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Big Oil Looks to Biofuels


As low-carbon fuels get pushed, BP, Shell and others invest in alternatives


The biofuels industry, hit hard by the global credit crunch, is getting a shot in the arm from a new source–the oil majors.

Among the oil companies, BP PLC and Royal Dutch Shell PLC have been the most active investors in the sector. But it’s even beginning to attract more-conservative companies like Exxon Mobil Corp., whose chief executive, Rex Tillerson, once famously dismissed corn-based ethanol as “moonshine.” Exxon announced in July it was investing $600 million in an algae-to-fuel start-up, Synthetic Genomics Inc.

“It was a major signal to the biofuels industry,” says Bruce Jamerson, chief executive of Mascoma Corp., a producer of cellulosic ethanol, which is made from inedible plant materials.

Big Oil and biotech may seem an odd combination. Oil companies’ profits are driven by traditional, fossil-based gasoline and diesel. Biofuels are alternatives that have a marginal market presence. So why switch to switchgrass?

The answer is the low-carbon policies now being put in place across the developed world. In the U.S., for example, the Renewable Fuels Standard mandates growth in annual sales of biofuels through 2022. The Department of Energy expects U.S. production of biofuels to increase from less than half a million barrels a day in 2007 to 2.3 million barrels a day in 2030. Inevitably, that will erode the oil majors’ conventional business.

Getty ImagesChoren Industries hopes to produce 18 million liters of biodiesel a year from wood residue.

“The oil companies…see a world of restrictions coming on high-carbon fuels, and they need alternatives,” says Mr. Jamerson.

Making the Cut

The biofuels industry also is benefiting from a sharper investment focus among the big oil companies. For years, companies like BP and Shell had a scattershot approach, investing across the entire clean-energy spectrum. BP’s chief executive, Tony Hayward, describes the company’s initial policy as “a thousand flowers blooming all over the world.” But last year, he says, the company began narrowing its investments down to those that it considers commercially viable and a good match with its existing business. Biofuels made the cut, in part because they fit nicely into the company’s existing infrastructure of refineries, pipelines and distribution networks.

“Oil companies have a natural affinity for the biofuels business,” says Katrina Landis, head of BP’s Alternative Energy division. Combining their knowledge of how to produce and market transportation fuels with the potential of biotech start-ups creates a “very powerful partnership,” she says.

Shell made a similar move, announcing in March that it wouldn’t be expanding its wind and solar portfolio, and would concentrate instead on biofuels along with carbon capture and storage, or CCS, a technology to counter global warming by trapping carbon dioxide from the emissions of power plants and burying it deep underground.

Within biofuels, the majors have largely eschewed corn-based ethanol to focus on the next generation of fuels, which don’t rely on food crops. They’re mostly producing fuel from cellulose, the fibrous backbone of plants.

BP, for instance, has a joint venture with Verenium Corp., a maker of cellulosic ethanol. Chevron Corp. has one with lumber giant Weyerhaeuser Co. to make fuel from biomass such as switchgrass, a prairie grass native to the southeastern U.S. And Shell is working with Canada’s Iogen Corp. to produce fuel from wheat straw, and with Choren Industries GmbH of Germany to make fuel from wood residue.


Peanuts or Seeds?

Some in the industry are dismissive of the funds the majors are committing. “It’s less than peanuts for them, given the size of their investment budgets,” says Steen Riisgaard, head of Novozymes AS, a Danish company that provides enzymes used in the production of bioethanol.

Shell, for example, has spent about $1.7 billion on alternative energy and carbon-emission-reducing technologies like CCS in the past five years, while its total capital investment budget last year was $32 billion. BP’s investments in alternative energy totaled $1.4 billion last year, about 6% of its capital-expenditure budget for the year, and will fall to between $500 million and $1 billion this year as the global economic slowdown saps demand for energy.

But others think of the current level of investment as just the start of a long-term trend. “The bigger investments will come beginning next year, when commercial deployments start to gain pace,” says Carlos Riva, chief executive of Verenium.

“The investment in dollar terms doesn’t tell the whole story,” adds Mr. Riva. Another key contribution is the “management skills [the oil majors] bring, in terms of design and engineering and the delivery of large-scale commercial projects.”

“That’s something the biofuels industry really needs,” he says.

Ultimately, some industry insiders see a future of integrated biorefineries, where the majors will have a suite of low-carbon products they can blend at varying strengths for different markets.

For now, though, the majors are maintaining a cautious stance even as they invest in biofuels, a position shared by industry analysts. “It’s an exciting area, but it’s unproven,” says Angus McCrone, senior analyst at New Energy Finance Ltd., an alternative-energy research firm. “We still don’t know if you can produce them at a cost that’s economic.…It’s a gamble.”

— Mr. Chazan is a staff reporter in the London bureau of The Wall Street Journal. He can be reached at [email protected] .Printed in The Wall Street Journal, page R6

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