Financial Times: BP gets into position for the biofuels era

By Ed Crooks, Energy Editor
Published: June 27 2007 03:00 | Last updated: June 27 2007 03:00

The downfall of Biofuels Corporation will have come as no surprise to Philip New, the president of BP’s global biofuels business.

Speaking at yesterday’s launch of a new £200m ethanol plant in Hull, Mr New rejected the idea that BP would similarly expand into producing biodiesel.

“Esterification [the process of making biodiesel from vegetable oil] is relatively basic chemistry with low barriers to entry,” he said.

“And our conclusion in investment decisions is that this is a market that either is, or shortly will be, over-supplied with production capacity.

“So esterification [producing biodiesel] is not something that we regard as being a strategic priority for BP right now.”

Yet the launch shows that BP is prepared to invest in the other “first generation” biofuel – ethanol – which, like biodiesel, is produced by a reasonably simple process, and has also been criticised for having high costs and questionable environmental benefits.

For a company of BP’s size, its share of the investment in the plant at Saltend in Hull – about £90m – almost counts as petty cash. But it is an important move in the oil company’s strategic repositioning to prepare for a world in which biofuels will provide a significant proportion of road fuels.

The Saltend plant will be a joint venture, 45 per cent owned by BP, 45 per cent by Associated British Foods, and 10 per cent by Du Pont. Coming on stream at the end of 2009, it will take about 1m tonnes or more of wheat every year and turn it into 420m litres of ethanol, supplying about a third of Britain’s total demand by the end of the decade.

As with biodiesel, the economics of ethanol production are fragile. Prices for wheat and other grains have been rising, under pressure from poor harvests and demand from the food industry, as well as expectations of rising demand from biofuels producers. Margins in the ethanol industry have been squeezed.

BP admits the project as it stands is uneconomic without government help, even with oil at $70 a barrel.

“Without the regulatory environment, no company would be able to compete at current prices and the industry would not exist,” says Mr New.

The biofuels market is supported in Britain by the Renewable Transport Fuels Obligation, which sets a target for the proportion of road fuels coming from biofuels that rises to 5 per cent by 2010.

The RTFO provides strong support for the industry, creating a market, which by 2010, BP estimates, will be split roughly 50-50 between ethanol and biodiesel.

But Mr New insists government incentives were not the reason BP and its partners were making the investment. The Saltend plant is to be a “platform for new technology” and support an alliance that the groups hoped would lead to further biofuels developments.

For example, Mark Carr, the chief executive of British Sugar, which is owned by ABF, says he expects the fuel produced at Saltend to have carbon dioxide emissions through its life-cycleat least 40 per cent lower than for conventional fuel:a saving higher thanhas been estimated for similar ethanol production in Europe or the US.

BP and its partners also have plans to press ahead with the development of bio-butanol, another fuel made like ethanol from sugars, but one that has a higher energy content, is easier to handle and transport, and can be used in higher concentrations in road fuel – perhaps up to 16 per cent – in cars without modification.

However, BP’s approach contrasts sharply with that of Royal Dutch Shell, which has stayed out of the business of producing first-generation biofuels.

Rob Routs, Shell’s executive director for downstream, said this week:”We don’t believe the current situation is sustainable, because if agricultural land is being picked up for fuel production, sooner or later there is going to be a clash. And as a fuel company, we don’t want to get involved in that.”

Shell’s effort is going into “second generation” biofuels: a diesel fuel made from wood chips, and ethanol made from straw. BP is researching this second generation too; its work seems less advanced, but no-one has yet made a commercial breakthrough. The first company that does could transform biofuels from a marginal, subsidy-dependent and volatile activity into a hugely successful business.

Background

*On the market today

Biodiesel Produced from vegetable oils or sometimes animal fats, it is relatively easy to manufacture and handle. Added to diesel

Ethanol Produced from sugars by time-honoured method of fermentation. Difficult to handle because it attracts water. Added to petrol

*On the market in the future

Biobutanol Produced from sugars like ethanol, it has a higher energy content, is easier to handle and can be used at higher concentrations in existing engines

Biodiesel from energy crops Biodiesel produced from oil from plants that can grow on land not suitable for food production, thus getting round objections over the impact of fuel demand on food supplies

Biomass to liquids Biodiesel produced by taking gas from decomposing vegetation and turning it into a liquid

Cellulosic ethanol Ethanol made from plant waste, such as straw or crushed sugar cane, or from energy crops such as switchgrass

Copyright The Financial Times Limited 2007

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