BP Jumps Into Next-Generation Biofuels With Plans to Build Florida Refinery

The Wall Street Journal
By Russell Gold

February 19, 2009; Page B1

Moving quickly to produce the next generation of biofuels, energy giant BP PLC said it is making a major investment in extracting transportation fuel from plants.

The British company said Wednesday it is extending an existing partnership with Verenium Corp. to include developing what would be the world's biggest facility to make biofuels from inedible plants such as grass. The facility, to be built in Florida, will be 25 times larger than Verenium's biofuels refinery in Mermentau, La., a pilot project with BP that was commissioned only two weeks ago and currently is the world's largest such facility.

The rapid move from starting a demonstration-scale refinery to pursuing a full-scale biofuels facility reflects the interest in cellulosic ethanol, which comes from breaking down plant material and turning it into ethanol that can be used to displace crude-oil-based fuels in cars and trucks.

With the move announced Wednesday, BP has invested $112.5 million in Verenium and received a 50% stake in licensing the smaller company's technology. The larger money lies ahead. It is estimated that the Florida facility will cost between $250 million and $300 million. The partners said they plan to build another full-scale facility in the Gulf Coast soon.

BP is further along than its rivals in pursuing biofuels, but other large oil companies are paying attention. Exxon Mobil Corp. Chief Executive Rex Tillerson said in a speech this week that the company's executives have “turned our attention to next-generation biofuels” through in-house research. Royal Dutch Shell has taken small equity stakes in several fledgling biofuels companies.

There are many U.S. manufacturing plants that turn corn into ethanol. But the ethanol industry came under fire last year when it was blamed for using up crops and driving food costs higher. The industry also has been stung by rising corn prices, which increased the expense of ethanol. BP and Verenium aim to get around these problems by focusing on cellulosic ethanol, which is made from inedible grasses and leftovers from agricultural production. The Louisiana plant uses crushed sugar-cane stalks, and the Florida facility will use grasses.

While interest in — and political support for — renewable energy has never been stronger, companies such as Verenium are in desperate need of financially secure backers. Alternative-fuel makers are being spurred on by U.S. government mandates requiring big increases in the amounts of renewable fuels to be used in the nation's gasoline tanks — at least 16 billion gallons of cellulosic ethanol by 2022, representing about 7% of total transportation-fuel consumption, up from a negligible amount today.

But the new commitment to biofuels has coincided with a frigid financial climate, when few investors are inclined to sink money into unproven technologies, according to investment bankers and alternative-energy financiers. “Access to capital is the most critical issue right now,” said Chris Standlee, an executive with Abengoa SA, a Spanish company building cellulosic ethanol plants in Spain and Kansas. “New technologies are hard to finance in good times. Right now, it's virtually impossible.”

This has opened the door for BP, which has a strong balance sheet and access to capital and debt markets. BP also brings decades of experience running huge refineries. This is critical since the challenge ahead for biofuel companies is in ramping up technologies that have only worked in small-scale, often laboratory, settings. The next step is turning that process into a commercially viable business that can operate on an industrial scale. Verenium said the Florida facility will make 36 millions of gallons of fuel a year and is aiming for a cost of $2 a gallon, roughly on par with gasoline.

“Scientifically, you can make ethanol out of cellulose. [But] can you make it cost competitive? Only scaling up will tell you,” said Harry Boyle, a biofuels analyst at New Energy Finance Ltd.

BP became interested in the biofuels market after the U.S. in 2007 set the goals for renewable-energy use, said Phil New, who leads BP's biofuels efforts. The global oil company cut a deal in Brazil to get access to sugar cane to produce ethanol there and then pegged Verenium, based in Cambridge, Mass., as its partner in the U.S.

Write to Russell Gold at russell.gold@wsj.com.

Russell Gold/The Wall Street Journal

BP and Verenium's new Louisiana demonstration refinery, above, produces ethanol from sugar-cane stalks.