Another oil industry earnings season bolstered by high oil prices has sparked the customary controversies about price gouging and industry subsidies. Last Thursday I participated in ExxonMobil's press call following the release of that company's first quarter earnings. In addition to the responses to my questions about access to non-US energy resources and the progress of the company's algae venture with Synthetic Genomics, I was intrigued by the answer of Ken Cohen, VP of Public and Government Affairs, to a question concerning Exxon's crude oil sales to other refiners. It resonated with my own experience in commodities trading at Texaco in the 1980s and '90s. Not only do major companies like Exxon, Chevron, Shell and BP control only a small fraction of the world's petroleum reserves and production, but they are often large net buyers of crude oil for their refining operations. Understanding the relationship between industry profits, gas prices and the federal tax deductions and credits designed to promote domestic energy production requires a deeper look into the results.
It's discouraging how much confusion still exists in the media concerning oil prices and gasoline prices, as noted in an excellent posting on the topic by Robert Rapier. Members of the public who are convinced that oil companies are manipulating prices to gouge them can always find some poorly reported news story or garbled explanation to justify their belief. Yet while it's certainly true that oil companies benefit from the higher oil prices that result when global demand for petroleum products is strong and supply is constrained and/or subject to unusual risks--both factors are at work today--their interests are not quite as divorced from those of gasoline consumers as they appear, because they are, to a very large extent, also consumers themselves.
A quick look at ExxonMobil's 1Q11 earnings release shows their net global production of crude oil and natural gas liquids at 2.4 million barrels per day (MBD). Meanwhile the company's refineries processed nearly 5.2 MBD in support of global refined product sales of nearly 6.3 MBD. In other words, Exxon had to buy more crude oil from other suppliers than it produced itself in order to feed its refineries, and then still had to acquire more than a million barrels per day of additional refined products from other refiners to meet its marketing demand. Meanwhile, 81% of its nearly $10.7 billion of first quarter earnings was attributable to oil and gas production, and 85% of that was from production outside the US. By comparison, just 6% of that $10.7 billion came from the domestic refining and marketing activities affected by US gasoline prices.
That's a fairly typical pattern for the majors, which have generally been short of crude oil for their refining systems since the big wave of nationalizations and expropriations in the 1970s. My old company, Texaco, refined about twice as much oil as it produced and sold roughly half-again more products than it refined. That meant that my trading colleagues and I were in the market every day, buying crude oil and refined products from our competitors, in order to keep our refineries and marketing outlets supplied. When supplies were tight, the only way to secure what we needed was to bid more than the next company, and that reinforced the dynamic of rising prices until supplies expanded or demand slackened. I see that as of the first quarter, Texaco's successor Chevron Corp. (of which I am a shareholder) produced about as much oil globally as it refined, though not in the US, where it processed 80% more crude than it produced domestically. Global product sales exceeded refinery throughput by more than a million barrels per day. Royal Dutch Shell's results exhibit an even more pronounced case of net purchases of both crude oil and refined products.
So while higher oil prices are good for some parts of these companies' businesses--the exploration and production divisions that contribute the majority of profitability in most years--other business segments find higher prices a mixed blessing, at best. That's particularly true for the parts of these companies with which US consumers have the most contact.
As for the questions I posed to Mr. Cohen, I was somewhat surprised to hear that ExxonMobil isn't looking for the US government to provide it with any assistance in gaining access to resources around the world. Foreign governments routinely help their national and quasi-national oil companies to negotiate for access. ExxonMobil seems able to compete in this arena without help from the US government but is much more concerned about the latter's restrictions on access here at home, and its efforts to tax non-US income that has already been taxed by host governments overseas. And with regard to ExxonMobil's activities in algae, I was informed that R&D is progressing well in both California and in Baytown, TX, where a large pond has just been completed. Mr. Cohen stressed that it was still early days for algae.
