THE RICE STRAW DEMONSTRATION PROJECT FUND

 Proposed Grant Awards For Fiscal Year 1998-99

 Presented for the California Air Resources Board's Consideration On April 22, 1999


TABLE OF CONTENTS

SUMMARY

FUNDING CRITERIA USED TO EVALUATE RICE FUND GRANT REQUESTS

RECOMMENDED GRANT AWARDS

Agriboard Industries L.C.

Louisiana-Pacific Corporation

Enviro Board Corporation, Inc.

Arkenol Holdings, L.L.C.

PROPOSED CHANGE TO THE FUNDING CRITERIA

REALLOCATING GRANTS

ATTACHMENT A:   "The Rice Straw Demonstration Project Fund--Program Description and Invitation for Grant Requests Fiscal Year 1998-1999"


SUMMARY

 Senate Bill 318 (1997, Thompson) created the Rice Straw Demonstration Project Fund (the Rice Fund) and directed the California Air Resources Board to administer it. The goal of the Rice Fund is to help create a market for Sacramento Valley rice straw by providing cost-sharing grants for projects which show the greatest potential for becoming commercially self sustaining users of rice straw.

 Thirteen grant requests were received for fiscal year 1998-99 funding. Grant requests were evaluated by expert reviewers using the funding criteria (see page 2) adopted by the Board at its January 29, 1998, public meeting. The review panel consisted of four business experts, three technology experts, and two rice straw experts.

 Based on the results of the review process, staff recommends that the Board award grants to the following four project applicants:

Agriboard Industries L.C.,  "Phase One Development of the Agriboard Industries L.C. Rice Fiber Based Structural Panel Plant in Sacramento Valley, California", for a grant award of $665,000;

Louisiana-Pacific Corporation, "Medium Density Fiberboard manufactured from Sacramento Valley Rice Straw Residuals", for a grant award of $565,753;

Enviro Board Corporation, Inc., "Colusa Rice Straw Project", for a grant award of $500,000; and

Arkenol Holdings, L.L.C., "Production of Citric Acid From Sacramento Valley Rice Straw", for a grant award of $519,247.

A total amount of $2.25 million is being recommended for this fiscal year's grants. Brief project descriptions, evaluation summaries, and project executive summaries are presented for these four projects.

In addition to recommendations for projects to be funded, the staff recommends a change to the Board's funding criteria for grant awards that were adopted on January 29, 1998. The possibility exists that grants could be terminated before the projects are completed. For this reason, the staff recommends that the Board amend the criteria to allow existing grants to be augmented with unspent grant money from other projects whose grants have been terminated.


FUNDING CRITERIA USED TO EVALUATE RICE FUND GRANT REQUESTS

Grant requests were evaluated using the criteria summarized below, which were adopted by the Air Resources Board at its January 29, 1998, public meeting. A copy of the complete criteria is included as Attachment A.

Technical Plan Review:

 Viable technology for utilization of rice straw

Reasonable and complete project

Stage of technology development

Technical competency of project team

 Business Plan Review:

Business merit and commercialization plan

Straw supply plan

Financial support and credit integrity

Business competency of project team

Program Goals Satisfaction:

 Potential quantity of rice straw to be used annually

Length of time to self-sustaining operation

Project location and replication potential

Local community support

Policy Assessment:

Policy Assessment

Environmental Effects



RECOMMENDED GRANT AWARDS

Following are discussions of the four projects that the staff recommends that the Board fund. Each discussion includes: the applicant's name, the recommended grant amount, the project time line, the five-year rice usage outlook, the staff's description of the project, and a summary of the review panel's assessment of the project. Following these elements of each project is an executive summary of the project that was written by the project proponent.


Title: Phase One Development of the Agriboard Industries L.C. Rice Fiber Based Structural Panel Plant in Sacramento Valley, California

Applicant: Agriboard Industries L.C.
Grant Amount: $665,000

Straw used after 5 years: 46,000 tons per year
Project time: 8 months

Proposal Summary

Agriboard Industries currently manufactures structural, insulated panels made of wheat straw in Texas. These panels have been used to build several residential and commercial buildings. Agriboard has manufactured test panels using rice straw and proposes to establish a rice straw panel manufacturing plant in the Sacramento Valley. The project comprises conducting a product certification and testing program to receive California building code certification (necessary for the product to be used in structural applications), reengineering the mill to process rice straw, completion of architectural and engineering designs of building shells for residential and commercial buildings that could be built in California using these products, and market development and product distribution plans for California.

