http://www.bloomberg.com/news/2013-04-18/chevron-defies-california-on-carbon-emissions.html
By Ben Elgin & Peter Waldman -
Apr 18, 2013 12:01 AM ET
Chevron Corp. (CVX) helped write the
first-in-the-nation rule ordering reduced carbon emissions from
cars and trucks. Its biofuels chief spoke at the ceremony where
California Governor Arnold Schwarzenegger signed the executive
order in 2007, the same year the oil company pledged to develop
a gasoline replacement from wood.
Now Chevron is leading a lobbying and public relations
campaign to undercut the California mandate aimed at curbing
global warming, two years after the state started phasing it in.
Research on commercially viable climate-friendly products has
come to naught, stymied by the poor economics of coaxing
hydrocarbons from plants’ stubborn cell walls, according to
Chevron officials.
An employee works on a Chevron
Corp. sign at a gasoline station in San Francisco, California. Like
other major investor-owned oil companies, Chevron and ExxonMobil accept
climate-change science and acknowledge carbon emissions contribute to
global warming. Photographer: David Paul Morris/Bloomberg
April 18 (Bloomberg) --
Chevron Corp. helped write California's first-in-the-nation law ordering
reduced carbon emissions from cars and trucks. Now Chevron is active in
lobbying and public relations efforts to undercut the mandate.
Bloomberg's Kevin Thrash reports. (Source: Bloomberg)
“We’ve looked at 100 feedstocks, 50 conversion
technologies, worked to shape this law the best we can, and we
have not come up with a solution to be able to comply,” said
Rhonda Zygocki, Chevron’s executive vice president of policy and
planning, in a Feb. 4 talk at the Commonwealth Club in San
Francisco. Rick Zalesky, the Chevron official who celebrated the
order’s signing with Schwarzenegger, was blunt last June when he
declared the low-carbon standard “not achievable.”
While still promoting its commitment to renewable energy,
the second largest U.S. oil company quietly shelved most of its
biofuels work in 2010, according to internal documents and
former Chevron officials. It decided products with potential
returns of at least 5 percent weren’t enough for a multinational
used to margins triple that, said Paul Bryan, a former vice
president of biofuels technology.
Cutting Funding
“The best outcome for the oil companies is if nothing
changes,” said Bryan, who left Chevron in 2010 after 15 years.
“You can make money today making advanced biofuels -- you just
won’t make as much money as the oil companies would like.”
Chevron’s switch is part of the fossil fuel industry’s
hardening line against efforts to supplant petroleum in the $500
billion U.S. transportation fuels market.
ExxonMobil Corp., the largest U.S. oil company, has also
retreated from a biofuels effort. It slashed funding for
research into making the fuel from algae, according to former
employees involved in the project, and with Chevron is pressing
California to postpone the low-carbon standard. In
Europe,
meanwhile, carbon credits for December plunged to an all-time
low yesterday, making it cheaper for companies to buy the right
to emit more carbon dioxide gas under the European Union’s
system for controlling global warming.
‘Shockingly Small’
Like other major investor-owned oil companies, Chevron and
ExxonMobil accept climate-change science and acknowledge carbon
emissions contribute to global warming. They say they’re pushing
back against the California rule because it demands technology
that may not be available for years, and will cost jobs and send
pump prices soaring if not rewritten.
The oil industry is lobbying to stop other states from
following California. All the while, oil companies are
dedicating few resources to the advances in biofuels they talk
about needing to make, said Mary Nichols, head of the California
Air Resources Board, which enforces the carbon rule.
“It’s shockingly small given their profitability,” Nichols
said. “We’re dealing with companies with revenues in excess of
the state of California.”
San Ramon, California-based Chevron had its second most
profitable year in 2012, posting net income of $26.2 billion on
$222.6 billion in sales, the vast majority from petroleum.
California’s
revenue in fiscal year 2012 was $87.8 billion.
Doomed Project
The company touts its biofuels program on its Facebook page
and website. “It’s time oil companies get behind the
development of renewable energy,” a headline on the website
says. The text says a joint venture with
Weyerhaeuser (WY) Co.,
Catchlight Energy LLC, is “working to commercialize advanced
biofuels made from forest-based biomass.”