The purpose of drawing my readers' attention to the distinction concerning oil companies' large net oil and product purchases isn't to solicit sympathy for an industry that's obviously having a very profitable run, but to remind you that the oil and gasoline price situation is a lot more complicated than suggested by the sound bites we often hear. The biggest companies make most of their profits producing oil and gas outside the US, while refining and marketing here remains a capital-intensive and relatively low-return sideline that many of them have been quietly exiting for years. Ending the industry's tax breaks outside of the comprehensive tax system reform I believe to be necessary probably wouldn't harm the big oil companies as much as it would accelerate their shift away from operations in the US that contribute less to company profits than they do to US energy security.
Showing posts with label algae. Show all posts
Showing posts with label algae. Show all posts
Monday, May 02, 2011
Thursday, February 04, 2010
EPA's New Biofuel Rules
Yesterday the administration issued an important set of new rules and proposals relating to energy, mainly dealing with expanded biofuel production and the biomass supply chains that must be developed to sustain it, as well as addressing carbon capture and storage (CCS.) There's far more here than I could cover in one posting, so I've chosen to focus on the EPA's finalized Renewable Fuels Standard (RFS) rules, which were first proposed last May and have been the subject of intense study and considerable controversy ever since. While the print edition of the Washington Post characterized these as "A boost for corn-based ethanol" I'm not so sure. In the process of laying out a roadmap for how new corn-based ethanol facilities can contribute to the expansion of biofuel in the US, the EPA effectively froze the output of a large number of older facilities, unless they invest in significant upgrades. It also raised big questions about the future of E85, a blend of 85% ethanol and 15% gasoline that has so far failed to attract much interest from consumers, while suggesting that ethanol might have to share the ultimate 36 billion gallon per year biofuel target for 2022 with large volumes of other, more advanced biofuels.
At the heart of the new biofuel rules, which are designed to implement the goals established by the Energy Independence and Security Act of 2007, is the assessment of lifecycle greenhouse gas emissions from biofuels, including the highly-controversial "indirect land-use impacts" first highlighted in a landmark paper published in Science two years ago and confirmed by subsequent research. Although the EPA's final interpretation of the science has not turned out to be quite the catastrophe that the corn ethanol industry feared--and based on the quote in the Post from the lead author of the relevant research, Dr. Tim Searchinger, might have gone easy on them--it nevertheless constrains the future role of ethanol produced from this source. While clearly stating that facilities producing ethanol from corn starch using natural gas or biofuel for process heat and employing other efficient technologies would qualify for the least-stringent category of renewable fuel, many existing facilities would qualify only under grandfathering that restricts their output to historical levels. That includes newer facilities that started construction by 12/19/07, and essentially all that use coal for heat or dry all their distillers grains byproduct.
In contrast the biodiesel industry, which has been suffering recently, got a shot in the arm with a ruling that qualifies most biodiesel produced from soy oil or waste cooking oil or grease
for the tougher "biomass-based diesel" category, consistent with a 50% reduction in emissions. And the specific RFS quota for 2010 carves out a healthy 1.15 billion gallon target for biodiesel--including retroactive volumes from 2009 that could cause no end of confusion.
Perhaps the most urgent aspect of the requirements for 2010 was the EPA's concession to reality on its cellulosic ethanol quota. The original targets set by Congress called for the use of 100 million gallons of biofuel produced from cellulosic sources this year, but as I've pointed out frequently, bleeding edge technology doesn't just appear on command. The EPA's estimate of how much cellulosic biofuel will actually be available in 2010--and thus mandated for use--is just 6.5 million gallons. And if fuel blenders aren't able to acquire even that much, EPA has provided the alternative of paying $1.56/gallon in penalties, instead. That sounds cheap until you realize that this only pays for an attribute; they still have to buy the gasoline or conventional ethanol on which to apply this Renewable Identification Number, or RIN. Based on current prices, the total cost for such virtual cellulosic ethanol could thus exceed $3.50/gal., compared to around $2.00 for wholesale (untaxed) gasoline.
