Royal Dutch Shell Plc .com: Farm Waste Into Your Gas Tank

FROM THE WALL STREET JOURNAL

Energy Stalks
Big Players Join Race to Put
Farm Waste Into Your Gas Tank

With Federal Push, Companies
Propose Plants That Turn
Husks, Grass Into Ethanol
Delving Into Elephant Dung
By JOHN J. FIALKA and SCOTT KILMAN
June 29, 2006; Page A1

WILMINGTON, Del. — One way to wean America from its addiction to foreign oil might well lie in the muddy solution swirling about a glass container on top of a DuPont Co. laboratory bench.

Inside the liter-size vessel, a desert-loving bacterium is making motor fuel. The organism, which normally lives on the agave plant of tequila fame, is munching on the chopped-up leaves and stalk of a plant, and excreting a dilute form of ethanol, the gasoline substitute normally made from corn kernels in the U.S.

The tiny organism — and others being engineered in competing labs around the country — could hold the keys to a new U.S. fuel source: cellulosic ethanol, which can be made from crop residues, wood chips, switchgrass and even municipal garbage.
 
The effort to make cellulosic ethanol into a full-blown power source to run America’s cars is embryonic, and its outcome uncertain. But the fuel has two big things going for it: High oil prices and backing from the Bush administration, which sees it as a potentially important part of future energy supplies and is putting up money to help launch the first “biorefineries” to make it. Adherents think it could reduce U.S. dependence on imported oil, cut emissions that cause global warming and shore up the nation’s rural economy. Already, the race is attracting big names, with the likes of Archer-Daniels-Midland Co., Royal Dutch Shell Group and Goldman Sachs Group Inc., investing time and seed money.

In the U.S., ethanol for fuel is typically made from corn. But growing corn gobbles up a lot of power in the form of everything from fertilizer to pesticides. The economics of cellulosic ethanol, made essentially from waste, could be different. With the booming economies of China and India helping increase the world’s appetite for petroleum faster than new sources of fossil fuel can be found, economists figure there will be a need for tens of billions of gallons of alternative fuels within just a few decades.

“Suddenly, there is a race out there to develop a new source of energy,” says Thomas Connelly, DuPont’s chief innovation officer.

THE NUMBERS GUY
 
1 • Digging Into the Ethanol Debate2
06/09/06
 
Until recently, the idea of squeezing ethanol from farm waste and other sources was barely clinging to life in the recesses of university campuses and federal labs. Few in the private sector seriously pursued the idea for the simple reason that it’s far easier to make ethanol from corn. The microorganisms good at making ethanol prefer eating the sugar in corn kernels.

Getting the bugs to dine as heartily on corn stalks and wheat straw is tough. It requires huge investments in research to find enzymes that can break down the cellulose into sugars and microorganisms that eat the sugars. The search is leading scientists to explore the dung of elephants and the guts of cows. Genetic engineers are also modifying the bugs they find to do the job more efficiently.

To help prove that these problems can be overcome on a commercial scale, the Energy Department is staging a competition for its backing to build the nation’s first three plants. The department, which has $160 million to spend on the contest, is requiring each candidate to have a pilot plant showing a process that can be successful once it is scaled up.

At least 30 companies are in the running for the aid, industry officials say. One player with big backers is Iogen Corp., a privately held Ottawa-based biotech company that has patented enzymes that can extract the sugars from wheat and barley straw. It has proposed building a commercial plant in southeastern Idaho, where it already has contracts with farmers to deliver the raw materials.

Iogen is teaming up with Royal Dutch Shell and Goldman Sachs, the Wall Street investment banking firm. Jeff Passmore, executive vice president of Iogen, says that operations at its Ottawa-based pilot plant indicate that a larger, commercial plant will be capable of producing cellulosic ethanol at a starting price of $1.35 a gallon. That would be far cheaper than current gasoline prices, although it is still more expensive than the ethanol from a modern corn-ethanol plant, which the Energy Department figures at about $1 a gallon.

