Oil Companies and Ethanol Plants: Slash, Burn and Buy

RenewableEnergyWorld.com
by David Blume
February 26, 2009

With all of the corporate bailouts and economic disasters our country is facing at present, it really is easy to welcome the wallet-relief provided by currently low transportation and heating fuel prices. As the saying goes, “Why look a gift horse in the mouth?” It isn’t comfortable to consider that the relatively calm waters international oil prices present could be covering an insidious undertow that is quietly dragging our renewable and alcohol fuel industry down to the OPEC equivalent of Davey Jones’s Locker where it will lay submerged until the big oil pumps finally do run dry.

In some places around the country today we are paying US $1.89 a gallon for gas (or even less). However, it is important to point out that with that short term windfall comes the ominous realization that nearly 25% of our Alcohol fuel producing industry will be going belly-up soon. That is correct. Many investor-backed as well as entrepreneurially driven Alcohol plants currently producing in the US may be bankrupted by the end of February 2009.

It is very likely that 40 of the nearly 200 alcohol fuel plants we have working now will be victims of what I refer to as big oil’s slash, burn and buy strategy to collapse, consume and control our fledgling alcohol fuel industry.

The obvious poster child for this tragedy is VeraSun. Declaring bankruptcy recently in a federal court in Delaware, VeraSun represents a considerable failure for the alcohol fuel industry. Having fallen from the vanguard of ethanol plants funded by venture capital, its collapse is having a rip-tide effect through the investment (and sadly) the farming community as well. Once a mighty force for alcohol expansion VeraSun is now reduced in value to pennies on the dollar. [Editor's note, for more on the takeover bid, read RenewableEnergyWorld.com's story, Ethanol Industry Eyes Valero's Bid for Verasun.]

How did this happen? What is the sleight of hand big oil is using to lull us to sleep at the wheel, while it methodically implements the conquest and enslavement of America’s independent and sustainable energy future?

Here’s the answer. Oil companies are using the commodities futures trading system to artificially drive up the price of corn while depressing the price of alcohol, essentially gaming the futures market. The impact of artificially high corn prices is that plants like VeraSun (that aren’t built and supported by farm-owners, but rather by capital investors) had to pay high prices to compete with big oil to buy corn and make fuel. Meanwhile, the futures price of alcohol was driven down by big oil’s fuel monopoly-easy since they buy over 99% of alcohol fuel produced.

Although VeraSun recently named the company that has offered to buy it out of bankruptcy and as I had predicted, it’s an oil company. Big oil recently spent a billion dollars conducting a fictitious food vs. fuel campaign, contributing to devaluation of US $6 billion dollars’ worth of alcohol plants by more than 90%. Big oil is now quietly spending a fraction of the $125 billion they made in profit last year to buy up alcohol fuel plants for pennies on the dollar.

It is sad that VeraSun and some other independent distillery companies face bankruptcy, but the real market losers are our farmers. While oil companies bought futures contracts for corn at $6 a bushel, farmers were subjected to a quadrupling of prices for oil-based crop inputs such as fertilizer.

With the federal court ruling in the VeraSun bankruptcy, a legal precedence is being set that now allows plant owners to reject contract commitments for grain and corn purchases they have made with working farmers. For the first time ever for any company, there may be an escape from paying for the futures contracts that are bought. The problem with this is that farmers have of course already borrowed money (based on futures pricing) to pay for higher input costs in producing the supposedly higher-priced corn. Unlike the plant owners, they won’t get to avoid their debts and as that crunch goes on.

I think that there is a real chance that big oil will buy up the alcohol plants, reject the futures contracts, bankrupt the farmers and then be able to buy their land.

If the oil companies gain control of even a quarter of the alcohol production infrastructure and land for the crops, there will be no end to the disruption they can cause in markets, they could even potentially bankrupt the rest of the industry. If you think that it’s a nightmare that big oil controls our energy, think what life would be like if it controlled our land and food, as well.