This project, which would take eight months to complete, would result in a fully-certified rice straw building product, plant design, and financial underwriting material and would enable Agriboard to have a manufacturing plant in operation 18 months later. At full scale development of a two-line plant, approximately 35,000 tons of rice straw would be consumed annually. At completion of its third line by the fifth year of operation, the plant could consume 46,000 tons of rice straw annually while employing 250 employees.

 Evaluation Summary

Agriboard has had practical business and manufacturing experience with these products at its existing Texas plant. Several buildings, which have been constructed from panels made from wheat straw, provide evidence of real-world use of the product, making this proposal less risky than a start-up company. Converting this technology to use rice straw should not be a major problem. Reviewers noted the excellent technical and business skills of the project team. Agriboard partners include Raytheon and the United States Department of Agriculture's Alternative Agricultural Research and Commercialization Corporation, the latter which has funded the development of the wheat straw product and holds a 30 percent equity position in Agriboard. Because of its connection with the USDA, Agriboard is well positioned for federal contracts. Agriboard plans to commit $665,000 of its own money to the project. Staff recommends that Agriboard Industries be awarded a grant of $665,000 for this project of eight months' duration.


Phase One Development of the Agriboard Industries L.C. Rice Fiber Based Structural Panel Plant in Sacramento Valley, California

EXECUTIVE SUMMARY

Provided by Agriboard Industries L.C.

Agriboard Industries L.C. is a manufacturer of a unique, and ecologically sound, structural insulated panel building system. This structural panel system provides a cost-effective, yet high quality, building system that is based on an environmentally responsible manufacturing process. This process uses straw cereal fiber as an insulating structural core material laminated between sheets of OSB panels. Agriboard has a fully operational production mill engineered and constructed by Raytheon Engineers and Constructors and has been producing code complying structural wall, floor and roofing panels for the construction industry since April 1998. Compressed agricultural fiber board or Agriboard is manufactured without the use of any additional chemical adhesives or binders. The straw for board production has historically been wheat straw. Agriboard is now proceeding to qualify its panel system using rice straw fiber in place of wheat straw and to establish its second full scale production facility to be located in Sacramento Valley, California.

The Agriboard panel provides remarkable structural strength, has excellent thermal insulating properties and provides up to one- and two-hour fire-resistance ratings in wall, floor, and ceiling assemblies for houses and commercial buildings. When incorporated as the core of a stress skin panel system, Agriboard offers a superior, cost-effective building system for strong, durable, energy-efficient buildings. Agriboard has manufactured test panel using rice straw fiber and now intends to execute the first phase of a comprehensive development program to construct a commercially viable plant. That program includes an extensive product certification and testing program to demonstrate compliance with Uniform Building Code and all applicable California Codes including seismic and thermal testing criteria. It will also include the conversion engineering for a mill that would process rice straw fiber and plant layout engineering for the California plant in Sacramento Valley. The first phase of this development program will also include the structural and architectural engineering of specific building shells for both commercial and residential applications in the state of California to show compliance of building designs utilizing the rice straw fiber based panels with all California codes. It will also complete an in-depth market development and product distribution plan that will establish the company's ability to market up to 18 million SF of the Agriboard core panel from the Sacramento Valley plant location.

The first phase of this project will require 8 months to complete from an anticipated start date of April 1999. The successful completion of this first phase will enable Agriboard to have a fully operational plant on line in Sacramento Valley within 18 months of completing this first phase project for this development program. At full scale development of a two line plant operating at 85% plant capacity, the operation will consume approximately 35,000 tons of rice straw fiber annually. At the completion of its third line by the fifth year of operation, the plant will consume a total of 46,000 tons of rice straw fiber annually. The Sacramento Valley operation will employ up to 250 employees by its third year of operation. The first phase development of this operation is approximately $1.33 million. Agriboard is applying to the California Air Resources Board for $665,000 of this amount.