ADM, already the nation’s biggest maker of ethanol, is using some federal funds to figure out how to convert more of the corn kernel into ethanol. While much of the kernel is readily convertible to sugar, the hull contains fiber that the Decatur, Ill., grain-processing giant’s ethanol-making microorganisms can’t use. Figuring out how to convert the fiber into more sugar could increase the output of an existing corn-ethanol plant by 15%.

ADM executives want government help to build a plant that could cost between $50 million and $100 million. Thomas P. Binder, president of the ADM research division, says the company has one leg up on others trying to crack the cellulosic ethanol code: ADM wouldn’t have to figure out how to collect a new source of biomass but merely use the existing infrastructure for gathering corn.

A third contender to watch is Abengoa Bioenergy, a U.S. subsidiary of Abengoa S.A., a Spanish conglomerate that is the leading ethanol producer in Europe. Late this year Abengoa will open a large demonstration facility that makes ethanol out of wheat straw in Spain. It will also seek U.S. federal financing to build its first commercial-size plant somewhere in the Midwest.

According to Gerson Santos-Leon, director of research for the subsidiary, it will be a “hybrid” plant capable of producing 15 million gallons a year of ethanol out of wheat straw and corn stalks, and another 85 million gallons from corn. Cargill Inc., one of the largest corn-derived ethanol producers in the U.S., has licensed to Abengoa a microorganism it discovered.

Meanwhile DuPont, the chemical giant, is figuring out how to construct a biorefinery fueled by corn stover — the stalk and leaves that are left in the field after farmers harvest their crop. The company’s goal is to make ethanol from cellulose as cheaply as from corn kernels by 2009. If it works, the technology could double the amount of ethanol produced by a field of corn.

Four-Year Research Effort

The technology grew out of a four-year-long research project in which the Energy Department and DuPont have each invested $19 million. The group working with DuPont includes Moline, Ill., farm-equipment maker Deere & Co. and Diversa Corp., a San Diego enzyme provider. The pilot plant envisioned by DuPont executives would cost roughly $50 million to construct and go into operation by 2010.
 
The energy bill passed last year mandates the first use of cellulosic ethanol, 250 million gallons by 2013, and allows federal loan guarantees for new cellulosic biorefineries. Congressional committees are considering additional incentives, and President Bush has made the effort the centerpiece of his energy strategy.

Until now, corn growers have jealously guarded subsidies for the corn-to-ethanol industry, which last year consumed 14.4% of their crop. Advocates for going beyond corn were overshadowed by the political punch of the corn lobby.

But the arrival of $3-a-gallon gasoline has helped persuade Washington, and many of the farmers who own shares in ethanol plants, that the industry is outgrowing the corn crop. Already demand for ethanol — now used both to stretch gasoline supplies and as an oxygen-rich additive to make fuel burn more cleanly — is so strong that many of the nation’s 101 corn-ethanol plants are generating 35% returns. That is helping fuel a building boom that could double the size of the industry by 2008.

One downside: The boom is pushing up the price of corn. Agriculture Department economists expect the value of this year’s corn crop to climb roughly 20% over last year, lifting the soft-drink industry’s tab for corn sweetener, as well as the cost of fattening cattle, hogs and chickens. Largely due to ethanol, futures traders at the Chicago Board of Trade are bidding the price of the 2007 corn crop above the $3 a bushel level. Farmers in central Illinois are being paid a little more than $2 a bushel now. “We’re seeing a demand shock in corn markets,” says Michael J. Swanson, an economist at Wells Fargo & Co.

As a result, the Renewable Fuels Association, the group that lobbies for the ethanol industry, is now helping to build a political coalition for cellulosic ethanol. Beyond farm groups and agribusiness — the traditional allies for corn-based ethanol — some strange bedfellows are coming together: environmental groups, biotechnology firms, some major oil companies, chemical giants, auto makers, defense hawks and venture capitalists.

They’re pushing the White House and both parties on Capitol Hill to create new subsidies and mandates to promote cellulosic ethanol. “This is on everybody’s radar screen,” says Agriculture Secretary Mike Johanns.