Oh no, I hear another bailout in the makings! Unfortunately, I think that the only way to avoid this catastrophic scenario is for us to provide alcohol fuel plants with a bail-out plan. However, as I have recommended for the auto industry bailout, there should be conditions. While a number of initiatives should be addressed to ensure the alcohol fuel industry’s long-term growth, implementing these bailout conditions in the short term will make the ethanol business more secure and less likely to need any future assistance:

•All alcohol fuel plants should be required to install the equipment necessary to handle non-corn energy crops.
•By 2010 plants should be required to diversify their crop inputs, limiting corn to 50% of the total. This would insulate them from further manipulation by oil companies and start the country, especially the Midwest, on the path of sustainable agriculture.
•By 2011 all plants should be required to run at least 90% on renewable fuel, not fossil fuels. Corn Plus has already converted its plant to run on biomass, reporting a 6:1 energy return compared to the usual 1.5:1 of coal-based alcohol fuel plants.
•The bailout should include loans to provide energy to alcohol fuel plants using biomass-fired combined-heat-and-electricity facilities. This would reduce alcohol price volatility, since alcohol production would largely be decoupled from the prices of oil, coal, and natural gas.

Even though I am an advocate for smaller alcohol fuel plants for many reasons (security, local economy strength, true energy independence among others), the larger plants need to be protected for the health of the industry and the United States. Without an effective alcohol industry to compete with big oil, the sky would be the limit on gasoline prices.

I have already gone on record predicting that we can expect gas prices to rocket by March 2009. I have also stated that there will be a concerted effort to blame the new administration for this occurrence. This will happen because oil companies and OPEC are afraid that President Obama will carry out his campaign promises to reduce oil imports and address climate change.

There is already a big oil campaign going on to portray the oil companies as back in control of energy prices that somehow got out of control last summer due to “speculators.” You might have caught the 60 Minutes Infomercial they ran for OPEC and the Saudi family recently, (wow take a guess at what that cost to purchase and produce).

Big oil is already floating articles that say that putting money into alternative fuels will be a waste of taxpayer dollars and will raise rather than lower the price of auto fuel. Expect this chorus to become a propaganda flood during the first 60 to 90 days of President Obama’s administration, with the aim of discouraging Congress from doing anything substantial to cut our oil use via any alternatives not controlled by big oil (oil shale, tar sands, coal-to-gas).

It will be in the oil companies’ best interests to avoid attention until after the first round of legislation from the new administration. Traditionally, new presidents can get almost anything passed in the first 60 days or so. The oil companies would prefer to not have the gun sights of legislators trained on them during this period. Once the first flush of legislation is introduced, it will be autumn before another major bill could be introduced to interfere with the oil companies. They will hope to have the ethanol industry and enough legislators bought up by then.

I urge citizens everywhere to contact their Congressional representatives, the Department of Justice, Antitrust Division and the Federal Trade Commission, Bureau of Competition to express their concern regarding the Valero acquisition of Verasun and to help mandate protectionary and regulatory programs for the formation of a truly independent renewable energy and fuel producers market. (Note: email is not always secure. Mark confidential information “Confidential” and send it via postal mail).


David Blume is the executive director of the International Institute for Ecological Agriculture, (I.I.E.A.). He is a globally renowned permaculture and alcohol fuel expert and is author of the Amazon best-selling book Alcohol Can Be A Gas (www.alcoholcanbeagas.com). Mr. Blume is a leading advocate for alcohol fuel and the role of the American farmer in developing a truly sustainable energy and food policy for the post-oil era.

Big Oil Bets on Biofuels

By Jennifer Kho
Renewable Energy World
July 21, 2009

At first glance, it might look like oil companies are pulling out of renewables. At the end of June, BP closed its alternative-energy headquarters. The oil company also has cut its alternative-energy budget and closed several solar factories in Spain. And that's after Shell sold off most of its solar business at the end of 2007. But while solar might not have been the best fit for the petroleum industry, analysts say that oil companies might be better-positioned in renewable fuels - and are seeing some obvious signs of movement into the area.