I confess I didn't make it through the entire 418 page "preamble" to the regulation, but what I found there was a fascinating picture of how much the official view of biofuels has evolved since the Congress set us on this path at the end of 2007. Then, hopes for E85 powering many millions of "flexible fuel vehicles" (FFVs) ran high. Today, reading between the lines, there are hints that EPA might regard E85 as a failed product that may no longer be necessary for pushing biofuel into the market. Their statistics on E85 paint a bleak picture. According to EPA, out of a total retail gasoline market of 138 billion gallons in 2008, E85 accounted for just 12 million gallons. Such low volumes are partially attributable to the fact that there are still only 2,100 retail facilities in the US with an E85 pump, and only 8 million FFVs on the road, out of a US vehicle fleet of 240 million or so. Yet after taking these constraints into account, the EPA calculated that FFV owners bought E85 just 4% of the time. They offer a variety of reasons for this, including concerns about reduced range on the lower-energy fuel, but mainly point to the much higher average price of E85 compared to unleaded regular on an energy-equivalent basis. In other words, consumers are choosing value and maximizing their miles per dollar. So it wouldn't just require a big increase in the number of E85 pumps and FFVs to make E85 successful; the product must be priced a heck of a lot cheaper than it has been, reducing the incentive for dealers to sell what today is a very low-volume product. Catch-22?
How much of a problem this poses for ethanol producers depends on whether the EPA relaxes the 10% limit on ethanol blended into normal gasoline, as the ethanol industry has petitioned them to do, against most auto industry advice. It also depends on how quickly non-ethanol biofuels such as biobutanol and biomass-derived hydrocarbons--gasoline or diesel from algae, bacteria, or gasification--that would be fully compatible with current cars and infrastructure take off. It's worth noting that the new rules explicitly qualify biobutanol from corn starch in the same category of renewable fuel as the best corn ethanol pathways, and leave the door open to qualify these other fuels if they satisfy EPA's emissions framework. The preamble includes one scenario in which such fuels account for nearly as much of the 2022 biofuel target as corn ethanol.
Needless to say, I haven't had time to go through all the intricate details of the EPA's new RFS regulations. Their ultimate impact may depend as much on some of those nuances as on the big-picture elements I spotted in my cursory review, and I can easily picture a host of law firm, trade association, and energy company personnel poring over them for the next couple of weeks. Still, although what I saw was hardly the death-knell for the existing corn ethanol industry that some might have expected or hoped for, in the process of codifying the means for implementing the intent of Congress in its 2007 legislation the agency has laid out a vision of a much more diverse and competitive biofuel industry than the architects of that bill could have guessed just a couple of years ago.
At the heart of the new biofuel rules, which are designed to implement the goals established by the Energy Independence and Security Act of 2007, is the assessment of lifecycle greenhouse gas emissions from biofuels, including the highly-controversial "indirect land-use impacts" first highlighted in a landmark paper published in Science two years ago and confirmed by subsequent research. Although the EPA's final interpretation of the science has not turned out to be quite the catastrophe that the corn ethanol industry feared--and based on the quote in the Post from the lead author of the relevant research, Dr. Tim Searchinger, might have gone easy on them--it nevertheless constrains the future role of ethanol produced from this source. While clearly stating that facilities producing ethanol from corn starch using natural gas or biofuel for process heat and employing other efficient technologies would qualify for the least-stringent category of renewable fuel, many existing facilities would qualify only under grandfathering that restricts their output to historical levels. That includes newer facilities that started construction by 12/19/07, and essentially all that use coal for heat or dry all their distillers grains byproduct.
In contrast the biodiesel industry, which has been suffering recently, got a shot in the arm with a ruling that qualifies most biodiesel produced from soy oil or waste cooking oil or grease
for the tougher "biomass-based diesel" category, consistent with a 50% reduction in emissions. And the specific RFS quota for 2010 carves out a healthy 1.15 billion gallon target for biodiesel--including retroactive volumes from 2009 that could cause no end of confusion.
