Keep An Eye On Biobutanol

By Stephen D. Simpson, CFA | May 18, 2010 AAA

Few topics seem to garner as much interest these days as the idea of moving past the gasoline-based transportation economy and onto something better. Several candidates for "better" have risen and fallen in recent years - fuel cells and ethanol seem to be yesterday's news - and advanced batteries are the belle of the "better" ball right now.

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Investors should keep an eye out for biobutanol. While there are several significant challenges to surmount before biobutanol could be commonplace, this is an alternative fuel that may actually give us a real alternative when it comes to fueling our cars. That, in turn, could deliver real rewards for companies like DuPont (NYSE:DD), BP (NYSE:BP) and Total (NYSE:TOT) down the line.

What Is It?
Like ethanol, butanol is an alcohol, but where ethanol has two carbon atoms per molecule, butanol has four. In practice, butanol is more similar to gasoline than ethanol, and some people have managed to use butanol in a gasoline engine without modification. It also happens to be more energy-dense, more tolerant of water, and less corrosive than ethanol.

What makes butanol interesting is that is possible to produce biobutanol; that is, butanol derived from biological (not petroleum) sources. The same feedstocks that make ethanol (sugarcane, sugar beets, corn, other grains, etc.) can make biobutanol and the process is technically similar. Like ethanol, there is also talk of harnessing algae to produce biobutanol. (For more, see Clean Or Green Technology Investing.)

If It's So Great, Where Is It?
As promising as biobutanol is as a fuel, there are a few problems. Using it as anything more than a 10% blend-in to gasoline will likely require cars built with the intention of burning butanol as fuel. That is not such a big deal, really - Ford (NYSE:F), Honda (NYSE:HMC), Toyota, General Motors and many other automakers already sell flex-fuel cars in Brazil that can run on 100% ethanol, and it would not be a difficult conversion to biobutanol.

The bigger problem for now is the actual production of the biobutanol. Biobutanol is pretty nasty to the organisms used in fermentation, so it is difficult to get a high concentration from a batch. Beyond that, the distillation and separation of the alcohol can be tricky, and it has high energy and water demands. In other words, biobutanol is just not that easy to make in commercially viable quantities with today's technology.

Big Players Showing Interest
The good news, though, is that the challenges facing biobutanol do not seem insurmountable. Relatively modest improvements in yeast cultures and the separation/distillation process could lead to pretty significant gains in yield and commercial viability.

DuPont and BP have already teamed up to tackle some of these difficulties. Given the relative areas of expertise for each company (DuPont has ample experience in genetically-modified organisms and fermentation biology, BP is a major refiner), it seems like a natural match. French energy company Total is also in the game, with an investment in Gevo. Other private companies like Cobalt Technologies, Butalco, and ButylFuel are also developing their own systems and technologies to deliver biobutanol in economically useful quantities. (For more, see Peak Oil: What To Do When The Wells Run Dry.)

The Bottom Line
Unfortunately, investors looking to play this idea as the next big thing will find their menu of choices to be rather limited. Certainly there are large companies with serious interest in this field - in addition to the names mentioned, there are companies like Cosan (NYSE:CZZ) and Archer-Daniels-Midland (NYSE:ADM) with interests in this field.

On the other end of the spectrum are several names that are basic bulletin board stocks and suitable only for highly risk-tolerant investors. But even if investors cannot find an ideal pure-play, it is a good idea to keep an eye on biobutanol as leadership in this field could ultimately move the needle for even these large companies. (For related reading, see Five Companies Leading The Green Charge.)

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