How Many Big Dogs?Considerations of a Mature Algal Fuel

Industry

AcknowledgementsThe 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.

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.Imports of Crude Oil (average from 2000-2008 in barrels) 3,544,660,889

Average Price of Crude Oil (real US$/bbl) 48.93Total Gross Value of Market (real US$) 173,443,582,734$

Potential Size of US Bio-crude Market

*From http://www.eia.doe.gov data

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.

Total US Supplies of Finished Motor Gasoline 3,273,027,556 Average Retail Price of Gasoline (real US$/gallon) 2.24Total Gross Value of Retail Gasoline Market (real US$) 7,326,373,926$

Potential Size of US Bio-gasoline Market

*From http://www.eia.doe.gov data

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.

Total US supplies of Diesel 1,451,224,000 Average Retail Price (exlcuding taxes) of Diesel (real US$/gallon) 2.34Total Gross Value of Retail Diesel Market (real US$) 3,390,283,082$ *From http://www.eia.doe.gov data

Potential Size of US Bio-diesel Market

Relative to the US Economy

Value Added GDP ComponentTotal Value Added

(2007 US $)Value Added

Sector as % of GDP

Total Bio-Crude Sector as % of

Value Added GDP

ComponentGross domestic product 13,807,539,000,000 100.00 1.26 Utilities 281,424,000,000 2.04 61.63 Construction 610,842,000,000 4.42 28.39 Retail trade 892,522,000,000 6.46 19.43 Transportation and warehousing 407,188,000,000 2.95 42.60 Information 586,269,000,000 4.25 29.58 Finance, insurance, real estate, rental, and leasing2,811,217,000,000 20.36 6.17 Professional, scientific, and technical services1,007,780,000,000 7.30 17.21 Legal services 198,351,000,000 1.44 87.44 Administrative and support services 381,215,000,000 2.76 45.50 Educational services 129,531,000,000 0.94 133.90 Health care and social assistance 957,440,000,000 6.93 18.12 Arts, entertainment, recreation, accommodation, and food services513,335,000,000 3.72 33.79 Government 1,742,926,000,000 12.62 9.95 *From http://www.bea.gov

A Bit of Perspective

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.

Yield ScenariosLand Area Needed (hectares)* Water Needed (M^3)**

1 g/liter 12,689,886 38,678,776,237 2 g/liter 6,344,943 19,339,388,118 8% PAR (approx. 4 g/liter) 3,157,242 9,623,275,905 27% PAR (approx. 13 g/liter) 935,480 2,851,342,246 *From USGS data. **One time volume only, excludes evaporation and recycling

Potential Resource Use to Produce the Petroleum Crude Oil Equivalent (2000-2008 Average)

Hypothetical Resource UsePercent of Resource Used 1 g/Liter Yield 2 g/Liter Yield 8% PARAll US Land Area 1.36 0.68 0.34Pasture/Range Land 2.19 1.09 0.54Land Area of New Mexico 40.37 20.19 10.05Total US Water Use 7.23 3.62 1.80Total NM Water Use 766.96 383.48 190.82Total NM Irrigation Water Use 978.82 489.41 243.53Total NM Salt Basin Aquifer 55.01 27.51 13.69

Percent of Available Resources Used at Various Yield Rates

*From http://pubs.usgs.gov/circ/2004/circ1268/pdf/circular1268.pdf and http://www.census.gov

Water Use

Fresh Water Saline Water Irrigation Aquaculture Power GenerationTotal US 534,708,998,153 96,440,805,246 189,289,259,581 5,112,191,682 270,117,155,095 Total NM 5,043,108,011 - 3,951,586,003 - 77,926,381

Water Use (M^3 per Year)

acre feet M^3Potable 15,000,000 18,502,200,000 Saline 25,500,000 31,453,740,000 Brackish 16,500,000 20,352,420,000 Total 57,000,000 70,308,360,000

USGS Water Supplies Southern NM (acre feet)

Full Scale Algal Industry

Characterisitc 1 g/L 2 g/L 8% PAREmployment (.1 FTE /ha) 1,268,989 634,494 315,724 Wages (average wage=$40,000) 50,759,543,929 25,379,771,964 12,628,969,775 Firms (average employee base=5,000) 254 127 63 Average Algal Farm Size [ha] (based on 254 firms) 50,000 50,000 50,000 *From Hypothesized Scenarios

Potential Market Characterisitcs

•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.

Firm Size

1 g/Liter 2 g/Liter 8% PAR 27% PAR

Average Number of Employees

Percent of Firms in

Size Category

2 60.94% 1,353,366 676,683 336,717 99,768 8 17.61% 104,314 52,157 25,953 7,690 15 10.74% 32,899 16,450 8,185 2,425 60 8.90% 6,642 3,321 1,653 490 300 1.50% 223 112 55 16 750 0.15% 8.83 4.42 2.20 0.65 1,750 0.09% 2.25 1.12 0.56 0.17 3,750 0.03% 0.37 0.18 0.09 0.03 7,500 0.02% 0.09 0.05 0.02 0.01 10,000 0.02% 0.07 0.04 0.02 0.01 Totals 100% 4,441,460 2,220,730 1,105,035 327,418

Number of Firms and Employee Size of Hypothetical Algal Fuel IndustryYield Scenarios

Number of Firms

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.

