The Shell Game: What's up with Biofuels' "Quiet Company?"
In the old and famous “shell game”, a small, round ball, known as a “pea” is located under one of three shells, and shuffled around by an operator. The player can double his bet by guessing under which shell the pea is located. Of course, the skilled operator is using sleight-of-hand to move the pea so that no player can ever successfully guess where the pea is located.
For those who track the numerous yet generally quiescent biofuels bets placed by Royal Dutch Shell, it feels as if the word will never quite come clearly through what direction Shell will take.You never quite figure out where the pea is really situated.
Occasionally, we hear something sharp and defining from corporate headquarters — for example, when Shell abandoned its participation in the Choren biomass-to-liquids project this past year, or when Shell announced that it would abandon its investment in wind and solar and concentrate all its renewables R&D on biofuels.
Yet, generally, we are left to guess — sometimes for reasons that are forced by external factors — such as the quiet period that (Shell-invested) Codexis is going through now prior to its IPO. Sometimes, there are significant periods of development where we are not quite sure if the R&D is continuing at its normal pace, or slacking off, or accelerating.
Companies with investments from Shell are – on the whole – reluctant to give extensive briefings and when they do, it is generally on background and with an almost visceral feeling that, somewhere in Den Haag, an executive is wagging a finger.
The reason is simple: though the biofuels industry should, and generally does, reacts with excitement when oil industry majors invest in biofuels ventures — such as Shell’s investment in cellulosic ethanol pioneer Iogen and in algal fuels pioneer Cellana — it is hardly the case that they have entered some Nirvana of strategic investment where money is no object and scale is a certainty.
In fact, the oil company investment committee process is a trial by fire that the designers of the medieval Inquisition might well have taken some notes on. Even after initial investment decisions are taken. The oil industry’s little investments in biofuels — for example, Lord Browne of BP reportedly characterized the company’s investment in D1 Oils as ‘coming from the PR budget’ — are fragile enough that the managers of the ventures rarely have an appetite to court publicity.
A shell, of course, is a barrier that insulates an organism from the predators of the outside world.
“You are up against, to give an example, a $400 million internal upgrade to an off-shore platform that is using known technology to produce a known return, for the production of oil and gas that the company is entirely comfortable with,” an industry executive recently told the Digest, requesting confidentiality. “Even if you pass through that, investment is on a stage-gate process, and they are really, really serious about internal controls and hurdles. ”
The stages and gates, according to other executives who discussed the process with the Digest, are highly disciplined, and woe betide the biofuels venture that comes short of them, no matter how understandable the reasons that generally stem from the technical uncertainties of producing new fuels from new feedstocks using new processes.
Another problem stemming from oil company investment is, in fact, the size disparity between oil companies and their biofuel investments. The largest advanced biofuels plant capacity currently under development in the US is the 100 Mgy AltAir camelina biofuel facility in Anacortes, Washington. A small Shell oil refinery in the same town — ranked only 50th in the country in size, among refineries, produces 100 million gallons every three weeks.
The engineering disciplines to erect giant oil refineries are in a different world than those needed for digging and lining of an open-air algae pond. Not to mention the sensation that oil company executives must experience when microbiologists visit corporate headquarters and discuss the commercial timelines for taming organisms that eat sugar and excrete diesel.
Micro-algae, they might well conclude, are being presented as compliant puppies when they are better described as wolves with 400 million year histories of surviving in the wild and, thank you very much, have their own timelines for engaging in service of humankind’s energy demand.
Ventures like the Canadian cellulosic venture Iogen do not end up being sent to the wilderness as punishment for falling short of commercial expectations — at Shell, as at BP and other oil majors who have entered the space through JVs — like hockey players, the penalties come generally in the form of time in the penalty box, in the form of delayed investment towards the commercialization phase, rather than bringing an uncommercial fuel to the market hoping that government tax credit support will make up the difference.
In their ruthless drive for parity, the oil majors are reflective of their government experience, compared to the earlier-stage green energy investors such as Archer Daniels Midland, Bunge and Cargill. The ABCs have have shown themselves generally more comfortable to rely on their DC muscle to win tax and subsidy supports to bridge any flaws in the commercial model, reflecting their long experience within the farm sector. We already see the RFA ginning up for a full-court press on renewal of the ethanol tax credit.
As for the oil majors, they appear to more content picking up nickels in the parking lot than picking up subsidies from Washington — their attitude, as multinationals, appears to be that Washington is warmly welcome to provide extra incentives for domestic production, but it is hardly required by the industry that, frankly, has long since taken the majority of its upstream production business elsewhere.
So, oil company investment brings good news and bad news. Good news — a lifeline of capital and access to downstream markets. The bad news — a brutal internal competition for capital, and a scale that is generally the subject of snickers from oil execs, even some who have made the transition over to the fuels of the future.
So where does that leave us with Shell? In the shell game we have described, the pea is for Parity, and there appears to be no lack of support for R&D in pursuit of that goal, but no moving ahead with commercial scale until it is reached.
The discipline of market realities, is maddening to lawmakers and the public who ask “where are all the wonderfuels?”
In the long term it is likely to offer short-term pain, long-term gain, as perhaps any biodiesel producer could tell you after waiting all these months for their tax credits to re-appear and bridge a price gap that Shell would never tolerate in the first place.
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