BP shuns advanced biofuels investment in Europe; turns to US, South America instead

Reuters/London

Oil major BP is directing investment in advanced biofuels to the US and South America due to uncertainty about the European Union’s future regulatory environment, a senior executive said.

“At the moment we are not contemplating investing in second-generation cellulosic (ethanol) in Europe simply for the reason that there is not enough certainty on what the market conditions will be like,” Phil New, head of BP Biofuels, said.

The European Union initially embraced biofuels, setting a target that 10% of all fuels used in transportation should come from renewable sources by 2020.

Support has wavered, however, as questions have been raised about the environmental credentials of some biofuels.

Some critics have argued, for example, that the additional crops needed to produce the fuels can lead to the destruction of forests, which would release large quantities of greenhouse gases into the atmosphere and exacerbate climate change.

The debate has created considerable uncertainty about future regulation in the EU and stalled investment not only in biofuels made from food crops, known as first generation, but also in advanced or cellulosic biofuels, which are made from the inedible parts of plants and do not compete with food crops.

“There are other places in the world that appear to be more attractive places to invest,” New said, noting BP was developing its technology predominately in the US and was looking at several options on where to invest, including Brazil.

BP is the owner-operator of several sugar cane ethanol mills in Brazil, where it may develop cellulosic projects.

“I think what we are becoming increasingly interested in is the integration potential between a sugar cane mill and a cellulosic plant,” New said.

One of the biggest problems for cellulosic biofuel plants has been the cost of transporting feedstock to the facility, but with a sugar cane mill it is already on site.

“We have mountains of bagasse (the fibrous matter left after sugar cane has been crushed). The choice at the moment is, ‘Do I burn the bagasse and export electrons to the (power) grid or use it as a feedstock for cellulosic ethanol?’” New said.

New said all of BP’s mills in Brazil had the ability to alter their mix of sugar and ethanol output to a maximum of around 60% directed to the product with higher value, which varies according to market conditions.

Raw sugar futures have fallen to the lowest levels in almost three years this month, prompting expectations that mills will maximise production of ethanol, but New said the weakness of Brazil’s real had changed the outlook.

Most sugar produced is exported and benefits from a weaker real, while the bulk of ethanol is consumed domestically.

“It may not be as overwhelming a switch to ethanol as was originally seen, simply because the weakening of the real has offset some of the impact of the lower sugar price,” New said.

He added that in principle a weaker real should open up more export markets for ethanol either to Japan, Europe or the US.

BP has also invested in a major biorefienry in Britain through its partial ownership of Vivergo. The plant uses wheat as a feedstock and is in the process of ramping up ahead of its official opening later this year.

Britain, however, looks set to harvest its smallest wheat crop in more than a decade this summer and should be a net importer in 2013/14.

“It’s a worry. It would be nice if we hadn’t had this awful winter,” New said, adding the firm’s preference was always to use British wheat.

The site includes port access if imports are needed.

“We have got options,” New said.

Biorefineries can sometimes be converted to use other grains or even a mix of grains if a feed source becomes scarce or there are quality concerns. Last year UK biofuels producer Ensus used a blend of wheat and maize following a poor quality harvest.