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BP Bucks Oil Industry Allies on Advanced Biofuels

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With a boost from the US government.

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Oil giant BP (BP) is betting big on biofuels, which the London-based company says could account for 30% of the world's liquid transportation fuels by 2030, sharply reducing demand for gasoline and other refined petroleum products in the process.

BP is especially enthusiastic about cellulosic biofuels, which are more environmentally friendly than conventional corn-based ethanol because they are made from non-edible plants or even "dedicated energy crops" grown on marginal lands. BP plans to break ground on a major cellulosic ethanol plant in Florida later this year, and it may also convert a conventional ethanol facility in its native United Kingdom to produce the fuel.

On its website and in other marketing materials, BP says it is pushing cellulosic ethanol in order to meet surging world demand for liquid fuels, as well as to reduce motor vehicle carbon-dioxide emissions that are linked to global climate change.

But the head of BP's alternative-energy division recently said that the company would not be investing in advanced biofuels fuels at all--anywhere in the world--if the US government was not requiring refiners and other entities to blend ever-increasing amounts of cellulosic ethanol into the nation's gasoline supplies.

"If there were no mandates on cellulosic development, we would not be investing at all," Katrina Landis, the CEO of BP Alternative Energy, said July 10 at a renewable-energy forum in Washington.

Congress passed a major energy bill in 2007 that requires increasing amounts of cellulosic ethanol to be blended into gasoline supplies over time, ratcheting up to 16 billion gallons annually by 2022. But the Environmental Protection Agency has exercised its discretion to lower the annual blending targets for cellulosic ethanol in recent years because of the technical and financial problems that companies have had in standing up advanced biofuel plants. This year, for example, EPA is requiring just 8.65 million gallons of cellulosic ethanol -- a tiny fraction of the 500 million gallons that Congress called for in the 2007 energy bill.

But Landis said that as the industry develops, cellulosic biofuels will be able to compete against gasoline and other petroleum-based fuels at a relative hydrocarbon cost of $80/barrel by 2030. Right now, corn-based ethanol is more competitive with gasoline because it sells for about $50/b, Landis said.

In any event, BP has become somewhat of an outlier among its oil-industry peers because of its enthusiasm for cellulosic ethanol. While BP is investing hundreds of millions of dollars to develop the fuel, two influential Washington-based trade groups that represent US oil companies and refiners are suing EPA over the blending mandate for cellulosic ethanol. The groups--the American Petroleum Institute and the American Fuel & Petrochemical Manufacturers--say EPA cannot EPA cannot legally require the oil sector to blend cellulosic ethanol into the gasoline supply if no such cellulosic ethanol yet exists.

"No cellulosic biofuel has been produced in commercial quantities," Charles Drevna, AFPM's president, said in a July 10 letter to House lawmakers. "Despite this fact, EPA increased the amount of cellulosic biofuel refiners are supposed to blend into the fuel supply from 6 million gallons in 2011 to 8.65 million gallons for 2012."

Ironically, BP is a member of both oil-industry trade groups that are suing the US government over the federal cellulosic mandate that BP wholeheartedly supports. BP's Landis declined to personally comment on the lawsuit, but her office issued a statement saying the mandate does not need to be scrapped or modified because EPA has the discretion to adjust it to "market-realistic values."

Drevna, of the refiners' group, used his letter to suggest how many gallons of cellulosic ethanol EPA should require this year: zero. A court could conceivably grant his wish, thus eliminating BP's stated sole reason for investing hundreds of millions of dollars in cellulosic ethanol plants in Florida and the UK.

Would BP pull the plug on those plants if the mandate goes away? Would other would-be cellulosic ethanol companies do the same? It's unclear at this point, and it may remain that way for a while.

This article originally appeared on Platts' The Barrel.

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