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BP Biofuels goes for full vertical integration, in US cellulosic ethanol expansion

| October 9, 2011

Is BP going for vertical integration, just as Shell has opted for a massive JV with Cosan; and Total, Marathon and Chevron continue with strategic investments in advanced technologies. Why vertical, why now?

When BP entered into the biofuels sphere in 2008, the strategy under CEO Phil New was to seek out “advantaged” biofuels, in both first- and second-generation, based on looking for low-cost feedstock and appropriate processing technologies that could unlock the underlying value.

In the earlier days, BP announced an aggressive series of partnerships – with Dupont to form the biobutanol venture now known as Butamax, with Dupont and AB Sugar to develop the Vivergo ethanol project in the UK; Tropical Bioenergia, a 50/50 JV in Brazil, and Vercipia, a 50/50 JV with Verenium in cellulosic ethanol.

As well, the company made investments in companies such as Qteros and Mendel Biotechnologies.

Then, in 2010 came the stunning news that BP was acquiring all of Verenium’s interests in Vercipia, and news started flowing out of Texas that the company was developing grower relationships and looking at land for a production facility in Texas. At the same time, the company acquired the whole of Tropical Bioenergia, and acquired additional Brazilian capacity in the form of assets from CNAA.

What up? Is BP going all vertically integrated, from field to wheels? Is this a strategic shift, an extension, or just a series of unrelated, opportunistic deals?

To learn more, the Digest spent time this week with BP Biofuels North American CEO Susan Ellerbusch, and global BP Biofuels CEO Philip New.

BP Biofuels North America chief Susan Ellerbusch

BD: Rewind a little on your biofuels story, for those readers who are newer to the BP Biofuels story.

SE: We entered into biofuels 2008 with Verenium after looking at who was most advanced. We partnered with them, and over the course of the relationship, we confirmed we had a leading technology. But we discovered we were struggling with partner strength, in terms of scale-up financing.

BD: But you were going full-ahead in Brazil.

SE: Yes, and at the same time, what we saw in Brazil was that there was a real value in having a fully integrated model – feedstock – conversion

So, we are seeking the same structure in the US. Now, at BP there are dozens of BP people who are experts in growing crops design, farm logistics. We are building an agriculture team after having acquired the biotech parts.

BD: So the moves to acquire and develop we are seeing in Florida and Texas are strategic.

SE: Yes, every move is around how do we get a fully integrated chain.

Now, the results

BD: Results so far?

SE: We found that once we started down this path, we have been able to significantly accelerate on technology, and that we are out-advancing the project in highlands.

So we are looking for where do we go next, and have been looking at land and future plant sites along the Gulf that would be two times the size of Highlands at 72 million gallons.

BD: What has BP Biofuels been focused on to date in Texas?

SE: We have been finding land options and working with farmers, to bring in those crops, learn about them, and bulking up feedstocks, primarily focused on Texas, Louisiana and Florida, where it is warm and wet enough for the tropical energy grasses.

BD: So you are focusing in on cane?

SE: We want to focus in warm wet crops, not switchgrass, but energy canes and varieties of grass that grow 12-15 feet tall.

We have brought a lot of technical people, as well as working with USDA, and we have made investments like Mendel and other feedstock developers. So there are lots of business models in cellulose, all viable. But we have concluded that to get to material scale you have to have a purpose grown crops.

The timing

BD: Timing?

SE: It takes several years to start the feedstocks, so it will be 4-5 years to have a fully functional 20-50,000 acres, so we need to be developing now.

BD: How are you working with growers?

SE: We view farmers as our partners, we are working with various models, such as leasing or growing on their land, or they can grow for us. It’s a very big analogy with what goes in Brazil, and we are bringing new jobs and revitalization to areas suffering from citrus and cotton decline.

The farmers have been very receptive. They are entrepreneurial, and look at their land as an asset to optimize.

BD: Do you think you have that advantaged biofuel in cellulosic ethanol that you have been seeking?

SE: We believe we have reached a point in the technology we can economically bring an economic cellulosic ethanol to market, and a technology build program to reduce costs further. As we reach 2022 we will have cellulosic ethanol on an unsubsidized basis.

BD: Unsubsidized?

SE: Although regulatory regime formed the industry, it has to stand on its own.

Progress in Florida

BD: OK, back to Florida. Progress there?

SE: In Highlands, we are building the farm out. We have 3500 acres, roads, ditches. Quite a bit of effort there. We have planting just starting this week and next, with 1500 acres this year, and we will construct and plant more next year. All land is secured, and all major permitting is secured.

BD: You plan to stay with ethanol there, or do higher-value molecules figure in the plan?

SE: Our focus is very strategic. It’s low cost feedstocks, converted via a biological fermentation that starts with ethanol. But we want to take that to another level, and we do see butanol as an important molecule for us.

BD; It sounds pretty big. How many people are working on BP Biofuels now?

SE: We now have over 4000 people in the US and Brazil, including over 300 people in the US.

BP Biofuels CEO Philip New

BD: Looking at Brazil and the US, what’s changed in the strategy, what has remained the same?

PN: As you know, we have always convinced about the attraction of Brazil. We were the first of the non-ag players, and by far the first of the energy companies, starting out in 2008 to build out the position.

We are comfortable with the position, but what has changed is our view on joint venturing. We came to believe that we didn’t need 50/50 JVs any more, and are now happy to go in as the only energy firm, owning and operating, as opposed to an “at arms length” arrangement.

BD: So you are in expansion mode?

PN: Yes, when the CNAA assets on the market, which were adjacent to our current investments, and available, we were able to move.

A change in strategy?

BD: Is that a change in strategy from partnership model to vertical integration?

PN: The strategy is consistent, what has changed is moving from JVs to 100 percent, and taking on the operating risk and challenge. The timing of moves related to that change in thinking, rather than being opportunistic. The attraction for us is a geographically coherent group of mills with common technology. All new, all on some of the best land, with potential for further expansion.

BD: The new Brazilian capacity, does it have mechanized harvesting?

PN: It’s 99.8 percent mechanized harvesting and planting, and the plants are 60/40 sugar ethanol capable, in terms of how we switch from one to another. We have cogeneration [for power] in place, and we throughly tested bagasse and it works perfectly.

Options with bagasse

BD: So you have the option, with bagasse, to go for power or fuel?

PN: The question is the arbitrage between power and cellulosic conversion.

BD: Why the decision to go for the partnership model back in 2008?

PN: Back in 2008, fundamentally BP had no real experience in agricultural operations at any kind of scale, and we felt we didn’t understand agricultural risk, or the social and safety exposures properly. Through the JV, we wanted to get ourselves comfortable about operating safely and well. Now, managerial – optimized improvement at Tropical, we think it has an industry leading safety record, an order of magnitude better than before.

Options with isobutanol

BD: Butamax?

PN: Butanol remains the key limb of our strategy, and the poster child for that strategy is isobutanol from Butamax.

BD: Models for Butamax – we hear ‘licensing’ but don’t hear about any licenses. Why?

PN: To deploy at scale, we expect to see a mixed model. We will happily contemplate BP equity assets, and licensing playing a key role. There have been no licenses announced, because we will start when we believe we have tested at scale. There isn’t a need for us to create speculative positions without the technology, we don’t need to try and feed a market appetite for news stories.

Dupont’s acquisition of Danisco

BD: Dupont and Danisco?

PN: Dupont is a very close partner of ours in the space. I would argue with Dupont and Danisco coming together and the BP acquisition, there are really only two companies in the space that have got completely integrated capability.

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