Title: Medium Density Fiberboard Manufactured from Sacramento Valley Rice Straw Residuals

Applicant: Louisiana-Pacific Corporation
Grant Amount: $565,753

Straw used after 5 years: 70,000 tons per year
Project time: 8 months

Proposal Summary

Louisiana-Pacific currently operates a facility in Oroville that produces hardboard and (MDF) medium density fiberboard (a product similar to particle board). Because the primary source of wood shavings and sawdust from sawmills has been diminishing, Louisiana-Pacific has been looking for an alternative source of raw material.

Louisiana-Pacific proposes to convert its MDF line to use rice straw fiber. If successful, this technology could be transferred to its hardboard line at the facility as well. The project would consist of modifying the manufacturing process to accommodate rice straw, additional research and development work at the laboratories of Louisiana-Pacific and its suppliers, the installation of new straw handling equipment, and modification of existing equipment. Existing customers using Louisiana-Pacific's current MDF product will participate in evaluating the new, rice straw product. The initial percentage of rice straw in the product is expected to be 30 percent, and this will be increased during the development stage while testing product performance.

The Louisiana-Pacific project, which would conclude shortly after the startup phase of the newly converted manufacturing system, is expected to be self sustaining almost immediately thereafter. The first year of operation would use rice straw at the annual rate of 33,000 tons. At a higher percentage of rice straw (replacing wood), the plant could eventually use 70,000 tons of rice straw per year.

Evaluation Summary

This is a very promising project proposed by a well established company. Louisiana-Pacific has an existing, fully operational facility, an established customer base, an experienced workforce, and a functioning sales network. It is a Fortune 500 company with excellent technical and business expertise and financial strength needed to achieve its goals. This project would be converting an existing facility, replacing an existing product, and using an existing customer base and established marketing and distribution channels. The project would start using rice straw during the grant period and would be self-sustaining shortly after the grant is over. Louisiana-Pacific has shown community support for this project.

Although the proposed project has not completed its internal corporate review for approval of internal funding, a corporate officer has submitted a letter stating that within six weeks of the notice of grant award for the project, the decision for authorization of corporate funding should be available. Subject to this contingency, staff recommends a grant award of $565,753 for the Louisiana-Pacific project for 8 months.


Medium Density Fiberboard Manufactured from Sacramento Valley Rice Straw Residuals

EXECUTIVE SUMMARY

Provided by Louisiana-Pacific Corporation

Louisiana-Pacific has maintained a presence in the Sacramento Valley since 1976. Louisiana-Pacific currently operates a multi-million dollar facility located in the city of Oroville that produces hardboard and Medium Density Fiberboard (MDF). At present, the primary wood source is from traditional (and diminishing) sawmill residuals in the form of shavings and sawdust and to a lesser extent, recycled wood from the San Francisco area.

We propose converting our current (MDF) facility in Oroville, California from its present raw material source of wood fiber to rice straw fiber. The Oroville facility MDF line in operation since 1984, produces 47,000,000 square feet (3/4 inch basis) annually of high quality flat panels that are typically remanufactured by down-stream users into architectural wood work such as cabinets, countertops, shelving, laminated flooring and furniture. The facility is located on 114 acres consisting of three major buildings with a total of 432,000 square feet of space and employing 70 employees directing involved with the MDF line.

Converting the facility would mean a realization of as much as 70,000 tons of rice straw consumed annually. If successful, this technology could be transferred to the hardboard line at the facility as well. The conversion to rice straw is thought to have several potential advantages over wood based panels, including superior physical properties at lower panel densities, lower thickness swell when exposed to moisture (depending on fiber preparation), greater availability, ecologically friendly. Disadvantages could include higher potential for dirt contamination, higher silica content, mold and mildew issues, and herbicide/insecticide exposure, fine airborne particulate from handling, and the burning of straw sander dust for process steam could lead to excessive slagging in a burner's ash separator.

The mill has established customer base, market contacts, and is fully staffed (including a seasoned sales force) and operational. The MDF market panel consumption is projected to almost double by the year 2008 with projected sales increasing from current levels of $225 per thousand square feet to $450 during the same time period (taken from RISI). The estimated project costs are $1,168,557, of which Louisiana-Pacific is requesting grant support for $584,279, which represents a fifty percent project funding level.