Perhaps the most urgent aspect of the requirements for 2010 was the EPA's concession to reality on its cellulosic ethanol quota. The original targets set by Congress called for the use of 100 million gallons of biofuel produced from cellulosic sources this year, but as I've pointed out frequently, bleeding edge technology doesn't just appear on command. The EPA's estimate of how much cellulosic biofuel will actually be available in 2010--and thus mandated for use--is just 6.5 million gallons. And if fuel blenders aren't able to acquire even that much, EPA has provided the alternative of paying $1.56/gallon in penalties, instead. That sounds cheap until you realize that this only pays for an attribute; they still have to buy the gasoline or conventional ethanol on which to apply this Renewable Identification Number, or RIN. Based on current prices, the total cost for such virtual cellulosic ethanol could thus exceed $3.50/gal., compared to around $2.00 for wholesale (untaxed) gasoline.
I confess I didn't make it through the entire 418 page "preamble" to the regulation, but what I found there was a fascinating picture of how much the official view of biofuels has evolved since the Congress set us on this path at the end of 2007. Then, hopes for E85 powering many millions of "flexible fuel vehicles" (FFVs) ran high. Today, reading between the lines, there are hints that EPA might regard E85 as a failed product that may no longer be necessary for pushing biofuel into the market. Their statistics on E85 paint a bleak picture. According to EPA, out of a total retail gasoline market of 138 billion gallons in 2008, E85 accounted for just 12 million gallons. Such low volumes are partially attributable to the fact that there are still only 2,100 retail facilities in the US with an E85 pump, and only 8 million FFVs on the road, out of a US vehicle fleet of 240 million or so. Yet after taking these constraints into account, the EPA calculated that FFV owners bought E85 just 4% of the time. They offer a variety of reasons for this, including concerns about reduced range on the lower-energy fuel, but mainly point to the much higher average price of E85 compared to unleaded regular on an energy-equivalent basis. In other words, consumers are choosing value and maximizing their miles per dollar. So it wouldn't just require a big increase in the number of E85 pumps and FFVs to make E85 successful; the product must be priced a heck of a lot cheaper than it has been, reducing the incentive for dealers to sell what today is a very low-volume product. Catch-22?
How much of a problem this poses for ethanol producers depends on whether the EPA relaxes the 10% limit on ethanol blended into normal gasoline, as the ethanol industry has petitioned them to do, against most auto industry advice. It also depends on how quickly non-ethanol biofuels such as biobutanol and biomass-derived hydrocarbons--gasoline or diesel from algae, bacteria, or gasification--that would be fully compatible with current cars and infrastructure take off. It's worth noting that the new rules explicitly qualify biobutanol from corn starch in the same category of renewable fuel as the best corn ethanol pathways, and leave the door open to qualify these other fuels if they satisfy EPA's emissions framework. The preamble includes one scenario in which such fuels account for nearly as much of the 2022 biofuel target as corn ethanol.
Needless to say, I haven't had time to go through all the intricate details of the EPA's new RFS regulations. Their ultimate impact may depend as much on some of those nuances as on the big-picture elements I spotted in my cursory review, and I can easily picture a host of law firm, trade association, and energy company personnel poring over them for the next couple of weeks. Still, although what I saw was hardly the death-knell for the existing corn ethanol industry that some might have expected or hoped for, in the process of codifying the means for implementing the intent of Congress in its 2007 legislation the agency has laid out a vision of a much more diverse and competitive biofuel industry than the architects of that bill could have guessed just a couple of years ago.
Thursday, July 23, 2009
Big Algae?
In spare moments during the last week I've been mulling over the implications of ExxonMobil's announcement of a very large investment in research and development on producing biofuels from algae, in collaboration with a leading biotech firm, Synthetic Genomics, Inc. While the reported figure of $600 million wouldn't buy much in the way of actual deployment, it could sure pay for a heck of a lot of R&D. The joint conference call about the announcement emphasized that the companies will be pursuing several possible technological pathways, though all appear to be focused on producing biofuel from algae continuously, rather than in a batch mode more analogous to farming. That would certainly increase the attractiveness for Exxon, which after all operates some of the world's biggest continuous production processes, in the form of its oil & gas fields, refineries, and chemical plants. The timing of this announcement is also interesting, coming just a few weeks after the US House of Representatives passed the first cap & trade bill to make it through either chamber of Congress.
