The Rocky Road: What can biofuels learn about paths to commercialization from Standard Oil?

From every corner of the biofuels universe, the Digesterati are giving mixed signals.  There’s a financing crisis for US-based commercial-scale bioenergy, on an epic scale. There’s an ongoing debate about whether microcrops and unicellular organisms such as algae will provide parity-priced fuels in three years, or ten, or ever. Sections of the country are tiring mightily of the subsidization of first generation corn ethanol.

Yet the farm sector has become, in the wake of ethanol, a rare shining star in the sputtering US economy. Cleantech investors are pouring funds into bio-based investments that are getting shatteringly close to price parity with fossil-based oil – there are more projects than can be counted on two hands that project parity with $60 oil within four years.

Biofuels companies face tough challenges in policy, technology, finance in 2011 in the “Year of Decisions”. How did the oil industry manage it, when it overtook steam and coal to become the dominant transportation energy platform? We look at what Standard Oil did and how it did it – for guidance and as a cautionary tale.

A twice-told tale

It’s a rocky road. But then it always was. As William Manchester told it, in A Rockefeller Family Portrait:

“While [John D. [Rockefeller]  was still in high school, a Dartmouth professor found that petroleum could be refined, and the month after the young merchant’s 20th birthday, the first oil well was sunk near Titusville, Pennsylvania…the possibilities of oil were staggering…Yet the big money was staying out of the oil regions. Drilling was risky and inefficient, wells were always exploding. The oil regions were peopled with adventurers, stock swindlers, fancy women. Worst of all, no one could stop overproduction.”

The script is so familiar, it blows. Big money standing aside due to excessive risk. Adventurism and stock swindling in the new fuel platform. The crushing forces of over production.

The road previously traveled

But the success of the oil industry reminds us that the this rocky road, no matter how narrow and creepy, has been negotiated before. We are not the first to pass this way. In this, the biggest game that was ever played, the transition of the energy industry to a new technology platform, we are not the first, nor the last – and this is a do-able thing that is being done, that will be done, that must be done.

In the opening address at Advanced Biofuels Markets a few weeks ago, where we we were privileged to welcome the makers of 97 percent of advanced-generation biofuels in the US, I made the observation that the world’s largest oil company, Saudi Aramco, was founded in San Francisco, about seven blocks from the conference’s location on Nob Hill.

There’s a very good chance that – if we are to place our faith in the voting for the 50 Hottest Companies in Bioenergy, that we will eventually find that the world’s largest post-oil company will have been founded in San Francisco as well. In fact there’s a very good chance that the founders of the world’s largest post-oil company are active in the industry today.

The foundation of Saudi Aramco

I thought at the time it would be, therefore, useful to relate something of the character of the man who founded Saudi Aramco, Harry Deward Collier. As one of those who in an earlier day mastered the fusing of capital and talent and technology into the most relentlessly successful and enduring energy giant of all time.

Collier was a marine engineer by training, who joined Standard Oil in 1903 when it became clear that the marine industry was going to completely convert over from coal to oil, and he took a leading part in that transition.

His own father had participated in the transition from sail to steam. His grandfather had participated in the transition from the New England whalers to the great Yankee Clippers, as a fleet owner and china trader.

From his own story, Henry Deward Collier understood the transitory nature of transportation technologies, the importance of thinking globally, the importance of China.

He had a little trick he would play. He would ask you, “Would you like a nickel?” This was back in the day when a nickel was worth something.

“Sure,” you’d say, “what do I have to do for it?”

“There is is, take it.” And he’d point to a nickel by the stove. What the victim didn’t know is that he’d have heated up the nickel, so it was burning hot, and when you picked it up you’d drop it right away.

“What the Sam Hill you do that for?” you’d say.

“Don’t grab what you can’t hold on to,” he’d answer. “Study the problem, make a tool, make a friend. if you do that, there’s nothing you can’t get a hold of and keep holding onto.”

Study the problem, make a tool, make a friend. Isn’t that what we are doing here this week? Isn’t that what networking is all about?

Make a friend, that was his secret, that was how he corralled Exxon, Mobil, and Texaco into forming Aramco, and held off BP and Shell, and maintained the critical alliance with King Saud.

The secret of partnership

The secret of partnership is that it’s not who you know, or what you know, it’s what you do with who you know. That is a lesson for all time.

It was the secret of Rockefeller too – the partnerships he forged to achieve scale, drive down cost, and (ruinously, say his critics) impose order on his industry through monopoly control.

It was the secret of Aramco, in its earliest days. The co-operation of political, technical, and financial forces to pump, refine, and distribute the world’s biggest oil find.

It is the challenge of today. The very excellence of the 50 Hottest Companies in Bioenergy make the case that innovation is not enough, not near enough. One company and its technology will not get this done – this transition from fossil liquid energy to its bio-based replacement. Nor will a dozen, nor a hundred.

The answers lie in the power of combination. Not the murderous combinations that were the foundation of Standard Oil, nor the precise balance of giants that was the foundation of Aramco.

But combinations that will render end-to-end solutions in technology, de-risk the projects; form, concentrate and deploy capital; distribute the fuel. As hard as it was to make 50 of the Hottest Companies, it will be five times the work to make one-fifth as many.

Study the problem, make a tool, make a friend. Network like crazy to do all these things. This is the hard work the industry will be called upon to do as this transition plays out. The lone wolf must give way to the pack.

Fewer companies, more fuel

If the 50 Hottest Companies are still an independent 50 in five years, it is not a sign of the power of innovation, but industrial strength that failed to materialize. As astronomers know, asteroid belts are fascinating phenomena, but are ultimately failed planets – they foster nothing, host nothing, and become nothing. Aggregation at scale – planetary formation – is the basis of life.

Less is more – that it is the only way to negotiate the rocky road, as surely Rockefeller’s career and the story arc of the oil industry must inform us. A certain type of scale comes from steel in the ground, but the more profound kind comes from combinations that protect the value of the fuel.

So, just as we celebrate the formation of all these centers of excellence, let us set ourselves to the task of sweeping these many twinkling stars into a few brilliant galaxies, and soon, and begin to do something more transformational that the development of a technology. It is time to organize this market.