Bluefire Ethanol (BFRE)

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Avinash Gandhi

Geoffrey Jordan

Bluefire Ethanol Fuels, Inc. (OTC: BFRE) produces cellulosic ethanol, an emerging but expensive alternative to gasoline. Cellulosic ethanol gained support from the U.S. government with the passage of the Energy Independence and Security Act of 2007. The company uses Arkenol Technology, a process licensed from the Arkenol Group, to break down cellulose from feedstocks like agricultural waste, green waste, and trash. The waste products are turned into sugar, which then ferments and distills into ethanol. Bluefire's favorite input is municipal waste, because it can build its refineries on landfills, cutting feedstock transportation costs and using methane emitted from decomposing waste to help the plant generate 70% of its own electricity. Since there are thousands of landfills around the world, there are literally thousands of opportunities for Bluefire to expand its reach.

Recent growth in the ethanol market has greatly increased demand for corn. Farmers cannot produce enough to meet this demand, which has led to higher corn prices and higher food and ethanol prices. Cellulosic ethanol (also known as "ceetol") made by Bluefire has a major advantage over corn-based ethanol in that it does not depend on food prices or on the capacity to produce a single agricultural product. Bluefire is receiving Department of Energy funding to build its refinery, which helps to offset the hefty installation cost of $5.00 per gallon for a 55 million gallon per year facility. Without such funding, it would be difficult for Bluefire to make ethanol cost-competitive with other fuels, much less turn a profit.

The U.S. government is also supporting the national development of commercially viable cellulosic ethanol through research grants and subsidies to the tune of $1.18 per gallon. These subsidies are meant to help ease the transition to ethanol by paying for research into higher efficiencies and cheaper methods of production. Bluefire faces infrastructure challenges, however, as the world's current dependence on oil makes a transition to ethanol very difficult. The company competes with other ethanol producers, including Verenium, Verasun Energy, and Pacific Ethanol.

Company Overview

Bluefire Ethanol is a development-stage company. The company focuses on developing, owning and operating high-value carbohydrate-based transportation fuel plants, or biorefineries, to produce ethanol, a viable alternative to fossil fuels, and to provide professional services to biorefineries worldwide. Its biorefineries convert widely available, inexpensive, organic materials such as agricultural residues, high-content biomass crops, wood residues and cellulose from municipal solid wastes into ethanol. BlueFire was established to deploy the commercially ready and process for the conversion of cellulosic waste materials to ethanol (Arkenol Technology) under a technology license agreement with Arkenol, Inc. BlueFire’s use of the Arkenol Technology positions it as a cellulose-to-ethanol company with demonstrated production of ethanol from urban trash (post-sorted MSW), rice and wheat straws, wood waste and other agricultural residues.

Currently, BlueFire Ethanol is focused on the development of two cellulosic ethanol facilities in Lancaster, CA and Fulton, MS.^[1] The fully-permitted and shovel-ready Lancaster, CA facility, BlueFire's first U.S. commercial plant, will use post-sorted cellulosic wastes diverted from Southern California's landfills to produce approximately 3.9 million gallons of fuel-grade ethanol per year.^[1] BlueFire is in the detailed engineering phase for its second commercial plant in Fulton, MS, which will produce approximately 19 million gallons of ethanol per year from woody biomass, mill residue, and other cellulosic waste.^[1] The company expects to have all necessary permits for this second plant by summer 2010, putting the company on a path to commence construction by the end of 2010.^[1]

A Chinese investment firm has also agreed to fund a portion of these plants at an unknown cost.

it well in 2 Timothy 3:1-5: "But realize this, that in the last days dcfliiuft times will come.For men will be lovers of self, lovers of money, boastful, arrogant, revilers, disobedient to parents, ungrateful, unholy, unloving, irreconcilable, malicious gossips, without self-control, brutal, haters of good, treacherous, reckless, conceited, lovers of pleasure rather than lovers of God, holding to a form of godliness, although they have denied its power;..."Whatever your beliefs are concerning a personal God, there are spiritual and moral laws that govern the universe as predictable as those formulated by Newton, that if broken bring consequences...simple cause and effect.I happen to believe in a personal God and expect that there will be judgment on our nation for our flouting His laws. Paul's letter to Timothy has a "modern" ring to it, because it describes so well our modern culture in detail.My prayer is that judgment is tempered with mercy and redemption, knowing that judgment is not always a bad thing. No one would wish another Depression and World War on us, but both of them produced the "Greatest Generation" of the last century, whom we honor now as they pass from the scene.Perhaps the hard times ahead will produce another last-days generation that will repudiate the softness and self-absorption that has brought such moral rot to our society. Perhaps the "sleeping giant" will once again shake off his slumber, and rise once more.That is my hope and my prayer.