Title: Colusa Rice Straw Project

Applicant: Enviro Board Corporation, Inc.
Grant Amount: $500,000

Straw used after 5 years: 80,000 tons per year
Project time: 12 months

Proposal Summary

Enviro Board Corporation has a patented technology that uses rice straw as a primary material to manufacture fiber-board panels as low-cost building materials. The panels, which are both water and fire resistant, can be used in the place of conventional dry wall, plywood, thermal insulation, door cores, office partitions, and sound walls. The company has built a facility at the Colusa Industrial Park and is in the process of moving its prototype production mill to this facility after it has been modified to use rice straw.

The project would start with the production of sample fiber-board panels for Enviro Board's marketing program and building code approval program. These panels would be sent to potential customers who have already been in contact with Enviro Board and have asked for sample products. An engineering firm has been identified to perform the necessary tests for building code certification. Enviro Board would develop complete home shell building kits and start building a demonstration house and other targeted products for permanent display at its Colusa site. Targeted customers would include general contractors, pre-fabrication home manufacturers, retail distribution outlets, and do-it-yourself consumers

At full production, the first mill would use 20,000 tons of rice straw annually. As markets develop, up to 4 production mills would operate at the Colusa facility for a total annual straw usage of 80,000 tons employing 35 people.

Evaluation Summary

Enviro Board has just completed building its facility in Colusa which would be operational during grant period. The manufacturing process is flexible since it can produce panels in a range of thicknesses (1 1/2 to 3 inches) and range of widths (2 1/2 to 4 feet) allowing multiple market targets. The manufacturing process is very clean, and the product, which is easy to fabricate at low cost, is predominantly rice straw by mass. The company has invested a lot of its own money to bring the project to its current status and has strong community support. Enviro Board has assembled a strong technical and business team and has a fully developed plan.

Enviro Board has demonstrated a strong commitment to its project by building its facility in Colusa. The grant award would speed the company's commercialization process, bring in outside investors, and help ensure the project's success. Staff recommends a grant award of $500,000 to Enviro Board Corporation for this project of 12 months' duration.



Colusa Rice Straw Project:

Production, Development and Marketing of Successful Fiber-Processed Products

EXECUTIVE SUMMARY

Provided by Enviro Board Corporation, Inc.

Enviro Board Corporation has developed, patented and trade marked "Enviro Board" a fiber processing technology that utilizes California rice straw as a primary material in the production of fiber-board panels.

Researching and studying a dormant technology, that was originally invented in Sweden during the 1930's, Enviro Board Corporation perfected, developed and patented an new manufacturing process that is able to convert waste fiber into a durable panel membrane. These unique panel membranes are both water and fire resistant and can be used as a replacement material for conventional dry wall, plywood, thermal insulation, door cores, office partitions as well as soundwalls.

Enviro Board is presently developing a six-acre site at the Colusa Industrial Park adjacent to the Colusa Airport. This site will be the home of a 19,000 square foot facility that will house our existing prototype mill as well as three additional mills when fully operational. With all architectural, engineering, geological, survey and excavation work completed at the site, construction on the facility is planned to begin on November 1st 1998. The building will be completed in January 1999, with full operation and production commencing in February.

The first production mill will require an annual consumption of 20,000 tons of rice straw to operate. A second mill shall be added 6-months after the first line is operational. A third and fourth mill will be installed at the site over the following 24-month period. It is anticipated that 80,000 tons of rice straw will be annually consumed upon full production at this site, employing approximately 35 semi-skilled people.

An infusion of $1,000,000 of additional capital has been determined in order to launch the successful commercial operation in Colusa. $400,000 in matching fund investments will be supplied by a primary investor (See Addendum O) upon notification of ARB grant approval. Additional monies from principals along with in-kind contributions in the amount of $100,000 will bring the total cost of the Colusa project to approximately $1,000,000.

By the end of January 1999, Enviro Board will have spent over 5 million dollars during a six year period to reach completion of the prototype mill, patenting the new technology, developing a prototype housing system, trade-marking the product name (Enviro Board) and the completion of a new 19,000 sq. ft. production facility in Colusa.

