John Williams, CEO of Domtar, is fond of saying about diversifying into the bio-economy that he's kissing frogs, hoping to find a prince. I think it's a great analogy, but you can kiss an awful lot of frogs and not get anywhere. Ensuring you have a decent selection of frogs to start with is critical. And you want to weed out the toads, which will only give you warts. So how to sort through all the frogs?
As manager, the frogs came at me from all directions. First and foremost, they came from the scientific and engineering staff at FPInnovations who were (and hopefully still are!) very curious, motivated people who are excited about moving new processes and product lines into the existing Canadian forest sector. I could count on at least one idea per hour from these guys. (OK, OK, I'm exaggerating. Maybe one a day.) Then there were the people employed by forest sector companies, who are overworked and who are constantly approached by start-up firms with a great idea that just needs some cash. Finally there were ideas from university professors, government labs and funding agencies, conversations and presentations at conferences, etc. It can all be a bit overwhelming, and I gather from ongoing conversations with people in the field that it remains challenging.
So are you awash in frogs? Worried you might be stuck with a bunch of toads? I thought I'd outline some of the approaches I developed in partnership with colleagues. Initially the point of view was that of a not-for-profit research institute, but I have tried to rewrite it here so it could also be used by a government agency, a for-profit industrial player, or anyone else interested in evaluating which frogs to kiss.
The overall approach, which led to the LignoForce lignin extraction plant at West Fraser's mill in Hinton, Alberta, involves picking a Plan A (selected by triaging a broader set of ideas), then focusing on delivering. A couple of backup plans (Plan B and C) should be identified in case Plan A falls through, but should only take a small portion of the overall effort. An initial list of criteria for the triage process follows. Note that not all points need to be addressed in detail for all projects, but you should skim through to make sure there isn't a deal-breaker lurking in there somewhere.
Fuels versus value-added
In my view, the first step is to separate bio-fuels and bio-energy projects from pathways leading to platform chemicals, materials or intermediates that are presently made from petroleum. Hauling wood out of the bush and turning it all into fuels, without a concurrent value-added pathway, is only really economic in very narrow circumstances or in the presence of the appropriate politically-supported carrots (renewable fuel standards) or sticks (carbon taxes). As a result, there are additional criteria for these projects which I will not get into here.
Technology
Do the claims seem reasonable from a scientific basis? Anything that appears to violate laws of thermodynamics or conservation of mass should be looked at with great skepticism. The same goes for paths that seem to ignore the basic chemistry of wood (or whatever your bio-based feedstock is).
Estimate the yield (kg of product per dry tonne of wood consumed). Equally important is what happens to the yield losses (residues). These numbers are essential for subsequent steps.
Evaluate the patent landscape. Are there existing patents out there? Can a deal be made to license the patents from the owners, and at what cost? If we are free to develop and operate this proposed process without infringing someone's patent, might there be an opportunity to build a patent position that would protect all this and give us an advantage? At what cost?
Estimate the yield (kg of product per dry tonne of wood consumed). Equally important is what happens to the yield losses (residues). These numbers are essential for subsequent steps.
Evaluate the patent landscape. Are there existing patents out there? Can a deal be made to license the patents from the owners, and at what cost? If we are free to develop and operate this proposed process without infringing someone's patent, might there be an opportunity to build a patent position that would protect all this and give us an advantage? At what cost?
Markets
Most importantly, who would want this? Pushing a new product into the market is like pushing on a rope; far better to have some serious market pull.
Are you replacing an existing product or are you proposing something which is completely new to the world? In the first case you need to worry about incumbents; in the second, it is a major challenge to convince someone with an existing profitable product line that he needs your new material.
If you are proposing some form of drop-in replacement, what is the likely product quality compared with the incumbent? Is it better, the same, worse?
Assuming product quality is decent, what is the likely market in terms of tonnes (NAFTA, world-wide), and at what typical list prices? Given transportation costs and discounts you may need to offer to volume buyers, what is the likely mill-gate price? Will a further discount be needed to account for poorer (or different) product performance characteristics? If so, how big a discount?
At full scale, what percentage of this market would a new plant occupy? If the answer is a large number, you will need to consider what existing players might do to protect their turf (lower their prices, for instance, to drive you out of business). Sneaking into the market with capacity of 0.5% of world demand is safer.
Understand the incumbents: They have a lot to lose and may have sneaky ways to keep you out. Alternatively, in a market with several players, one may be interested in partnering as a way of keeping ahead of the competition. Monopoly markets have their own challenges.
Are you replacing an existing product or are you proposing something which is completely new to the world? In the first case you need to worry about incumbents; in the second, it is a major challenge to convince someone with an existing profitable product line that he needs your new material.
If you are proposing some form of drop-in replacement, what is the likely product quality compared with the incumbent? Is it better, the same, worse?
Assuming product quality is decent, what is the likely market in terms of tonnes (NAFTA, world-wide), and at what typical list prices? Given transportation costs and discounts you may need to offer to volume buyers, what is the likely mill-gate price? Will a further discount be needed to account for poorer (or different) product performance characteristics? If so, how big a discount?
At full scale, what percentage of this market would a new plant occupy? If the answer is a large number, you will need to consider what existing players might do to protect their turf (lower their prices, for instance, to drive you out of business). Sneaking into the market with capacity of 0.5% of world demand is safer.
Understand the incumbents: They have a lot to lose and may have sneaky ways to keep you out. Alternatively, in a market with several players, one may be interested in partnering as a way of keeping ahead of the competition. Monopoly markets have their own challenges.
Economics
Given the yields and process details, what are the likely operating costs (chemicals, energy, wood) per tonne of product? Start with variable costs; you'll need to consider fixed costs eventually, but if it doesn't work with your variable costs, no point in digging deeper.
What are maximum possible gross revenues at steady-state and full-scale? Can you take a crude first pass at capital costs? From this, a crude first pass at internal rate of return (IRR) or Return on Capital Employed (ROCE) can provide some guidance. If it is poor even in an optimistic framework, can the technology be improved to be more effective? Sensitivity analysis to the major costs will show where opportunities might exist. Eventually a pro-forma showing revenue ramp-up over several years will give a more accurate estimate of payback time.
To be continued...
So far I have covered items where data analysis and research can lead to relatively hard numbers, with reasonably well-understood probabilities and risk factors. Next week I'll outline some approaches to risk factors which can't be so easily quantified in numerical terms, but which are equally important. Stay tuned!
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