Trends and Forces

Bluefire is Dependent on Legislative Support to Achieve Profitability

In October 2007, Bluefire announced that it would receive $40 million from the U.S. Department of Energy to build its second cellulosic ethanol refinery with a capacity of about 17 million gallons per year in California.^[2] The "Arkenol Technology" that Bluefire uses costs $5.00 per gallon installed, a hefty price considering that the average price of ethanol hovers around $2.00 per gallon.^[3] Since continuing operations for the "Arkenol Process" only cost around $0.50 per gallon^[4], it's the installation costs that hurt profitability, so the $40 million grant allowed Bluefire to stabilize its balance sheet during the company's start-up phase. Without the grant, however, Bluefire's facility would have no hope of being profitable, illustrating the company's dependence on government aid to be feasible. Fortunately, the DOE grant is not the only support Bluefire has to rely on:

• The Department of Energy announced that total funding over the next few years for research into commercializing enzyme-based production of cellulosic ethanol would be around $68 million.^[5]

• In 2007, Congress passed the Energy Independence and Security Act of 2007, which mandates that renewable fuels production in the U.S. should increase from 2007 levels of around 4.7 billion gallons per year to 36 billion gallons per year by 2022 - 21 billion gallons per year of which should come from cellulosic ethanol and other "advanced biofuels."^[6]

• A Cellulosic Ethanol Tax Credit became effective on January 1st, 2008, which gives a total government subsidy of $1.18 (for large producers) to $1.28 (for small producers) per gallon of cellulosic ethanol produced.^[7]

Rising Commodities Prices Make Cellulosic Ethanol a More Attractive Fuel Source

Since the Energy Policy Act of 2005, ethanol has been pushed as the next big biofuel. With oil prices rising, consumer and government demand for alternative fuels has been increasing. As oil prices have risen, however, so too have corn prices; as an example, ethanol company VeraSun Energy's average payment for a bushel of corn rose from around $3.32 in the second quarter of 2007 to $4.60 in 2008.^[8] Rising corn prices, aside from making ethanol less cost-efficient, cause prices for many other foods to rise. Corn is a major animal feedstock, forcing meat prices up, and high-fructose corn syrup is found in many mass-produced food products. Corn prices have not just shot up on their own, however; petroleum is used as a corn fertilizer, making corn's price directly related to oil's price. Furthermore, demand for corn has increased substantially because of the emerging ethanol market.

Without a Shift in the Auto Industry, Cellulosic Ethanol is No More Than a Good Idea

Currently, American cars can run on a mix of 90% gasoline and 10% ethanol, though there is not nearly enough corn-based ethanol being produced at the moment to meet this capacity. Part of the goal of the government's support of ethanol is to increase ethanol production and use to a scope well beyond that of the standard 10% blend. E85, a blend of 85% ethanol and 15% gasoline, is the big hope for the biofuels industry, as its use would greatly reduce greenhouse gas emissions and help to meet the new energy standards that have been placed on the U.S. through the Energy Independence and Security Act - all while greatly increasing demand for sustainable, non-food biofuels. There are, however, a number of blockades to the widespread adoption of E85 in the U.S.:

• E85 cars have been shown to run with an almost 50% reduction in miles per gallon - though this is measured in miles per gallon of E85, not of total gasoline.^[9]
• There are over 247 million cars in the U.S.^[10], but very few of them are "flex-fuel" vehicles, which are compatible with E85. The prospect of replacing all of these with flex-fuel vehicles is staggering, and the automotive industry is dragging its feet at the idea of having to develop cost-efficient vehicles that are E85 compatible.