Market Characteristics

Average Number of

Percent of Firms in

Average Hectare Size Oil Produced Revenue/Firm Profit/Firm

2 60.94% 6 386,675,977,913 428,571 21,429 8 17.61% 21 111,765,046,638 1,607,143 80,357 15 10.74% 41 68,148,855,902 3,107,143 155,357 60 8.90% 170 56,459,003,284 12,750,000 637,500 300 1.50% 856 9,541,446,703 64,178,571 3,208,929 750 0.15% 2,141 945,505,109 160,607,143 8,030,357 1,750 0.09% 4,999 562,203,618 374,892,857 18,744,643 3,750 0.03% 10,713 197,761,655 803,464,286 40,173,214 7,500 0.02% 21,427 98,090,624 1,607,035,714 80,351,786 10,000 0.02% 28,571 100,408,555 2,142,857,143 107,142,857

Potential Revenue and Profit of Hypotethical Algal Fuel Industry

Potential ProfitsIf 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.

Liters of Oil Produced 634,494,300,000 Revenue Generated 173,440,257,536$ Profits Produced by Industry 8,672,012,877$

Total Oil Produced and Potential Profit of Industry

Value Added GDP ComponentTotal Value Added

(2007 US $)

Value Added Sector as %

of GDP

Total Bio-Crude Sector as % of Value

Added GDP Component

Gross domestic product 13,807,539,000,000 100.00 1.26 Utilities 281,424,000,000 2.04 61.63 Construction 610,842,000,000 4.42 28.39 Retail trade 892,522,000,000 6.46 19.43 Transporation/Warehousing 407,188,000,000 2.95 42.60 Information 586,269,000,000 4.25 29.58 Finance 2,811,217,000,000 20.36 6.17 Professional/Technical Services 1,007,780,000,000 7.30 17.21 Legal services 198,351,000,000 1.44 87.44 Administrative 381,215,000,000 2.76 45.50 Education 129,531,000,000 0.94 133.90 Health Care 957,440,000,000 6.93 18.12 Liesure Services 513,335,000,000 3.72 33.79 Government 1,742,926,000,000 12.62 9.95 *From http://www.bea.gov

A Bit of Perspective

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!

1 g/L 2 g/L 8% PAREmployment 444,146 222,073 110,503 Total Employment 2,382,237 1,189,621 575,584 Total Value Added 323,346,594,695 161,430,341,905 77,596,245,143 Total Tax Revenue 76,965,586,497 38,423,619,050 18,452,148,437 *From IMPLAN Analysis

Hypothetical Economic Development Potential in New Mexico35% of total market is produced in NM [Employment is the direct impact in sector 6

Greenhouse/Nursery and Sector 142 Petroleum Refining]

Hypothetical Economic Impacts

Oil and Gas Industry 1 g/L 2 g/L 8% PAREmployment 39,559 2,382,237 1,189,621 575,584 Value Added 14,297,270,599 323,346,594,695 161,430,341,905 77,596,245,143 Tax Revenue 1,782,100,000 76,965,586,497 38,423,619,050 18,452,148,437

Hypothetical Economic Activity Compared to Existing Oil and Gas Industry in New Mexico

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.

Employment Comparisons

Sector Employment Construction 7,629,846 Manufacturing 13,857,615 Trade, Transportation, 26,629,538 Information 3,031,769 Professional/Service 17,942,308 Leisure and Hospitality 13,426,615 Government 22,218,154

1 g/l 1,268,989 2 g/l 634,494 8% PAR 315,724

Algae Production at Differing Yields

Comparing Employment Values (National Figures for Select Industries) 2007 BLS Values

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.

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.

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!

Significant Barriers to Full ScaleMarket CompositionEconomically Viable Scale DivergenceWater Use!Net Energy ProductionCost of production versus long-run

commodity price of fuel ($0.27/liter).

AssumptionsHere is a list of the major assumptions

employed in generating this big-picture analysis:Average yield per hectareCost of production less than sales price0.1 FTE per hectare employmentIndustry is similar to oil and gas refining

sectors and nursery/greenhouse sectorsHomogenous production technologyHomogenous productHomogenous firms (other than size)

Validity of AssumptionsCyanotech in Hawaii has an FTE of 0.687 compared

to the assumed 0.10 FTEA 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.

Validity of AssumptionsThe 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’.

BarriersCurrently 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.

BarriersTo 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-productsWater used (g/l/ha)Energy used (g/l/ha)

BarriersHowever, 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’.

Data Sourceswww.usgs.govwww.census.govwww.bea.govwww.bls.govwww.eia.doe.gov