Oil, biofuel companies evolve into uneasy “frenemies”

Source: Matt Daily, Reuters • Posted: Thursday, April 5, 2012

WASHINGTON (Reuters) – Rapid growth in the U.S. biofuels markets has often pitted oil companies against small start-ups seeking a toehold in the gasoline markets, despite the need for both sides to work together, according to industry experts.

U.S. gasoline consumption peaked in 2007 as corn-based production surged and more fuel-efficient cars joined the nation’s fleet, and crude oil-based gasoline demand is likely to see its market share eroded further when a new wave of advanced biofuels plants come on line over the next three years.

The U.S. Renewable Fuel Standard mandates the use of 13.2 billion gallons of alternative fuels this year, most of it made from corn. The mandate rises to 36 billion gallons in 2022, with 21 billion gallons from sources other than corn.

That rule has been challenged by the oil industry group American Petroleum Institute, which filed a lawsuit last month challenging the requirements for cellulosic-based ethanol as “unachievable.”

“You’re faced with a very well-financed group of people who don’t necessarily want this industry,” Agriculture Secretary Tom Vilsack told the Advanced Biofuels Leadership Conference this week.

The legal move from the oil industry group comes despite significant investments in next-generation fuels by companies such as Chevron Corp.

Phil New, head of BP’s biofuels unit, said the oil industry and the biofuels sector should be working together to advance the industry, which he said provided the only economically viable alternative fuel for cars.

“That is the bridging point that we should all remember and sometimes not allow ourselves to be distracted by the tactical debates that go on between the two camps. Fundamentally, we are on the same side,” New told reporters at the conference.

BP, which bought Verenium Corp’s lignocellulosic biofuels assets for $98.3 million, will start building a 36-million gallon biofuels plant in Florida this year.

The oil industry has chafed under rules that forced it to blend ethanol into the gasoline pool and warned the new fuels would drive up prices for consumers.

“They’re kind of ‘frenemies,'” said Jim Lane, publisher of the Biofuels Digest, noting the two sides have worked together at times and been at odds on other occasions.

Biofuel proponents have touted the alternative energy’s promise of cutting greenhouse gases and reducing U.S. dependence on foreign oil supplies, and see the oil industry’s moves as roadblocks toward those goals.

“It seems like the petroleum industry is trying to frustrate this all along the way,” said Brian Duff, demonstration and deployment Supervisor for the U.S. Department of Energy’s Biomass Program.

Oil companies have long been skeptical of the economics of corn-based ethanol, once derided by Exxon Mobil CEO Rex Tillerson as “moonshine,” as well as federal rules that called for the fuel to make up as much as 10 percent of the gasoline supply.

Last week, the Environmental Protection Agency approved a move paving the way for E15, or gasoline with 15 percent ethanol, to be sold at retail pumps.

Still, Exxon has said it would invest $600 million by the end of the decade to research and invest in biofuels made from algae.

Chevron has invested in a different technology, forming a 50-50 joint venture called Catchlight Energy with Weyerhaeuser Corp (WY.N: Quote, Profile, Research, Stock Buzz) to use waste forest products to produce fuel.

That company is working with biofuels company Kior Inc (KIOR.O: Quote, Profile, Research, Stock Buzz) at its Columbus, Mississippi, plant that will be the nation’s first large-scale advanced biofuels production site when it comes on line later this year.

Catchlight is likely to continue that strategy of investing in other companies, rather than taking the lead on projects itself, Chief Executive Michael Burnside told the conference.

“The key to this is collaboration, not confrontation,” he added.

The new wave of young biofuels companies such as Kior, Codexis Inc CDXS.N and Amyris Inc (AMRS.O: Quote, Profile, Research, Stock Buzz) developing new tools that will help bring down the costs of cellulosic and other types of biofuels that do not rely on food crops, but most of them lack the money to build the expensive plants needed to produce the fuel in large volumes.

“We need each other. This is non-competitive,” said Kevin Berner, CEO of privately owned Byogy Renewables.

For BP, the profits from biofuels are enough to keep pumping new money into investments in places such as Brazil, where it is boosting capacity at a mill there to process 5.51 million tons of crushed sugarcane to produce ethanol.

“(That) will be the equivalent of an 8,000 barrels per day, and it’s a non-depleting reserve. So even if you put a notional life span of 30 years on it … then it’s about a 90-million-barrel green reserve,” New added.