Big Oil and Biofuels: Bitter Rivals or Best Friends?
By: TODD A. TAYLOR & ZACHARY D. OLSON
September 2009
Since the 2005 enactment of the Renewable Fuels Standard (RFS), big oil companies have partnered with, invested in, and acquired biofuels companies – an increasing trend as oil companies realize that the public wants biofuels to have a permanent role in the transportation fuels market. For many in the biofuels industry, this encroachment is an unwelcome and troubling sign that oil companies are unwilling to let the biofuels industry succeed as a true independent alternative to petroleum. To others, it is a positive sign that biofuels are finally being treated seriously.
What are the facts at work here? The United States is the world’s leader in petroleum consumption. In 2007, we consumed more than 390 million gallons of gasoline per day, amounting to 142 billion gallons annually – contrasting with consumption of 17.7 million gallons of ethanol per day or 6.5 billion gallons annually – approximately 4.5% of gasoline consumption. Gasoline consumption decreased slightly in 2008 and ethanol increased to 9 billion gallons (6.3%). With the enactment of the RFS regulations, blending of biofuels will increase annually from 9 billion to 36 billion gallons between 2008 and 2022 (see table).
A major concern is that RFS goals will be undone by the huge gap between mandated blending levels and actual production of renewable fuels. For example, in 2009 many plants are sitting idle, under producing, or in bankruptcy. Per the Renewable Fuels Association, almost 2 billion gallons (of 12.5 billion capacity) is sitting on the sidelines, thus seriously preventing renewable fuels producers from meeting the 2009 standard. There are also significant doubts about whether there will sufficient cellulosic ethanol production to meet the RFS 2009-and-beyond requirements. Low carbon fuel standards, as adopted by California and in EPA review, could also reduce the industry’s production ability.
While ethanol production is becoming a significant portion (almost 10%) portion of U.S. transportation fuel supply, and there are efforts underway to increase the maximum blending percentage to 15%, U.S. ethanol production remains a small component of our transportation fuel market.
The good news for biofuels, however, is that there are political, societal, and economic pressures to increase biofuels usage. RFS II is a significant driver of biofuels, directing billions of federal dollars towards advanced biofuels development. Legislation may also make using carbon-intensive fuels cost-prohibitive. While public pressure increases to move away from petroleum to renewable alternatives, economic pressures may provide ultimate trump leverage, as experts agree that oil will be depleted in 50 to 100 years. As oil becomes scarce, it will become more expensive, making biofuels price-competitive – an advantage biofuels can exploit as technological development drives down biofuels production costs.
Currently oil companies vastly out-produce biofuels producers, control the infrastructure and have considerable resources – making them the “800-pound gorilla” in the room. As oil companies begin active participation in biofuels, the biofuels industry needs to be alert and watch with caution:
- ExxonMobil, the largest publicly held oil company, announced on July 14, 2009, its first venture into biofuels by investing $600 million into research regarding algae-produced biofuels while partnering with Synthetic Genomics to identify/research algae-derived biofuels opportunities.
- British Petroleum (BP) has been active in renewable fuels in recent years, having invested $112.5 million in partnership with Verenium to develop in Florida the world’s largest biofuels facility. BP has also invested $500 million to establish the Energy Biosciences Institute (EBI), a research endeavor collaborating with three U.S. university-based partners.
- Chevron indicates it expects to invest more than $2.5 billion in renewable energy technologies before the end of 2009, having announced in January, 2008 that it has entered into an agreement with Solazyme to develop feedstocks for biodiesel production.
- Valero entered the biofuels arena through asset acquisition, having bought seven ethanol plants from VeraSun, the first such purchases by an oil refiner. Valero also invested in ZeaChem, which intends to build a cellulosic ethanol plant – and in Solix Biofuels, which plans to harvest oil from algae to produce biocrude, which has the same properties and refinable qualities as standard crude oil.
- Shell has spent $1.7 billion since 2004 on renewable fuels projects and intends to focus on biofuels development in 2009 and 2010, with specific focuses on cellulosic biofuels and algae-to-biofuels R&D. It has also collaborated with Codexis to develop biocatalysts in hopes of using them to accelerate commercialization of next-generation biofuels.
- ConocoPhillips has engaged in research collaboratively with universities and other groups and has sponsored, investing $5 million into, a research agreement with the Colorado Center for Biorefining and Biofuels. In 2008, it formed a strategic research alliance with the Department of Energy’s National Renewable Energy Laboratory (NREL) and Iowa State University for researching renewable biofuels applications. In addition to its partnership with NREL, ConocoPhillips has provided more than $4.75 million to the university to begin biofuels-related research projects – and plans to invest $22.5 million with them over an eight-year period. ConocoPhillips has also partnered with Archer-Daniels-Midland Co. to develop biocrude.
- Marathon has made a $10 million equity investment in Mascoma Corporation, working on development of cellulosic ethanol. Marathon has also partnered with The Andersons to build and own ethanol plants in three Midwest locations.
Even a casual observer will notice that most oil companies are not involved with first-generation biofuels. When they are, as with Valero, they have invested to fulfill needs to secure ethanol for blending. Oil companies are mostly involved with advanced biofuels projects that utilize animal feedstocks for production, focusing on cellulosic ethanol, renewable diesel, biogasoline and other biofuels.
Biofuel companies have three relationship choices with oil companies: cooperate, compete, or co-exist. Cooperation involves investment, acquisition, or joint R&D, but means accepting oil companies as powerful partners. Competing is a hard choice given economic advantages enjoyed by oil companies, but if a biofuels company develops a fuel that is a direct replacement for any petroleum fuel, the rewards of creating a seismic market change can be enormous. Coexisting means status quo, accepting a role where biofuels, a small component of the overall fuels market, are blended into existing supplies.
Takeaway
Should the biofuels industry be pleased or worried? Given oil companies’ current market dominance, biofuels companies would be wise to consider working with oil companies that have considerable money, access to or control of blending, distribution and sales channels, and R&D resources to ensure project success. On the other hand, concern lingers over whether oil companies are simply dabbling in biofuels to attenuate public and governmental pressures to use renewables. Regardless of how one views the situation, biofuels companies should be aware of how oil companies become involved in their specific fields and should develop a strategies for dealing with them.