“Who killed $2.18 gasoline?” Reaction from the field

Readers inundate the Digest with old slide shows, perspective, anecdotes.

On Friday morning, the Digest published “Who killed $2.18 gasoline?”, reviewing an explosive investigative report from Bloomberg that itself looked at low-cost, low-carbon fuels technology developed by Catchlight Energy.

“They say [Chevron is] pushing back against the California rule because it demands technology that may not be available for years,” the team writes, as they detailed 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.

The report’s authors concluded that the technology was, essentially, abandoned by Catchlight parents Chevron and Weyerhaeuser after an internal report from Chevron analysts concluded that it was cheaper to pay for carbon emission exemptions than to build low-carbon fuel capacity.

The report has become a textbook example of how to stimulate crowdsourced documentation — as numerous Digest readers stepped forward with perspective and data to add color to the story. At the Digest’s conning tower, we received patent application data, presentations made by Chevron and Catchlight dating back to 2006.

We even received data on greenwashing activities by other members of the Fueling California coalition, including Wal-Mart, which has draped itself in recent years in eco-friendly ambitions and ironically released its Global Sustainablity report last week.

Reader reaction included those who sympathized with Catchlight and Chevron — noting the poor investment climate for all refining technologies, fossil or biobased. Others provided data that confirmed the bullish nature with which Catchlight has been touting the transformative economics of its solvent liquefaction technology — raising questions as to why the Catchlight partners have not proceeded to build a demo plant.

As we do in Digestville, let’s delve into the data.

Back in 2006

Here’s a slide Chevron presented back in 2006 — at the height of the ethanol boom, and not long after President Bush’s “addicted to oil” remarks in the State of the Union speech. For sure, at the time Chevron saw that growth in liquid fuel demand was primarily coming from unconventional liquids — including heavy oils, gas to liquids, some coal to liquid, and biofuels.

Chevron’s investment’s today

Let’s spin forward to 2013 — and Chevron’s 2013 capex budget. In all, $36.7 billion — that’s billion with a B. But it is almost all going upstream in petroleum and gas exploration — those very unconventional liquids such as heavy oils and gas to liquid opportunities, and conventional crude & gas exploration. Downstream (refining) receives just about 6 percent of the overall investment — and there’s no greenfield expansions in there, we understand — these are upgrades, expansions of existing plants, maintenance and the like.

As a Digest reader wrote:

“You may want to go back  and look at the return on capital for building oil refineries over the past 50 years.  It will be around 5%, probably below the cost of capital for most IOCs.  This is probably a difficult issue for most of your readers to get their heads around, and even more difficult for the average reporter or politician.  MONEY DOES NOT GET MADE IN THE “stand alone” REFINERY BUSINESS. No one pointed out that Chevron has not built, nor is planning to build any US oil refineries for the same reason – the returns stink!

The industry needs to figure out that cheap feedstock will not be vomited on top of them no matter how clever their technology is, they need to figure out how to be integrated into the upstream (like cane mills).  “Stand-alone” biorefineries will get built at the same pace as domestic oil refineries (approximately zero) until the upstream and the refinery can be integrated together with shared risks and transfer pricing.

The Chevron solvent liquefaction technology

Indeed, Chevron filed a patent app for its technology – which, it told the USPTO, does not require a catalyst, does not require CO2 or hydrogen in the process, and results in an upgradable bio-oil that is “easily transportable” and can be performed “at a local site such as a wood pulp generating facility.”

CLE: “Proven technology” discussed in 2011

CLE described solvent liquefaction as “proven technology” in a DOE presentation in 2011 – proven, that is, in what it described as a “large pilot plant” that had a “commercially-scalable feed system” and an associated “commercial plant design.”

In presenting the technology in 20111, Catchlight Energy touted high yields, moderate pressure, low char, and a low oxygen biocrude (thereby requiring less hydroprocessing when upgraded to hydrocarbon fuel).

