Miami, FL, USA -- Last year, Shell's chief technology officer, Gerald Schotman, told Reuters that the company will narrow its research paths in advanced biofuels from 10 advanced technologies to five in 2011, and described 2011 as "the year of choices."
Last week, after previously exiting an investment in Choren, a Fischer-Tropsch technology based in Germany, Shell announced that it will will exit its shareholding inCellana, a joint venture between Shell and HR Biopetroleum. Today, HRBP will become the sole owner of Cellana, including its six-acre demonstration facility in Kona, Hawaii.
To support the transition, Shell has agreed to provide short-term funding to advance and focus the algae technology development program, which is supported by stakeholders like the University of Hawaii, Hawaiian Electric Company, Maui Electric Company, the National Alliance for Advanced Biofuels and Bioproducts consortium, and the DOE.
[Note: In 2007, HRBP and Royal Dutch Shell had formed Cellana as a separate joint venture to build and operate a demonstration facility to grow marine algae and produce vegetable oil for conversion into biofuel].
HR BioPetroleum’s view:
Ed Shonsey, HRBP CEO, said, “We will continue to operate Cellana’s Kona demonstration facility and to continuously improve the economics for growing marine algae using HRBP’s patented process. Based on HRBP’s and Cellana’s results to date, we believe this technology holds great potential for the economical production of algae and algae-derived products for applications within the aquaculture and animal feed markets, as well as for the production of algal oil for conversion into biofuels.” Shonsey added that the venture has acquired all its permits and aims to commence producing algal biofuels “in two to thre years."
Shell’s view?
“In keeping with Shell’s portfolio approach to the research, development and commercialisation of advanced biofuels, this decision will allow Shell to focus on other options that have shown a better fit with Shell’s biofuels portfolio and strategy.”
So, Shell is out of the algae race, for the time present. And what does this mean for future investment? Let’s start with some background on how oil majors like Shell manage, communicate about, and think upon their biofuels investments.
The Shell Backstory
“Though the biofuels industry should, and generally does, react with excitement when oil industry majors invest in biofuels ventures — such as Shell’s investment in cellulosic ethanol pioneer Iogen and in algal fuels pioneer Cellana — it is hardly the case that they have entered some Nirvana of strategic investment where money is no object and scale is a certainty.
“In fact, the oil company investment committee process is a trial by fire that the designers of the medieval Inquisition might well have taken some notes on. Even after initial investment decisions are taken.
“You are up against, to give an example, a $400 million internal upgrade to an off-shore platform that is using known technology to produce a known return, for the production of oil and gas that the company is entirely comfortable with,” an industry executive recently told the Digest, requesting confidentiality. “Even if you pass through that, investment is on a stage-gate process, and they are really, really serious about internal controls and hurdles.”
“The stages and gates, according to other executives who discussed the process with the Digest, are highly disciplined, and woe betide the biofuels venture that comes short of them, no matter how understandable the reasons that generally stem from the technical uncertainties of producing new fuels from new feedstocks using new processes.”
At the same time, we have this to go on: Shell exited its wind and solar businesses in recent years, and said that it will focus its attention entirely on biofuels as an alternative energy platform.
At the same time, we have this to go on: Shell exited its wind and solar businesses in recent years, and said that it will focus its attention entirely on biofuels as an alternative energy platform.
So, background aside, where exactly are we with Shell and its biofuels babies?
Shell’s Biofuels Portfolio
Cosan
Shell’s view: “In Brazil, Shell signed a binding agreement to form a joint venture (Shell share 50%) with Cosan for the production of ethanol, sugar and power, and the supply, distribution and retail of transportation fuels. The transaction is subject to regulatory approvals, which it is essentially at this date cleared.”
The Digest’s take: Unlike BP, we have a pretty good idea what Shell is going to do in Brazil, thanks to its monster merger of its bio-based business with Cosan. The company will have its hands full just absorbing and energizing its new JV. But Shell isn’t in Brazil for the joys of the sugar business, not ultimately as solely a renewables play in the ethanol space. Ethanol is an affordable, sustainable route to increasing domination of an important fuel market (Brazil), with tempting M&A economics caused by huge debt loads in the sugar/ethanol sector.
Though they have contributed their investment in Iogen into the mix here, we look at the fact that Shell has placed this venture into its Downstream business unit as a sign that their initial focus is, primarily, about distributing sugarcane-based ethanol and gasoline to the vibrant Brazilian market. But we think something else is brewing here, which we’ll discuss later in this article in “The Bottom Line.”
Iogen
Shell’s view: “We are working with Iogen Energy, a Canadian company, to develop the processing technology that enables ethanol to be made from straw using enzymes. Iogen opened a demonstration plant in Ottawa, Canada, in 2004. A Shell service station in Ottawa sold petrol containing 10% cellulosic ethanol from the demonstration plant for one month in 2009.”
