Grupo de Economia da Energia

The future of biofuels V: Shell and BP’s strategies

In biofuels on 25/10/2010 at 00:30

By José Vitor Bomtempo

In previous article, we discussed the nature of competition and innovation in biofuels. In the classification proposed, the essential issue was a basic distinction between competition within the existing industrial structure – ethanol and biodiesel – and the competition in what we call biofuels and bioproducts industry of the future – new biofuels and bioproducts. In the first case, we have typical competition based on positioning according to Porter. A competitor becomes competitive upon finding a favorable position within the existing industrial structure.  In the second case, the industrial structure is not established yet, and the basis of competition is Teece capabilities building that seek make feasible opportunities for innovation and shaping the new industrial structure.

It is also important to note that the first-generation biofuels industry conversion technologies are available to investors from accessible external sources such as engineering/technology companies and equipment manufacturers. In the biofuels industry of the future – based on innovation in new feedstocks, new processes, new products – a fundamental change is to move the source of technology into the companies; thus, the technology tends to be much more advanced in bioproducts of the future and, therefore, owned.

In this article, we will analyze companies’ strategies have dealt with these challenges. Are there clear strategic focus? In the current industry or industry of the future? Is there a variety of strategies? Or are they converging?

We start by oil and gas companies. Three companies stand out for their involvement with biofuels, by the amount of resources used, and how they address the industry: BP, Shell and Petrobras. We discuss now the cases of BP and Shell.

Shell expressed interest for biofuels since 2005. At that time, the second-generation biofuels appear as company’s target, in particular biofuels derived from agricultural residues (cellulosic ethanol) and biofuels via BTL (biomass to liquids). In a presentation published by the company, these two technologies are presented as “aspired technology positions” (Rob Routs, Executive Director Downstream, Oil Products and Chemicals, September 2005). In the 2007 Technology Report, BTL technology and the involvement of Shell in the Choren’s project, a German company, are highlighted as innovations in biofuels. It is also emphasized the commitment not to use commodities that could compete with food and, once again, focused on the so-called second-generation biofuels.

Consistent with this view, as explained in 2005, in recent years Shell entered a number of projects for the development of advanced biofuels in terms of new conversion processes and new products. So, they released five different platforms, all operated as association or involvement by technology-based companies.

The first of these projects was prepared by Iogen in 2002. Iogen is a Canadian biotech company with expertise in enzymes. The association Shell/ Iogen aims to produce ethanol from lignocellulosic material, that is, agricultural waste. In 2008, Shell increased its stake to 50% of the capital. A demonstration unit is in operation and there is a unit project on a commercial scale.

In 2005, Shell joined Choren, a German company, also supported by Volkswagen and Daimler, to produce biodiesel from wood wastes, using BTL technology (the thermochemical route: gasification followed by FT synthesis).

In 2006, Shell began working with Codexis, a USA biotech company, for new routes of fermentation for the production of new biofuels.  Unlike the two previous projects, new products are sought in the Codexis project, not only new conversion technologies for the production of fuels already known, such as ethanol and diesel.

In 2007, Shell joined HR Biopetroleum, established in Hawaii, a joint venture called Cellana, to produce algae for biodiesel.

In 2007, Shell began supporting Virent, a USA start-up, which, based on the chemical route, develops the production of biofuels from sugar. The Virent project has been highlighted in specialized publications due to its innovative nature and business prospects.

Shell’s approach emphasizes clearly the focus on technological innovation based on competition in biofuels, focusing the advanced biofuels and directs itself for exploring several different platforms. In the company’s strategy, one or more platforms could reveal the winners of technological competition, being selected in the selection process and developed as commercial scale businesses. The remaining would not be considered.

In 2009, however, a certain correction of directions seems to have been carried out by Shell. The company abandoned the Choren project that explored the BTL route. And, moreover, it has moved so strongly in a new direction by partnering in a joint venture to Cosan, the largest Brazilian producer of ethanol. Shell thus becomes first-generation ethanol producer. Note that the Shell/Cosan joint venture involves, besides the production of ethanol, the commercial activity in fuel distribution.

