Bloomberg News

Sugar Cane Grows on Oil as $71 Billion Bet Outspends D.C.

May 10, 2012

Beakers of oil extracted from green algae. The company Solazyme is working to engineer a green micro algae in large quantities to create clean renewable bio-fuels. The largest investments in green fuels are coming from Big Oil. Photographer: Michael Macor/San Francisco Chronicle/Corbis

Beakers of oil extracted from green algae. The company Solazyme is working to engineer a green micro algae in large quantities to create clean renewable bio-fuels. The largest investments in green fuels are coming from Big Oil. Photographer: Michael Macor/San Francisco Chronicle/Corbis

BP Plc (BP/) has invested $7 billion in alternative energy since 2005. Exxon Mobil Corp. (XOM:US) is spending $600 million on a 10-year effort to turn algae into oil. And Royal Dutch Shell Plc (RDSA) has been buying up sugar cane mills, plantations and refineries to make ethanol in Brazil.

In the U.S., Shell already produces small lots of so-called drop-in biofuels--engine-ready products that can replace gasoline from a plant in Houston that uses sugar beets and crop waste.

On the way to a renewable energy future, a funny thing has happened: Big Oil has become the biggest investor in the race to create green fuels, Bloomberg Businessweek reports in its May 14 issue. In the last decade, the industry says, it has put $71 billion into zero- and low-emission and renewable energy technologies. The U.S. government, by contrast, has spent about $43 billion on similar efforts during the same period, according to the American Petroleum Institute, a trade group.

“We are making huge bets” on biofuels and also investing in wind and solar, says Katrina Landis, chief executive officer of Houston-based BP Alternative Energy, noting that her division has grown to 5,000 employees from a handful in 2005.

Many environmentalists doubt these investments represent more than window dressing. An API report shows $9 billion of the $71 billion is for renewable energy while the rest has gone toward greening up companies’ fossil-fuel business. The industry has, after all, bankrolled research casting doubt on climate change while lobbying to defeat a White House-backed climate bill in 2010, says Simon Mui, a scientist with the Natural Resources Defense Council.

Green Spending Incentive

“Their interest is a validation of the promise of cleantech,” he says. “But I don’t want to imply that this is something we should be falling out of our chairs over.”

The investments are less impressive, Mui says, when measured against profits -- Irving, Texas-based ExxonMobil reported 2011 net income of $41 billion -- and the money the companies still devote to the hunt for conventional oil and gas. Mui estimates the industry has spent about $341 billion developing tar sands, which contain heavy crude that is energy- intensive to recover and refine, over the same period that it touts its $71 billion in carbon reduction and renewables.

The API dismisses such criticisms, saying it put together the report on clean investing to dispel the notion the industry isn’t interested in climate change or reducing greenhouse gases.

There’s also an incentive for green spending: the Renewable Fuel Standard. A law signed by President George W. Bush in 2005 now requires about 15 billion gallons of alternative fuels such as ethanol in the nation’s energy mix annually, and that number is mandated to grow to 36 billion gallons by 2022. (U.S. drivers consumed about 134 billion gallons of gasoline last year, according to the U.S. Energy Information Administration.)

Making Money

Oil and gas companies, the law says, are among the “obligated parties‘” to help the U.S. reach these goals.

“Inside these companies the thinking is, ‘We can’t get caught out without having an answer and a way to meet our obligations,’” says Wesley Bolsen, chief marketing officer for Codexis Inc., a Redwood City, California-based enzyme maker that has a five-year-old partnership with Shell. “In some ways they can’t afford not to invest. On the other hand, I think a lot of oil companies today think, ‘If we do this right, we can make a lot of money.’”

For Sheeraz Haji, CEO of San Francisco-based Cleantech Group LLC, a 10-year-old consulting firm, the investments represent pragmatism, since companies see that long term they won’t be able to meet demand with conventional oil and gas.

‘Economically Rational’

While PR concerns are a factor, with cleantech providing cover for carbon-centric core businesses, Haji also says it’s a matter of pride and fear. He says oil companies, with their technological prowess at deepwater drilling and the like, don’t want to be seen as stodgy -- or worse, to wake up to find the renewables world exploding with profits they aren’t sharing.

“We’re not talking about oil companies turning into green activists,” says Haji. “It’s tied to their view that this is economically rational.” And the scale of their investments is immense. Sizing up Exxon’s algae play, he says, “$600 million is big money. Maybe it’s not big dollars to Exxon, but it’s still big dollars for the sector.”

Exxon’s algae project is a partnership with La Jolla, California-based Synthetic Genomics Inc., co-founded by human genome pioneer J. Craig Venter. On paper, algae has a lot going for it. It produces energy-storing molecules called lipids similar to those extracted from crude oil, and it can be grown in saltwater on marginal land, so it won’t compete for fresh water or valuable farm acreage.

Winning Over Skeptics

While the project, in its third year, recently moved out of a San Diego greenhouse to an outdoor facility in Texas, Exxon says billions more in research dollars are needed before it will know whether commercial production is possible.

Shell’s partnership with Codexis uses enzymes to turn grass, stalks and sugar cane waste into biofuels; The Hague- based Shell has so far put about $60 million a year into the project. Such research portends the production of renewable fuels without displacing food crops. And there’s a ready supply of raw material: The Department of Agriculture estimates U.S. farms produce 1 billion tons of crop residue each year.

Mark Brownstein, chief counsel for the Environmental Defense Fund’s energy program, warns that Big Oil will have trouble winning over skeptics. “This is an incredibly conservative and hard-headed industry,” he says. “They have a lot to prove before people are willing to believe that there has been a fundamental shift about how they think about climate and other environmental matters.”

Nonetheless, Brownstein adds, “I wish ExxonMobil all the success in the world in figuring out how to commercialize biofuels. That would be great for everybody.”

To contact the reporter on this story: Ken Wells in New York at Kwells8@bloomberg.net

To contact the editor responsible for this story: Gary Putka at gputka@bloomberg.net


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