Oil majors ‘fishing’ in biofuels market

One might legitimately question whether this change is transitory or permanent. Given the current policy climate, particularly in North America, one is tempted to think that this change is more than a mirage, but then, only time will tell.

Staggering windfall

Oil companies historically have been huge profit earners. Consider this: In 2005, the oil industry recorded revenues of $1.62 trillion and profits of $40 billion, of which 76% was accounted for by the 5 major integrated oil companies with the largest company, Exxon Mobil Corp., earning more than 25% of the total profit. The annual turnover at $36.13 billion followed by ConocoPhillips at $13.53 billion and Chevron Corp. closed at $14.1 billion in 2005.

Given the recent high profitability of the oil and gas industry, it becomes easier to understand why the oil majors have been reluctant to embrace ethanol wholeheartedly. The oil industry is characterized by lack of intense competition and this combined with the high international price of crude oil has been reason enough for the oil majors to ensure that their coffers keep brimming over at the expense of customers, who, consequently have had to pay higher gas prices at the pump.

Another major overriding factor for the oil majors has been the fact that they do not own ethanol. However, to imply that the lure of the profits has been the only factor that has kept the oil majors away from ethanol would be not entirely true. The ethanol industry has been perceived as extremely risky due to volatility of the feedstock price and international crude oil prices. Uncertainty over the acceptance of ethanol by consumers was another factor that has made ethanol a risky proposition.

For a long time, potential investors found it difficult to come to grips with the risks associated with the ethanol industry, and the oil majors were no exception. However, things are changing. Due in part to government mandates and increasing investor confidence in the ethanol industry, a few of the oil majors have begun to “fish” in a market that was long viewed with considerable skepticism.

Paradigm shift

The recent shift (see Table 1) in the attitude by the petroleum industry towards ethanol is corroborated by the recent agreement by Marathon Oil Corp. and the Andersons Inc. in July of this year to construct and operate a number of ethanol plants. There are a number of reasons for the oil majors’ change in attitude towards biofuels and ethanol.

First, it is apparent that the oil majors have started to become comfortable with the risks associated in the industry. Consequently, the biofuels industry is beginning to be looked upon as an extremely lucrative market. Second, a combination of fiscal incentives for the ethanol industry and regulations has left the oil majors with little option but to choose to replace, thus necessitating investments in the ethanol and biofuels market by these oil majors. Currently, there are about 19 states in United States that have already mandated the phase-out of MTBE, and this list of states is expected to grow.

Looking forward

Given the never-ending political uncertainty in the Middle East and crude oil prices that seem to defy gravitational law, one is left in no doubt that United States and Canada will further intensify their efforts to embrace ethanol. In my view, the future looks bright for the biofuels industry.

Against this backdrop, it seems natural to see an increasing number of oil companies fishing in a market that they seemed reluctant to touch with a 10-foot pole not too long ago.

The author

Shreyas Rajan is a research analyst with the Frost & Sullivan North American Energy and Power Supplies Group. He focuses on monitoring and analyzing emerging trends, technologies, and market dynamics. Prior to joining Frost & Sullivan in April 2006, he was with Millipore India in Bangalore. He holds a master of science degree in environmental and energy engineering from the University of Sheffield in the UK. To comment directly to Frost & Sullivan on this article, contact Trisha Bradley at [email protected]

Chevron, UC Davis team up to pursue research into biofuels

Chevron Corp. and the University of California, Davis have formed a strategic research collaboration to pursue advanced technology aimed at converting cellulosic biomass into transportation fuels. The joint research effort will coordinate with the California Biomass Collaborative to focus on renewable feedstocks available in California, including agricultural waste such as rice straw.

Chevron Technology Ventures LLC, a subsidiary of Chevron, plans to support a broad range of UC Davis scientists and engineers with funding of up to $25 million over 5 years for research into and development of these emerging energy technologies.

The objective of the Chevron-UC Davis research is to develop commercially viable processes for the production of transportation fuels from renewable resources such as new energy crops, forest and agricultural residues, and municipal solid waste.

The collaboration calls for research into biochemical and thermochemical conversion, as well as a demonstration facility to test the commercial readiness of these technologies.

The alliance with UC Davis is the second biofuels research partnership launched by Chevron this year. In June, Chevron and the Georgia Institute of Technology formed a strategic research alliance focusing on cellulosic biofuels and hydrogen. Chevron also is investing in conventional biofuels.

Chevron has formed a biofuels business unit to advance technology and pursue commercial opportunities related to the production and distribution of biofuels in the US. The company has invested in a new biodiesel facility in Galveston, Tex., that aims to produce diesel fuel from soybeans and other renewable feedstocks.

E85 less efficient than gasoline

The Bush administration and the automotive industry have been pushing ethanol as a homegrown, environmentally friendly alternative to gasoline and diesel fuels. Leading automakers such as DaimlerChrysler, Ford, and General Motors have begun producing flexible-fuel vehicles (FFVs), designed to run on either gasoline or E85 (a blend of 85% ethanol and 15% gasoline.

Touting independence from foreign oil sources and proclaiming the virtues of green energy, Detroit’s auto manufacturers have said they plan to double production of FFVs and other biofuel vehicles to 2 million by 2010.

Consumer Reports magazine recently put a 2007 Chevrolet Tahoe FFV through a battery of fuel economy, acceleration, and emissions tests and interviewed more than 50 experts on ethanol fuel for a comprehensive report. CR determined that E85 will cost consumers more money than gasoline and questioned whether the government’s support of FFVs is really helping the US achieve energy independence.

Here are some of Consumer Reports findings:

• The fuel economy of the Tahoe dropped 27% when running on E85 compared with gasoline, from an already low 14 mpg overall to 10 mpg (rounded to the nearest mpg).
• At a pump price of $2.91/gal (August average), a 27% drop in mileage means drivers would have paid the equivalent of $3.99 for the energy equivalent of a gallon of gasoline.
• The Tahoe’s driving range decreased to 300 miles on a full tank of E85 compared to about 440 miles on gasoline. You have to fill up more often with E85.
• Because E85 is sold primarily in the upper Midwest, most drivers in the US have no access to the fuel even if they want it. Consumer Reports had to blend its own E85 to conduct its test.
• When running on E85, there was no significant change in acceleration. However, fuel economy dropped across the board. In highway driving, mileage decreased from 21 to 15 mpg. In city driving, it dropped from 9 to 7 mpg.

The National Highway Traffic Safety Administration says that ethanol has a lower energy content that gasoline - 75,670 BTUs/gal instead of 115,400 with gasoline. Consequently, you have to burn more fuel to generate the same amount of energy.

The agency notes that FFV engines are designed to run more efficiently on gasoline. E85 fuel economy could approach that of gasoline if manufacturers optimized engines for that fuel.