While
Catchlight still exists, Chevron and the forest
products company three years ago scratched a plan to spend more
than $400 million and build commercial plants by 2014, according
to an internal Catchlight business plan.
The plants were expected to generate a profit of 5 percent
to 10 percent, according to Bryan and other former Chevron
officials -- short of the average 17 percent the company earns
on capital investments, including oil and gas exploration and
production, for which it has budgeted $33 billion this year.
The Catchlight plan was doomed when management decreed
biofuels had to compete with fossil fuel projects for funds,
said Bryan, a lecturer in chemical and biomolecular engineering
at the University of California at Berkeley. He said he left
Chevron, taking a severance package during a staff downsizing,
because he didn’t believe the company was committed to biofuels.
Too Ambitious
Chevron was optimistic when it worked on the low-carbon fuel
standard with Schwarzenegger’s team in 2007, said Desmond King,
president of Chevron Technology Ventures, which oversees
emerging technologies. Former biofuels chief Zalesky, now the
company’s general manager of crude and manufacturing strategy,
was among several Chevron officials who helped craft the rule.
As the company put theory into practice, trying to make a
propellant out of wood’s sugar-rich fibers, it realized the rule
was too ambitious, King said. The research didn’t lead to
anything that would be commercially viable, he said.
Even a 10 percent potential profit wasn’t attractive
because the average payback from other projects is so much
higher, he said. “It’s hard for Chevron to make major
investments in anything that would be dilutive to its return,”
he said. “It all comes down to getting good enough returns for
our shareholders.”
Algae Fuel
Spending on biofuels has shrunk, he said, declining to give
details. A leading producer of geothermal energy, Chevron
expects to spend about $2 billion between 2012 and 2014 on
renewable energy and energy efficiency, according to Morgan Crinklaw, a company spokesman.
To try to make algae fuel, Irving, Texas-based ExxonMobil
said it would spend up to $600 million and hired Synthetic
Genomics Inc. in 2009 to identify and modify algal strains that
yield high amounts of oils. The oil company promoted the work in
ads with a scientist saying, “We’re making a big commitment to
finding out just how much algae can help to meet the fuel
demands of the world.”
Research hit a snag in 2011 when a strain that made enough
oil in a California greenhouse to meet a required milestone in
the contract failed to perform in a pond at an ExxonMobil
facility in
Texas, according to J. Craig Venter, Synthetic
Genomics’ chief executive officer and co-founder and one of the
first scientists to sequence the human genome.
Long Term
ExxonMobil recast the contract, leading to layoffs of more
than half the Synthetic Genomics employees working on biofuels
for the oil company, according to former managers and scientists
involved in the project. The effort now focuses on long-term
research and development rather than commercial production, said
Heather Kowalski, a spokeswoman for La Jolla, California-based
Synthetic Genomics.
Charles Engelmann, a spokesman for ExxonMobil, declined to
discuss details of the partnership or comment on the company’s
opposition to the low-carbon rule’s timeline.
That’s being targeted by Fueling California, an advocacy
group whose major funder is Chevron and that spent more than
$327,000 in 2011 and 2012 lobbying on fuel and transportation
policies, according to state disclosure forms.
The Air Resources Board’s Nichols said regulators haven’t
been swayed by the arguments, among them that the economy will
suffer if implementation of the rule isn’t delayed. “At this
point we’re not seeing any need to change course,” she said.
Corporate Representatives
Both Chevron and ExxonMobil help finance the Houston-based
Consumer Energy Alliance, which runs ad and Web campaigns
warning low-carbon mandates could cost hundreds of thousands of
jobs. After the alliance lobbied in New Hampshire last year,
lawmakers passed a law prohibiting the state from participating
in any low-carbon fuel program without legislative approval.
In January, the Washington-based American Legislative
Exchange
Council, which writes bills it recommends to
legislators, endorsed a measure based on the New Hampshire law
that it’s urging other states to adopt.
