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A.I.M. Interview: Sapphire Energy’s CJ Warner and Tim Zenk

October 21, 2012, by David Schwartz

Sapphire Energy CEO and Chairman, CJ Warner

Sapphire Energy CEO and Chairman, CJ Warner

Sapphire Energy’s Green Crude Farm, in Columbus, New Mexico, is the biggest gamble on the table for commercial-scale algae to fuel. With over $300 million in investments and loan guarantees, Sapphire is on course to bring algae cultivation technology and processing to the American farmer—at some point not too far down the road.

So now that we’ve all seen pictures of their prototypical New Mexico open pond algae farm, what is the real story behind it? What’s it like operating the place? Where is it going from here?

Sapphire Energy Vice President of Corporate Affairs, Tim Zenk

Sapphire Energy Vice President of Corporate Affairs, Tim Zenk

At the recent ABS in Denver we had a chance to sit down with Sapphire’s Chairman and CEO, CJ Warner, and VP of Corporate Affairs, Tim Zenk, to assess the progress of this phase of the Sapphire business plan.

With CJ’s background of over 20 years in the top ranks of Big Oil, and Tim’s as a well-respected pundit of the algae industry to many Washington legislators, as well as a board member of the Algae Biomass Organization, this dynamic duo brings a large perspective to the conversation on algae’s future – Sapphire style.

At your ABS keynote you mentioned how you respond to people who still find it odd to imagine algae in their gas tanks. You tell them, “You’ve been driving with algae all along, but you were just using the old stuff.”

CJ: It’s really true. People just don’t think about it that way.

So now that Green Crude Farm is in operation, what’s the current activity there?

CJ: We are about to do the next big thing with the Farm, which is the strain transition. We’re demonstrating several interesting things. One of them is that you can have a summer crop and a winter crop. So we’ll be going through the winter crop transition.

Another very interesting thing that we are modeling is the farm coop concept. If you think about what we are doing as being a new form of agriculture, it’s very unlikely that we’re going to have just a few large farms with all contiguous property. It’s much more likely that a wide variety of farmers will be growing algae and then will bring it all together, coop style, and that’s where the harvest and extraction will take place.

We’re currently using tanker trucks to transport the algae paste to a remote site, and then we process that into the crude. And that’s a very important part of the demonstration. So over the next two years we’ll be building the next phase of the system. And in that phase, the technology that we’ve piloted to demonstrate commercial economics will become competitive with crude.

1.1 and 2.2 acre ponds in operation at Green Crude Farm, near Columbus, NM

1.1 and 2.2 acre ponds in operation at Green Crude Farm, near Columbus, NM

When that’s been accomplished, and you begin rolling out commercially, how do you see the farmers fitting in?

CJ: For our very first commercial facility our vision is that we would own it with a group of partners. And the reason we would do that is that it is a first of a kind, and it’s going to be very important to control and manage all of the variables, and to optimize them. Our view is, as we start to build out, we’ll bring in more and more of the farming concept and we will do less and less of the farming ourselves. But we’ll still provide the seed – from all the work we do in the upstream biotech – and then we’ll provide the downstream processing.

How long is that process to move this out to the farmers?

CJ: I had a young man from Canada come talk to me last night, and say, “When will we be able to do this in Canada?” And I really firmly believe we will be doing this everywhere someday.

As far as how long the process will be to move it out to the farmers, I don’t know the answer definitively, but I believe after we do the first commercial operation we will get enough interest and farmers will want to learn, and we will want farmers to learn, and we’ll figure out a way to do that. What we’re offering for many farmers is to take land that is no longer viable for them for growing crops, and bring it back into usefulness.

It seems to have been a bit of a whipsaw year as far as governmental support for algae initiatives. How does it look from your point of view?

TZ: This is a political climate we live in. It’s the presidential season and the intensity of the conversation around energy has been a big part of the presidential discussion, and it’s not surprising that the renewables have entered into the picture. It’s been a big part of President Obama’s initiative and there’s been a lot of discussion in Congress whether we should be doing this or not.

An aerial view of Sapphire Energy’s Green Crude Farm.

An aerial view of Sapphire Energy’s Green Crude Farm. There are currently 100 acres of ponds developed and the site is approximately one mile long by one-quarter of a mile wide.

At the same time, there have been some big breakthroughs, like the bipartisan bill in the Senate Finance committee. Algae was singled out as one of only five new adds to the Chairman’s tax bill, giving us parity with other biofuels. That’s an enormous accomplishment. It’s taken us five years to get to that point. That’s a process of due diligence on Congress’ part. You don’t get into a tax bill just because you are a good lobbyist. You have to really justify that your technology warrants it, and the government should invest. I think it’s a huge breakthrough for the industry.

