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By Tom Bergin

LONDON - The credentials of biofuels might have been dented by claims that current production methods are inefficient, lead to deforestation and drive up food prices, but a German firm hopes to all this with new technology.

Tom Blades, chief executive of Choren, said his company planned to the world's first commercial-scale plant to manufacture transport fuels from plants, using second-generation technology, later this year.

 

However, Blades said it would take time before the processes were refined to give western leaders concerned about energy security and people worried about climate a realistic fossil fuel alternative.

 

I wouldn't say we have discovered the holy grail but we're in the lead in the quest, Blades told Reuters on Wednesday.

 

Currently, there are two main types of biofuels -- ethanol, which is made by distilling sugars from corn or sugar cane, and biodiesel made by processing plant oil.

 

Rising biofuel demand due to government incentives has pushed up the prices of feedstocks, which are also foodstuffs, and led to rain forest being felled for oilseed plantations.

 

Inefficient production methods, which mean the equivalent of nearly a liter of fuel is used to produce a liter of biofuel, has seen limited net CO2 reduction, and high costs.

 

Second generation biofuels would use non-food crops such as straw and waste lumber, be more energy efficient, require less land use, offer more CO2 reduction, be cheaper and offer greater energy security.

 

Yet so far second-generation biofuels production has been essentially experimental.

Choren's new plant in Freiberg will manufacture a synthetic diesel from woodchips that produces much less CO2 than existing biofuels. Nonetheless, scale and cost will be remain an issue.

 

Blades said the plant would produce only 300 barrels per day (bpd) of SunDiesel at a cost of 0.90 euros per liter.

 

This compares with 0.48 euros per liter for regular diesel, based on a $65 per barrel crude price, and around 0.60 for first generation biodiesel.

 

Without tax breaks or government-mandates for biofuel use, Choren's diesel will not be economic and even with these, the Freiberg plant will not be a lucrative venture.

 

It's not going to make us rich .. we're still on target to make a black zero, Blades said.

The Freiberg unit will enable Choren to refine its methods, with more plants planned in the coming years. Choren expects to building a 5,000 bpd facility in Germany in the next two years that could manufacture for 0.70 euros per liter.

 

The company is also in talks on constructing a plant in the United States, where project economics are helped by feedstock costs being half the level of Germany -- partly because higher use of wood in construction means more waste lumber.

 

The improved prospects for energy security offered by Choren's technology may also bring U.S. opportunities.

 

Blades said the Pentagon had expressed interest in using the technology to produce green jet fuel for its fighter planes.

 

To fund ambitious growth plans, Blades and fellow shareholders, including the oil major Royal Dutch Shell Plc (RDSa.L: Quote, Profile, Research), may float the company in an initial public offering or sell shares in the planned plants to investors, with Choren retaining a management contract.

 

We'll probably make a decision on which route in mid-to-late 2008, Blades said.

Over time, the new facilities could push the manufacturing cost down to 0.50 euros per tonne -- competitive with diesel even without subsidies.

 

If oil prices stay high and governments offer incentives, Blades thinks green diesel could take up to 20-30 percent of the global market, although he expects to wait at least 30 years to see it.

 

Some scientists are less optimistic, saying the heat required in gasifying biomass to produce second-generation biodiesel will always limit its cost effectiveness.

 

Oil major BP Plc is more optimistic about cellulose ethanol - the next generation of ethanol, which uses enzymes to produce fuel from biomass, rather than distilling expensive sugars.

 

Shell is hedging its bets. It also has an investment in Iogen Corp., a company researching cellulose ethanol, although commercial-scale production seems some way off.