Biofuel Investments at Seven-Year Low as BP Blames Cost
Europe’s biggest oil companies are scaling back work on the next generation of biofuels, a setback for the effort to create a gasoline substitute that doesn’t drain the food supply.
BP Plc (BP/) and Royal Dutch Shell (RDSA) Group Plc have halted funds for four separate ventures because the technology to produce fuel from woody plants and waste won’t be economical until 2020 or beyond, executives at both companies said in interviews.
“This is very capital intensive,” Phil New, head of BP’s biofuels program, said in an interview. “There’s lots of difficult engineering. It will take time for scale-up.”
The decisions helped cut global investment in biofuel production to $57 million in the first quarter, the lowest since 2006, from its peak of $7.6 billion in the last quarter of 2007, according to data compiled by Bloomberg. That makes it less likely the industry will meet the ambitions of U.S. and European leaders to help reduce fossil fuel pollution and wean motorists off crude oil-based fuel.
“Progress in deploying these technologies has been slower than many had anticipated and what’s needed to keep on track with our aspirations,” Maria van der Hoeven, executive director of the International Energy Agency, said in an e-mailed response to questions. “Many potential producers have found it difficult to secure the capital they need.”
Biofuels are one of the measures both the U.S. and Europe are counting on to reduce the emissions blamed for global warming. The IEA, a policy adviser for industrial nations, estimates biofuels must supply about 27 percent of road fuels worldwide by 2050 to meet climate targets, up from 3 percent last year.
Ethanol made from sugar or corn accounted for almost all of the 1.9 million barrels a day of biofuel produced last year. Output grew 10 percent since 2011, helping boost corn prices and raising concerns at the United Nations that fuel production in rich countries was cutting the supply of food to the poor.
Making the next-generation fuel requires more refining to break down the tough cellulose found in plant walls. It would open the industry to supplies that don’t compete with food. Those include switch grass, corn stalks and jatropha, as well as waste from the lumber and paper industries and from garbage heaps. Scientists are also experimenting with using microscopic bacteria and algae that can make fuel.
BP and Shell have been the “most open” of the major oil companies to biofuels, said Peder Holk Nielsen, CEO at Novozymes A/S (NZYMB), the world’s largest maker of enzymes for making biofuels. “They could help to boost investment in cellulosics, but that’s not what is happening right now.”
Both BP and Shell had trouble making technology that works in the lab economical at a commercial scale. In October, BP scrapped a four-year-old project to spend $300 million on a cellulosic ethanol refinery in Florida. It ended its work to use jatropha as a feedstock for fuels in 2009.
BP continues to work with DuPont & Co. and the companies today opened a 350 million-pound ($520 million) wheat-to-ethanol facility in the U.K. The plan is for the plant to eventually make biobutanol, a fuel it says could “unlock the next pulse of investment” as it’s more efficient than ethanol and doesn’t require any changes to be made to existing vehicles. It doesn’t expect to commercialize that fuel before 2016.
Shell in April canceled plans with Iogen Corp. for a commercial-scale plant in Manitoba, Canada, that would have made ethanol from straw. In August 2012, it stopped funding for biofuel enzymes at Codexis Inc. (CDXS) The year before, it exited an algae venture with HR BioPetroleum Inc.
“All of these technologies are capable of working technically,” Matthew Tipper, Shell’s head of alternative energy, said in an interview. “It was purely on cost that this technology couldn’t be taken forward. Fuels have to be cheap enough to burn. Otherwise no-one will buy them.”
In the U.S., Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) already have pared back on biofuels. Chevron shelved most of its work in 2010 after deciding the 100 feedstocks it examined wouldn’t provide the returns executives desired. Exxon spent $100 million over four years on algae without finding a viable fuel.
Both Shell and BP are expanding their traditional biofuel businesses in Brazil, where they brew fuels from sugar cane. Shell has 23 refineries there with Cosan SA Industria e Comercio. BP in December announced a $350 million doubling of the capacity of its Tropical ethanol project in Brazil.
Together, those companies will help boost U.S. cellulosic biofuel output 20-fold in 2013 as the first high-volume refineries start, the U.S. Department of Energy estimates. The 9.6 million gallons of production expected would be short of the government’s target for 14 million gallons.
“Growth opportunities for first-generation biofuels are close to exhausted, while a series of next generation technologies are not quite ready,” said Roberto Rodriguez Labastida, an analyst at Bloomberg New Energy Finance in London.