Despite Issues, BP Kicks Off Cellulosic Ethanol Project (BP, VRNM, DD)

Making ethanol from corn has fallen out of favor. The next big thing is making the stuff from non-food feedstock like switchgrass, corn stalks, and wood chips. There is a lot of potential here, but some of the problems with corn-based ethanol remain.  BP plc (NYSE: BP) has announced a joint venture with Verenium Corporation (NASDAQ: VRNM) to develop a cellulosic ethanol plant in Florida capable of pumping out 36 million gallons of ethanol annually.

The 50-50 deal will cost each company $22.5 million at the outset, and lead ultimately to breaking ground in 2010 for a $250 million-$300 million plant. Production is scheduled to start in 2012. The JV also would develop a second plant in the Gulf Coast region at some unspecified date. The JV’s initial focus will be “developing and securing financing” for the first plant.

The US generates about 1 billion tons of cellulosic material every year that could be used to make ethanol. If 40% were used in this way, the US could manufacture 40 billion gallons of fuel a year. The US currently consumes about 140 billion gallons of gasoline a year, so the amount is not trivial.

BP is also working with EI DuPont de Nemours & Co. (NYSE:DD) on the development of a biofuel manufactured from excess low-grade sugar that the two companies call biobutanol. Biobutanol contains about 95% of the energy present in gasoline, whereas cellulosic and corn-based ethanol contain about 75% of the energy. Biobutanol also has the advantage of being compatible with the nation’s existing pipeline system, whereas ethanol requires a separate, new pipeline infrastructure.

The JV between BP and Verenium takes advantage of Verenium’s technology and BP’s ability to build to scale. Of course 36 million gallons is a far cry from 40 billion, but its a lot closer than the test tube quantities of biobutanol.

In either case, though, until the economy improves and crude prices rise, investment in new fuels like cellulosic ethanol or biobutanol will be constrained. All the tax incentives and subsidies in the world won’t change that.

Paul Ausick
February 19, 2009