Biofuel Fraud Case Could Leave the EPA Running on Fumes

Cello Energy is unlikely to produce 70 million gallons of cellulosic biofuel next year, which means that the EPA will not meet its 2010 target of 100 million gallons
By Brendan Borrell
Scientific American

Grassoline it ain't. After a jury ordered a leading cellulosic biofuel company to pony up millions for defrauding investors, the U.S. Environmental Protection Agency will likely come in 60 million gallons shy of its 100 million gallon target next year.

Late last month, a federal court in Mobile ordered Cello Energy of Bay Minette, Ala., to pay $10.4 million in punitive damages for fraudulently claiming it could produce cheap diesellike fuel from hay, wood pulp and other waste.

Cello's owner, Jack Boykin, allegedly built a sham facility and lured pulp producer Parsons & Whittemore Enterprises to invest $2.5 million in an ownership stake in 2007. In court, Parsons & Whitmore CEO George Landegger said he was unimpressed with the company's facilities, and a string of expert witnesses testified that fuel samples were derived from petroleum sources.

Neither Boykin nor his attorney, Forrest Latta, returned calls for comment, but in statements to the press following the trial, Latta has indicated that Cello's technology has "global potential." Another defendant, Khosla Ventures, a California firm that invested $12.5 million in Cello in 2007, was unavailable to comment.

Although it's no surprise that investors might be dazzled in the rush to hop on board the biofuels bandwagon, the EPA appears to have been duped as well.

Cellulosic biofuel technology is still in its infancy, and the agency and Congress required gasoline blenders to purchase and sell just 100 million gallons next year, less than 1 percent of the nation's proposed renewable fuel mandates. To encourage biofuel producers to meet that demand, the government would establish a credit scheme to set a floor on the wholesale price of $3.00 per gallon—about twice that of corn-based ethanol—if production fails to reach the 100 million gallon mark.

But David Woodburn, an analyst at ThinkEquity Partners in Chicago says that the agency had pinned its hopes on Cello and has not put in place the cellulosic biofuel credit system required to maintain that price point. "EPA was supposed to have prepared it in late June," he says, "In the EPA's eyes, they only need to implement that system if they see a shortfall coming.... Up to now on paper they've totally ignored this credit system."

As reported in earth2tech, Woodburn first realized the EPA would fall short of its target when it released its draft regulatory impact analysis in May. This document listed firms that were to make cellulosic biofuel, and most were on the hook to produce one million or two million gallons by the end of 2010. Cello Energy, however, claimed that its Bay Minette facility would pump out 20 million gallons. The agency also had Cello down for new plants that would produce another 50 million gallons. Woodburn says he grew skeptical of the company after calls and e-mails to the company for verification were never returned.

EPA spokeswoman Cathy Milbourn says Cello estimates were "derived based on commercialization plans from the company. They never gave us volume—only size of the facilities and planned timeline."

So, what's the chance that Cello can still meet its target? "It seemed extremely unlikely three weeks ago before this jury verdict," Woodburn says. "It seems extremely unlikely today. How can you create three additional plants and have them producing in 2010 when ground hasn't been broken yet?"

Woodburn adds that Cello also faces another hurdle, which is that it has no distribution agreements: in other words, no one has promised to buy their biofuel. In the best-case scenario, he says, the nation will produce 39 million gallons of cellulosic biofuel next year and blenders will be on the hook to pay the government a $600 million or more for biofuel credits through a program that still does not exist.

Alternatively, the EPA could lower the cellulosic biofuel target when it finalizes the contentious renewable fuel standards in the fall, a decision that would defeat the whole idea of the goal in the first place.

Milbourn says the EPA is "continuing to assess the viability of not only Cello, but also the various other technologies and companies in supplying cellulosic biofuel."

For George Huber, the University of Massachusetts Amherst chemical engineering professor who wrote Scientific American's July cover story about cellulosic biofuels, Cello is a lesson to be learned. "There are no magic processes for conversion of biomass into liquid fuels," he says, "If something sounds too good to be true, it probably is not true."

Biofuel Development a Burning Priority for Obama Camp

By Greg Burns
Chicago Tribune
July 9, 2009

Even with new rules in the offing that would slap handcuffs on oil traders, a prospect that sent shares of Chicago-based CME Group tumbling, the feds are more eager than ever to promote oil-free gasohol. They especially love the stuff brewed from wood chips, corn cobs, switch grass and other forms of cellulose.

Yet cellulosic ethanol, as it's called, remains more of a promise than a reality. So far, no one has produced it on a mass commercial scale at a price that would rival ethanol made from corn or sugar cane.

For a shining moment, the fuel-from-sawdust movement attracted a fortune in private investment, before venture capital funds dried up across the globe. Now, however, at least a few of those bucks are being clawed back the hard way.

The wood chips hit the shredder in Alabama at the end of June, when a federal jury ordered a cellulosic energy company and its executives to pay $10.4 million in a fraud suit brought by an unhappy investor. It's a complex case focused on allegations of bad-faith business practices that involved Silicon Valley visionary Vinod Khosla, whose firm denied any wrongdoing.

But the case also highlighted a once-eager convert's loss of faith in cellulosic fuel.

"This was supposedly a breakthrough technology," said investor George Landegger, who runs the privately held pulp producer Parsons & Whittemore Inc. "This particular one is worthless."

Will any live up to the hype? The potential for scaling up beyond a lab or pilot program "has yet to be proven," he said.

For its part, Cello Energy LLC vowed to continue fighting the legal case and moving ahead with its plant startup.

"It would be wrong to read the lawsuit as any kind of scientific referendum on the ultimate success or failure of the cellulosic fuel process," the company said in a statement.

The fight between Landegger and Cello has a bigger dimension. Government officials were counting on the Alabama-based company to meet 50 percent of the bio-requirement under the nation's motor-fuel standards for next year.

That's not happening, said David Woodburn, research analyst at ThinkEquity LLC in Chicago.

Counting all the demonstration projects, pilot plants and one or two bigger ventures, then assuming that all perform at maximum advertised capacity, only 39 million gallons of a required 100 million will be produced in 2010, he calculates. That's a tiny fraction of the fuel used by U.S. cars and trucks in a year. In 2011, the requirement rises to 250 million, but production to no more than 82 million.

Federal officials may delay imposing the standards, and the production shortfall may in turn trigger further incentives for development.

Certainly, the government shows no sign of backing off. Announcing an additional $787 million for biofuel research and commercialization in May, Chu reportedly sounded an optimistic note: Corn-based ethanol was "a good start," he said, but "research will lead the way to give us much better options."

Landegger worries those research dollars could be wasted. By the time he severed ties with Cello, he said, "It was no longer a biofuel enterprise. It was a grant-requesting enterprise."