In our current economy, and depending on the outcome of the election, there could be a shrinking of government money for biofuels. What other sources would be most likely to take its place, private equity? Offshore?

TZ: I don’t want to guess on that, but I have a high degree of confidence that once we get through the election, the political rhetoric—which is all it is today—of not wanting to invest in these projects, will dissipate.

It just makes so much sense for our country. I spoke the other day about our willingness to invest in a weapons system – well this is just as strategic as the B2 bomber. Before we even got that built, we’d spent $29 billion in just unclassified research dollars. For that $29 billion, plus another $40 billion, we built 18 planes that had a ten-year lifespan. So, the small amount of money that we’re investing in renewable energy really seems reasonable and easy to accomplish.

How strong are the signs from the military that they want to see this develop?

TZ: What I’ve noticed over the last five years is that this is not just the administration’s objective. This has filtered through the military ranks. So you have soldiers that really believe in this today. And you have veterans who believe in this, as well as people with a lot of stars on their shoulders who really believe in this today. It’s not just something the president wants them to do. The DOD doesn’t operate that way. They have a real philosophy about why they are doing this.

My view is that this will filter through to the McCains of the world, and they’ll have a very hard time resisting what the military wants.

CJ: I have to echo what Tim is saying. It’s really clear to me that what is going on now is political and they are trying to use certain sound bites to attack the other side. But when it comes down to what they really believe about this technology, I have yet to find anyone who isn’t actually excited about it.

From a high level perspective, I have to say that we have been really blessed with very supportive legislators, congressmen and representatives – and local government. I can’t think of anybody who knows Sapphire who’s been a detractor in any way. And it does seem whenever someone comes to visit us, whether they’re Republican or Democrat, and they really get to see what it’s all about, they go away feeling more strongly towards supporting us.

CJ giving a keynote address at this year’s ABS in Denver.

CJ giving a keynote address at this year’s ABS in Denver.

What is your best argument to those who see the cost of biofuel today as a roadblock to supporting its development?

We’re actually already able to compete with corn, if corn weren’t being subsidized so heavily. Now we are not asking for a subsidy in order to stay alive, but having something that helps us early on will help us become competitive faster. We really just want a level playing field because we know we can compete head to head on a level playing field.

You mentioned earlier that you will soon be changing over to a winter strain. You’ve been running spirulina so far. While many people think of spirulina as a low lipid strain, you seem to be getting much more oil from it. What can you tell us?

CJ: This is the excitement of our proprietary extraction system. It unveiled all kinds of new things to us once we started working the technology.

Our extraction process is different from the ones that people are using when they quote those low lipid contents. The classic old methodologies only pull out a limited amount. But we have been able to boost yield by a huge percentage by using the hydrothermal extraction that we now have a patent for.

What it does, basically, is convert all of the biomass into usable oil, with the exception of the nutrients, which we then recycle back to the ponds. And that’s what we want to do; we want to use everything. So the proteins, the carbohydrates and the lipids that exist in any algae form, will all get converted, to some degree, into hydrocarbon.

With spirulina we can already get 40% oil, and we continue to perfect both our downstream processing, as well as the strain that we use. That was a huge breakthrough for us. The value of integration is very high because this is an example of something where the chemical engineers were working with the biologists and together they discovered that there was something completely different than any of us expected that was available to us.

Did this happen since you began the collaboration with Earthrise?

CJ: The Earthrise arrangement was really established to help us learn cultivation from people who really knew cultivation. That was valuable to us and we started talking with them very early on. And then somewhere in the middle of that we suddenly realized that we were actually going to grow spirulina in the big ponds, because we were able to make so much oil from it. The partnership grew from that.

This quarter of an acre inoculation pond is the smallest onsite.

This quarter of an acre inoculation pond is the smallest onsite, and the beginning of the cultivation process in Columbus, NM.

So what winter strain are you about to change to?

CJ: We’re going to be using a form of scenedesmus. And, just like farmers, we are reading the Farmers’ Almanac, watching the weather forecasts, and testing all kinds of things. We began the inoculation on October first, just to get things started. Then we’ll decide when to start building out from the inoculation to the bigger ponds based on the weather.

Then do you go into a new crop management regime?

CJ: We have a whole different cultivation routine for the two, so what they need in terms of a nutrient regime, in terms of water chemistry, in harvest frequency, and crop protection are all different. It stands to reason, because it is a completely different crop. It’s like if we were going from corn to wheat.

Is your winter crop going to have as healthy a lipid content do you think?

CJ: It will, and actually the scenedesmus makes more oil.

What is the climate like in Columbus, NM, in the winter?

