ExxonMobil's (XOM) plunge into alternative energy doesn't mean it is going green. Instead, like its recent decision to proceed with a relatively high-polluting Canadian oil shale project, Exxon's entry in algae-to-fuel research demonstrates yet again its willingness to weather criticism while it pursues a go-it-alone strategy toward investment.
On July 14, Exxon announced that it would spend at least $300 million in an algae-to-fuel research and development deal with J. Craig Venter's Synthetic Genomics—the oil giant's first big investment in biofuels. Previously, CEO Rex W. Tillerson ruled out the prospects for corn-based ethanol, which he called "moonshine," and said that no other current alternative fuel technology is worth investing in, either.
It turns out, however, that while environmentalists were criticizing Exxon for failing to follow Big Oil rivals into large investments in alternative energy, it was conducting what it calls an exhaustive internal review of nonfossil fuel technologies. The result? The company continues to be suspicious of alternative fuels, but has determined that one of them might prove commercially viable: algae. "Essentially we did a lot of analysis," company spokesman Alan Jeffers says, explaining how Exxon selected algae as worthy of research investment.
Late to Russia
The investment demonstrates an inclination—one maddening to Exxon's critics and admirers alike—that, even when it joins others in an investment, it does so only when it is fully ready. Exxon was also late getting into Russia and onto the Caspian Sea in the 1990s, for instance, watching as rivals slugged it out to obtain oil and natural gas properties. The company eventually secured prize properties, in a couple of cases by buying in through merger.
Now, although others have been investing in algae for some years, Exxon has emerged with a high-profile partnership with the world's best-known private genomics scientist. In 2000, Venter succeeded in a partnership with a federal program in sequencing the human genome for the first time.
"I have always maintained that Exxon is smart and disciplined," said Robin West, CEO of PFC Energy, a consulting firm in Washington. "They were always skeptical that wind or solar could be scalable and profitable. If Exxon takes algae-based fuel seriously, then I do."
Venter's role in the deal is to figure out how to turn algae into oil. Exxon's task is to engineer an economically replicable plant design so that the process can be scaled to produce commercial volumes. The algae oil is meant to be fed into conventional refineries for conversion to finished products, such as gasoline, jet fuel, diesel, etc. In January, Continental Airlines (CAL) conducted a test flight in Houston using a Boeing 737 run on a 50% blend of biofuel derived from algae and says the test was successful.
Algae-to-fuel is one of the hottest areas of biofuels research. But as with the rest of the alternative-fuels industry, private and public laboratories are attempting a variety of approaches to make algae commercially feasible as a large-volume fuel source, and no one is sure which technology—if any—will work. Among the approaches are the use of closed, loop systems and open ponds. In Venter's case, he thinks the best approach may be to genetically modify algae to produce a strain tolerant to viruses and intense sunlight. Skeptics, however, say algae strains are exceptionally competitive biologically, and that a genetically modified variety might not be able to withstand attack by other algae species.
For Exxon, the relatively small investment—the company will spend $29 billion overall this year on capital and exploration—provides it a high-profile entry into alternative fuels. "I think it's part R&D, part PR," says Paul Sankey, an oil industry analyst at Deutsche Bank (DB). As for Venter, he stands to earn a $300 million fee if he reaches certain unspecified milestones in the process, making the deal worth up to $600 million. "If I were Rex Tillerson, I'd have done the same, because Craig is the king of genomics," said Lissa Morgenthaler-Jones, CEO of LiveFuels, a San Carlos (Calif.) algae-to-fuel rival of Venter's.
But Venter noted what every company studying algae has discovered: It is highly complex—and difficult to turn into oil cheaply. "The real challenge to creating a viable next-generation biofuel is the ability to produce it in large volumes, which will require significant advances in both science and engineering," Venter said in a statement.
Exxon, like many companies, has also withstood much criticism over its heavy investment in Canadian oil sands. Two months ago the company announced it would proceed with an $8 billion project in the Kearl oil sands in the Canadian province of Alberta. Exxon spokesman Jeffers says the company regards the sands as "an important source of supply for the U.S. from a very stable neighbor."
Proven Reserves in Oil Sands
Unlike the highly speculative algae venture, the oil sands are a core Exxon investment. The company is heavily relying on the oil sands for maintaining its base of proven oil reserves. Last year, the company booked 1.1 billion barrels of oil from the sands, or 73% of the 1.5 billion barrels it added to its cache of proven reserves.
In addition, the oil sands have long been crucial to maintaining the company's smooth record for reserve replacement. For the last nine years, for instance, Exxon has announced an unbroken trajectory of replacing more than 100% of the oil and natural gas that it pumps out of the ground. Yet, according to its 10-K filings with the Securities & Exchange Commission, it has reached that mark in just four of the past nine years; in the other five years—in 2001, 2002, 2004, 2007 and 2008—its volume of proven oil reserves actually dropped, according to the reports. The difference—the reason Exxon was able to announce publicly that it had fully replaced its reserves—was its holdings of oil sands, which in each year pushed the company over the 100% mark. SEC rules do not permit the oil sands to be combined on the 10-K with a company's other oil and natural reserves, but companies can do so in public announcements such as press releases and statements to investors, according to an SEC spokesman.
Starting next year, the SEC will allow companies to combine the oil sands with other reserves, yet Alberta will remain a key strategic holding for the company because of its supergiant size—it holds more than 1.2 billion barrels of oil—and proximity to the U.S. market. As with the long period that Exxon withstood pressure to invest in alternative fuels, Kearl also demonstrates the company's willingness to go against the political current. At the same time that U.S. politics has been fixated on carbon-trading legislation moving through Congress, Exxon in May officially approved construction of Kearl's first phase. Environmentalists criticize oil sands projects because of the comparatively high greenhouse gases they produce while being refined into fuel.
Exxon says there is some dispute as to how much more oil sands projects contribute to greenhouse as compared with other unconventional fuels that already are used in U.S. refineries, such as the heavy oil found in places such as Venezuela, which is far more difficult to process. Gordon Wong, a spokesman for Exxon's Imperial Oil subsidiary in Canada, said the company is committed to investing in technological research that could greatly reduce the greenhouse gases associated with oil sands production.