The fundamental question I've been pondering is "why"? Why algae, and why ExxonMobil? For all of algae's enormous potential to produce large quantities of useful fuel, skepticism that this could ever be done economically on a useful scale abounds. And until now, Exxon had made a virtue of avoiding investments in renewable energy, generally seeing them as delivering returns well below those of the large oil & gas projects that have earned Exxon a sterling reputation for capital discipline. The answer to both questions likely resides in a word that appears frequently in the press release, in news coverage of the announcement, and in the press conference: scale. Two aspects of scale are relevant, here. First, in order to contribute meaningfully to our energy and climate problems, an alternative energy technology must be capable of being scaled up rapidly to a level comparable to today's oil, gas and coal industries. Current biofuels, solar power and wind still don't come close to matching the energy delivery of conventional sources. Exxon's website indicates potential liquid yields from algae of 2,000 gallons per acre, presumably in the form of the hydrocarbon-based "biocrude" emphasized repeatedly in the press conference. Even that relatively conservative estimate--my own back-of-the-envelope upper-bound estimate was 6,000 gal./acre--is at least ten times the current US yield of corn ethanol, after adjusting for energy content. Simplistically, if the acreage currently devoted to growing corn for ethanol were devoted to oil-excreting algae, it could replace nearly 60% of our gasoline supply from crude oil, rather than the 5% or so we get from ethanol.
Scale is also crucial for a firm of Exxon's size. A report in today's Wall St. Journal caught my eye. Occidental Petroleum announced its discovery of a 200 million barrel onshore oilfield in the middle of one of the most mature oil provinces in the world, in the San Joaquin Valley of California. I know that territory very well from my oil trading days, and it's an exciting development. However, Exxon is so big that it must find the equivalent of 8 such fields every year, just to stay even with its production. When I listen to the way Exxon describes its algae investment, I get the distinct sense that it views this arrangement as analogous to a very large oil exploration project, one that would be material to the results of the largest oil SuperMajor--and perhaps with similar odds of success. Now, it would be meaningless and of no value to Exxon if algae could produce the equivalent of hundreds of thousands of barrels per day of oil, but at a cost of $1,200/bbl. Exxon appears to be convinced that algae can contribute at a price very close to today's hydrocarbons, and probably without subsidies, knowing the firm's distaste for them. That has implications beyond algae.
In the conference call, Exxon's VP of R&D indicated that the company had assessed all of the advanced biofuels technologies and concluded that algae offered the best hope for producing fuels that would compete economically, with acceptable environmental impacts. That says something very worrying about the near-term prospects for cellulosic ethanol and the other "second-generation" biofuels technologies on which companies such as BP, Shell, and many others have pinned their hopes. Indeed, the US Congress pinned the whole country's hopes on the prompt commercialization of these unproven technologies in the remarkably ambitious national Renewable Fuels Standard they enacted in late 2007. If Exxon has concluded correctly that algae--which faces many serious hurdles of its own--is the best bet, then the entire US alternative fuels strategy could be in trouble.
There is also another way to look at this announcement. Exxon has been under enormous pressure to take a big stake in renewable energy. I vividly recall a Congressional hearing last year when committee chairman Ed Markey (D-Mass.) berated and belittled the Exxon representative for doing so little in this area. More recently, an environmental group took out full page ads targeting Exxon's opposition to cap & trade. I can't find the ad on the internet, but it said something like, "Poor Exxon, all alone in opposing Waxman-Markey." That has to get old, even for Exxon.
Could the algae tie-up with Synthetic Genomics, with its impressive expenditures contingent on achieving a series of unspecified milestones, be intended mainly to get this particular monkey off their backs? I doubt it, even though all the other advanced biofuel technologies being touted by their promoters also involve a substantial element of PR, until they actually produce commercial outcomes. If Exxon merely wanted to create some "green cred", it could have taken the same money and bought a dozen bankrupt corn ethanol plants or a few medium-sized wind farms. If the Exxon/Synthetic Genomics collaboration is about making Exxon greener, then it is certainly doing it the Exxon way, investing in something that, if successful, would neatly and profitably slot into their existing business model--and by the way into the hundreds of existing refineries and hundreds of millions of internal combustion engine vehicles globally. It's probably too early to imagine Big Oil becoming Big Algae, but the possibilities have obvious appeal, apparently even for the world's most successful oil company.
