Setting the Record Straight on Cello Energy and E3 Biofuels
The Art of Spin
Politicians are known for their ability to spin any situation to make sure it doesn’t present them in an unfavorable light. In that vein, I’m beginning to feel as if Vinod Khosla would make a fine politician. As much as I am tired of writing about him (and I am sure he long-ago grew tired of me writing about him), his recent response to a Wall Street Journal editorial called The Range Fuels Fiasco warrants its own response.
While Khosla does not point a finger directly at me in his response, a number of readers e-mailed or commented on my blog that they believed Khosla was accusing me of misrepresenting his relationship with some of the companies I mentioned (as I explain in more detail below). I will set that record straight and deconstruct his recent response.
Vinod Khosla has long sought to influence the direction of energy policy in the U.S. Business and political leaders listen to him and act upon his recommendations. Therefore his actions — his essays, his speeches, and his investments — are all fair game for judging whether he should be influencing energy policy. I have a fundamental disagreement with him over U.S. energy policy. Khosla’s views are shaped by his experience in the computer industry. He believes that if he spreads his bets, a solution to our energy problem is virtually assured. He believes in the certainty of Black Swans, Moore’s Law, and the power of venture capital to make the impossible happen. If you understand that this is where he is coming from, then his words and actions make sense in that context.
I come from a different place, where the way of life we enjoy has been made possible because of many years of easily accessible and affordable energy. I think those days of cheap energy are coming to an end, and it is far from assured that spreading lots of money around is going to result in a solution to our energy problem. In fact, I can see nothing on the horizon that can easily replace oil, and that poses a serious risk to our economy and our way of life. But if we assure people again and again that solutions are easy and the real problem is oil companies blocking access to renewable energy, or not enough investments in the sector — you lull people into believing in solutions that may never appear. And while they hold out hope for the silver bullet, time is lost and we move closer toward disastrous supply shortages. We should of course still work hard on solutions; that is after all what I do every day. But we should not over-promise. After all, we have no worries if we are about to be swimming in $2/gallon celulosic ethanol, but if this belief prevents us from taking other necessary actions then we may have a problem if the promise doesn’t materialize. If you understand that this is where I am coming from, then my words and actions should make sense in that context.
I want to be clear that I have no personal animosity toward Vinod Khosla. He has never wronged me in any way. In fact, my organization has some ties with him (several people know him or have done business with him) and they probably get uncomfortable over some of my critical articles. I have spoken to Khosla at length on the phone twice and have exchanged numerous e-mails with him. He has always been cordial to me (and I to him). My criticisms are about one thing: The direction of energy policy in this country.
I will defend Khosla on one point. Perhaps I am naive, but I believe his motivation is that he believes he is doing the right thing for the planet. I am currently reading Power Trip by Amanda Little. In the book, she quotes Khosla: “We are seeing in green technology what we once saw on the Internet. But in this case the end result isn’t buying a book or getting a date online, it’s saving the future of civilization.” I think we both want a similar end result, but have sharply different views on the path that needs to be taken, as well as the risks of choosing the wrong path.
With that said, let’s take a look at recent events and Khosla’s response.
The Wall Street Journal Editorial
The Wall Street Journal recently published an editorial called The Range Fuels Fiasco. In the article, they were critical of Khosla on a number of points. I wrote an essay in the wake of that called The Media’s Role in the Range Fuels Fiasco, pointing out that the media also has an obligation to do a better job of investigating claims like those in connection with Range Fuels over the past few years. In my essay I also mentioned Khosla’s connection to E3 Biofuels and Cello Energy, which I will get into below.
Vinod Khosla published a response to the WSJ editorial:
Khosla begins by stating that the WSJ misrepresented his relationship with Cello Energy:
“I have never publicly uttered the word ‘Cello,’ nor classified it as a ‘great cellulosic hope.’ I have never owned any shares in Cello. I have never evaluated the technology directly or indirectly. A company backed by a fund I invested in paid Cello a relatively small amount for a non-equity relationship to buy blind ‘insurance,’ a tiny amount compared to our biofuels portfolio. This has been widely misreported in the press. An earlier story in the WSJ chose to report ‘that I was an investor in Cello’ despite receiving a statement to the contrary in writing from me prior to publication. It makes me wonder about the ethics of some of WSJ’s reporters.”
