Continental Airlines and Air New Zealand Fly on Biofuel

On December 30, 2008, Air New Zealand (NZSE: AIR, http://www.airnewzealand.com) completed a two-hour test flight using a 50/50 mixture of jatropha oil and Jet A1 in one of the four Rolls-Royce RB211 engines of a Boeing 747-400 (http://www.youtube.com/watch?v=d5g5Z3GTNwk). The flight was a success and the airline has announced plans to use the fuel for 10% of its needs by 2013. Jatropha was chosen as the candidate for the test as it passed the three rigorous criteria set by Air New Zealand: social, technical and commercial. That is, it is environmentally sustainable and will not compete with existing food resources, it is a drop-in replacement for traditional jet fuel and is as good as the product used today and, finally, it is cost competitive with existing fuel supplies (http://www.airnewzealand.co.uk/aboutus/biofuel-test/default.htm). Furthermore, Continental Airlines (NYSE: CAL, http://www.continental.com)  undertook the first biofuel-powered test flight in the U.S. on January 7th this year. They used a mixture of algae/jatropha fuel and conventional fuel in one engine of a 737-800 for a 90 minute flight out of Houston. According to Terrance Scott, the engine with the biofuels mix ran even more efficiently than the control engine (http://earth2tech.com/2009/01/07/continental-gives-flight-to-algae-jatropha-jet-fuel/)! CAL closed at $10.26 today, vs a 52-week high of $23.42.

In late 2007, Goldman Sachs cited jatropha curcas as one of the candidates for future biodiesel production (http://www.cnbc.com/id/20767755/). This resilient, inedible plant has plenty of attributes – it can be grown in poor soils, has a high oil yield and molecular make-up similar to that of fossil fuels. The cost of production tends to be low: around $43 per barrel according to GS, with sugar cane-based ethanol at $45 and corn-based ethanol at $83. Native to Central America, jatropha was brought to Europe by Portuguese explorers in the 16th Century and has since been grown in tropical and subtropical climates all around the world (http://www.timesonline.co.uk/tol/news/world/article2155351.ece). In the past it has been used as a treatment for malaria, in hedgerows and for candle-making, but only now is it coming into its own as a crop for biodiesel. With an oil content of 40%, you can, according to Alex Worrall, chairman of Helius Energy (http://www.heliusenergy.com/, a non-jatropha biomass producer), ‘produce 2.7 tonnes of oil and about 4 tonnes of biomass’ from every hectare. The freezing point is also low: -2c (-47c when treated for use as a jet fuel!), which compares favorably to the most prevalent biofuel feed grown in the tropics, palm oil, which has a freezing point of 10c. And the list goes on (http://www.reuk.co.uk/Jatropha-for-Biodiesel-Figures.htm): it prevents soil erosion, it acts as a soil enriching mulch and it can be intercropped with cash crops offering both a fertilizer and protection against livestock.

But through protecting crops against livestock we are also highlighting one of the plant’s major stumbling points: its toxicity (http://uk.reuters.com/article/oilRpt/idUKHKG7593720070912). Western Australia has recently banned the plant, as the nuts and leaves are so toxic they can lead to not only skin irritations, but ingesting three untreated nuts can be fatal to humans. Furthermore, an engineer has stated that special facilities will be needed when crushing the nuts as they could produce a poisonous vapour. Our instincts tell us that costs could spiral in trying to manage such hurdles on a large scale, especially as yields are unreliable, so precautions would have to be put in place all year round. There are still question marks over the viability of this plant as we are yet to see the results of all its potential. People latched onto it late as a ‘second generation’ biofuel as existing food crops were the first targets by companies and farmers looking to turn a profit from the green revolution.

These few concerns are definitely not stopping companies vying for a piece of the pie! A listed Los Angeles-based company, Global Clean Energy Holdings (OTC: GCEH, http://www.gceholdings.com), announced on October 30 2008 that they had acquired a Belizean jatropha producer through the purchase of Technology Alternatives Ltd. GCEH are well positioned through this acquisition, as not only are they already producing, but Neal Walmsley, the founder of TAL, is an alumni of D1 Oils (LSE: DOO, http://www.d1plc.com/index.php), the London listed company generally used as the benchmark for all jatropha business (significantly, BP took 50% stake in a joint venture with D1 in 2008). GreenGold Ray Energies (OTC:GRYE, http://www.greengoldenergies.com), are also a player in jatropha– they announced on 03/24/09 that a 3 hectare ‘Demo-Jatropha Farm’ is being constructed in the Phillipines along with the acquisition and building of a second biodiesel refinery site. There are plenty to choose from, generally at a similar stage of development: London listed Viridas (LSE:VIR, http://www.viridas.com), is looking to plant 30,000 hectares of jatropha in Brazil by 2011, all completely sustainable . They have a strong partnership with Cazanave, the South American agribusiness, and an off-take agreement with Ineos, the European distiller.

Competition is hot! Jatropha needs to be proved commercially – and if it succeeds, will we see the airline industry have a complete biodiesel overhaul? ANZ seems to think so. For more developments, watch this space…

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