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Shell’s Brash Biofuels Partner

Kerry A. Dolan04.22.09, 06:00 PM EDT

Codexis predicts profits ahead of the pack.

While many biofuels companies are laying low and keeping mum, Codexis of Redwood City, Calif., is holding its head high.

Codexis Chief Executive Alan Shaw surveys the landscape of his biofuels competitors and scoffs. “I don’t believe that venture-backed companies can compete in energy,” he says. “The VC model doesn’t work in this space.”

As for Codexis, says Shaw, “We think our process will be up and running and making money for people by 2013.” In a partnership with Royal Dutch Shell ( RDSA – news – people ), Codexis aims to be first to market with a next-generation biofuel.

It’s a big challenge to come up with affordable technology to turn things like corn cobs and wood chips into biofuel. For one, it takes a lot of money. The auditors of Verenium ( VRNM –news – people ), a publicly traded company that has a demonstration plant partly up and running in Louisiana, said in Verenium’s 2008 annual report that the company’s operational losses and working capital deficit “raise substantial doubt about the company’s ability to continue as a going concern.”

Brian Fan, senior director of research at the Cleantech Group, says most of the second-generation biofuels companies are doing the same thing Codexis is: working on improving their technologies. “I think it’s a little too early to pick winners and losers,” Fan says.

Shaw says Codexis–a privately held Silicon Valley enzymes company–is on firm ground, in large part because of the Shell deal. It already has revenues–$50 million in 2008–from its biocatalyst and enzyme business with pharmaceutical companies like Pfizer ( PFE – news – people ).

In 2006 and 2007, Shell invested $33.5 million for a 13% stake in Codexis; it made an additional equity investment (the amount was undisclosed) in March this year. Shell pays Codexis’ biofuels research costs and will pay a royalty upon commercialization.

“Codexis was an obvious choice [as a partner] as it has a fine track record in improving enzyme performance, a technology that we believe will play a significant role in the journey toward full-scale production of advanced biofuels,” says Luis Scoffone, Shell’s vice president for biofuels.

Shaw is enthusiastic about Shell’s scale of operations. He notes gleefully that Shell is already the largest distributor of biofuels globally.

Codexis, which was spun out of biotech company Mayxgen in 2002, is working with Shell to produce enzymes that will break down a variety of biomass (such as wheat grass) to turn it into fermentable sugars, which can then be made into cellulosic ethanol. A variety of companies, including Genencor (a unit of Denmark’s Danisco) and Novozymes, have spent decades in the enzyme business and are working on similar projects.

But Shaw says Codexis has a unique approach in enzyme production. Instead of finding existing enzymes in places like termite bellies and improving them, Codexis scientists follow what Shaw calls an evolutionary approach. They start with DNA information of an enzyme and do sexual reproductions of millions of parents and millions of offspring, using computing power. “Each time [the enzymes] get incrementally better. This is a random but directed process,” Shaw says.

Codexis is also working on improving the productivity of the fermentation process using designer microbes. Shaw says the whole process will be up and running and making money for Shell and Codexis by 2013.

Shell, meanwhile, has partnered with several companies in the biofuels sector, including Iogen in Canada, which is making cellulosic ethanol out of wheat straw. Last month, Shell announced that all its future investments in alternative energy would focus on biofuels and carbon capture and storage. Scoffone explains that “sustainably sourced biofuels could make a substantial contribution to reducing CO2 emissions. Second, they are a natural fit with our downstream capabilities in transport fuels.”

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