The fundamental question I've been pondering is "why"? Why algae, and why ExxonMobil? For all of algae's enormous potential to produce large quantities of useful fuel, skepticism that this could ever be done economically on a useful scale abounds. And until now, Exxon had made a virtue of avoiding investments in renewable energy, generally seeing them as delivering returns well below those of the large oil & gas projects that have earned Exxon a sterling reputation for capital discipline. The answer to both questions likely resides in a word that appears frequently in the press release, in news coverage of the announcement, and in the press conference: scale. Two aspects of scale are relevant, here. First, in order to contribute meaningfully to our energy and climate problems, an alternative energy technology must be capable of being scaled up rapidly to a level comparable to today's oil, gas and coal industries. Current biofuels, solar power and wind still don't come close to matching the energy delivery of conventional sources. Exxon's website indicates potential liquid yields from algae of 2,000 gallons per acre, presumably in the form of the hydrocarbon-based "biocrude" emphasized repeatedly in the press conference. Even that relatively conservative estimate--my own back-of-the-envelope upper-bound estimate was 6,000 gal./acre--is at least ten times the current US yield of corn ethanol, after adjusting for energy content. Simplistically, if the acreage currently devoted to growing corn for ethanol were devoted to oil-excreting algae, it could replace nearly 60% of our gasoline supply from crude oil, rather than the 5% or so we get from ethanol.
Scale is also crucial for a firm of Exxon's size. A report in today's Wall St. Journal caught my eye. Occidental Petroleum announced its discovery of a 200 million barrel onshore oilfield in the middle of one of the most mature oil provinces in the world, in the San Joaquin Valley of California. I know that territory very well from my oil trading days, and it's an exciting development. However, Exxon is so big that it must find the equivalent of 8 such fields every year, just to stay even with its production. When I listen to the way Exxon describes its algae investment, I get the distinct sense that it views this arrangement as analogous to a very large oil exploration project, one that would be material to the results of the largest oil SuperMajor--and perhaps with similar odds of success. Now, it would be meaningless and of no value to Exxon if algae could produce the equivalent of hundreds of thousands of barrels per day of oil, but at a cost of $1,200/bbl. Exxon appears to be convinced that algae can contribute at a price very close to today's hydrocarbons, and probably without subsidies, knowing the firm's distaste for them. That has implications beyond algae.
In the conference call, Exxon's VP of R&D indicated that the company had assessed all of the advanced biofuels technologies and concluded that algae offered the best hope for producing fuels that would compete economically, with acceptable environmental impacts. That says something very worrying about the near-term prospects for cellulosic ethanol and the other "second-generation" biofuels technologies on which companies such as BP, Shell, and many others have pinned their hopes. Indeed, the US Congress pinned the whole country's hopes on the prompt commercialization of these unproven technologies in the remarkably ambitious national Renewable Fuels Standard they enacted in late 2007. If Exxon has concluded correctly that algae--which faces many serious hurdles of its own--is the best bet, then the entire US alternative fuels strategy could be in trouble.
There is also another way to look at this announcement. Exxon has been under enormous pressure to take a big stake in renewable energy. I vividly recall a Congressional hearing last year when committee chairman Ed Markey (D-Mass.) berated and belittled the Exxon representative for doing so little in this area. More recently, an environmental group took out full page ads targeting Exxon's opposition to cap & trade. I can't find the ad on the internet, but it said something like, "Poor Exxon, all alone in opposing Waxman-Markey." That has to get old, even for Exxon.
