Who killed $2.18 gasoline?

April 19, 2013 |

gaspricesAn explosive report from Bloomberg alleges that a pathway to $2.18 per gallon gasoline was developed at Chevron-Weyerhaeuser owned Catchlight Energy.

Yet, the project was sidelined. Why?

Was the project really saddled with a threshold ROI 10 percent above Chevron’s annual average return on capital?

The Bloomberg investigative team of Ben Elgin & Peter Waldman yesterday published an expose on Chevron trying to undercut California’s low-carbon fuel standard. “They say they’re pushing back against the California rule because it demands technology that may not be available for years,” the team writes, as they detail the derailing of a technology that would have been available at commercial scale as soon as next year, according to the company’s own internal documentation.

Impossible?

“We’ve looked at 100 feedstocks, 50 conversion technologies, worked to shape this law the best we can, and we have not come up with a solution to be able to comply,” said Rhonda Zygocki, Chevron’s executive vice president of policy and planning, in a Feb. 4 talk at the Commonwealth Club in San Francisco. Rick Zalesky, the Chevron official who celebrated the order’s signing with Schwarzenegger, was blunt last June when he declared the low-carbon standard “not achievable.”

A contrasting view

“You can make money today making advanced biofuels,” Bloomberg quoted former Chevron biofuels VP Paul Bryan in the report. “You just won’t make as much money as the oil companies would like.”

Was there really a project at Chevron that could profitably make renewable gasoline at $2.18 per gallon?

Apparently, yes. Catchlight Energy, a joint venture of Chevron and Weyerhaeuser — have such a technology.

But let’s put some qualifiers on that. It was at pilot stage. The Bloomberg report points to “a $504 million solvent liquefaction plant producing 92 million gallons a year at a cost of $2.18 a gallon.” Did that include the capital investment? That’s not clear, and could have added $0.36 per gallon (amortized over 15 years).

But certainly, competitive with the cost of making gasoline when the Brent Crude benchmark has been between $93 and $115 per gallon this year.

What happened?

The Bloomberg report points to an internal Chevron report, written in 2009, that concluded it would be cheaper to buy renewable energy exemptions than make renewable fuel.

According to Bloomberg, a few months after the report appeared, Catchlight’s budget was scaled back. Originally the venture was intended to build 17 plants by 2029, making 2 billion gallons of renewable fuel, starting with a $370 million commitment by 2013 and a first commercial plant in 2014.

The projects were projected to make a return on investment of between 5 and 10 percent per year, compared to Chevron-wide average return of 17 percent. According to Bloomberg, the Catchlight board said in April 2010 that there was “no urgency” in advancing the technology, set the minimum annual return at 20 percent to greenlight a project, and reduced Catchlight’s 2013 budget from $370 million to $8.9 million.

Chevron’s overall capital budget this year? $33 billion. Net income? $26.2 billion on $222.6 billion in sales, according to Bloomberg.

It’s the money, honey.

Desmond King, president of Chevron Technology Ventures, told Bloomberg “It all comes down to getting good enough returns for our shareholders.”

Ironically, RIN prices (the currency of renewable fuel mandate compliance) have soared this year and high prices are being cited as a reason to repeal the Renewable Fuel Standard.

“Something’s got to be done, so we’re doing it.”

Bloomberg pointed to the irony of a 2010 Chevron advertising campaign.In October 2010, six months after Chevron and Weyerhaeuser put the brakes on at Catchlight, Chevron ran television and print ads about its work on non-petroleum fuels. “Something’s got to be done. So we’re doing it,” the ads said. “We’re not just behind renewables. We’re tackling the challenges of making them affordable and reliable on a large scale.”

R&D spending offloaded to the Feds

According to Bloomberg, R&D on solvent liquefaction is now reduced primarily to a $3.5 million program at Iowa State, $2.8 million funded by a federal grant and $700,000 by Catchlight.

More on Fueling California

The article also traces the ratchet-back of efforts at ExxonMobil to develop algal biofuels — and points to a new strategy among oil companies based on funding lobbying efforts to repeal or slow renewable fuel mandates, saying that they are unworkable based on current technology.

The Bloomberg team traces well-funded attempts to derail California’s Low Carbon Fuel Standard — including Chevron and ExxonMobil’s funding of Fueling California, “an advocacy group whose major funder is Chevron and that spent more than $327,000 in 2011 and 2012 lobbying on fuel and transportation policies” — and which has targeted a slowdown in implementing California’s Low Carbon Fuel Standard.

The bottom line

We’ve seen much of this before in the kinds of charges that are often leveled at oil companies — toxic levels of cynicism in public relations, capitalism run amok, projects subject only to economic sustainability, leaving someone else to clean up the carbon.

But there’s something here that we see less often. The bottling up of game-changing technologies, a tying up of talent.

Here’s the pattern: bend to public will when mandate efforts become popular, establish big projects, hire top R&D talent and bottle up IP to prevent technology spread, kill off the projects with absurd profit requirements, cite lack of feasible technology as a reason to kill or delay mandates, and then lobby like crazy to get back to the status quo.

True? Fair? Let’s explore in the days and weeks to come.

At the very least, Chevron has some explaining to do.

We’ve offered Chevron and Catchlight space in the Digest to set out their view. We invite others to reach out to the Digest and share what they know.

Not in a spirit of agenda-ranting, but a spirit of nuanced debate between grown-ups as they tackle real issues, navigate opportunity, and balance social and financial obligations.

The full Bloomberg report is published here.

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