Who Killed $2.18 Gasoline?

April 19, 2013

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by Jim Lane (Biofuels Digest) An explosive report from Bloomberg alleges that a pathway to $2.18 per gallon gasoline was developed at Chevron-Weyerhaeuser owned Catchlight Energy. Yet, the project was sidelined. Why? Was the project really saddled with a threshold ROI 10 percent above Chevron’s annual average return on capital?

The Bloomberg investigative team of Ben Elgin & Peter Waldman yesterday published an expose on Chevron trying to undercut California’s low-carbon fuel standard. “They say they’re pushing back against the California rule because it demands technology that may not be available for years,” the team writes, as they detail the derailing of a technology that would have been available at commercial scale as soon as next year, according to the company’s own internal documentation.

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“You can make money today making advanced biofuels,” Bloomberg quoted former Chevron biofuels VP Paul Bryan in the report. “You just won’t make as much money as the oil companies would like.”

Was there really a project at Chevron that could profitably make renewable gasoline at $2.18 per gallon?

Apparently, yes. Catchlight Energy, a joint venture of Chevron and Weyerhaeuser — have such a technology.

But let’s put some qualifiers on that. It was at pilot stage.

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But certainly, competitive with the cost of making gasoline when the Brent Crude benchmark has been between $93 and $115 per gallon this year.

What happened?

The Bloomberg report points to an internal Chevron report, written in 2009, that concluded it would be cheaper to buy renewable energy exemptions than make renewable fuel.

According to Bloomberg, a few months after the report appeared, Catchlight’s budget was scaled back.

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Bloomberg pointed to the irony of a 2010 Chevron advertising campaign.In October 2010, six months after Chevron and Weyerhaeuser put the brakes on at Catchlight, Chevron ran television and print ads about its work on non-petroleum fuels. “Something’s got to be done. So we’re doing it,” the ads said. “We’re not just behind renewables. We’re tackling the challenges of making them affordable and reliable on a large scale.”

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We’ve seen much of this before in the kinds of charges that are often leveled at oil companies — toxic levels of cynicism in public relations, capitalism run amok, projects subject only to economic sustainability, leaving someone else to clean up the carbon.

But there’s something here that we see less often. The bottling up of game-changing technologies, a tying up of talent.

Here’s the pattern: bend to public will when mandate efforts become popular, establish big projects, hire top R&D talent and bottle up IP to prevent technology spread, kill off the projects with absurd profit requirements, cite lack of feasible technology as a reason to kill or delay mandates, and then lobby like crazy to get back to the status quo.

True? Fair? Let’s explore in the days and weeks to come.

At the very least, Chevron has some explaining to do. READ MORE and MORE (Bloomberg) and MORE (Biofuels Digest) and MORE (update Biofuels Digest)

Reaction from Readers: The report’s authors concluded that the technology was, essentially, abandoned by Catchlight parents Chevron and Weyerhaeuser after an internal report from Chevron analysts concluded that it was cheaper to pay for carbon emission exemptions than to build low-carbon fuel capacity.

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As a Digest reader wrote:

“You may want to go back and look at the return on capital for building oil refineries over the past 50 years. It will be around 5%, probably below the cost of capital for most IOCs. This is probably a difficult issue for most of your readers to get their heads around, and even more difficult for the average reporter or politician. MONEY DOES NOT GET MADE IN THE “stand alone” REFINERY BUSINESS. No one pointed out that Chevron has not built, nor is planning to build any US oil refineries for the same reason – the returns stink!

The industry needs to figure out that cheap feedstock will not be vomited on top of them no matter how clever their technology is, they need to figure out how to be integrated into the upstream (like cane mills). “Stand-alone” biorefineries will get built at the same pace as domestic oil refineries (approximately zero) until the upstream and the refinery can be integrated together with shared risks and transfer pricing.

The Chevron solvent liquefaction technology

Indeed, Chevron filed a patent app for its technology – which, it told the USPTO, does not require a catalyst, does not require CO2 or hydrogen in the process, and results in an upgradable bio-oil that is “easily transportable” and can be performed “at a local site such as a wood pulp generating facility.”

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CLE described solvent liquefaction as “proven technology” in a DOE presentation in 2011 – proven, that is, in what it described as a “large pilot plant” that had a “commercially-scalable feed system” and an associated “commercial plant design.”

In presenting the technology in 20111, Catchlight Energy touted high yields, moderate pressure, low char, and a low oxygen biocrude (thereby requiring less hydroprocessing when upgraded to hydrocarbon fuel).

...CLE’s technology is, based on the techno-economic analysis that the company presented in 2012, is capable of producing sub-$2.50 biofuels at a yield of 104 gallons per bone dry ton of biomass. The chart is not exact but it looks like a cost of right around $2.30-$2.40.

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There are technical challenges indeed — but there’s only limited progress on those challenges to report since 2010. For sure, Catchlight’s technology appears to be in a holding pattern, and tight capital appears to be the culprit here.

But not tight capital in the conventional sense — since any company with a $36.7B capital budget can’t really be described as capital-constrained. The money is, frankly, going to high-carbon resource discovery. There’s more money to be made in high-carbon than low-carbon.

And CLE is just as frankly admitting that uncertainty over biofuels and RINs is the primary cause of the pull-back in capital spending on low-carbon techologies like solvent liquefaction.

And, ahem, guess who is creating that very uncertainty over biofuels and RINS— to a great extent, independent oil companies. They appear to have concluded that it is safe not to invest in low-carbon technologies. READ MORE