With big oil moving into biofuels, Shell is one to watch.
Last week, World Bio Market Insights reviewed developments in the biofuels industry in 2022. It noted continued growth in global biofuels production despite many countries falling back on fossil fuel reserves as an energy security measure.
In a further sign of how established biofuels have become, even rising food prices and a renewed debate over the link between famine and biofuel crops did not weaken EU support for the sector.
However, our review proceeded on the assumption that biofuels remain an embattled and emerging sector still fighting for support from government in infrastructure and de-risking.
In this article, we shift perspectives slightly. From another angle, biofuels are an already-lucrative global commodity attracting attention from some of the biggest corporate entities in the world: oil majors.
The oil companies say renewable fuels are central to their long-term business strategies as they adapt to a changing climate. Royal Dutch Shell Mr. Ben van Beurden told investors recently that Shell no longer an oil and gas company, but an energy transition company.
How have oil majors moved into the biofuels business over the years and what does it mean for the sector? We look at BP and Shell’s history in biofuels and their latest moves into renewable fuel.
The first wave
Oil first went into biofuels in the 2000s. This was when the sector first went big. Between 2004 to 2009, annual average growth rates reached 20% for ethanol and 51% for biodiesels. In the peak years of 2006 and 2007, investments into biofuels hit above 25 billion US dollars – a level never seen since.
Financial and strategic reasons drove big oil’s move into the biofuel supply chain. Access to low cost, conventional oil was already becoming difficult back in the 2000s. What’s more, the oil majors knew that climate targets were rapidly becoming part of the business calculus.
In this first decade, the biofuels strategies of the oil majors diverged. On the one hand we have BP and Shell which invested in mature, first-generation biofuels: these are made from crops normally grown for food such as corn, sugar, palm oil.
Exxon took a slightly more unconventional route. It bypassed these proven biofuels for more exotic R&D ventures, partnering with biotech company Synthetic Genomics to develop viable ways to turn algae into liquid energy. Algal biofuels belong to third generation biofuels and progress in scaling remains extremely limited.
That’s not to say that Shell and BP didn’t also try their hand at biofuels innovation. Like many other researchers and energy companies since, they have been trying to find economically viable tech for making cellulosic biofuels.
Made from the stringy fibres of plants – rather than their fatty seeds and fruits – cellulosic biofuels are of the second-generation type. Also known as advanced biofuels, breakthroughs in cellulosic biofuels production would mean that cheap by-products from forestry and agriculture, and even household waste, could be used as feedstock.
Shell’s first investments into cellulosic biomass conversion began in 2002. A major development came in 2006 when they partnered with Codexis to develop more powerful enzymes that could convert organic waste into furls, spending $126 million on this between 2008 and 2010.
Generating energy from organic waste is not just appealing to oil majors from an economic perspective. Cellulosic biofuels would lessen the need for land-hungry fuel crops, deterring criticisms that the industry drives hunger and price inflation.
Viable and scaled cellulosic biofuels production remains a work in progress but Shell continues to invest in the sector.
BP’s entry into biofuels
By the late 2010s, BP was one of the largest blenders and marketers of first-generation liquid biofuels in the late 2010s. It first went into the sector in 2007. In 2012, it blended over 7 billion litres of biofuels into finished products in its FVCs, mainly in Europe and the US.
By 2010, BP had also gained control of some existing biofuel producers. It was a major shareholder in a British ethanol plant in Hull and achieved 83% control of the Companhia Nacional de Açúar e Álcool (CNAA), one of the largest ethanol and sugar producers in Brazil.
In 2008 it also invested in Brazilian ethanol production through a Tropical BioEnergia S.A . joint venture, constructing two ethanol refineries. At the time it was the largest investment by an international oil major in Brazil’s ethanol production ever.
Right now, BP says that it places biofuels production expansion at the heart of its strategy to diversify its portfolio and secure revenue under accelerated decarbonisation scenarios.
In its 2021 annual report, it said it plans to reduce hydrocarbon production by around 40 % relative to 2019 levels by the year 2030 while at the same time tripling biofuels production.
BP blows hot and cold on biofuel strategy
Yet BP is coy about its actual production figures for biofuels, raising question marks about their commitment to targets.
Its 2021 annual report mixes in biofuels under the broader heading of bioenergy – which includes biogas.
In 2021, BP delivered 26 million barrels per day of bioenergy with a target for 50 million barrels per day by 2025.
Its 2020 report was even more scant on details. There were no figures at all on either biofuel production specifically nor even bioenergy in general.
There is a yet more significant indication that BP is uncertain of its biofuel strategy. In 2019, it formed a joint venture known as Brazil’s BP Bunge Bioenergy. It became 50:50 co-owners with Bunge, a Brazilian firm, pooling both company’s existing biofuel mills and sugarcane cultivation lands.