In February 1999, Enviro Board will open its doors and begin to market its many commercial fiberboard products to the respective industries that have expressed interest in our alternative low cost and environmentally friendly products. These industries, already identified, include: the construction industry, door core manufacturers, office partition manufacturers and sound-wall manufacturers. Enviro Board will obtain the necessary code approvals on specific products where needed and as outlined in the preliminary operational budget.


Title: Production of Citric Acid From Sacramento Valley Rice Straw

Applicant: Arkenol Holdings, L.L.C.
Grant Amount: $519,247

Straw used after 5 years: 160,000 tons per year
Project time: 8 months

Proposal Summary

Arkenol Holdings proposes to demonstrate that citric acid can be economically produced from rice straw. Citric acid is used in a broad range of industries such as food, beverages, pharmaceuticals, detergents, cosmetics, textiles, electroplating and printing operations.

Arkenol would use its patented, acid hydrolysis technology and conventional fermentation processes at its existing pilot facility in Orange, California. The demonstration project would consist of optimizing the commercial-scale conversion process, preparation of a detailed engineering design of a commercial plant, siting the plant, securing commitments for the sale of citric acid and other by-products, and developing the pro-forma financial analysis for future investors.

The Arkenol demonstration project would take eight months to complete, and if it is successful, it would result in an attractive investment package for a full-scale commercial plant. The goal would be to have the first full-scale plant built by 2001, at a cost of $140 million, using 80,000 tons of rice straw per year to produce about 40,000 tons of citric acid; citric acid has a value of about 57 cents per pound. The commercial success of the first facility would lead to a second facility being built within five years which would use 160,000 tons of rice straw annually, while employing 120 people.

Evaluation Summary

Arkenol has a patented technology and existing laboratory facilities in which to conduct the demonstration project. The technical and business teams are highly qualified for an operation of this scale. It appears that there is a growing market for citric acid that is currently unsatisfied, which would give this project the opportunity for success.

Arkenol is currently working with major capital investors to negotiate terms and conditions for funding the full-scale commercial plant, pending the outcome of the demonstration project under the Rice Fund. The staff and the reviewers believe these factors combined with the potential for such high volume rice straw use justifies the risk of funding this project.

Arkenol will invest $519,247 of its own resources in cash and in-kind contributions. Staff recommends a grant award of $519,247 for the Arkenol Holdings project. The project's duration would be eight months.



Production of Citric Acid From Sacramento Valley Rice Straw

EXECUTIVE SUMMARY

Provided by Arkenol Holdings, L.L.C.

This proposal presents an innovative process for the large scale use of Sacramento Valley rice straw to produce citric acid, a versatile basic chemical. Citric acid is used in a broad range of industries, including: food, beverages, pharmaceuticals, detergents, cosmetics, textiles, electroplating and printing operations. The worldwide consumption of citric acid is well over 800,000 tons per year and growing at a rate of about 30,000 tons per year. It is largely produced in the United States, Western Europe and China from corn dextrose or sugar beet molasses and sugar cane molasses as raw materials.

The proposed 8 month program will demonstrate the economic production of citric acid from Sacramento Valley rice straw at Arkenol's existing pilot facilities in Orange, California. Arkenol will also complete key siting and commercial activities required for the construction of the commercial plant. Arkenol proposes to use it patented technology of acid hydrolysis to convert cellulose and hemicellulose in rice straw to a mixed sugar solution containing largely glucose and xylose for conversion into citric acid using conventional fermentation processes. Arkenol has produced citric acid using the conventional microorganism, Aspergillus niger at our laboratories in southern California. We are now ready to commercialize the production of citric acid from rice straw with the goal of having the first commercial plant built by 2001. This commercial scale facility will utilize about 80,000 tons per year of rice straw to produce about 40,000 tons of citric acid for use domestically or exported from the Port of Sacramento to overseas markets.

