Colorado Corn

By Todd Neeley
DTN Staff Reporter

OMAHA (DTN) -- Tuesday's announcement that oil giant Royal Dutch Shell has extended an agreement with Codexis, a California-based biotechnology company, to continue work on cellulosic-ethanol technology may be indicative of exactly how oil companies look at the future of alternative fuels.

While oil companies may not be willing to jump on the corn-based-ethanol bandwagon full speed, even though a current profitability downturn could be an opening for companies with capital to buy ethanol plants, they are increasingly looking at making ethanol and other biofuels using advanced feedstocks and technologies.

Such developments may be important to the future of the ethanol industry, especially if large profiteers like oil companies increasingly put their money behind cellulosic ethanol and other advanced biofuels.

Wallace E. Tyner, agriculture economist at Purdue University, said it has become clear that oil companies are not convinced corn-based ethanol merits their attention.

"I have not seen significant interest on the part of oil companies in buying or building ethanol plants," he said. "However, they are investing in research on future biofuels technologies. Most of the oil companies are funding university research on conversion of cellulosic feedstocks to ethanol or other biofuels. So far as I can tell, they are not interested in corn ethanol plants."

One of the key technological challenges for cellulosic ethanol is the need to discover or develop enzymes robust enough to break down virtually any biomass and produce biofuels on a large scale.

Graem Sweeney, executive vice president of Future Fuels and CO2 at Shell, said the company has to-date spent at least $1 billion on cellulosic-ethanol research and is hoping that its partnership with Codexis will result in so-called "super enzymes" capable of breaking down multiple feedstocks into usable sugars for ethanol production.

Despite Shell's technological pursuits, he said the company likely will not start producing cellulosic ethanol in the near future.

"It likely will be five to 10 years before we'll see these biofuels in large volumes," Sweeney said.

Others in the industry hope to see cellulosic-ethanol production in full swing well before then. Colorado-based Range Fuels Inc. plans to convert wood to ethanol on a commercial scale starting in 2009.

While both Shell and Codexis say "advancements" made since the two companies entered into a partnership one year ago led to the extension of the agreement, neither was willing to disclose exactly what has been accomplished.

"We see a significant competitive advantage in keeping secret the advancements," Sweeney said. "We need to accelerate the pace. This announcement is part of that story. This will help to drive down the costs."

While cellulosic-ethanol production has not yet started on a commercial scale, economic models show that it costs about $2.50 a gallon to make. Cellulosic ethanol is not cost-competitive with corn-based ethanol, which is produced for about $1.60 per gallon.

Alan Shaw, Codexis president and chief executive officer, said his company is new to the fuels business.

He said Shell's confidence in working with Codexis comes from the company's track record of "taking an idea and showing progress."

"We've proven we can take an idea and scale it up," Shaw said. "We have proven expertise in getting products to market. However, fuels are alien to us."

Codexis is best known for the development of a custom biocatalyst that, according to the company, showed a 4,000-fold productivity increase over a natural enzyme.

According to the company's website, the resulting biocatalyst was used to manufacture a key building block of atorvastatin -- the active ingredient in the world's largest-selling drug to lower cholesterol.

Shell has also signed an agreement with the Iogen Corp. based in Ottawa, Ontario. The Canadian company supplies Shell with cellulosic ethanol made from the company's pilot plant in Ottawa.

But Shell isn't the only oil company investing in alternative fuels.

Oil energy giant BP is developing biobutanol, which the company said holds more promise when it comes to energy security. BP officials say butanol has an octane rating similar to gasoline.

In addition, BP has spent $500 million to establish the Energy Biosciences Institute. The University of California-Berkeley, the University of Illinois and Lawrence Berkeley National Laboratory are studying how to produce new and cleaner energy, initially from biofuels.

Chevron Corp. established partnerships to study cellulosic ethanol, including agreements with Texas A&M University, Weyerhaeuser Co. and the National Renewable Energy Laboratory in Golden, Colo., as well as a $25 million agreement on a research project with the University of California-Davis and a $12 million research agreement with Georgia Tech University.

Houston-based Marathon Oil Corp. has invested in ethanol made with corn and sugarcane and biodiesel derived from vegetable or other oils. Last year ago the company announced a joint venture with ethanol company the Andersons Inc. to jointly build a 110-million-gallon ethanol plant in Greenville, Ohio.

According to information from Checkbiotech.org, oil companies' investments in alternative fuels are a small part of their overall investments.

For example, BP's investment is less than 3 percent of the company's annual capital expenditures, which were about $17.2 billion in 2006.

Purdue's Tyner said corn-based ethanol is likely to continue to be unattractive to oil companies in the near future.

With corn futures above $4 from May 2008 on out and ethanol prices that will continue to struggle for the foreseeable future, he said ethanol profit margins will remain tight.

"Right now we have two probably temporary disequilibria in gasoline and ethanol markets," Tyner said. "First, with $90 crude oil, we would normally see gasoline at the pump at about $3.60. As you know, gasoline is substantially below that. The reason is that this is the low demand season for gasoline, so refiners have not been able to pass through the higher oil price."

As a result, refining margins have fallen substantially, he said. They were around $37 a barrel in May and now are around $3 a barrel.

"That will not persist," Tyner said. "Gasoline prices will come back to $3.60 or higher if oil stays around $90."

Second, there are infrastructure problems getting the ethanol produced in the Midwest to markets in the East, South and West.

"I expect over time these markets will adjust," he said. "Assuming oil stays high, and assuming sometime next year at least a good part of the infrastructure problems will be solved. Then I would expect to see ethanol higher."

Todd Neeley can be reached at Todd [dot] Neeley [at] dtn [dot] com.

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