These 2 Big Oil Companies Just Got the Cold Shoulder From the EPA

Natural gas fuels produced from biogas will now be recognized as advanced biofuels, but butanol will have to wait to replace ethanol. Is that bad news for BP and DuPont?

Aug 21, 2014 at 10:10AM

Hold the champagne. Biobutanol won't be recognized as an advanced fuel after all.

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Butamax's demonstration facility in the United Kingdom. Source: Butamax.

Big Oil has been a pretty vocal critic of the U.S. Environmental Protection Agency's Renewable Fuel Standard, or RFS, which mandates volumes of ethanol and biodiesel that must be produced and/or blended into the nation's fuel supply each year. Last November, refiners gave a collective sigh of relief when the EPA (finally) lowered required ethanol volumes for the first time, for the 2014 production year and beyond. Unfortunately, the EPA missed a golden opportunity to put a few more nails in ethanol's coffin by surprisingly omitting biobutanol -- widely considered a slam-dunk for inclusion -- from its latest RFS updates for advanced biofuels. How will that affect development for Butamax, a joint venture between BP (NYSE:BP) and DuPont (NYSE:DD)?

Why butanol should be the next American biofuel
The EPA will now recognize three fuels sourced from biogas (compressed natural gas, liquefied natural gas, and electricity used to power electric vehicles) as advanced biofuels, which means the fuels reduce total greenhouse gas emissions by 50% compared to gasoline. Advanced biofuels capture larger subsidies and tax credits, thus prioritizing their development. The move makes sense for some pretty obvious reasons. After all, the United States would benefit from capitalizing on its vast natural gas reserves. Natural gas fuels and electric vehicles also offer perhaps the best two opportunities to break the monopoly of petroleum-based fuels in the U.S. transportation system.

However, blending of renewable alcohol fuels will remain a powerful tool for reducing gasoline consumption, although we can do much better than ethanol. So it's surprising that renewable butanol was left out of the advanced fuel pathway additions, especially considering it could solve the nation's misguided love affair with ethanol. It might require several more years of development, but butanol has compelling advantages over ethanol as a blendstock.

 

Butanol

Ethanol

Energy content of gasoline

91%

67%

Can use existing infrastructure

Yes

No

ASTM-approved blend ratio

16%

10%

Maximum national production potential*

21.3 billion gallons

13.3 billion gallons

*Based on approved blend rates and gasoline consumption in 2012.

The higher energy content of butanol means that a 16% blend would only reduce your car's fuel economy by 1.5%, while a 10% blend of ethanol equates to a 3.5% hit. Moreover, existing ethanol facilities can be retrofitted to produce butanol, which would drastically reduce investment and time requirements for transitioning to butanol as our alcohol fuel blend of choice. While an ethanol production facility's capacity would be reduced to 82% if butanol were produced, the economics still greatly favor butanol, which could be used as a fuel blendstock and as a chemical intermediate for polymers, rubbers, solvents, and more. The diversification of markets could even make it possible for a robust butanol industry to exist without help from subsidies or tax credits. That would be a big win-win for industry and consumers (who double as taxpayers), so why would the EPA leave butanol out, especially when deep-pocketed companies such as BP and DuPont are attempting to bring it to the market?

Butamax gets minimized
The EPA provided no explanation for giving the cold shoulder to butanol. While omitting butanol from the advanced fuel pathways this time around is a minor setback for catalyzing partnerships for the fledgling industry and encouraging investment, BP and DuPont are forging ahead with development independent of EPA decisions. Butamax has formed the Early Adopters Group, which consists of ethanol companies considering retrofits to their facilities. The group currently features seven ethanol companies and 10 facilities with a combined capacity of 750 million gallons per year. In fact, Butamax last October began retrofitting a 50 million gallon per year ethanol facility to produce isobutanol. It's a small start, but the facility will be key in demonstrating the technology's commercial viability.

Progress updates have been interrupted by a long and hard-fought intellectual property dispute with competing isobutanol producer Gevo, but Butamax has the advantage of big backers in BP and DuPont and a $50 million demonstration facility in the United Kingdom -- which represents the final step before commercial deployment of the platform. Unfortunately, the EPA isn't helping to speed up the timeline.

Foolish takeaway
Butanol would be the perfect olive branch between the EPA and Big Oil, and would be welcomed by consumers and producers alike. The overnight success of the ethanol industry in the United States suggests that corresponding regulatory and industry support could enable a similarly robust butanol industry. The ability to retrofit existing ethanol facilities would not only reduce capital and time requirements, but would also help producers weather storms, wean themselves off subsidies, and swipe away the nearly 1.2 billion gallons of excess ethanol capacity drowning the market. That also presents a massive opportunity for BP and DuPont and justifies big up-front investments for long-term value creation. Now, it will take a bit longer for investors to enjoy the new capability. 

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Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolioCAPS pageprevious writing for The Motley Fool, or his work for SynBioBeta to keep up with developments in the synthetic biology industry.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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