The Cello Energy Connection
In 2009, Cello Energy was taken to court and accused of fraud with respect to their operation. While I don’t recall Khosla ever being quoted as calling it a “great cellulosic hope”, relevant court testimony showed more direct involvement than Khosla is admitting. Trial testimony exposed the connection between Khosla’s firm and Cello:
The leadership of California-based Khosla Ventures was so impressed with Baldwin County inventor Jack Boykin and his claim that he has unlocked the secret to turning wood chips and hay into cheap diesel fuel, they agreed to give him $25 million to build three manufacturing plants and to spend millions more each year to operate them, Khosla partner Samir Kaul testified in Mobile’s federal court on Monday.
Khosla Ventures, a venture capital firm created by the billionaire co-founder of Sun Microsystems, Vinod Khosla, has been sued along with Boykin’s company, Cello Energy, by Parsons & Whittemore Enterprises, one of the world’s leading pulp makers and Boykin’s initial investor.
Kaul told jurors that he first learned of Boykin and his potentially “game-changing technology” in 2007 from David Bransby, an Auburn University agronomy professor. Kaul asked Khosla’s chief scientist to meet with Boykin. His verdict, Kaul said: “Boykin is the real deal and he’ll get funding one way or another.”
It was also revealed that Khosla had Cello’s fuel tested (and determined that it was not derived from biomass), although it was not clear whether this was before or after they had a deal in place. But one thing is clear: The court testimony from Samir Kaul shows that there was a relationship. It is true that Khosla prevailed in the lawsuit, which had accused him of interference between Cello and another investor in Cello called Parsons & Whittemore. But the fact that Khosla prevailed in the lawsuit does not change what Samir Kaul testified to under oath: Khosla Ventures was in fact involved with Cello. A detailed look at the case can be found here, in which Khosla was quoted: “Great job on this one. Herculean effort. But my bet is it will pay off.”
The very same website where Khosla’s recent response to the WSJ was published — GreenTechMedia — wrote this previously on Khosla’s Cello involvement:
Cello Energy isn’t listed on Khosla Ventures’ list of biofuel companies. But the well-known green VC firm has put $12.5 million into the Alabama-based startup, which the EPA expects to be producing 70 million gallons of ethanol from trash and biomass by next year.
Beyond the initial $12.5 million, Khosla agreed to additional funding for a second and third plant in the contract, Woodburn said.
Those plants, along with a fourth new one, are meant to eventually reach 50 million gallons per year production, but Cello’s shorter-term goal is to be producing 70 million gallons per year by next year, he said.
These accounts and the court testimony contrast with Khosla’s characterization: “A company backed by a fund I invested in”, “a relatively small amount”, “a non-equity relationship”, “blind insurance”, “a tiny amount.” The conclusion on Cello is that Khosla’s organization — and even Khosla himself — viewed Cello as a promising technology and they did provide money to Cello. Cello was convicted of fraud, so someone, somewhere, failed the due diligence test and Khosla is engaging in damage control.
The E3 Biofuels Story
On E3 Biofuels, Khosla wrote this in his WSJ response:
“Others have claimed without attribution that I invested in E3 Biofuels, which I have never done either.”
He doesn’t identify who “others” might be, but I have gotten a number of e-mails who think this is directed at me. Whether it was or not, some people believe it was so I will address it. Typical of some of the responses I got was a person who wrote that Khosla was correcting the factual errors that I reported about his ownership stake in E3 Biofuels, and accused me of “lazy/fact free journalism.”
There is just one problem. I never reported that Khosla had an ownership stake in E3 Biofuels. I wrote that he had promoted them, and you can see that for yourself in My Big Biofuels Bet. In that article, Khosla heaped on the hype. He called the E3 approach “the most promising solution to our nation’s energy crisis”, claimed that they were “the most energy-efficient corn ethanol facility in the country”, and claimed they would make ethanol for 75 cents a gallon — before they even started up. A year later they were bankrupt.
