Why Algae-Fuel Firms Are Now Targeting the U.S. Navy, Drugs and Food

Some 12 months ago, analysts and industry folk were falling all over themselves in a lovefest over algae fuel. The summer of algae -- as it was called -- included Exxon's (XOM) $600 million investment into Synthetic Genomics to develop next-generation biofuels from photosynthetic algae and start-up Algenol Biofuels' partnership with Dow Chemical Co. to develop an algae-to-fuel pilot scale plant. These days, the path to commercialization -- meaning, getting algae to the point where it can compete with fossil fuels -- has been doused with a hefty bucket of reality, and algae-to-fuel companies are tweaking their business models to target markets outside of the biofuels world.

Any business that expands its market focus risks drifting away from its original goal, in this case creating commercially viable algae fuel. Or a company may inadvertently move into too many markets to be successful at any of them. But algae-to-fuel companies have discovered that if they hope to exist without being propped up by government subsidies and investors, they have to carve out profits somewhere.

Here's what three algae fuel companies are doing to branch out beyond biofuels and finding revenue sources in pharmaceuticals, food products and chemicals.

Aurora Biofuels: The company announced this week a new name -- Aurora Algae -- and an expanded market focus. Aurora will continue to work on scaling up its biofuels unit, but it also will use its proprietary strain of algae to be used in pharmaceutical products, nutritional supplements, fish meal and even health shakes and protein bars. Brian Hinman, Aurora's executive chairman and venture partner at Oak Investment Partners, explained in a statement that the company plans to target high-value markets served by competitors who have higher-cost fermentation processes. In short, they're going to take high-performance strains of algae that they spent four years to develop and undercut competitors in the algae product market.

Solazyme: The company is one of the more successful algae biofuel producers. It's actually found a customer -- the U.S. Navy -- for its product. the company announced Wednesday it delivered 20,000 gallons of algae-based shipboard fuel to the Navy. This summer it provided 1,500 of algae-based jet fuel to the Navy for testing. Still, the company has branched out beyond biofuels.

Its latest investor is consumer goods-giant Unilever (UN), which has faced increasing problems securing palm oil -- a key ingredient in its Dove soap and Vaseline lotion -- without damaging the environment. Solazyme's algal oil could replace palm oil used in foods, soap and lotion. Unilever says Solazyme's algal oil is still three to seven years from being used as an ingredient in its products, according to a WSJ report. Despite the seemingly long time frame, it offers some promise of a viable commercial purpose for Solazyme's product.

Blue Marble Energy: The Seattle-based company was originally founded to produce biofuel from algae and other biomass. The company has undergone a transformation and recently launched its wholly owned subsidiary Blue Marble Biomaterials. Bleu Marble's CEO Kelly Ogilve explained to Biofuels Digest why they made the change.

The whole business of producing a low-margin product (like fuel) at high volumes is challenged, in many ways it is not working. Especially if you're raising equity. there just isn't lots of money for lots of volume any more.

Photo from Synthetic Genomics
Related:

• Green Power: Researchers Harness algae to Generate Electricity
• Exxon Gives SGI's Algae-to-Fuel effort $600 Million Kickstart