Project turns wood into oil substitute

Mississippi could become the first place in the world where simple woodchips are turned into a commercial crude oil substitute.

Pending a $75 million loan from the state, Houston, Texas-based biofuel company KiOR will locate three plants in timber-rich areas across Mississippi over the next five years.

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"A few days ago, this was a tree growing somewhere," KiOR CEO Fred Cannon said, holding up a vial of dark brown oil.

Lawmakers will meet in a special session today to vote on the incentive package, which also includes $5 million for work-force training and research. Most lawmakers seemed to be on board with the project Thursday, though several also appeared skeptical of the technology.

"It sounds too good to be true," said Rep. Alyce Clarke, D-Jackson. "I'm looking for what's not true."

KiOR wants to take biomass - in this case wood chips from local timber - and use a catalyst to chemically turn it into a near-perfect match to crude oil in a matter of seconds. The product then can go through existing crude refineries and be used to make standard gasoline or diesel fuel.

"They're going to do what it takes millions of years for Mother Nature to do in a matter of seconds," Gov. Haley Barbour said.

KiOR officials say one barrel of the new oil can make more gasoline and diesel than standard crude, and it will burn cleaner, releasing just 25 percent of the amount of emissions into the air. And it will cost less than typical crude prices.

"Is this the first plant of this kind in America?" asked Rep. Walter Robinson, D-Bolton.

"In the world," Cannon replied.

Company officials said they selected Mississippi for the start-up because it has widespread timber resources but not low demand. Mississippi ranks fifth in available forestry, but paper mills and sawmills across the state have closed in recent years.

"We see it as an opportunity," Cannon said.

The first site will be built in Columbus and could open by the end of 2011.

"We've got a good work force there," said Sen. Terry Brown, R-Columbus. "We need those jobs."

Montreal-based Domtar Corp. closed a paper mill in Columbus earlier this year, leaving 200 unemployed. Other KiOR facilities will be built in Newton County and in southwest Mississippi near Franklin County by 2015.

Officials estimate 1,000 jobs will be created directly or indirectly. The Columbus site will produce 800 barrels a day, Cannon said. The others will double or triple that. Each will require 100 to 200 truckloads of wood a day.

"They have a hard commitment to us to spend more than $85 million a year on labor and Mississippi wood products," Barbour said.

KiOR officials also have agreed to locate two more facilities in Mississippi sometime in the future, even as they expand to other states.

"When the company gets to eight (plants), five of them will be in Mississippi," Barbour said.

During Thursday's hearings, lawmakers spent hours asking Cannon questions about the technology behind his new crude and KiOR's business plan. Some recalled a state-backed beef processing plant that operated a short time before closing in November 2004, leaving 400 people without jobs. The beef plant's failure cost taxpayers at least $55 million and led to criminal convictions of private developers.

"Anything we do has risks," Mississippi Development Authority Executive Director Gray Swoope said.

Swoope said MDA has worked to minimize the risk, including visiting KiOR's test site in Texas.

"We've been out to Houston," he said. "Believe me, it works."

While other biofuels can run as high as $3 or $5 per gallon, officials estimate gasoline from KiOR's renewable crude would average just over $2 a gallon.

"We wouldn't be interested if it wasn't intended to be profitable," Barbour said.

The company will get no subsidies or state support until it has formed a partnership with a major oil company to refine it.

"If they're willing to buy it and refine it with their regular oil, that says a lot," Barbour said.

KiOR is backed by Khosla Ventures, a Silicon Valley-based venture capital firm started by Sun Microsystems founder Vinod Khosla.

"They have equity," Swoope said. "They have cash in the bank."

Lawmakers today are being asked to put $45 million into a fund administered by MDA, which would oversee the loan. The fund already has the other $30 million. Another $4 million will go into the state's work force training fund for community colleges and universities, and $1 million would go to Mississippi State University for research. The company is applying for federal support, as well. Some lawmakers said they wonder why their areas were not selected.

"We've got more timber than any other county," Sen. Tommy Dickerson, D-Waynesboro, said of Wayne County.

He and others worry the site selection was politically motivated, but company and MDA leaders denied that.

"There's no politics in the decision process," Swoope said.

Sen. David Jordan, D-Greenwood, said he hopes the company will venture into the Mississippi Delta for one of its other two sites.

"The Delta is one of the most impoverished regions," he said. "We don't have as many trees but we have a lot of corn stalks."

KiOR vice president of supply Mike McCollum said the research at MSU likely would look at other biomass, including agriculture waste. Based off that technology, one of the two later plants could be located in or near the Delta, he said. Members of the Jackson delegation met with Barbour on Thursday over concerns about granting the $75 million in bonds to a private start-up when the state Bond Commission has refused to grant the city of Jackson $6 million in bonds for water infrastructure upgrades.

"He said he has concerns about giving this loan to Jackson, but there are no questions about this company," said Rep. Earle Banks, D-Jackson. "Let's make it equal and fair."

KiOR will put its facilities up as collateral for the loan.