The cellulosic lobby scored its biggest victory when President Bush, decrying America’s oil addiction in the January State of the Union address, set a goal of making the fuel competitive within six years. President Bush’s 2007 budget earmarked $150 million for the research effort — more than double the 2006 budget. “The tenor in this town has shifted from whether or not this makes sense to how fast you can produce it,” says Bob Dinneen, president of the Renewable Fuels Association.

Shouldering the Cost

Taxpayers and consumers are already shouldering part of the cost. Each gallon of ethanol sold is subsidized by a 51-cent federal tax credit that, along with state incentive programs, costs the nation over $2 billion a year.

Moreover, according to the Energy Department, ethanol contains 30% less energy than gasoline. That means filling up the family car with an ethanol blend hurts gasoline mileage. Among the 30-odd bills with further subsidies for ethanol pending in Congress, several require auto makers to build more cars that can burn the 85% blend, rather than the 10% blend that is mainly sold today.

Ultimately, though, science is more important than politics in this quest. In general, ethanol is the same thing as grain alcohol, a beverage that has been fermented and distilled from the sugars in kernels of corn, wheat, rye and barley for centuries. To make cellulosic ethanol, scientists are going after the sugar that is locked away in the stalk and leaves of the plants in the form of cellulose, the basic building block of plants.

Government laboratories and companies have long been involved in the struggle to do this, beginning in the 1950s when Elwyn T. Reese, an Army microbiologist, was investigating “jungle rot,” a strange fungus that ate the uniforms, boots and tents of U.S. troops fighting in Guadalcanal in World War II.

Fascinated by a Fungus

The Army wanted Dr. Reese to find ways to kill the fungus, but he became fascinated with a family of enzymes that allowed the fungus to break down substances with tough cellular structures and feed on the sugar from them.

Michael A. Pacheco, director of ethanol research at the Energy Department’s National Renewable Energy Laboratory, estimates the U.S. has spent more than $1 billion on cellulosic research since the 1980s, some of it focused on ways to make the enzymes that Dr. Reese discovered more effective.

“The costs of enzymes were outrageous,” he explains. But over the past five years researchers have dropped the cost of enzymes for making a gallon of cellulosic ethanol to less than 50 cents from $6, making it possible now to think of building large commercial plants. There is a lot of room for companies to experiment here, says Dr. Pacheco. “You can wind up using two dozen different enzymes in the cocktail that works for you,” he explains.

He said DOE and company researchers are also exploring ways to make ethanol easier to use for the oil companies. Currently ethanol-blended fuels can’t be shipped by pipelines because they mix with water and become diluted as they move through the pipes. So for now, all ethanol must be moved by trucks or trains and blended close to where it’s sold.

But there is also more basic work that needs to be done, he warns. The sugars released by the new enzymes are different from those squeezed from corn and much tougher to ferment.

Advocates for cellulosic ethanol say the task is so daunting that massive government help is needed. Michigan State Prof. Bruce Dale, a leading authority on cellulosic ethanol, argues that the government needs to spend $2 billion in the next few years. Corporate executives want a federal effort akin to the space program. “We need something galvanizing,” says Mr. Connelly, the DuPont chief scientist.

Even though DuPont has deep pockets for experimental work, spending $1.3 billion annually on research and development, company executives say the difficulty of turning biomass into fuel makes it such a risky venture that they probably wouldn’t attempt it without government backing. “It’s so challenging that cellulosic ethanol wouldn’t have made the cut,” says John Ranieri, a DuPont vice president.

DuPont’s big breakthrough so far is genetically modifying an ethanol-producing bacterium — Zymomonas mobilis — so that it is good at eating both the glucose sugar found in the corn kernel and the xylose sugar locked away in cellulose, a crystalline structure that is hard to break apart. Scientists say the trick is akin to getting someone to eat their salad when given the choice of cheesecake.

Ultimately, high oil prices may be the best thing cellulosic ethanol has going for it. “If the price of oil stays at $50 a barrel and above, all of these things will happen,” predicts Mr. Santos-Leon, director of research for Abengoa’s subsidiary. Below that, he warns, it’s still possible to have the “legs pulled off” the nascent industry.

Write to John J. Fialka at [email protected] and Scott Kilman at [email protected]

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