Gulf of Mexico oil spill has dimmed the prospects for new offshore oil drilling, next-generation biofuels may be able to compensate for that lost production, marking the start of a bigger move away from oil.
Crisis in the Gulf
"Six-billion dollars goes a long way,” says one energy fund portfolio manager, referring to one estimate of the oil spill’s final cost. “With the right amount of investment [in biofuels], eventually the need for new [fossil fuel] production drops at some point. Is it $6 billion? I don’t know.”
Biofuels like ethanol and biodiesel have been commercially available for some time, mandated by various laws and regulations, but are usually blended with their fossil-fuel-derived counterparts.
Next-generation biofuels in the development pipeline now use different processes to create fuels from renewable feedstocks—animal fats and algae for example—that are chemically identical to the products created from petroleum.
Known as “drop-in fuels", they can be put directly into gas tanks and burned like fossil-fuel gasoline and diesel, with no equipment modifications or blending needed.
“There’s no need to rebuild the entire infrastructure” says Advanced BioFuels Association president Michael McAdams, a trade organization representing biofuels developers. “It could be $20 billion to retrofit the market for (more) corn-based ethanol.”
Several members of McAdams’ organization are now ramping up test-production facilities.
Biofuel generation at a Tyson Foods [TSN 17.65 0.92 (+5.5%) ] processing plant in Louisiana will come online later this year, turning chicken fat into diesel with a production capacity of 75 million gallons a year.
Tyson produces about 300 million gallons of chicken fat per year, and would normally sell it for use in other chemical processes or simply pay for disposal.
Finland's Neste Oil is now producing 700 million gallons of diesel from green feedstocks in several different countries.
McAdams notes Neste’s output is the equivalent to that of the entire US biodiesel sector at the moment but the green-fuels sector will need greater scale quickly to replace any new capacity from offshore oil.
Oil firms operating in the Gulf of Mexico produce about 71.5 million gallons of crude daily, and convert some of that oil to about 3 million gallons of diesel daily, according to DOE figures. Offshore oil production currently provides about 8 percent of daily US oil consumption.
Photo by Fred LaSenna
Though the output gap between the two fuels is now enormous, proponents say the seven-to-ten year development window from permits to production for new offshore drilling projects, allows ample time to ramp up production and approach parity.
George Santana, director of research at independent research and banking firm Greener Dawn, says that commercial production of next-generation biofuels is now achievable in that time frame.
He points out that perfecting the enzymes needed for cellulosic ethanol production is probably three to five years away from commercialization, while algae-derived drop-in fuels are five to ten years away.
McAdams agrees that drop-in biofuels are still in the demonstration plant phase, but as firms like Neste and Tyson demonstrate feasibility, investment should flow and scale could be achieved quickly.
“Ethanol took 20 years to achieve commercial scale,” McAdamas points out. “But then took six years to double production.”
John Felmy, API’s chief economist, says take those estimates with a grain of salt. “In the early 80s, people were saying cellulosic ethanol was five years away.”
But the cost gap is closing from both ends, and investment in biofuels today hinges on the rising cost of oil production and on tax incentives to help bridge the remaining difference.
For oil production costs, Felmy points to a 2008 Department of Energy survey placing US offshore production costs at $73/barrel, versus $38/barrel in Canada and $17/barrel in the Middle East.
Joule Biotechnologies, a green energy startup making diesel fuel from algae-like organisms, is aiming for production costs of as little as $30 per barrel.
Cost of production comparisons aren’t the only point of contention between green and fossil fuel energy firms.
As a large employers and sources of tax revenues—often in areas of high unemployment—all energy producers sell themselves as job creators, and all benefit from government subsidies in the process.
McAdams and Felmy disagree over which sector has benefited the most from government tax incentives in recent years, but a 2007 report on oil and gas sector subsidies from the Congressional Research Service, a non-partisan group that provides data and analysis to members of Congress, showed tax credits were evenly distributed.
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The agency determined that over an eleven-year period, oil and gas exploration/distribution tax credits were $5.6 billion, versus $5.7 billion for all renewable energy and energy efficiency initiatives.
Gauging job growth in the nascent biofuels sector is tough at this point, but industry sources claim it requires similar headcount, in production and distribution at least, to the oil and gas sector.
Felmy adds that even if new biofuel production replaces proposed expansion in US offshore drilling down the road, the US will still be consuming oil at that point.
“To the extent we're going to need [oil] and we're going to need it for the foreseeable future, we may as well produce it here, " he says.
DOE and industry sources, however, estimate that any new offshore capacity would meet growth in our domestic oil demand for a period of less than three years, based on projected consumption trends.
Greener Dawn’s Santana says that supports the case for moving investment capital into greener fuels now, when the price of oil is well off its sky-high peak of two years ago.
“Biofuels are not going to drive oil costs down to zero anytime soon,” he says, adding that we’ll be still consuming oil even if biofuels can replace any new offshore oil production. “But it can bend the [cost] curve.”
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