Without solutions to these obstacles, ethanol and cellulosic ethanol have no hope of being considered "replacements" for petroleum.

The Positioning of Bluefire's Production Plants on Landfills has Numerous Advantages

Bluefire positions its production facilities right on landfills, in order to take exploit certain cost advantages.

• By capturing the methane released by decomposing waste, Bluefire can use the landfill to power its refining process; combined with the use of lignin, a byproduct from the Arkenol process, the capture of methane from a nearby landfill allows Bluefire's refineries to be 70% self-powered.^[11]

• Since the Arkenol process converts any cellulosic matter to ethanol, Bluefire's placement on the landfill means the company doesn't have to spend on transporting its feedstocks - wood, paper, and food wastes are literally within arms distance. This allows the company to further reduce costs and improve its carbon footprint.

There are 1,600 landfills around the United States, and Bluefire can adapt its refinery set-up to work with most of them.^[12] Furthermore, Bluefire has stated that it wants to expand its reach globally, and with countries like India and China throwing away more and more trash every day, there are a huge and growing number of landfills that Bluefire could use. With so many possible refinery sites, Bluefire's potential to expand is much greater in scope than many competitors.

Competition

Bluefire competes with other biofuels manufacturers, though its closest competitors are cellulosic ethanol companies.

• Verenium Corporation - Though Verenium started as an agricultural, industrial, and medical enzyme engineering company, itrecently became heavily involved in researching enzymes to produce cellulosic ethanol, and will soon start construction of a 1.4 million gallon-per-year pilot plant in Louisiana and a 1.4 million liter-per-year pilot plant Osaka, Japan.^[13] The company hopes to start construction in early 2009 on a 30 million gallon-per-year plant in the Southeast U.S.

• VeraSun Energy - VeraSun's production of corn-based ethanol, at 340 million gallons per year, represented 4% of the total U.S. production.^[14]

• Pacific Ethanol - Pacific Ethanol won $24.32 million from the Department of Energy to build the first cellulosic ethanol pilot plant in the Northwestern United States. The plant is expected to have a capacity of 2.4 million barrels per year - 0.7 million less than Bluefire's pilot.^[15] Currently, Pacific Ethanol is the largest manufacturer of corn-based ethanol on the west coast.
• Nova Biosource Fuels and ConAgra - ConAgra has agreed to have Nova use its animal wastes to produce biodiesel, and will purchase 130 million gallons of this biodiesel each year from the companies' joint venture to sell on international markets.^[16]

References

1. ↑ ^{1.0 1.1 1.2 1.3}
2. ↑ Bluefire News Releases: "BlueFire's Southern California Project to Receive Initial Funds From $40 Million DOE Grant"
3. ↑ http://www.verenium.com/Pages/Biofuels/BiofuelsCellulosicEtoh.html
4. ↑ SeekingAlpha: "BlueFire Ethanol Fuels: Converting Garbage Into Profits"
5. ↑ U.S. Department of Energy, "Department of Energy to Make Available up to $33.8 Million to Support Commercial Production of Cellulosic Biofuels"
6. ↑ HR 6 Energy Bill Summary
7. ↑ "Salazar Lauds Passage of Finance Comm. Ag Tax Package/ Includes Ag Disaster Fund & Essential Ag & Energy Incentives", Point 3
8. ↑ "The Price VeraSun Pays For Corn"
9. ↑ Wikipedia: E85
10. ↑ http://en.wikipedia.org/wiki/Passenger_vehicles_in_the_United_States
11. ↑ SeekingAlpha: "BlueFire Ethanol Fuels: Converting Garbage Into Profits"
12. ↑ Bluefire News Releases: "BlueFire's Southern California Project to Receive Initial Funds From $40 Million DOE Grant"
13. ↑ Verenium News Release: "Verenium Corporation Announces Milestone Payment to the University of Florida for Cellulosic Ethanol Technology License"
14. ↑ http://stocks.us.reuters.com/stocks/fullDescription.asp?rpc=66&symbol=VSE
15. ↑ Pacific Ethanol News Release: "Pacific Ethanol Wins DOE Cellulosic Energy Grant"
16. ↑ Seeking Alpha: "Look Out For Winners In the Transition from Petroleum"