The case of BP shows a different strategic approach. The company, which invested about US$ 1.5 billion since 2006 in biofuels and bioproducts, showed more clearly its strategy with operations made in the last three years. BP aims to play an active role in expanding the market for biofuels from the first-generation fuels and moving, as the maturing of projects, for the production of advanced biofuels and bioproducts. The company currently operates in seven different projects ranging from the production of first-generation ethanol to advanced biotechnology research: production of ethanol in Brazil (Tropical, a BP, Santelisa and Maeda joint venture), production of ethanol from wheat in the UK (Vivergo, a BP, DuPont and British Sugar joint venture), development of technology and production of butanol (Butamax, a BP and DuPont joint venture), production of ethanol from lignocellulosic materials (Vercipia, a BP and Verenium joint venture, which recently came under full control of BP), production of diesel from sugars (project developed by Martek from algae supported by BP), biotechnology of seeds for high-yielding energy crops (Mendel supported by BP) and finally the application of US$ 500 million in 10 years, for the structuring and development of Energy Biosciences Institute (EBI), in partnership with University of California Berkeley, Lawrence Berkeley National Laboratory and University of Illinois.

How can both strategies be compared? Are there common points? Are there remarkable differences?

Firstly, an important common point: both of them believes industry of the future based on advanced technologies with new commodities, new conversion technologies and new products as well. However, while Shell tests diverse technologies – biotechnology, chemical and thermochemical – BP focuses on biotechnology in all its projects. Shell left Choren project recently – BTL thermochemical route – and, in the absence of further explanation for leaving, it can be noted as a movement in favor of the biochemical route.

A significant difference between the two strategies is a view of how the biofuels industry of the future would be built. In first Shell’s view, this process would take place from a few new technological platforms, among the various possible alternatives, which be feasible upon moving more quickly on the learning curve. BP now seems to see a transition process in which the production of first-generation biofuels would be an obligatory passage to introduce more advanced technology. These would be the predominant ones in the industry of the future, but only after a long transition process in which the scale production expertise of first-generation biofuels would be an obligatory passage. Interestingly, the recent Shell/Cosan joint venture may be interpreted as a Shell approximation in relation to BP’s strategy.

Another important point that distinguishes the two strategies is the attitude toward the most basic and fundamental research towards the construction of knowledge in the field. BP upon supporting the establishment of an important research center is in a position to control the cutting-edge knowledge generated. Apparently, Shell prefers to support initiatives for start ups and technology-based companies such as from fundamental researches in which there was no involvement from Shell.

Back to the initial distinction of the strategies – positioning or innovation/building capabilities – we can see in the case of BP an effort directed to reconcile both strategies, associating the search for positions in the first-generation industry with a careful construction of knowledge and technological training from research to development of new technologies. If we consider what has been explicitly presented in the last five years, Shell’s strategy is back to the technological development of multiple alternatives for innovation in association with companies generating initial concepts to be developed.

And what about Petrobras? And what about other oil companies? In the next article we will discuss the prominent strategies from other companies focused on the case of Petrobras. It will be interesting to compare Petrobras with BP and Shell, because, among the major oil companies, they have been involved deeply with biofuels.

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  1. […] the previous article, we compared the BP and Shell’s strategies for biofuels. Today we present the case of […]

  2. […] to the strategic views of the major oil companies on biofuels. Shell and BP, as discussed in article V, tend to seek a compromise between the first-generation – that is, ethanol – and the […]

  3. […] Shell case has already been discussed in article V. In order to avoid reiterating the development presented, we introduce here only the main subject […]

  4. […] Vitor Bomtempo  (Grupo de Economia da Energia)  In the previous article, we compared the BP and Shell’s strategies for biofuels. Today we present the case of Petrobras. […]

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