Shell Exits Algae as it Commences a "Year of Choices"

Jim Lane, Biofuels Digest
January 31, 2011 | 3 Comments

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 in Cellana, 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

Last spring, we wrote:

“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.

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.

3 Comments

jl roux
February 14, 2011

hello,thanks for the great analysis.
the exit of shell from the raceway business is a blessing for those who have focused on the industrial and sustainable production of biofuels and high value added chemicals.

In addition, whereas there might be short term local benefits in supplying one's distribution network, it remains to be convincing that ethanol, sugar and the likes from the agricultural industry are sustainable options for the powering of transportation worldwide.

we are confident that other options will be actively researched and financed. after all the recent past has shown how much insight we can expect from the giants these days.

best and keep your great postings.

david larson
February 6, 2011

All good. Research continues, but those that don't look like they'll pan out, or will anytime soon, get trimmed. The way it should be.

This is good news for renewables. Sure, sometimes the government continues to back stupid ideas, like "Railroads" or "Highways" or "Electricity" or that "Gasoline" they supported in the early parts of the last century, but the Government feels it can gamble a bit more than industry, since its not playing with real money, anyway.

That Exxon got skunked would surprise me. I don't picture their board being so starry-eyed that they wouldn't exercise due diligence, Venter or not.

Some of the ideas that got shelved, might be picked up later.
Once upon a time, I think it was back when VHS was still vying with Betamax, there was a thing called "Laser Disc" that flopped so bad you could feel the impact. A few years, and some molecular beam epitaxy later, we have much the same thing in CD and DVD technology.

Or in the 1970's, when Shell had the commercials on TV talking about the promise of "oil shale"? That was good for a laugh, for about twenty years. Now we've got people talking about those pockets of putty-like bitumen in the US being "Enough oil to last us for a hundred years" even though we don't have the technology yet to use more than 20% of it...yet.

More alternatives failed to make the cut this year, but a better economy suffers more fuels - I mean, fools. Oil in turmoil could push some "marginal" technologies back into the light, too. Exciting times.

Daniel Hayden
February 3, 2011

Personally I have been waiting for the first domino to fall. A tremendous amount of money and resources have been floated without any knowledge about how to make biofuels marketable. Cellulostic ethanol is a huge flop, and algae is right behind, but both still continue to be funded.
The only companies that are successful, are those that are focusing on existing profit models, with designer chemicals. Transportation fuel is the least profitable segment, when it comes to fuels and chemicals, but it is the "sexiest" when it comes to consumer image.
Amyris has been focusing on a yeast production model to replace designer chemicals for foods and home products (i.e. cosmetics, soaps, detergents, surfactants, cleaners). They have been successful in this quest.
Solazyme has been focusing on algae, that can be grown similar to yeast/bacteria at industrial scale without light, to produce designer chemicals. Their fuel division is just a model, with funding help from the government, to replace fossil fuel with renewables in the government fleets and military fleets.

Both models are financially sound, and growing. Those companies that throw tremendous resources at growing algae to produce barrels of oil using sunlight, have to deal with tremendous engineering constraints that have yet to be solved, and certainly aren't profitable. If you solve on hurdle, it may impair several other hurdles or take years to not be a detriment to other processes such as growth efficiency and or extraction.

Companies like Synthetic Genomics and Sapphire are dead in the water. They continue to take money from the government and industry, but will be a tremendous fail in the end. I even heard ExxonMobile thinks they got hoodwinked on the whole Synthetic Genomics venture, due to the celebrity status of Craig Venter, selling them a fantastical idea, with no merit. They will probably sell off a tiny collection of engineered algae to someone else at a terrific loss.

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Jim Lane

Editor & publisher of Biofuels Digest, the most widely-read biofuels daily and newsletter. The Digest covers producer news, research, policy, policymakers, conferences, fleets and financial news. It is home to the Biofuels Digest Index™,...