Could the algae tie-up with Synthetic Genomics, with its impressive expenditures contingent on achieving a series of unspecified milestones, be intended mainly to get this particular monkey off their backs? I doubt it, even though all the other advanced biofuel technologies being touted by their promoters also involve a substantial element of PR, until they actually produce commercial outcomes. If Exxon merely wanted to create some "green cred", it could have taken the same money and bought a dozen bankrupt corn ethanol plants or a few medium-sized wind farms. If the Exxon/Synthetic Genomics collaboration is about making Exxon greener, then it is certainly doing it the Exxon way, investing in something that, if successful, would neatly and profitably slot into their existing business model--and by the way into the hundreds of existing refineries and hundreds of millions of internal combustion engine vehicles globally. It's probably too early to imagine Big Oil becoming Big Algae, but the possibilities have obvious appeal, apparently even for the world's most successful oil company.
Friday, July 10, 2009
Biodiesel from Sugar Cane
I was intrigued by a story in yesterday's MIT Technology Today concerning a company that is applying biotechnology to convert Brazilian sugar cane to diesel, instead of ethanol. Amyris apparently intends to buy existing mills and convert them to produce hydrocarbons instead of alcohol. It has started up a demonstration-scale facility for this process near São Paolo. With so many other firms pursuing next-generation biofuels from cellulose or algae, tinkering with the most efficient current means of producing ethanol might seem an odd thing to do, but that efficiency is precisely the reason for choosing this pathway. Amyris sees an opportunity to produce a much better transportation fuel than ethanol at a cost low enough to compete with petroleum products, even if oil prices don't return to the levels we saw last year.
Energy efficiency and high energy returns on energy invested are essential to producing competitive biofuels in a way that avoids the trap the US corn ethanol industry fell into in 2008. Ethanol producers didn't benefit nearly as much from last year's high oil prices as they--and their investors--expected, because the rising cost of the large energy inputs required to make corn ethanol rose in tandem with the price of the fuels it was supposed to displace. This is an example of what some analysts call the Law of Receding Horizons. After factoring in the cost of natural gas-based nitrogen fertilizer, diesel-powered cultivation and harvesting, and gas-fueled distillation, the relatively small energy surplus created wasn't worth enough to make the operation profitable, even at the highest oil price in history.
Amyris's concept breaks out of this trap in several ways. First, by starting with sugar cane in the tropics, it avoids the large energy inputs associated with crop fertilizer. The article points out two other key benefits: Brazilian sugar/ethanol mills are net energy producers, not consumers, by virtue of capitalizing on the energy content of the waste left over from the grinding and fermentation process. In addition, while the ethanol produced by traditional fermentation is water soluble, requiring a lot of energy to separate the two, the molecules produced by the company's tailored microbes are not; the diesel precursors separate from water at little additional energy penalty.
The advantages of this approach continue after production, because of the properties of the fuel. Although it is possible to build engines that capitalize on ethanol's high octane and other properties to deliver fuel economy that nearly matches gasoline, the vast majority of the ethanol produced today will be burned either as a 10% blend in conventional cars or as a higher mix in flexible-fuel vehicles that must still be able to operate reliably on gasoline. That precludes the modifications that would compensate for ethanol's 33% lower energy content, compared to petroleum gasoline. Producing biodiesel instead of ethanol puts the fuel into engines that can take full advantage of its environmental properties, while yielding a roughly 30% fuel efficiency gain versus gasoline--and thus roughly twice the fuel economy of ethanol. Amyris claims that its biodiesel would be fully compatible with petroleum diesel, creating a significant advantage over biodiesel produced from soybeans, canola (rapeseed), and other vegetable oils. These so-called FAME biodiesels can normally only be used in blends of less than 5-10% in petro-diesel, to protect the sensitive fuel injection mechanisms of modern diesel engines.
There's no free lunch, of course. Part of diesel's advantage comes from its higher energy content, compared to either gasoline or ethanol, and the energy in the quantity of cane that would produce 100 gallons of ethanol could only yield around 60 gallons of diesel. However, when you burn these fuels in real cars--such as the VW Jetta that is available in both gasoline and diesel versions--the ethanol would take you around 1,650 miles, while the smaller quantity of diesel would be good for nearly 2,000 miles. That 20% improvement results from the higher efficiency of compression ignition engines over spark ignition.