This program will build upon previous work and will result in information necessary to complete the commercial plant resulting from three major tasks. First, this program will generate the engineering and process data for the detailed engineering design of the commercial facility. Arkenol will optimize the process and demonstrate its success through repeated testing at Arkenol's facilities using Sacramento Valley rice straw. These studies will be done in collaboration with the major equipment vendors and our engineering contractor who is expected to provide the necessary process guarantees for the commercial plant based on the results of the testing and analysis. Process optimizations and engineering design will occur at Arkenol's facilities in Orange, California. Second, Arkenol will identify potential sites in the Sacramento Valley for the first commercial scale facility. Third, Arkenol will complete the commercial activities necessary to build the full scale plant. These activities include feedstock supply, letters of commitments for the sale of the citric acid and other by-products, and pro-forma financial analysis.

The construction of the full scale plant will employ approximately 150 workers during construction, and about 60 workers will be required for on-site plant operations and maintenance. Off-site jobs related to the handling of the rice straw and other ancillary jobs will also result from the development and construction of the facility.

The total project cost is $1,038,494. An amount equal to $519,247 or 50% of the total project cost is requested from the Rice Fund. Matching funds will be provided by Arkenol through cash and in-kind contributions.

Arkenol has assembled a multi-disciplinary team of business and engineering professionals to ensure the success of the proposed endeavor geared towards the completion of a commercial plant by 2001. In this proposal, we present the proposed work plan, expected benefits, key personnel, and funding requirements to address the problems and opportunities of producing citric acid from Sacramento Valley rice straw.



PROPOSED CHANGE TO THE FUNDING CRITERIA

Senate Bill 318 (1997, Thompson) created the Rice Straw Demonstration Project Fund (Rice Fund) to provide cost-sharing grants for demonstration projects using Sacramento Valley rice straw. The bill specified that the grants be awarded during the 1997-98 and 1998-99 fiscal years. This is the second and final year of the grant program. The staff believes that it was the intent of the Legislature to make maximum, but prudent, use of the allocated $5 million grant program allocation.

Implementation of the grant program was designed to distribute the grant money based on the projects making suitable progress. Grant money is distributed on a cost-reimbursable basis upon successfully meeting project milestones and submitting acceptable progress reports. Because of this, the possibility exists that grants could be terminated before projects are completed. Therefore, staff recommends that the Board amend the criteria to include a procedure for reallocating unspent grant monies in order to make maximum use of the grant money allocated for the 1997-98 and 1998-99 fiscal years.

Proposed Changes to Rice Fund Criteria

At its January 29, 1998, Public Meeting, the Air Resources Board adopted funding criteria, titled, "The Rice Straw Demonstration Project Fund--Program Description and Invitation for Grant Requests Fiscal Year 1998-1999". These criteria are included as Attachment A, modified by nonsubstantive changes to reflect the second year of the grant program.

The staff has developed a procedure, in consultation with the Department of Food and Agriculture, the Trade and Commerce Agency, and the University of California, to reallocate grants should unspent grant money become available. Staff proposes that the Board amend the funding criteria with the changes listed below:

Add the following subsection to SECTION 1 - PROGRAM DESCRIPTION, after subsection SELECTION PROCESS, before subsection TECHNOLOGY FEASIBILITY, on page 5 of Attachment A:

REALLOCATING GRANTS

Grants may be terminated before projects are completed, leaving unspent grant money. In such circumstances, staff shall invite existing grant recipients, whose projects are in good standing, to submit proposals to have their existing grants augmented by expanding their current projects.

The criteria for evaluating the proposed grant augmentation projects shall be based on the criteria listed in Section II, with the additional criterion that the existing Rice Fund grant project be in good standing and making acceptable progress towards meeting its original milestones.

Proposed grant augmentation projects shall demonstrate how a grant augmentation would shorten the projects' time line to commercialization or would increase rice straw usage beyond the usage originally contemplated in the original project.

As with original grant proposals, the proposed grant augmentation shall be matched by the applicant in an equal amount, with cash and in-kind services. The minimum cash to be provided by the applicant shall be 20 percent of the augmented project cost.

The proposed grant augmentation projects will be evaluated by the ARB staff and by other technical and business experts. Based on these evaluations, staff shall make its recommendations to the Board, at a public meeting, which projects should have their grants augmented. Successful grant augmentation applicants will be required to sign amended grant agreements.