CJ: It will freeze at night and the ponds will probably get some ice on the top, but they won’t freeze all the way through. Of course, now that I’ve said that…! Actually, the great thing is that it doesn’t matter, because our winter crop doesn’t mind being frozen for a while. The cold weather slows down the growth, just like it does with any organism, so we’ll get lower biomass yields when it’s really cold. But a great thing about New Mexico is that it gets pretty warm even on a winter day, before getting cold at night.

As far as other next big steps, we are working on optimizing a new summer strain for next year. A big part of what we are doing to achieve commercialization is mapped out very precisely with metrics, and production improvement is one of those metrics. So each season we will be using an improved strain. Next summer’s strain will not be what we are using right now; it will have to have at least 20% greater growth.

Will it be an improved version of spirulina?

CJ: Spirulina is in the mix, but we have different strains competing with each other. It hasn’t lost out, but it’s not the clear winner, either. We’ll use the best one we have when we’re ready.

Sapphire's Dissolved Air Flotation

Sapphire’s Dissolved Air Flotation, or DAF system, an integral part of the harvest process.

What have you learned about crop protection over this last year in scaling up?

Lots of great things. We have refined our process of using fungicidals and other crop protection chemicals – and we use them very sparingly. We use the types that are already in use in agriculture in other places. And the great thing is that we don’t have to spray them. You can put them in the water so they actually stay where you want them – much better than in other applications. So as long as we’re staying ahead of the curve, we don’t need to use very much, and it goes a long way.

Sapphire has been in many ways an industry bellwether for open pond systems designed for fuel production. Not an easy path, and I’m sure you’ve had to defend it many times. You say that people are excited about it, and still there are many obstacles yet in scaling up open systems. How do you see that continuing to play out?

CJ: From a technical perspective it’s becoming, at least to us, absolutely clear that the open system is what you have to do. There’s nothing wrong with a closed system, especially if you are using them for research or to produce small quantities of some high margin product. But if you’re trying to grow extremely large quantities of something, it’s going to be an open system, simply from economics, and simply from a sustainability perspective. Putting that much plastic all over the place just doesn’t make sense, at least to me.

But even from the standpoint of culture stability, and your ability to grow something, plants do not thrive as well in a closed system. So you may think that you are going to protect them from pests when you close them up, and you may in the short term, but pests still get in. And it’s easier to control them when it’s an open system – the whole eco system helps to keep it clean. In a closed system, you cannot get rid of whatever it is. You have small crannies, and you’re not going to bleach your whole system if it’s thousands and thousands of pipes. We get contamination, too, but we’ve learned how to deal with it.

From a regulatory perspective, we just don’t have any evidence of ever having any problems of our material getting out of the pond and going somewhere else to grow. And that’s primarily because what we are growing is being grown in a unique environment and it’s being developed in order to grow in that environment. And that environment doesn’t exist outside of the pond. So if it gets outside of the pond, it simply doesn’t compete with all the other organisms that it encounters. So it just hasn’t been a problem.

GM agriculture is such a touchy issue internationally, how do you see transitioning from where we are to where it’s not only accepted, but it moves forward with reasonable guidelines?

TZ: Job number one for the industry, and particularly Sapphire and those of us who care about these issues, is to have a robust regulatory platform. We want that. Why? Because it gives us certainty about the process. As long as we meet the conditions, and can prove those conditions with a science-based regulatory process, then we are able to move forward.

There is a lot of dogma, as well as a lot of experts, in the business of genetic engineering. And you have to separate the dogma from the facts. And, in fact, thousands of plants every year get certified and licensed—or delisted, depending on what regulatory process you go through—to be implemented in farm settings here as well as in other countries.

Internationally, I’ve heard comments that there’s no GMO allowed in Europe. Nothing could be further from the truth. The Germans have large amounts of genetic engineering. Poland does. Many countries in Europe are coming online that are using genetically engineered materials and seeds. But they use seeds that are developed in Europe, and that’s been acceptable to the EU in the way that they’ve gone through their regulatory process.

The other point is that where you already have international conventions in place is where you start first. So there are international treaties in place that prevent certain countries from using these technology barriers from a World Trade Organization perspective. So if they want to be part of the convention and they want to be part of world trade, then there are certain agreements they have to live up to from a regulatory standpoint. And part of that is how we handle agricultural crops. So, many times the ecological discussion is really nothing more than a trade barrier.

If you are thinking about it globally—how do you go global with algae? I think the way to do it is to prioritize on nations that are part of the various ag safety conventions, and you move through the process, because they already have robust regulatory structures.

So the mechanisms are largely in place for this transition?