This idea looks clever for another reason. Brazil has become a large exporter of ethanol, but the world's biggest ethanol market is protected by an import tariff designed mainly to recover the $0.45/gal. US ethanol blenders' credit. Meanwhile, the EU, which uses little ethanol, but where half of all new cars run on diesel, has just imposed an anti-dumping tariff on biodiesel imported from the US. That creates an opening for Brazilian biodiesel produced from this process to compete into a market that can't get enough diesel fuel. All that remains is for Amyris to demonstrate that the additional capital and operating costs associated with converting ethanol mills to produce diesel are small enough to preserve the big advantage they start with by choosing the world's most efficient biofuel source.
Energy efficiency and high energy returns on energy invested are essential to producing competitive biofuels in a way that avoids the trap the US corn ethanol industry fell into in 2008. Ethanol producers didn't benefit nearly as much from last year's high oil prices as they--and their investors--expected, because the rising cost of the large energy inputs required to make corn ethanol rose in tandem with the price of the fuels it was supposed to displace. This is an example of what some analysts call the Law of Receding Horizons. After factoring in the cost of natural gas-based nitrogen fertilizer, diesel-powered cultivation and harvesting, and gas-fueled distillation, the relatively small energy surplus created wasn't worth enough to make the operation profitable, even at the highest oil price in history.
Amyris's concept breaks out of this trap in several ways. First, by starting with sugar cane in the tropics, it avoids the large energy inputs associated with crop fertilizer. The article points out two other key benefits: Brazilian sugar/ethanol mills are net energy producers, not consumers, by virtue of capitalizing on the energy content of the waste left over from the grinding and fermentation process. In addition, while the ethanol produced by traditional fermentation is water soluble, requiring a lot of energy to separate the two, the molecules produced by the company's tailored microbes are not; the diesel precursors separate from water at little additional energy penalty.
The advantages of this approach continue after production, because of the properties of the fuel. Although it is possible to build engines that capitalize on ethanol's high octane and other properties to deliver fuel economy that nearly matches gasoline, the vast majority of the ethanol produced today will be burned either as a 10% blend in conventional cars or as a higher mix in flexible-fuel vehicles that must still be able to operate reliably on gasoline. That precludes the modifications that would compensate for ethanol's 33% lower energy content, compared to petroleum gasoline. Producing biodiesel instead of ethanol puts the fuel into engines that can take full advantage of its environmental properties, while yielding a roughly 30% fuel efficiency gain versus gasoline--and thus roughly twice the fuel economy of ethanol. Amyris claims that its biodiesel would be fully compatible with petroleum diesel, creating a significant advantage over biodiesel produced from soybeans, canola (rapeseed), and other vegetable oils. These so-called FAME biodiesels can normally only be used in blends of less than 5-10% in petro-diesel, to protect the sensitive fuel injection mechanisms of modern diesel engines.
There's no free lunch, of course. Part of diesel's advantage comes from its higher energy content, compared to either gasoline or ethanol, and the energy in the quantity of cane that would produce 100 gallons of ethanol could only yield around 60 gallons of diesel. However, when you burn these fuels in real cars--such as the VW Jetta that is available in both gasoline and diesel versions--the ethanol would take you around 1,650 miles, while the smaller quantity of diesel would be good for nearly 2,000 miles. That 20% improvement results from the higher efficiency of compression ignition engines over spark ignition.
This idea looks clever for another reason. Brazil has become a large exporter of ethanol, but the world's biggest ethanol market is protected by an import tariff designed mainly to recover the $0.45/gal. US ethanol blenders' credit. Meanwhile, the EU, which uses little ethanol, but where half of all new cars run on diesel, has just imposed an anti-dumping tariff on biodiesel imported from the US. That creates an opening for Brazilian biodiesel produced from this process to compete into a market that can't get enough diesel fuel. All that remains is for Amyris to demonstrate that the additional capital and operating costs associated with converting ethanol mills to produce diesel are small enough to preserve the big advantage they start with by choosing the world's most efficient biofuel source.
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