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GIC Contributor Blog/ Ethanol: An Alternative Source? Goldman Takes Stake in Iogen By CHRISTOPHER J. CHIPELLO Goldman Sachs Group Inc. is placing a bet on "cellulosic ethanol," the alternative-fuel technology touted by President Bush in his State of the Union address earlier this year. The Wall Street firm is investing 30 million Canadian dollars (US$26.8 million) for a minority stake in Iogen Corp., a closely held Canadian company that has been at the forefront of efforts to turn agricultural waste into ethanol. The move underscores growing investor interest in cellulosic ethanol, as the U.S. looks for ways to reduce its reliance on oil amid rising gasoline prices. The investment also broadens Goldman's foray into alternative-energy technologies. Goldman last year acquired a Texas-based wind-energy company; it is also involved in a venture with BP PLC's solar-energy unit. "We believe that [the Iogen investment] has the potential to yield attractive returns," said Michael DuVally, a Goldman spokesman. He declined to specify the percentage stake that Goldman will hold in the Ottawa firm. A person familiar with the matter said Iogen plans to use the funds to help with development work as it moves toward assembling financing for its first industrial-scale plant. Royal Dutch Shell PLC, another minority holder in Iogen, has helped bankroll Iogen's development costs over the years. Boosters of cellulosic ethanol say fuel made from nonfood matter such as corn stalks, wood chips and switch grass has the potential to replace 30% of current U.S. gasoline consumption. They also say it is more environmentally friendly than ethanol made from corn, the main source of current U.S. ethanol production, since the feedstock is readily available as a byproduct of farm crops. But farm waste such as wheat straw or corn stalks must be broken down into sugars that can be fermented, making the production process for cellulosic ethanol more complex than for conventional ethanol. Iogen and other companies have been developing techniques to reduce production costs. GIC's Commentary: Implications: Although Iogen is one of the more advanced companies with respect to setting up cellulosic ethanol production facilities, it is far from the only such project. As pointed out in the July 6 issue of Nature Biotechnology, there exist a number of privately financed, government backed and publicly traded companies throughout the United States and Canada similarly focused on developing an efficient process for the production of cellulosic ethanol. Given the current high price of oil and interest from the public, as well as the government, in decreasing American dependence on foreign oil, the activities of these companies are attracting attention from an increasing array of interested parties. Analysis: Providing enough ethanol to fuel all of the light duty vehicles in the United States with a 10% ethanol/90% gasoline blend would require a tripling of current ethanol production. Currently, corn is the primary source of ethanol in the U.S. for three primary reasons: 1) existing wet milling plants requiring low cost retrofitting for ethanol fuel production; 2) the ease with which its sugars can be converted to ethanol; and 3) the bias in federal and state subsidy programs in favor of corn based ethanol plants. However, land-use limitations, high energy costs to run the plants, transportation costs, and competing domestic and export demand will be reality tests for current growth projections. These factors have led to efforts to develop alternative sources of ethanol. This search has lead to cellulosic ethanol which can be derived from materials including crop residues, woodchips and switchgrass. Unlike corn, cellulosic crops offer higher yields, lower costs, good suitability for low quality land and low environmental impact. Developing the technology to convert cellulose into ethanol has until recently been prohibitively expensive. Although the cost of enzymes needed to break down the cellulose into sugars has come down far enough to make the development of large scale plants feasible, significant challenges still remain. These risks are evidenced by the fact that even the large agribusiness and oil companies, who dedicate billions of dollars to research, have been reluctant to attempt the undertaking without significant government backing. That Iogen is now moving forward with backing from major banking and oil interests displays a high degree of confidence in the endeavor. Moreover, it offers a market sensitive alternative model that is less dependent on public subsidies. Could large-scale production of cellulosic ethanol be on the way?
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