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Financial Times: Oil majors cultivate an interest in the next generation of biofuels

EXTRACT: Ken Fisher, Shell’s senior vice-president of the strategy and portfolio division of its refining and marketing operations, expects biofuels to account for 7-15 per cent of global road transportation fuel volume by 2025, up from less than 1 per cent today.


By Sheila McNulty
Published: August 24 2006 03:00 | Last updated: August 24 2006 03:00

After years of playing down the role of biofuels in the global energy markets, the world’s biggest oil companies are now building an industrial-scale infrastructure to support their growth.

Chevron has invested in one of the first large-scale biodiesel plants in the US, and Marathon has just become the first US oil company to invest in ethanol production in almost 30 years. Shell is working on a programme for marketing cellulose ethanol, which is significantly more efficient than first-generation ethanol as it is produced from plant waste instead of food crops.

“This is the new phase,” said Donald Paul, vice-president and chief technology officer of Chevron, the second-biggest US oil company, referring to a desire by an increasing number of oil companies to develop a second generation of biofuels. The end goal is an “industrial-scale infrastructure”.

For years the biofuelsmarket has been dominated by relatively small companies and farm co-operatives, so the biggest production plant is still much smaller than the smallest refinery owned by the oil majors.

Indeed, the biodiesel production facility that Chevron is building with Galveston Bay Biodiesel will be able to produce annually up to100m gallons of fuel from soybeans and other renewable resources, more than double all biodiesel production in the US last year.

“Previously there was no real involvement by the oil companies in producing biofuels,” said Aaron Brady of Cambridge Energy Research Associates, the consultancy. “Some of the oil companies are shifting their thoughts; they believe biofuels are here to stay.”

The shift is driven byhigh oil prices and boosted by government regulation and public support.

The US set out in an energy bill last year a goal of 7.5bn gallons of ethanol in the petrol market by 2012, or 5 per cent of the total and up from 3 per cent at present. The European Union wants biofuels to account for 5.8 per cent of EU fuel by 2010.

Not only are numerous countries involved, but they bring a variety of renewable materials into the mix.

Brazil runs much of its country on sugar cane-based ethanol, while legislation in the Philippines mandates a coconut-based blend to be added to diesel. The US blends corn-based ethanol with its petrol and soybean oil with its diesel, while Europe uses rapeseed oil.

“The advantage of these feedstocks is they come from a variety of sources,” said Sergio Trindade, director of science and technology at International Fuel Technology. “These source materials can be cultivated all overthe world.”

Biofuels will increasingly supplement the fuel supply while reducing greenhouse gas emissions associated with climate change.

“The challenge will be how to get scale and profitability,” said Robin West, chairman of PFC Energy, a consultancy. That would take time, he said, while noting this was a long-term industry. “Developing an offshore platform in west Africa takes 10 years too. That’s the nature of this business.”

The big oil companies say they would rather take their time and build a sustainable and efficient biofuels market instead of capitalising on the short-term gains of first-generation biofuels, which they have been blending into petrol for at least 10 years to meet environmental regulations.

“Biofuels have a role to play in meeting US energy demand but, ultimately, they must overcome significant technical challenges to be able to compete without subsidies and mandates,” said Dave Gardner of ExxonMobil. To make that happen, Exxon is investing in biomass research projects, while BP is working with DuPont to develop and produce the “next generation of biofuels”.

Shell has teamed up with research and development companies, such as Iogen to develop cellulose ethanol and Choren to develop advanced bio-components for diesel engines. It has also obtained the support of Volkswagen to ensure the fuels being developed can be put to good use.

Ken Fisher, Shell’s senior vice-president of the strategy and portfolio division of its refining and marketing operations, expects biofuels to account for 7-15 per cent of global road transportation fuel volume by 2025, up from less than 1 per cent today.

The oil majors will not entirely take over the biofuels industry, however, given the inroads being made by the small players that have long dominated the sector.

Intrepid, an Idaho-based publicly traded company specialising in developing biofuel production, for example, is turning cow manure into a natural gas-type fuel. As that gas undergoes final testing to ensure it is “pipeline quality”, Intrepid has found a buyer in Intermountain Industries, which distributes gas to 300,000 customers in Idaho.

“We are in a position to take any amount of gas Intrepid can deliver to us,” said William Glynn, president of Intermountain Industries. Intrepid expects to produce 400,000 cubic feet per day from its facilities at Whiteside Dairy, which supplies it with manure from more than 6,000 cows.

“You have a steady supply of feed to the plant,” said Brad Frazee, Intrepid’s vice-president of technology and resources. “It literally doesn’t stop coming.”

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