With implementation of the revised renewable fuels standard delayed from a January 2009 start to January 2010, Big Oil's implementation strategy committees have been given a breather. When it comes to biodiesel, there are a lot of questions to answer. What approach is best to meet the standard? Where does it make the most sense to add blending infrastructure for biodiesel? Will there be a market for higher blends, and adding to the uncertainty, will soy biodiesel qualify as an advanced biofuel or be grandfathered in under the conventional biofuel standard?

With oil industry offices essentially in his backyard, Houston biodiesel producer Jeff Trucksess, executive vice president of Green Earth Fuels LLC, sees the industry taking a wait and see attitude. "The regulatory environment is so uncertain," he says. "It's not clear just how the RFS is going to kick in or how California's low carbon fuel standard is going to kick in. What sort of fuel and feedstocks are going to be favored?" he wonders. "At the same time [the biodiesel industry] is not as mature as ethanol, and consequently the majors' thinking on the subject is not as mature."

The recent change in ASTM standards to allow up to 5 percent blends of biodiesel in petroleum diesel without notice may actually open an opportunity for a rather quick transition to using biodiesel, Trucksess points out. Studies in the United States and Europe have indicated low-level blends can be successfully handled in pipelines. "You start to see potentially different thinking on the part of the majors, in using up to B5 they won't necessary have to change a whole lot." In that scenario, a refiner could convert a few tanks to biodiesel storage and inject 5 percent bio into the diesel as it enters the pipeline. Such low-level blends would also tend to minimize the issues of biodiesel's varying cold flow properties. "That's a feasible scenario for the next couple of years," he suggests. A B2 blend in the 60 billion gallon a year diesel market in the U.S. would provide a market for 1.2 billion gallons of biodiesel-just over the 1 billion gallons for biomass-based diesel required in the renewable fuels standard. The question arises, though, whether a second scenario of strong, regional demands for B20 or higher blends will require different infrastructure modifications.

In comparison, the ethanol industry has already seen many of those infrastructure questions answered, thanks to the wide substitution of ethanol for less environmentally-friendly oxygenates in recent years. "One could argue that, as an oxygenate, ethanol is so fully entrenched in the fuel system that the fuel makers wouldn't want it to go away now," says Donald Paul, executive director of the University of Southern California Energy Institute. He's also a former vice president and chief technology officer for Chevron. "They've already made the investments to integrate it," Paul says.

In his view of how the oil companies see it, infrastructure is just one of many ways where biodiesel differs greatly from ethanol. Ethanol production is considerably greater in the United States and Brazil, and elsewhere. Corn and cane ethanol are both built on large, existing agricultural bases prone to large surpluses. While the biodiesel industry in the U.S. also started under a business model of utilizing surplus, it now appears that growing global demand will keep supplies tight and prices up for all edible oils.

Feedstock Issues
Biodiesel producers know high feedstock costs and resulting negative margins have severely affected their business, even with the relatively generous $1 per gallon tax credit. The poor scoring for soy biodiesel in final versions of the U.S. EPA's proposed rule for the renewable fuel standard and California's low carbon fuel standard adds more uncertainty to the feedstock outlook, on top of the long-term price scenarios. That uncertainty is a key reason for the oil industry's wait-and-see attitude according to Paul. "Until it evolves to where there is a higher level of predictability and confidence in the economic model, especially a model that doesn't require very large price supports or subsidies, the large companies are going to wait," Paul says, adding that predictability, tight specifications and standardization are also important for biodiesel to be integrated into the hydrocarbon fuel system. "Particularly with biodiesel since diesel is primarily commercial fuel," he says. "You don't want to have to worry about what is in this fuel if you're running a hundred trucks or running locomotives."

Biodiesel is part of the fuel system now and will continue to be at some level, but from the oil industry's view the future of biodiesel still has too many unknowns, Paul says. "How much effort do you put in the current generation built around soybean oil or chicken fat? Or do you wait for something like algae where the feedstock supply could be scaled up?" he asks. For Big Oil to invest in infrastructure changes, the business model needs to stabilize, he says. "The business model that shows you how to invest, how you're going to make money and how to integrate [biodiesel into the system] is the driver that will ultimately bring the large participants," he tells Biodiesel Magazine.

A Question of Scale
Scale is an issue for the oil industry that has built its business model around driving down costs through economies of scale. For biodiesel, the nature of the technology and waste-based feedstocks has nurtured a large number of smaller facilities distributed throughout the country, alongside some more centralized larger plants based on virgin vegetable oil feedstocks. "You don't get to 10 percent [of the overall fuel supply] by having thousands of independent operators," Paul says. "You get to 10 percent by stabilizing the supply and integrating it into the system."

Trucksess points out that the scale of the biodiesel industry has only begun to ramp up quite recently. "Really, biodiesel is only three years old in its modern form," he says. "We haven't had enough time to create new feedstocks and new drivers that bring down the costs and eliminate the need for tax credits." He points out that Green Earth Fuel's 90 MMgy capacity is four times the total sales of the biodiesel industry just four years ago.

The questions Big Oil has to ask itself regarding biodiesel-will it ultimately fit into the infrastructure, what feedstocks will ultimately prevail, and is biodiesel scalable?-all point to uncertainties in the business model. "The nature of large oil companies is that the technical risk is something they accept," Paul says. "Oil exploration is one of the most technically risky businesses but they know how to do it. They know how to assess those risks and incorporate them. Business model risks-where you don't know how all these factors are going to add up, where you're going to make money on your investments-those are the risks the majors don't absorb generally."

A lot of the discussion in the biofuels sector is on reducing technical risk, Paul admits, but that is not enough. "The question ultimately is what are the business model risks, and the political risks around that? Once that gets more stabilized, you'll see more large companies and investors get interested."

The acceptance of technical risk is illustrated in ExxonMobil's recent announcement of a $600 million investment in algae research. In making the announcement, Emil Jacobs, vice president of the company's research and development, said the potential scalability of algae was a major reason it settled on algae as a research focus. The $600 million over five or six years is relatively small in terms of investments in oil exploration, he said in the news conference, but large in terms of other research efforts. If successful, the research investment would be followed by billions of dollars in infrastructure, he said.

Oil industry investments in the larger, more mature ethanol industry took a major step forward this past year when the nation's largest oil refiner, Valero Energy Corp., bought several bankrupt ethanol plants. Given the current uncertainties in the biodiesel market, no one expects that to happen with distressed biodiesel assets. Yet Big Oil will inevitably get more involved. In a talk earlier in the summer at the Renewable Energy Finance Forum in New York, Paul laid out five reasons why Big Oil will become a factor in the renewable energy market.
1. Global reach and scale
2. Strong balance sheets and cash flow
3. Technical, business and market capabilities
4. Infrastructure, land and supply chain management
5. Patience and longevity

"Energy is so big," Paul says. "Changes take time and last for decades. The large energy players will have a role-that's what they do."


Susanne Retka Schill is assistant editor of Biodiesel Magazine. Reach her at sretkaschill@bbiinternational.com or (701) 738-4922.