Local company out to turn algae into fuel of future

The coffee pot was broken at Stellarwind BioEnergy. It was probably just as well, since most of the liquid percolating at
its home — in the former Hoosier Orchid Co. — is green and algae-ridden.

It’s in water-cooler jugs and 64-ounce Coke bottles backlit by fluorescent tubes, back in the lab. But the main act at Stellarwind
is "the reactor," a long row of 55 transparent tubes soaring to the ceiling of a greenhouse and bubbling with green
glow that
would scare the living Holle out of Dr. Frankenstein.

"About every 52 hours, this stuff doubles. It’s so prolific in nature," said Keith Masavage, executive vice president
of the
startup, which took over Hoosier Orchid’s location on Indianapolis’ northwest side early this year.

Welcome to the future of oil production in the United States — or another remake of the 1958 horror film "The Blob".

Stellarwind is believed to be the first algae-oil company in Indiana and among dozens of others around the country at the
forefront of what’s being called the third wave of biofuels production.

To this point, neither ethanol made from corn kernels nor a second generation made from corn stalks and grasses has yet to
achieve the seemingly unattainable cost triumph over fossil fuels.

Plagued by high corn prices and relatively low gasoline prices, many ethanol makers are struggling for survival in Indiana
and around the Midwest.

But Stellarwind principals say their base crop, if you will, has tremendous advantages over corn, which can produce 150 to
235 gallons of ethanol per acre each year. Oil-rich algae, by contrast, can generate 10,000 gallons of fuel oil per acre.

"We call it extra-virgin crude," said John Kassebaum, chairman and chief technology officer at Stellarwind and a
electrical engineer, holding a vial of oil produced by the company. He and his twin brother, Will, Stellarwind’s president
and CEO and also a Purdue engineer, worked for years at Indianapolis’ Naval Air Warfare Center on defense contracts. They
also helped develop high-end consumer electronics products at Indianapolis-based Escient.

"The heart and soul of electrical engineering," added Will Kassebaum, "is energy."

Technical challenges

For the last two years, the brothers have meticulously studied reams of algae oil research conducted by the federal government
since the late 1970s. On a shelf in the greenhouse are a halfdozen jars of algae species they’ve identified as most promising
from among
at least 30,000 varieties found in nature. They quickly spin around the jars to conceal the labels of the species when visitors
drop by.

When the government pulled the plug on its oil-from-algae research in the mid-1990s, "the price of oil was about $15
said Eric E. Jarvis, a scientist at the National Renewable Energy Laboratory in Golden, Colo., which conducted the research.

Today, oil is around $45 a barrel.

"That’s the main thing that’s changed since then. I think that’s probably the main reason for such a resurgence ….
are probably at least 100 companies out there investigating this," Jarvis said.

"The potential of algae has a lot of people excited," added Matt Carr, director of the industrial and environmental
at Washington, D.C.-based Biotechnology Industry Organization.

The big challenge, though, is the high cost of building a plant to produce algae oil on a large scale.

"It’s the capital cost right now which is the limiting factor," Carr said.

A plant along the lines of what the Kassebaums envision likely would cost "in excess of $100 million," said Masavage,
thinks it would become profitable quickly enough to pay for itself in about five years.

Currently, Stellarwind is receiving private funding, though it isn’t identifying investors. The company also is looking for
state and federal funds.

Another challenge is that competitors have a head start numbered in years, competitors such as San Francisco-based Solazyme.
Founded in 2003, it makes biodiesel fuel from algae.

But the 44-year-olds say they need not reinvent the wheel as much as refine the process and develop a production line that’s
simple and relatively cheap.

"How can we create the lowest-tech, lowest cost?" Masavage said.

"Many of our competitors’ systems are too expensive," said John Kassebaum, who appears to be a virtual clone of
his brother
(wouldn’t put it past these guys) except that he’s wearing a white lab coat.

"We keep telling ourselves it’s not rocket science — it’s energy," said John Kassebaum, whose bio on the Web
including theoretical physics, "mad science experiments" and "broad-sword combat."

The two could also be onto a revenue gold mine — courtesy of the politics of global warming.

CO2 remedy?

It turns out that growing vast quantities of algae quickly requires lots of carbon dioxide, which some scientists blame for
a slight increase in the Earth’s temperature over the last century. The small-scale test operation under way at Stellarwind
relies on bottled CO2, which is pumped into the water reactor containing the algae.

But if the federal government enacts carbon dioxide restrictions, plenty of companies will want to dispose of their CO2 to
avoid paying penalties. Not only could CO2 be trucked to the facility, but Stellarwind could locate additional facilities
on the site of major emitters, such as at Indiana’s coal-fired power plants or at manufacturing facilities.

"We believe we can be a great partner for anyone wanting to get rid of CO2," Masavage said. Potential partners "have
expressed immense interest in paying us to take their greenhouse gases. This is a net gain for them as they will then have
the ability to resell their carbon credits to other entities."

All that will depend on being able to construct a large facility that can produce oil economically. The next big phase planned
at the former orchid farm is for 120 reactors inside three greenhouses on a roughly 1/10th-acre site.

Subsequent production would grow to 100 acres, which they anticipate could generate 1 million gallons, or about 23,800 barrels
a year. The company has a longer-term plan to make algae in a 2,000-acre facility. And unlike corn, growing algae doesn’t
farmland — just space for the reactors.

To sell the oil to refineries, Stellarwind officials first need certification from the American Society for Testing and Materials,
which they’re in the process of obtaining.

They decline to discuss revenue potential. But at prevailing market conditions, algae oil is fetching about $84 to $105 a
barrel, vs. about $45 a barrel for crude oil.

The reason for the premium is the purity of algae oil compared with crude, which contains a lot of sulfur and is more expensive
to process.

Jarvis, the National Renewable Energy Laboratory scientist, said algae-oil companies will need to maximize the oil-producing
yield of algae, in much the same way as researchers have been able to improve genetics of corn over the years.

"You really need to get your yields up high to enable you to recover your capital costs," added Carr of the Biotechnology
Industry Organization.

Stellarwind thinks it has some of that puzzle figured out. One of the byproducts of the algae is methane, which can be fed
into an engine and used to generate electricity and heat to power and warm the facility in the winter. On the visitor register
in the lobby is the signature of Mike Hudson, chairman of Anderson-based I-Power Energy Systems, which builds those co-generation

The residual algae also can be processed and sold for fertilizer, charcoal and butanol — producing another revenue stream.

"We believe we will be competitive in the sub-$50-a-barrel oil market," Masavage said.

"Our goal is to produce a continuously renewable energy source that is ecologically friendly, uses everything, and wastes

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