Incidentally, my comments on E3 are not meant to denigrate their approach; I was actually supportive of what they were trying to do. But if you asked me about their potential, I certainly would have cautioned that this approach would be capital-intensive and had a lot of technical risk because of the degree of complexity and integration. Khosla considered the technology so promising that it was a major focus of his article. But no, he never invested in them — and I never reported that he did. He just failed to appreciate the technical risks the company would encounter in commercializing, and thus he grossly overestimated their potential. He has shown a pattern of underestimating technical challenges in the energy business.
I strive to get my facts straight, but in reviewing what I had written previously it looks like I did get one wrong:
Khosla: “The goal was never 100 million gallons for $150 million project — those numbers would make it less capital-intensive than corn ethanol projects — not a figure Range ever planned. WSJ or somebody else misinterpreted those facts.”
A year ago I detailed the time line of the Range Fuels story. I wrote “An article in USA Today reported that the initial capacity would be 20 million gallons. The site was permitted for 100 million gallons of eventual capacity, and the cost of building a 100 million gallon per year plant was quoted at $150 million.” All of that is correct except for the last bit. The article actually quoted then-CEO Mitch Mandich as saying “The cost of the plant at a capacity of 100 million gallons per year will be more than $150 million.”
So that one is my mistake. In fact, I can’t find an estimate from Range on how much money they planned to spend in Phase 1 to build 20 million gallons of capacity. But what we do know is that they went through more than $200 million and ended up with a plant capacity that they claimed was “up to 5 million gallons per year” — and what it actually produced was methanol. So their goal may not have been $150 million to build 100 million gallons of capacity, but what they did end up with was more than $200 million for 5 million gallons of capacity.
The Rest of His Response
There are a number of statements in the rest of Khosla’s WSJ response that are worth examining.
“Range’s original formulation may not have been successful, but such risk-taking deserves applause, not derision.”
That depends entirely on the circumstances. Certainly derision shouldn’t be reserved for those who try and fail. But when someone dishes out plenty of their own derision, acts as if they are smarter than the people currently in the industry, says they have better ideas, hypes those ideas like mad, takes taxpayer money – and then fails? That’s a different matter.
“The biggest failure was, I am told by the company, in fact caused by problems in the ‘routine’ wood handling supplied by Metso, not the new technology! Whether that is accurate or not…”
You don’t know whether it is accurate, yet you still threw your wood handling supplier under the bus? Further, it would appear that by characterizing that as the “biggest failure”, it wasn’t the only failure. I have some direct experience with this, though. The reason you might identify the wood handling as a big problem up front, is that it is at the beginning of your process. You won’t know what other problems you have until you get that straightened out and running. Then your problems will move further downstream, and you start to work on those. That is how new processes are commissioned.
“It seems that facts don’t get in the way of any ‘proof’ that supports bigoted opinions of the WSJ editorial staff since they continue to use erroneous ‘facts’ with large doses of innuendo (like ‘superrich,’ political venture capitalist, taxpayer tragedy, etc.). But it gets them sensationalism and readership, so who cares?”
Those are very ironic words coming from someone who casually throws around innuendo and specializes in sensationalism. For instance, when Professor Mark Jacobson of Stanford published a study suggesting that certain emissions would go up for ethanol blends, you attempted to smear him by claiming that the study was funded by Exxon (documented here). Of course that was absolutely false.
From 2005 when gas prices started to rise, the refinery I worked at started to get death threats. And you were there fanning the flames of hatred – telling people that oil companies were ripping them off and suppressing biofuel innovations. You called your opponents derogatory (or maybe bigoted?) names like “oilies.” You hurled numerous accusations and used your own large doses of innuendo when trying to further your agenda. To this day you continue to use derogatory terms like “Luddites” to characterize the opinions of those that differ from your own.
“The project was the only one of the six DOE grants that has been built and mostly met its goals, in my view.”
We should all hope for fewer such successes then. Hundreds of millions of dollars are apparently gone*, and an idle plant is the result. It is hard to imagine what the goals must have been.
“The Range chemical catalysis was superseded by the rapid progress at companies like Coskata and Lanza and other biofuels production technologies.”
This one really leaves me scratching my head. Khosla is strongly implying that the problem with Range wasn’t the gasification, it was the back half of the plant; the part that takes the syngas and turns it into fuel. (Of course given his admission that there was a feed handling problem, it is clear that the plant wasn’t run long enough to accurately make that determination). So based on his experience with Range, Khosla concluded that the way forward had to be fermentation of syngas, and that those who believe otherwise are Luddites.