TZ: There’s no question they are in place. We have work to do in the United States to get the agencies the resources and technological expertise to review it, but the same statutes that apply to microorganisms, or to crops, apply to our plants.

Again, there’s a lot of dogma in algae. The GM issue is certainly one of those. Another is bioreactors versus open ponds. And, you can’t get high oil concentrations out of spirulina. And you can’t grow outdoors, or in dirt. There are a lot of “you can’ts” but we don’t let those barriers deter us. We just look at them differently.

The ABO has been active in educating and advocating to Washington. What are your observations about the doors and minds that have been opened through this process over the past couple of years?

TZ: The industry has really gotten its act together. Today there isn’t a meeting that happens in the biofuels space where somebody doesn’t bring algae into the discussion. We used to have to claw our way into meetings in the White House and Congress and other places when they were talking about biofuels. That doesn’t happen anymore. You see for the first time political leaders coming to our conferences, because they are trying to tell us they want to help.

We have a lot of support in the Senate, even by those who have been vocally opposed to the President’s agenda. Behind the scenes they say to me, “Don’t worry.” And it’s not all about the Congress, or the government. The stakeholder groups, the NGOs as well, have been very open to hearing our story.

There is so much diversity in algae at this point, as well as so many unsubstantiated claims. How consistent is that story?

TZ: I think one of the things we’ve tried to do as an industry organization is police ourselves. There is zero room within our board at the ABO for people to make claims that are unreasonable, or beyond the laws of thermodynamics. The board won’t stand for it, and people call them out. We still have some people out there that think they can get away with it but, by and large, rank and file people won’t put up with it anymore.

What is your overall observation of the industry at this point?

CJ: We are right on the front end of some consolidation, and also some expansion. That’s the normal ebb and flow of any budding industry. The ones who are not serious are going to fall off the edge.

And there are young people and academics coming in to the industry with new ideas that will spawn wonderful new things. As the industry gains a greater maturity, these new people have a better chance of doing something serious. Where, when we started, there were all kinds of ideas—also good—but some of them were legitimate and some really weren’t.

Coming from Big Oil, how do you see that sector responding to algae at this point? They put their toe in the water—they pulled it back…

CJ: I think that’s normal. Actually, one of the things that caused me to despair when I was still in Big Oil—and a strong advocate of sustainability and renewable fuels—is when you’re in the middle of it, and the volume is as high as what you’re dealing with, anything new just seems hopelessly small. And the amount of effort and time you have to put into the hopelessly small to get it big seems disproportionate to what it’s delivering to the business at that time. So it’s very difficult for Big Oil to get their head in the game this early.

I think they started by dipping their toe in the water and learning. Some of them have retracted, probably because it was taking longer than they expected, or they were just learning and now they’ve got a lot of other distractions. Natural gas, for example, is a big issue they need to resolve right now, because they have the problem right now.

Another commonality is they tend to do things in a very scientific way, so they see risk as something different than we do as entrepreneurs. They’re very happy for someone else to de-risk it for several years, and then they’ll come in. They’re not so price sensitive, so if it costs them more to come in later, it’s not a big deal for them.

But I think they are very intrigued. They want to stay in the game. They don’t feel that they have to play right now, but they’re still very much wanting to understand it so they know when it’s time to come in.

Will they acquire to come in? Will they cherry pick?

CJ: It’s hard to say. It’s interesting. Many big firms have now learned that acquisition too early is a good way to kill the idea, because their systems are not compatible with ones that are conducive to entrepreneurial activity. In other words, to run a big system like they have, they can’t act like entrepreneurs, and it’s good they have the system the way they do. So partnering is a better deal than acquiring, because that way you don’t kill the patient in the process.

And what is your assessment of the health of the industry at this point, and its direction?

TZ: It feels like we’ve just kind of found ourselves going over a tipping point here, because we are starting to see success in the space by companies who have really pushed things forward under difficult circumstances. Politically, certainly our visibility has grown. Lot’s of eyeballs are on what we’re doing. And it now feels like the expectations are not overweighted; people have a realistic understanding of how hard it is to do what we’re all trying to do.

There also doesn’t seem to be the backbiting or arrow throwing that used to happen in the early days, like over the open versus closed systems. I don’t even enter those debates anymore. We are one of the largest closed reactor users in the United States. There should be no competition. We have our philosophy, you have yours – have a nice day. I think that we’ve all sort of learned to work together and so you see a real maturing of the space. I think that’s a really good development.

CJ: We coined the phrase “Peace Love and Algae” a while ago. It’s really about that there is so much room for everyone to succeed there is just no point in fighting about one over the other. It’s about making all of it succeed. It’s an all of the above concept. And we can help each other so much if we have that attitude.

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