Big Companies Are Buying Into Biofuels

A handful of smaller companies like Solazyme (NASDAQ: SZYM  ) , Amyris (NASDAQ: AMRS  ) , and Renewable Energy Group are often credited as being the future of biofuels, while many experts in the biofuel industry argue that a monumental investment would be necessary for biofuels to take off in the short term. While leaders of these smaller companies in the biofuel industry are unquestionably committed to the success of their businesses, the scale of investment necessary for biofuels to see widespread implementation is likely beyond the means of these smaller companies.

Larger companies from a variety of backgrounds, including ExxonMobil (NYSE: XOM  ) , DuPont (NYSE: DD  ) , and BP (NYSE: BP  ) , are seeing the potential in biofuels and are investing in a range of different advanced biofuel technologies. The resources available to these companies with market capitalizations that in some cases are over 1,000 times greater than smaller biofuel companies may make the companies' ventures into the biofuel industry that much more likely to succeed.

With size comes money
After spending over $100 million on the development of algae-based biofuels, ExxonMobil is refocusing its efforts on developing new, more productive strains of algae with the help of Synthetic Genomics.

The collaborative effort, which may result in ExxonMobil investing more than the massive $600 million originally expected for the development of algae-based fuels, is just one example of why the next great advances in biofuels may not originate from the younger start-up companies in the industry. The ability to wager and lose $100 million on higher-risk ventures like algae-based fuels would spell the end for a newer company, but can be easily written off by the world's largest oil company.

DuPont's research into cellulosic ethanol and BP's investments in biobutanol both further increase the likelihood of big developments in bio-based fuels arising from the ranks of established larger companies. Through the combined expertise of recently acquired subsidiaries Danisco and Genencor and itsown strong history of industrial bioscience, DuPont is a major producer of enzymes for traditional corn-based ethanol production and has set the necessary groundwork for large-scale production of cellulosic ethanol.

After the success of a demonstration-scale facility in Tennessee, DuPont is now nearing completion of a commercial-scale cellulosic ethanol production facility in Iowa. By the end of the year, the facility should be operational with expectations to produce 30 million gallons of fuel ethanol from corn stover feedstock.

DuPont's interest in advanced biofuels spreads beyond just cellulosic ethanol into less traditional bio-based fuels like propanediol and biobutanol. The company's Butamax endeavor into biobutanol production is in collaboration with BP, with plans to use the fuel in place of ethanol for gasoline blending.

The major advantage of biobutanol over ethanol is its higher blending percentage given current regulations. It is not clear how detrimental the proposed changes to the Renewable Fuel Standard (RFS) would be to biobutanol, but it remains an intriguing opportunity given the ability to produce the fuel at already existing ethanol production facilities.

Retrofitting existing ethanol facilities and providing the complete set of resources to transition at least in part to biobutanol production and subsequent commercialization allows BP and DuPont to invest in advanced biofuels without the complete expense of building entirely new facilities. The required investments into research and development for the venture are still substantial, but BP's established infrastructure and the combined technology from both companies increase the likelihood for commercial success of the joint venture.

The takeaway
ExxonMobil, DuPont, and BP are just three of several large corporations investing in advanced biofuels. The sheer magnitudes of the companies and the technological and infrastructural resources available make their investments more likely to pay off in the long run.

Only time will tell whether the future of biofuels will be directed more by already established large corporations or by ambitious younger companies. For investors wanting to get into biofuels without the risk inherent to smaller cap companies, ExxonMobil, DuPont, and BP are all worthy of consideration.

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Read/Post Comments (4) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 16, 2014, at 4:28 PM, funfundvierzig wrote:

    Frankly and personally, fellow FOOLS, we don't believe DuPont Management will ever make a dime of profit for DD shareholders from their long touted DuPont corn cob "gasoline" (bad-mileage ethanol). For nearly a decade, DuPont has struggled and tried to commercialise a fuel manufactured out of corn stover, cobs and stalks, but the costs are huge:

    Stripping hundreds of thousands of fertile farm acres of corn stover deprives livestock of winter forage and exacerbates erosion and ground water pollution. Additional fertiliser is required to replace the organic material removed, and fertiliser is made from, guess what?...natural gas. Moreover the cost of harvesting the corn stover, drying it, storing it, and shipping to processing centres, and distributing final product is very high. DuPont corn cob "gasoline" may actually require more energy than its creates!

    DuPont corn cob "gasoline" is likely to end up little more than public relations fantasy fuel of the future, a "Sustainability" stunt.

    ...funfun..

  • Report this Comment On February 16, 2014, at 6:19 PM, stockanal45 wrote:

    Shame on you Shamus! Solazyme has a partnership with Cheveron. Maybe you're too new to the game but they've been working together for several years now.

  • Report this Comment On February 17, 2014, at 11:27 AM, GUVF wrote:

    "The ability to wager and lose $100 million on higher-risk ventures like algae-based fuels would spell the end for a newer company, but can be easily written off by the world's largest oil company."

    This statement is a ridiculous oversimplification. Sure a large corporation COULD just write-off $100 million loss but they WON'T. They need to hit their quarterly #s, they need to be able to project stable easy to predict growth to their shareholders, they need to avoid distraction and work within their existing areas of expertise.

    Start-ups have the luxury of risk, the luxury of making fast decisions, the luxury of true innovation. So what if they go belly-up? We have bankruptcy laws in this country.

  • Report this Comment On February 17, 2014, at 11:33 AM, GUVF wrote:

    I should make a corrections...maybe the WILL spend $100 million but it doesn't make them the most effective. They need to work within the confines of a well established bureaucracy. They can't just say "you know what, maybe fuels are too large of a initial goal, let's shift our initial focus to higher margin tailored oils...let's start a cosmetics brand."

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