The Digest’s take: An investment in transition. A new CEO, Duncan Macleod, arrived from Shell last July as COO and rapidly moved up to the CEO chair in September. Shell has re-signed its joint development agreement with Iogen, taking that collaboration through at least mid-2012. Macleod recently signaled at a biofuels gathering that the company will be converting its front end systems and will “redefine its process,” according to an attendee.
We are not entirely sure, nearly seven years into a pilot production program, that Shell would not have bailed on this investment.
Codexis
Shell’s view: “We have a joint technology program with Codexis to develop more powerful enzymes for faster conversion of biomass to ethanol and other fuels.”
The Digest’s Take: Last April, Codexis (CDXS) raised $78 million in its IPO, selling 6 million shares at $13 each. The $13 price was at the bottom end of the $13-$15 range targeted by the company and gives the company a $509 million market capitalization, and the company’s stock dipped into the $8 range for some time, but has recovered to $9.17 this week after some time last fall in the $10-$11 range.
It was the first renewables investment by an oil major in some time to manage an IPO, so definitely chalk this one as a winner, although we continue to hear from analysts that the value on Codexis is depressed by the fact that it is so dependent on Shell’s strategy and (to date) the future of the investment in Iogen, neither of which have come entirely clear.
A bright note for Codexis: The company has started to develop opportunities in renewable chemicals, independent of its relationship with Shell, and is proceeding rapidly in that direction. That could provide some upside regardless of what Shell decides to do.
Virent
Shell’s view: “With Virent Energy Systems we also have a joint technology development program to convert plant sugars directly into a range of high performance liquid transport fuels. In 2010 Virent opened a demonstration plant to convert plant sugars directly into petrol.”
The Digest’s take: Last March, Virent and Shell announced the successful startup of the Virent “Eagle” demonstration plant, producing 10,000 gallons per year of biogasoline, a drop-in renewable fuel, and shortly afterwards Shell announced that it had taken an equity stake in Virent and begun a joint technology program.
Under the program, part of a $46.4 million third round of funding in which Shell and Cargill deepened their commitment to Virent’s technology platform, the companies agreed to expand R&D beyond biogasoline to include diesel fuel. With its equity stake, Shell also gained a seat on Virent’s board.
Shell’s equity stake says just about everything. Cargill’s increased investment says the rest. Demonstration-scale data is just coming in now; but if Virent goes to 1 Mgy, it will go far. Along with Cosan, this looks like the most vibrant portion of the Shell biofuels portfolio.
Research Agreements
The company has a wide range of biofuels R&D agreements signed in 2008 with the Massachusetts Institute of Technology (MIT); the University of Campinas (Unicamp) in Brazil; the Institute of Microbiology, Chinese Academy of Sciences (IMCAS) in Bejing, China; the Qingdao Institute of Bioenergy and Bioprocess Technology, Chinese Academy of Sciences (QIBEBT) in Qingdao, China; the Centre of Excellence for Biocatalysis, Biotransformations and Biocatalytic Manufacture (CoEBio3) based at Manchester University, UK; and the School of BioSciences Exeter University, UK.
Last October, the company upped its ante with an agreement to fund $25 million in energy R&D with MIT’s Energy Initiative over a five-year period. The research collaboration will fund a suite of projects at $5 million per year for the coming five years, focusing on advanced modeling, earth science, biofuels, nanotechnology and carbon management.
Overall, at Shell
Credit Suisse recently said that it expected Shell to record 42 percent cash flow growth through 2015, compared to an industry benchmark of 27 percent, and upgraded the stock from neutral to outperform.
The Bottom Line
No one appointed us chief-visionary-of-all-things-Shell, but here’s our prognosis:
We think Shell is vitally interested in the junction between the Virent technology – producing diesel and biogasoline from sugar — and its considerable assets in Brazil as feedstock source and deployment point. If Virent nails its technology to a viable performance point, Shell has the feedstock, management, local presence and the downstream scale to completely dominate the growth opportunities in the Brazilian market.
Even Amyris, which has been moving at light speed, would be hard pressed to compete in Brazil, even with its investor Total commanding an estimable presence in the region through Total Brasil.
Long-term, we sure like the Codexis investment as a means to liberate cellulosic sugars from pre-treated bagasse and vinasse (saccharification), and potentially to produce up to eight-carbon alcohols (octanol) from bagasse.
We see Iogen, contributed as it is now to the Cosan JV, as a technology that could advanced that story by giving Shell options to produce cellulosic ethanol as a supplement to sugarcane ethanol.
Total-Amyris vs Virent-Shell, for control of the Brazilian advanced biofuels market, and the edge in dominating the fast-growing Brazilian fuel market? Game on.
