KiOR: The inside true story of a company gone wrong. Part 3, “You’ve Cooked the Books”

The biocrude offtake agreement that wasn’t

Meanwhile, the company was scrambling to obtain an offtake agreement that would satisfy the requirements of the company’s loan from Mississippi.

In the first half of May, according to the state of Mississippi, Dennis Cuneo notified Governor Barbour that “Kior will announce on Tuesday that it has an offtake agreement with the Chevron/Weyerhaeuser joint venture – Catchlight.”

A biocrude offtake agreement is what had originally been intended by KiOR. But this wasn’t a biocrude offtake agreement at all. Rather, it was a gasoline and diesel offtake deal. KiOR’s Columbus plant would ship upgraded gasoline and diesel blendstocks to Chevron’s Pascagoula refinery, where it would be blended into the fuel supply.

It’s a significant switch. The original plan had been to ship biocrude and let Chevron and others hydrotreat the biocrude to remove excess oxygen, and then blend the upgraded fuel. But Catchlight, as we reported, had not been able to make the biocrude work in Chevron’s refinery. So, KiOR would have to build a hydrotreating unit at Columbus, and a hydrogen plant.

At Columbus alone, it would add $90 million to the project cost.

The state of Mississippi alleges that KiOR concealed the true reason for the switch.

After a question from the governor, Cuneo explained the Catchlight deal: Kior decided to integrate forward into diesel and gasoline to take advantage of the renewable fuel credits (which otherwise would have gone to Chevron.) As a result of the forward integration – the investment in Columbus is larger than originally anticipated. 

Cuneo’s explanation prompted Governor Barbour to ask, “Will Hunt refine biocrude from Kior or also take gasoline and diesel?” Cuneo responded as follows: The Hunt deal is also for gasoline and diesel. Kior can make a nice additional margin by making gas and diesel – plus they get to keep the renewable fuel credits – which are gravy. That’s why they decided to upgrade their facilities beyond the crude oil stage. This means the investment at Columbus, which was originally targeted at $100 million is now $190 million. Their large scale facilities will be in the $200 to $250 million range for each facility – which means that the total investment in Mississippi will easily exceed $600 million (vs. $500 million in the MOU.) 

What Mississippi described as a “bait and switch” — the failure to secure an offtake agreement for biocrude, presented as an “opportunity to sell gasoline and diesel” would become a key point in the state’s lawsuit against KiOR.

Courts will rule on this point eventually, but it is difficult to imagine that, so long as KiOR was able to supply fuel to Catchlight that was suitable for blending — no matter what equipment was used on site to produce the blendstock — that KiOR owed a duty to disclose changes in technology it was utilizing to produce a fuel. So long as KiOR disclosed that its financials had materially changed with any particular change in process, which it did.

What’s a blendstock, anyway?

There are as many as 100 different molecules that might show up in a gallon of gasoline — gasoline is a fuel specification rather than a single molecule — and ultimately all “raw feeds” into gasoline refining are “blendstocks”, because refiners are blending different feeds to make the highest margin they can while remaining in spec. So, whether KiOR was supplying product from a reactor that was dewatered into biocrude, or biocrude that was further processed through hydrotreating into a “gasoline blendstock”, they are both blendstocks, although they would have different paths in a petroleum refinery to the ultimate gasoline or diesel stream.

A scientist approaches KiOR’s General Counsel

In June, Dennis Stamires met with KiOR’s General Counsel Chris Artzer. He told The Digest:

“I showed him the actual raw (unmassaged) demo plant oil yield data and also the raw actual Oil Yields produced by the KCR Pilot Plant. I pointed out in detail the large discrepancies between the low yields KiOR was producing and the much larger inflated ones which KiOR was disclosing to the public. Also, I provided him with pertinent documents on Hacskaylo’s mishandling of the IP and certain patent applications. I gave him copies of the data, and he promised to study them.”

What happened?

Stamires told The Digest, “I kept going back to Artzer’s office to discuss those issues, several times in 2011. I tried hard to convince him that he must take action. Artzer told me he was still studying his documents. I never heard back from him on these issues.”