Yet there are no commercial plants that ferment syngas. Khosla is once more discarding proven technology for unproven technology. Companies like Shell and Sasol have been using catalytic technologies for many years to turn syngas into fuel. They operate in the range of 15,000 barrels per day up to well over 100,000 barrels per day. Yet Khosla argues that such technologies don’t work, and the commercially unproven technology of syngas fermentation is really the way to go. Why should I take that seriously?
“If chemical catalysis was certain to succeed, we would not need the DOE at all.”
Is he simply unaware of approaches like Shell in Bintulu or Sasol in Secunda? Their chemical catalysis processes have commercially produced over a billion barrels of fuel. It seems the “Luddites” have figured out how to make catalysis work — even if Khosla didn’t.
“The purpose of the grant program was to assist high-risk technologies. It is often impossible to tell which is which a priori.”
Especially when you ignore all of the work that has been done before.
“This is how innovation happens, but the WSJ does not really understand innovation. In the end, success is never assured in new technology areas, except, of course, it seems, in the ivory tower of the WSJ, which is full of people who don’t understand technology and prefer to live in their bigoted walled world of pontification without reality checks.”
You created those expectations of success with the constant hype. But yes, reality checks are important. That is why I write essays like this.
“In biofuels we have generated hundreds of millions in profits for our limited partners.”
We probably have different views on what amounts to success. I consider success in the energy business to be the actual act of delivering energy to consumers, not whether investors got rich from an IPO. What if those companies never deliver any energy and burn through all of those investment dollars as Range Fuels did? Is that a success? Range was successful if the metric is raising money. And yes, before you ask “Well, what have you done?” – I have produced about a billion more gallons of butanol than Gevo has produced. My work in the oil industry has produced a billion more gallons of hydrocarbons than LS9 has produced. But those successes were via Luddite-technology.
“When we first invested in biofuels I expected up a [sic] 70 percent to 90 percent chance of failure (and went on record saying so), and today I’m pretty confident that 50 percent to 60 percent of the technologies will succeed.”
But which technologies have succeeded to date? Which ones are commercially producing energy? I don’t really trust prognostications, but we can look at the track record to date. Neither Altra or Cilion delivered (as Khosla acknowledged here). Range Fuels is not producing. So which companies in the portfolio are producing energy at a competitive price?
There is no shame in attempting something and failing, and there is nothing wrong with having big goals. What I am criticizing is the act of translating those big goals into something more akin to a guarantee of victory, and then soliciting and obtaining public funds as a result. Vinod Khosla has inserted himself as a larger-than-life figure into the debates and discussions on the direction of energy policy in this country. He wants to influence the direction of our energy policy. Hence, he should expect to be graded on performance. He should expect criticism when the hype fails to deliver, because when people believe the hype it can change the trajectory of our energy policy in a negative way.
My concerns have always been — as clearly stated in my 2006 essay on some of Khosla’s claims — that we lose precious time and taxpayer money chasing false solutions, and ultimately the public and politicians lose their appetite for investing in renewable energy because over-hyped claims fail to materialize (and this has certainly happened as I feared). So within our own industry, we have to police over-hyped claims and we have to hold those who make them ultimately accountable if they fail to deliver. If we do so, there will be a disincentive for making overblown claims.
I want Khosla to have projects that succeed, because the world needs solutions to our energy problems. But I want the public and the politicians to understand the risks going in. There were no caveats with Range Fuels, only hype, hype, hype. Had Khosla been more forthcoming about the risks (and more knowledgeable about prior work in this area) then there would be nothing to criticize. Tax dollars will continue to be spent on ventures that are not assured of success, but the risks need to be transparent so we can make informed decisions on whether the risks are acceptable.
* The final tally on the Range Fuels project will likely never be known, unless it is revealed in court. But we do know that there was an initial investment that has never been publicly disclosed, there were the reports of an additional $158 million in VC money, $76 million of DOE money (of which Khosla said half was spent), an $80 million loan guarantee from the USDA, and $6 million from the state of Georgia. I think it is a safe assumption that over $200 million was spent and the result was a small amount of methanol. Per this recent article on the project, even though Range announced that they would make one batch of ethanol, that never took place.