One of the biggest is ExxonMobil's announcement last week that it will invest more than $600 million in algae-based biofuels, with more than $300 million going to Synthetic Genomics. Of course, oil companies have previously invested at the research level, such as when BP announced it would invest $500 million - over a decade - in a research consortium led by the University of California at Berkeley in 2007. But Michael Butler, CEO of investment bank Cascadia Capital, said that starting last fall, about when the economic downturn began, he began seeing more activity in the business of renewable fuels as well.

Some examples? U.S. oil company Valero Energy Corp. in March won court approval to buy seven ethanol plants - and one partially completed plant - from VeraSun Energy Corp. Earlier this month, Redmond, Wash.-based Prometheus Energy, which converts waste methane into liquid natural gas, said it raised $20 million from the Shell Technology Ventures Fund and Black River Asset Management, a subsidiary of the agricultural giant Cargill. And in February, Conoco opened an ethanol fuel-blending station in Kansas in partnership with ICM, Poet and Crescent Oil. Conoco and Tyson Foods in May suspended plans for a plant that would have made biodiesel from animal fat, but DTN Research analyst Rick Kment said Conoco is considering buying a biofuel plant on the East Coast.

One reason for these investments is that the recession - along with the hard times for the ethanol and biodiesel industry - has led to great deals for biofuel assets, Kment said. Valero was able to acquire VeraSun assets for a mere 30 percent of the estimated cost of building the plants, and similar opportunities may be available. In February, Archer Daniel Midlands told analysts that nearly 21 percent of U.S. ethanol production capacity had been shut down, meaning that plenty of defunct assets could be up for grabs.

Kment said he expects to see more examples of oil companies buying ethanol and biofuel plants to meet that standard. After all, the renewable fuel standard calls for 36 billion gallons of biofuel to be blended into transportation fuels by 2022, up from 9 billion gallons last year. At today's low prices, it makes sense for blenders to buy biofuel assets as a hedge against higher prices in the future, Kment said. "At this point, companies are looking at this as economical and a good investment," he said. "The value of these plants are at nickels or dimes on the dollar, so [oil companies] have an opportunity to lock up a portion of their blending needs of biofuels ... and hedge their overall cost in case the overall supply becomes tighter in the future."

Kment sees oil companies spending more money at the asset-acquisition level than at the startup stage. But even those smaller startup investments represent a significant trend at a time when many venture capitalists and private-equity investors are pulling back, Butler said. "They're filling a void in the marketplace," he said. "Oil companies have the [technological expertise] to get really deep into this technology. So they can afford to take these bets and take on some of this risk."

Many renewable-fuel technologies have turned out to be harder to fully commercialize than startups expect. (It took Prometheus Energy, for example, an extra 1-plus year to get up and running. The company was delisted from the London AIM exchange last year, before scoring its funding round.) But even though financial investors have been burned by the significant amount of capital and secure distribution channels that it takes to make biofuels successful, those same factors could give oil companies an edge, Butler said. In fact, several of his clients are currently in discussions with big oil and gas companies. "It's just a natural fit," he said. "Big companies bring the distribution and [scale], and startups bring the technology and the innovation."

In any case, all the investments signify that the petroleum industry "really looks at biofuels as a stable part of the industry," Kment said. "Whether they like it or appreciate it or not, they see it as being part of the [fuels] industry and one of the things needed to [do business] in the United States."

Butler agrees that it's a milestone for biofuels. "My gut [feeling] is that oil companies understand that, at some point, they've got to get into renewables," he said. "I'm not really sure they're going to develop the products in their own companies, so it probably makes more sense for them to go outside. If the technology ends up working, this could be very, very synergistic."

The trend of oil companies expanding from buying to also producing biofuels could significantly grow the industry, analysts said. Renewable fuels is certainly a better fit for oil companies than solar power, said Ron Pernick, a principal at research firm Clean Edge. "They didn't know [solar] manufacturing, didn't have the distribution channels for something like a solar panel - it didn't fit their gestalt or their DNA," he said.

Alternative fuels could make far more sense because they tie more closely to oil and gas companies' core business, he added. "Here is a business where a lot of biofuel tech companies have tried and failed, and maybe that wasn't the right fit for them," he said. "I think if anyone can crack this nut, it's probably the chemical and oil and gas guys."