Biofuel Investments at Seven-year Low

Bio­fu­el invest­ments at sev­en-year low

July 8, 2013. Source: Bloomberg

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.”

Pol­lu­tion Tar­get 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. ‘Could Help’ 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.

Cost Issue

“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. They’ve left devel­op­ment of the next gen­er­a­tion of bio­fu­els more firm­ly with small­er spe­cial­ists such as Kior Inc. (KIOR), Poet LLC, Aben­goa SA (ABG) and Italy’s Grup­po Mossi & Ghisolfi. 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.