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Oil Refiner Agrees To Buy Sapphire’s Output

It might just seem like a drop in the bucket — but San Diego-based Sapphire Energy Inc.’s first steps to commercialize its algae-based crude oil speaks volumes.

Tesoro Corp., a San Antonio-based Fortune 100 company and the largest independent oil refinery on the West Coast, will buy all the crude oil Sapphire can produce at its algae farm in New Mexico and convert it into diesel fuel.

At the moment, that means Tesoro will purchase two barrels — or 84 gallons — from Sapphire each day. By comparison, Tesoro can process about 675,000 barrels of crude oil per day.

But this marks the first effort between a major refiner and an algae producer to commercialize a sustainable, algae-based biofuel.

“This is definitely our first step working with a very serious, credible refinery player — and as far as I know, it’s the first time a major refiner and an algae producer have teamed up like this,” said Tim Zenk, vice president of corporate affairs for Sapphire. “No question, it’s a big step, and this is a validation that renewable crude oil is viable on the market and works with the existing pipelines of oil production.”

$350 Million in Funding

Sapphire, founded in 2008, has received about $350 million in funding to date. This includes money from Bill Gates and the Rockefeller family, as well as $50 million from the U.S. Department of Energy and a $54.4 million loan guarantee from the U.S. Department of Agriculture.

Tesoro will also help Sapphire in the Environmental Protection Agency’s certification process, so that it can be used by any on-road vehicle. This is a costly, multimillion dollar process and will take about six months, Zenk said.

Following certification, Zenk said Sapphire has plans next year to expand its $135 million plant and 100 acres of “cultivation capacity,” adding several hundred acres of farming land and redesigning the algae ponds to reduce costs.

Zenk wouldn’t disclose the price of these algae-based crude oil barrels, but said that the cost is constantly lowering and is approaching the cost of oil barrels that come out of the ground. Crude oil derived from drilling or fracking costs between $80 and $110, he said.

“We haven’t reached that milestone, but it’s coming into close focus,” Zenk said.

By the end of 2014, the company hopes to produce about 100 barrels of algae-derived crude oil per day.

Zenk expects that within 15 years the company will have a large installation deriving thousands of barrels of crude oil from algae and should have expanded internationally by that time.

Fuel for the West Coast

Tesoro will purchase crude oil from Sapphire through the end of 2013 and likely further, said Christina Barbee, a representative with Tesoro. Further, both companies have the option to increase the purchase volumes under the agreement as Sapphire expands its green crude oil production.

Tesoro will initially market the green fuel to the West Coast, and will focus on the off-road fuel market — until EPA certification is complete. The company will conduct extensive testing on the fuel’s performance in a variety of vehicles. The results of the testing will determine to which end-user segment the fuel will be marketed, Barbee said.

But Sapphire’s fuel doesn’t require any change to infrastructure, pump, pipeline, or changes in automotive design, said Michael McAdams, president of the Washington, D.C.-based Advanced Biofuels Association.

“It’s identical. That’s what’s astounding. These guys have figured out different technological pathways to make fuels that are essentially the same — but instead of coming from a barrel of crude oil, it comes from a renewable source,” McAdams said. “They’re literally figuring out how to speed up the process of making oil, millions of years ahead of schedule.”

McAdams said that since algae is such a simple plant to farm, it requires less processing costs than other organic fuel sources like soy beans and corn.

“Using algae lowers the lifecycle of fuel, and reduces the carbon footprint,” McAdams said. “When you look at corn ethanol — another biofuel — it results in a generally less than 20 percent reduction in greenhouse gas. With algae, you have an 80 percent greenhouse gas reduction.”

Algae was the first plant on Earth. It bloomed prolifically billions of years ago because of the high concentration of carbon dioxide — and when it dies out and decomposes, it turns into natural gas.

“When we started, we figured that through modern biotechnology, there had to be a way to speed up the process,” Zenk said. “That was our theory going in, and five years later, it’s proven to be true.”

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