Big Oil and Biofuels – Are you out there?

Bioenergy PROFITS Principle, Position Only for Growth

By Biofuels Digest columnist Dr. Rosalie LOber

What happened to the prophetic rumblings of big oil’s future commitment (and investments) in biofuels?  Was it merely an apparition?  Are biofuels considered a good strategic risk for big oil companies?

This year, a significant number of migrations among early stage biofuels producers moved from a “fuel centric” strategy to an emphasis of renewable chemicals, organic acids, food oils, and nutraceuticals.  What is the thinking behind this?  Why change strategy when there is supposed to be big oil investments in biofuels?

Today’s Bioenergy PROFITS Principles column explores the thinking of big oil companies and how they position for growth in this 2010 economy.

Position for Growth

•    Find the winners

•    Find safe opportunities

Oil companies are looking for the best opportunity for assets.  It has little to do with attitude towards or the economics of biofuels. According to Biofuels Digest, this has to do with the massive profits available in developing upstream assets in traditional oil & gas.

As challenging as the midstream refining business becomes during days of $200 oil, and as murderous as the downstream retailing of gasoline or diesel becomes in times of high prices, the upstream business of exploration and discovery becomes a goldmine. Assets that were unproved reserves become proved (that is, economically recoverable), and proved reserves go from nicely profitable to wildly profitable.

The more expensive that oil becomes – and the more that the public hates it – the better the economics look for oil majors who have focused themselves on the upstream side of However, not every oil major is as well positioned as the others in terms of their upstream assets. The worse their opportunities are, the better biofuels look.

Biofuels are above-ground oil fields, a different kind of proved reserve, a renewable one. When the IRR of biofuels projects begin to exceed the upstream opportunities available to oil majors, that’s when scale will happen. The key to alternative energy is understanding that companies invest when they need alternatives, not when you do.

Find the winners

For biofuels, sugarcane is a winner.  This is something that Shell Oil recognized.  Brazilian sugarcane has a high EROEI (the energy returned on energy invested); for every unit of fossil fuel input, eight units of sugarcane ethanol energy are outputted.

Shell announced in late August that it finalized a massive deal with Cosan SA Industria & Comercio, the world’s biggest sugarcane producer, for a biofuel venture in Brazil. Shell is expected to contribute $1.95 billion, along with 2,740 service stations. Cosan will throw in 23 sugar mills, power plants that produce energy from sugarcane waste, and 1,730 service stations. When all assets involved are taken into account, the venture is worth approximately $12 billion.

Shell is going with a winner. Brazil’s ethanol fuel program is 30 years old, and sugarcane ethanol represented 17.6% of the country’s total energy consumption in the transport sector in 2008.

Last year oil giant Exxon invested $600 million in algae biofuel technology from Synthetic Genomics. BP bought Verenium’s biofuel business earlier this summer for $98 million. Chevron also recently partnered with Weyerhaeuser Company for a joint venture, dubbed Catchlight Energy, which will produce biofuels made from forest-based biomass. The remaining Big Oil companies, including ConocoPhillips ($22 million for biofuel research) and Total (undisclosed investments in biofuel startups Amyris and Coskata), have made relatively minor biofuel investments.

Find safe opportunities

We are living in a risk averse environment.  Money is tight and investors are careful.  For oil companies, ethanol made from corn and other products such as cellulosics are relatively safe bets.

French oil company Total has taken an interest in cellulosic ethanol. The oil giant has acquired an undisclosed stake in Coskata, an Illinois biofuel startup. The investment came during Coskata’s latest round of equity financing, which included Khosla Ventures. Total’s is on Coskata’s board of directors. Both firms said the investment will advance the commercial production of bioethanol.  Coskata, which is backed by General Motors, opened a “semi-commercial” refinery. The demonstration plant in Madison, Pennsylvania, uses bacteria to turn almost any organic material into ethanol. Coskata says it can be scaled up to produce 50 to 100 million gallons annually.

“This investment by Total, one of the world’s largest oil and gas companies and a major player in chemicals, confirms the potential of our technology platform and enhances our plans for commercial deployment,” Bill Roe, Coskata president and CEO, said in a statement.  Total said in a statement that the investment “is part of Total’s strategy to prepare for energy transition, in particular by supporting the development of innovative start-ups though its corporate venture activity.” Total says it plans to invest in other clean energy firms.

Royal Dutch Shell announced in February, 2010, that it created an Memorandum of Understanding (MOU) with Cosan to produce a 50-50 Brazilian ethanol joint venture valued at $12 billion.  This investment represents the single largest commitment to biofuels that any oil company has made to date.  This joint venture will own 4,500 retail stations and production capacity of 1,323 MGY, bringing the company into the top four global ethanol production (ranking behind U.S.-based POET, Archer Daniels Midland, and Valero).  Shell is contributing $1.63 billion in capital and its retail and marketing units (valued at $3B).  Cosan’s assets are valued at $4.93B, while part of its $2.5B in net debt will be carried on the balance sheet of the joint venture.

BP has a JV with DuPont to commercialize biobutanol, and is exploring other avenues in the sector.  They are also producing algae with Martek Biosciences, jatropha with D1, cellulosic ethanol with QTeros, and ethanol using sugarcane with Brazilian-based Tropical BioEnergia SA.

Exxon-Mobile, CEO Rex Tillerson said in 2006 that, “there’s an enormous amount of uncertainty around this whole question [of global warming].” He then made one biofuel investment, a $300-$600M algae collaboration with Synthetic Genomics.  Chevron invested in Codexis, while French major Total S.A. invested in biobutanol leader Gevo.

Over the last year, U.S. oil refiners Valero and Sunoco purchased the bankrupt assets of first-generation producers for dimes on the dollar of replacement cost.  By mid-2010, Valero will have 1.1 billion gallons of ethanol production capacity (from zero in 2008), making it the third-largest producer in the United States.

It has been stated, “If we consider that the oil majors are not in the oil business, but rather, the infrastructure business and as long as they control the liquids that come out of the pumps, they won’t care if it is made from petroleum or cow dung, then we shouldn’t be surprised that they are increasing their investments into biofuels.”

Position Only For Growth, is one of the seven Bioenergy PROFITS Principles.  These Bioenergy PROFITS Principles highlight proven principles to running your business more effectively and are featured in Dr. Lober’s forthcoming book, DELIVERANCE:  From the Valley of Death to Sustainable PROFITS in Bioenergy.