypothetical Resource Use

9. Water Use

10. Full Scale Algal Industry • Job creation varies with degree of automation and production factors. • Greater yield  More automated  Fewer jobs? • More automated  Greater total economic impact? • Unrealistic that there will be a small number of giant firms.

11. Firm Size • Based on the firm size characteristics of the US economy a potential distribution of firm size can be calculated. • 99% of all US firms have fewer than 500 employees. Less than 0.02% of firms have more than 10,000 employees.

12. Market Characteristics

13. Potential Profits • If algal crude could be produced and sold for the prevailing 10 year average price ($0.2735/liter) and the current imported quantity of petroleum replaced, than the total revenue of the industry would be $173.4 billion. • Potential profits for the industry could be more than $8 billion annually.

15. Hypothetical Economic Impacts NM population (over 16) is a bit more than 1.36 million; Labor force is 834,632 The direct employment of the industry would consume 53.2% to 13.2% of the NM labor force! Total employment would range from more than 1.75x the current population of the state to approximately the population of Albuquerque!

16. Hypothetical Economic Impacts • Comparing the Hypothetical Algal industry in NM to the existing oil and gas industry: • Oil and gas contributes $1.782 billion in tax revenues and 39,559 jobs can be attributed to the industry (direct+indirect+induced). • The algal industry could potentially dwarf this economic contribution.

17. Employment Comparisons • The potential direct employment in the algal industry (using the 0.1 FTE) is significantly less than other sectors in the US economy. • Notice government employs more than almost all other sectors.

18. How Many Big Dogs? • An algal industry is likely to be comprised of the following type of firms: • 1-2 large firms employing between 750-10,000 employees each with 2,100 to 28,000 hectares under cultivation. • 98.2% of the firms will have fewer than 100 employees and less than 200 hectares under production. • The composition of firm size is likely to be an accurate prediction since it is based on the actual firm structure of ALL United States firms. • The nature of competition and market behavior makes its highly likely that there will be a small handful of Big Dogs and a vast collection of small firms. • Innovation and improvements in yield will come from small firms; larger firms with market power will then acquire smaller firms leaving the overall market distribution unchanged.

19. How Many Big Dogs? • The predictions on farm size are problematic: • Based on specific technology/processes that are currently ‘secret’ and/or non-existent. • There may be a ‘valley of death’ between market composition realities and economies of scale in algae production. • The number of firms by employee size are consistent across all industries (including those typically thought to be monopolistic/oligopolistic) e.g., telecommunications and oil and gas extraction. • Across all US industries there are a small handful (less than 1%) of Big Dogs and vast numbers of Little Dogs. • History tells us there will be numerous small scale firms; however, there may be NO economically viable way to BE a Little Dog!

20. Significant Barriers to Full Scale • Market Composition • Economically Viable Scale Divergence • Water Use! • Net Energy Production • Cost of production versus long-run commodity price of fuel ($0.27/liter).

21. Assumptions • Here is a list of the major assumptions employed in generating this big-picture analysis: • Average yield per hectare • Cost of production less than sales price • 0.1 FTE per hectare employment • Industry is similar to oil and gas refining sectors and nursery/greenhouse sectors • Homogenous production technology • Homogenous product • Homogenous firms (other than size)

22. Validity of Assumptions • Cyanotech in Hawaii has an FTE of 0.687  compared to the assumed 0.10 FTE • A full scale algal industry must improve upon Cyanotech’s proven commercial scale production processes (in terms of labor) by more than 6.5x. • Cyanotech’s profit margin is 8.1%; which is far greater than what can be anticipated for an algal fuel industry; since the only benefit from an algal fuel is that it is a cheap, abundant product. • Cyanotech’s costs are roughly $12.8 million while revenues are only $13.9 million. • They cannot produce sufficient quantity at low enough cost for anything other than high value nutraceuticals.

23. Validity of Assumptions • The secretive nature of the development process as this point is hindering economic analysis that can benefit the Big Dogs and the Little Dogs. • Without information regarding yields, land, water, nutrients, CO2, production costs, processing costs that are in standardized form and available to the industry and government it will be difficult to steer the nascent industry through the formidable ‘valleys of death’.

24. Barriers • Currently the industry is facing a ‘prisoner’s dilemma’ of sorts. • No one wants to share outcomes for fear of giving away competitive advantage. • However, with no sharing of outcomes, the industry, regulators, investors, and potential adopters/creators of technology do not know where to focus energy and resources. • Beyond the obvious technical challenges lie the hidden dangers of competitive advantage seeking.

25. Barriers • To avoid the waste and potential failure to develop a commercial scale industry due to the prisoner’s dilemma researchers, innovators, and industry should provide the following publically available information: • Productivity (g/l/ha) of biomass, oil, co-products • Cost (g/l/ha) of biomass, oil, co-products • Water used (g/l/ha) • Energy used (g/l/ha)

26. Barriers • However, no one is likely to provide this information for fear of giving away the IP and the profit potential. • This hidden valley of death is perhaps more challenging the technical barriers—it may be a problem that has ‘no technical solution’.

27. Data Sources • www.usgs.gov • www.census.gov • www.bea.gov • www.bls.gov • www.eia.doe.gov