CLE in 2012: showing the reversed engines

By the time of a 2012 DOE update, Catchlight Energy was describing what it described as an “adapted strategy”. The company noted that CLE was formed when “Chevron faced a rapidly growing obligation under RFS2” and that the Catchlight Energy JV was “expected to quickly Build-Own-Operate”.

What happened?

In this slide, CLE identified five challenges around advanced biofuels. Uncertainty in the biofuel and RIN market, feedstocks at scale, cost competitive technology, tight capital and compatibility of product with “present infrastructure”.

The Digest is going to eliminate the feedstock problem, the cost competitive problem and product integration, in considering the shift at Catchlight Energy.

Clearly, CLE had been touting a cost-competitive path to an infrastructure-compatible drop-in fuel, and just as clearly noted its access to feedstocks at scale and Weyerhaeuser’s expertise in feedstock aggregation. In short, these are concerns for many technologies — but not really this JV.

Leaving two concerns. Tight capital and RIN/RFS2 uncertainty. Those, broadly put, are very much in agreement with the Bloomberg thesis that Chevron decided there was no need to make an internal effort to meet RFS2 low-carbon obligations and divert capital elsewhere on the basis that biofuel refining technologies were not ROI-justified.

The CLE pivot

We see the search for capital in the new CLE approach — a “wrap-around partnership” strategy that touts Weyerhaeuser feedstock capabilities and Chevron’s fuel distributing business.

CLE, in fact, signed such a partnership with KiOR, with the intention of supplying wood chips and buying fuel — and touted the partnership with the landmark catalytic fast pyrolysis firm in its DOE presentation.

Is CLE’s heart in KiOR-esque technology?

KiOR, in terms of the revised strategy, makes an excellent partner. But for sure, from a processing POV, CLE is also touting that it has a technology that beats the pants off any other leading bio-oil pathway. Solvent liquefaction, says CLE, gets up to 30% more yield per ton of biomass, has lower oxygen content, converts way, way more carbon to fuel, and accepts far more roughly chopped woodchips as well as requiring no catalyst.

Sub-$2.50 biocrude? You bet.

In fact, CLE’s technology is, based on the techno-economic analysis that the company presented in 2012, is capable of producing sub-$2.50 biofuels at a yield of 104 gallons per bone dry ton of biomass. The chart is not exact but it looks like a cost of right around $2.30-$2.40.

By comparison, current Brent Crude costs $2.38 per gallon — noting, at the same time, that some of that oxygen is going to come out of bio-oil and will increase the overall cost per gallon.

CLE says that the economics are more than $2 per gallon better than the current Fast Pyrolysis case and more than $0.30 per gallon better than a “best case” expected for fast pyrolysis in 2017.

Pilots are not operations at scale

Catchlight says that it has work to do in further developing the technology – and is openly seeking partners, both at DOE presentations and at the 2012 ABLC meeting, where it offered numerous slides on partnering opportunities in then-CEO Mike Burnside’s presentation.

Among the challenges: continuous recovery of solvent, assessing the hydroprocessing challenge, refining process economics and demonstrating the novel feed system.

The bottom line

There are technical challenges indeed — but there’s only limited progress on those challenges to report since 2010. For sure, Catchlight’s technology appears to be in a holding pattern, and tight capital appears to be the culprit here.

But not tight capital in the conventional sense — since any company with a $36.7B capital budget can’t really be described as capital-constrained. The money is, frankly, going to high-carbon resource discovery. There’s more money to be made in high-carbon than low-carbon.

And CLE is just as frankly admitting that uncertainty over biofuels and RINs is the primary cause of the pull-back in capital spending on low-carbon techologies like solvent liquefaction.

And, ahem, guess who is creating that very uncertainty over biofuels and RINS— to a great extent, independent oil companies. They appear to have concluded that it is safe not to invest in low-carbon technologies.

A reader writes:

“Your statement is dead spot-on: “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.” Big Oil needs to be exposed.”

We continue to seek dialogue and response from Catchlight and Chevron and look forward to presenting their POV. As we said Friday, “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.”