Friday, April 8, 2011

WSJ: Biofuels Industry Battles



From the Wall St. Journal:

Biofuels Industry Battles Past Bumps in the Road

When Royal Dutch Shell PLC announced its $12 billion joint venture with Brazilian sugar-cane-ethanol producer Cosan Ltd. last year, it was a massive vote of confidence in a sector that has taken a battering over the last few years.

After a big boom in the middle of the decade, biofuels were hit badly by the global recession, though they have recently begun to stabilize. Concerns about greenhouse-gas emissions, oil-price spikes and energy security have turned them from a niche sector into a global industry that attracted nearly $650 million in venture capital last year. World-wide production grew to more than 100 billion liters in 2010 from 16 billion liters in 2000. Shell says biofuels could make up as much as 20% of all transportation fuels in 30 years, up from about 3% now.

However, while placing its big bet on ethanol, a fuel with its roots in the 1970s, Shell has backed away from more daring investments in algae-to-diesel and biomass-to-liquids.

That reflects a hard-nosed calculation that such cutting-edge technologies are years, perhaps decades, away from being commercially viable. Shell's director of downstream products, Mark Williams, admitted in a strategy update last year the company was faced with the "difficulty of taking these advanced biofuels to anything of scale... particularly if they involve completely new and different agricultural infrastructure."

Royal Dutch Shell

Sugar cane is harvested at ethanol producer Cosan, a Shell partner.

Some think Shell is being too safe. Michael McNamara, head of new energy and clean-technology research at investment bank Matrix Group, disagrees. "At the end of the day, if you can secure a sustainable low-cost feedstock and use boring technology to turn it into cost-competitive gasoline, then why wouldn't you want to do that?"

The original biofuel was ethanol, made by fermenting the sugar components of plant materials. Brazil has been producing it from sugar cane for decades. Ethanol largely made from corn sugars now comprises nearly 10% of the gasoline pool in the U.S.

But biofuels have had a rocky ride. The 2008 financial crisis put a lot of ethanol producers out of business, and a huge spike in prices that year for food crops used to make the fuel, such as corn and wheat, triggered a political backlash.

As part of the post-2008 shake-out, much more research money is now flowing into so-called second-generation biofuels that, unlike ethanol, aren't made from food crops. They instead use feedstocks such as algae, municipal waste and grasses like miscanthus.

Great strides have been made on conversion technology. But although some demonstration projects for second-generation fuels are up and running, no commercial-scale conversion facilities have been built so far. Many analysts don't expect any before 2014 at the earliest.

"It's an incredibly seductive prospect," said Mr. McNamara. "But it can only happen on a commercial scale if it's cost-effective: and it isn't—yet."

That has led to fears that technical problems and cost issues may prevent advanced biofuels from becoming a viable form of energy, in the same league as solar and wind power. Such concerns could also deprive the industry of the kind of support from corporations or governments that will allow it to grow.

A key issue is the challenge of building a supply chain from scratch. "It's proving hard to develop the feedstock at an acceptable cost," says Susan Hansen, a clean-technology analyst at Rabobank International. "Which feedstock should you bet on? How do you price it? And the other problem is: where do you grow crops like miscanthus? How do you organize the logistics and transport from farmer to processing plant?"

Policies have changed to reflect the scaling back of industry ambitions. In 2007, Congress passed a Renewable Fuel Standard which established a 100 million gallon nation-wide mandate for more advanced, or cellulosic, biofuel by 2010, rising to 16 billion gallons by 2022. Later, when it became clear U.S. producers would never meet that target, the 2010 mandate was slashed to 6.5 million gallons.

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Of the major oil companies, Shell has been one of the most aggressive investors in green alternatives to gasoline and diesel fuel, building up one of the largest portfolios of biofuels research-and-development projects in the oil business. It currently spends about $1.3 billion a year on R&D, with a significant chunk of that spent on biofuels.

Shell has invested in a Canadian cellulosic-ethanol company called Iogen Energy Corp. a biofuels start-up called Codexis Inc. and Wisconsin-based Virent Energy Systems, which uses chemical catalysts to transform plant sugars from switch grass or wheat straw into hydrocarbons to burn as fuel.

But in recent months the Anglo-Dutch oil major has pulled back from some of its investments. In 2009 it sold its stake in Choren, a German biomass-to-liquids company after the full cost of scaling up its capital-intensive gasification technology became clear. "We realized the scale of these plants would be very, very big," said Mark Gainsborough, Shell's head of alternative energies.

Then last January it pulled out of an algae-to-diesel venture called Cellana, selling its stake to its partner, HR BioPetroleum. "We need to narrow down the number of advanced technological pathways [we invest in]," said Mr. Gainsborough. "Otherwise you spread your R&D over too many things."

Instead, its big bet has been on sugar-cane ethanol. In February last year, it announced the creation of a joint venture with Brazil's Cosan, the world's biggest producer of ethanol from sugar cane. The move gave Shell exposure to the huge biofuels market in Brazil, where more than 80% of all new cars sold are flex-fuel models that can run on any mixture of ethanol and gasoline, and where as much as 21% of all transport fuel is from biofuels, compared with 4% in the U.S.

"We recognized that moving to large-scale production [of advanced biofuels] is a big jump to make in one go," Mr. Gainsborough said. Instead, Shell chose to build up a position in conventional biofuels and use that as a launchpad for more advanced technologies. "You get up the learning curve faster if you do it on the back of an existing infrastructure," he says.

Carl Weins

Part of the logic of the tie-up is that Shell can potentially use Cosan's facilities to develop Codexis and Iogen's technology. For example, it could use Cosan's bagasse—the fibrous waste material left behind after sugar-cane stalks are crushed to make ethanol— as feedstock for cellulosic ethanol. Currently, a third of the energy content of the sugar cane Cosan uses is left behind, in the green parts of the plant that never get processed.

Shell also hopes to make Cosan's current ethanol-production process more efficient by using technology from its core businesses. Plans include using leftover plant fibres to produce electricity for the joint venture's sugar-cane mills and selling the excess to Brazil's national grid. Shell will also look at ways to boost yields by cultivating new sugar-cane varieties and better protecting crops. "There's massive potential to improve the yields from sugar cane," Mr. Gainsborough says.

Shell isn't the only oil company to make a big bet on Brazil's ethanol sector. Last month, BP PLC acquired an 83% stake in sugar-and-ethanol producer Companhia Nacional de Acucar e Alcool, or CNAA, for $680 million. Like Shell, BP hopes that one day it can export the ethanol it produces in Brazil to the U.S., Europe and Asia, where biofuel use is expected to rise fast as countries move to reduce their carbon emissions.

Currently, tariff barriers have virtually closed off the U.S. market to Brazilian and other ethanol exporters. But Shell hopes they will one day be removed. "Their logic is being increasingly questioned by regulators and those who set the tariffs," said Mr. Gainsborough. "The biofuels should go to the markets where they have the best value."

Write to Guy Chazan at guy.chazan@wsj.com

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Biofuels are a wide range of fuels which are in some way derived from biomass.

Your idea?