BP Bunge Bioenergy is poised to become a leading company in the sugar, ethanol, and low carbon bioelectricity market in Brazil with a production capacity of 1.5 billion litres (237 billion gallons).
Yet in 2022, just three years after its founding, Shell put the company up for sale. When BP Bunge Bioenergy came on the market, two buyers expressed interest: one was Raízen,, the longstanding Shell venture in biofuels, and Abu Dhabi’s state investment vehicle Mubadala. Sale negotiations continue.
Why did BP sell off such a major producer in a country with world-leading biofuels production levels? BP Bunge Bioenergia only commented that “While we are pleased with how the business is performing, it is not core to our overall business strategy.”
BP takes a gamble on biogas
BP Bunge Bioenergia’s sell off set in motion from August 2021 but this sudden biofuels divestment was omitted altogether from all three quarterly reports released by the company through 2022.
Instead, BP highlighted its newer biofuels ventures. In 2022, for example, it entered into a long-term strategic offtake and market development agreement for low-carbon biofuels feedstock with Nuseed.
It also reported “advanced its strategy in biofuels” producing sustainable aviation fuel at bp’s Lingen refinery. 2022 also saw BP acquire 30 percent stake in acquired a stake in Green Biofuels Ltd, the UK’s largest provider of low emission hydrogenated vegetable oil fuels
Despite its rhetoric, BP appears unclear on the real place that biofuel holds in its renewables strategy. Shortly after putting its Brazilian biofuels venture up for sale, BP made a large acquisition in biogas instead. It purchased Archaea Energy, which produces renewable natural gas to a volume of around 6, 000 barrels of oil equivalent per day.
Chairman and president David Lawler celebrated BP’s acquisition as an “enormous opportunity to grow” the oil company’s interests in bioenergy.
This will boost BP’s biogas supply volumes 50%. BP also revised the contributions made by biogas to its overall EBITDA from $1 billion in 2030 to $2 billion.
While it remains a significant producer in biofuels, BP appears to be switching its investment strategy towards renewable natural gas, a segment that has been attracting heightened investor attention over the last two years.
Shell’s biofuel interests expand
Shell meanwhile is more forthcoming on its biofuels programme.
Its biofuels interest is Brazil’s Raízen, which produced 2.5 billion litres of ethanol in 2021. In the same year, Raízen bought Biosev, which will add 3.75 billion litres to its bioethanol production capacity per year.
Right now, it looks like Raizen might well take over BP Bunge Bioenergia, being only one of two buyers in contention for the Brazilian bioenergy asset after BP put it up for sale.
Raízen began life as a 2011, $12 billion joint-venture by Shell and Cosan S.A. Indústria Comécio, a natural gas distribution company operating in Brazil, Argentina, Uruguay, Paraguay, and Bolivia. Because Raizen grows its own crops, the deal meant that Shell entered the biofuels supply chain right at its source. Shell now holds a 44% interest in the company.
Raízen began life producing first generation biofuels. However, by 2021 it had announced plans to build its second cellulosic ethanol plant – the only producer in the world to do so. Five more are in the pipeline. These five sites will supply a forward purchase of cellulosic ethanol signed in November 2022 by Shell. The deal locks Shell in to purchase 3.2 billion litres of the fuel from Raízen
Shell looks set to strengthen its joint venture. Just over a year previously, the company went public for the first time on the São Paulo Stock Exchange, with Shell’s downstream director commenting that the company is “committed to Raízen as we grow our renewable energy business and our presence in Brazil and Argentina”
Big oil and government support drive consolidation
In Europe, Shell is building its own biofuels operations. In 2021, it announced it was building a large facility with 820, 000 tonne capacity in Rotterdam, the Netherlands, expected to begin production in 2024.
What’s more, Shell has sustained an interest in cellulosic biofuels that first began in the 2010s. One of its strategic aims now is to develop or take equity positions in commercial scale biofuels projects. Under this programme, it has already invested in two plants that specialise in cellulosic: Enerkem Varennes Québec and Lanza Jet’s plant in Georgia US.
Combined with increased government incentives, biofuels scaling and consolidation will likely be driven by legacy energy firms pushing to diversify their portfolio before oil becomes a stranded asset. Shell’s active investments suggest that, among all other Western oil majors, it will play a major role in this.
The first wave of biofuels consolidation occurred in the 2000s, again driven in part by oil. Now, with a turbulence in key input markets set to linger, a repeat might already be underway.
What makes oil majors so well-positioned to consolidate the biofuels industry is their capacity to absorb volatility in input and market prices where smaller companies may fold. While the biofuels industry will only grow, some smaller players are likely to be pushed out over the next few years.