The council is made up of lawmakers and corporate
representatives. Company memberships cost from $7,000 to $25,000
annually, and those that belong include ExxonMobil, the coal
concern Peabody Energy Corp. and Koch Industries Inc., a
chemical, textile, trading and refining conglomerate whose co-
owners, Charles and
David Koch, have supported the Tea Party.
Front Line
The council opposes government dictating Americans’ fuel
choices, said Todd Wynn, director of the energy, environment and
agriculture task force at the group. It also encourages
legislators to repeal mandates -- which exist in 29 states --
requiring renewable energy from solar, wind and other sources to
be part of the electric power mix.
This year, 30 bills to kill or weaken renewable rules have
been considered in 16 states, according to the North Carolina
Solar Center in Raleigh, which tracks such measures. None have
passed so far.
California, the most populous state, is the front line:
Emission controls enacted there since 1966 have been models for
federal car-pollution and miles-per-gallon rules.
The state began to phase in the low-carbon standard in 2011.
When it’s fully in effect in 2020, greenhouse gas emissions
associated with transportation fuels are supposed to be 10
percent less than they were in 2010.
Transportation Mix
The state’s 32 million vehicles consume 15 billion gallons
of gasoline each year, according to state data, and emit 160
million metric tons of greenhouse gases annually, 36 percent of
all such emissions in California.
Right now, the state is on track to achieve the goal,
according to Stanley Young, a spokesman for the Air Resources
Board. Neither the agency nor Chevron and ExxonMobil will
disclose how the companies are complying with the rule.
The U.S. government first spurred interest in biofuels,
after President George W. Bush signed laws in 2005 and 2007
ordering more non-petroleum ingredients in the fuel supply.
The
laws required refiners, importers and blenders to put
16.6 billion gallons of renewables into the mix by 2013. At
least 1 billion gallons would have to come from cellulosic
biofuels, which, unlike the widely used ethanol supplement
derived from corn, are harvested from non-food crops, including
switch grass and woody debris.
Fading Appetite
To meet its obligations, Chevron in 2008 teamed up with
Weyerhaeuser to start Catchlight. Its goal was 17 plants by
2029, making 2 billion gallons annually, with spending of $370
million by 2013, according to a Catchlight business plan.
“There was a lot of enthusiasm that we would move forward
on a path to develop something significant,” said Denny Hunter,
Catchlight’s chief technology officer in 2008 and 2009 and a
former vice president of technology for pulp, paper and
packaging at Federal Way, Washington-based Weyerhaeuser.
Chevron’s appetite for biofuels began to fade after about a
year, according to Hunter, Bryan and other former officials
affiliated with Catchlight. A key reason, they said, was the
shrinking federal cellulosic biofuels directive.
The laws Bush signed instruct the U.S. Environmental
Protection Agency to adjust requirements based on supplies,
which have never reached the goal. The EPA’s cellulosic biofuels
mandate for 2013 is 99 percent below the original target.
‘No Urgency’
Chevron’s biofuels plan wound up in the cross-hairs of cost
analysts in 2009 when they determined it would be a better bet
to buy renewable fuel credits rather than keep trying to make
the product, according to Bryan and two other former employees
who asked not to be identified because they were discussing
confidential company information. Credits, purchased from the
government or producers who exceed low-carbon obligations, allow
non-reducers to abide by clean fuel regulations.
After the cost analysts’ report, the Catchlight budget was
stripped of money for plants, said Hunter, the former chief
technologist who said he retired in 2009 because he was unhappy
with the joint-venture’s direction. Chevron “no longer wanted
to be a leader in biofuels,” he said.
In April 2010, Chevron and Weyerhaeuser told Catchlight to
ratchet back, according to an internal business plan that set
the 2013 budget at $8.9 million -- 98 percent lower than
previously envisioned.
The Catchlight board said in the plan there was “no
urgency” to commercialize and that, “in the absence of
mandates,” the first plant “should be driven by financial
returns.” The return on the investment would have to “meet or
exceed” 20 percent, according to the plan.
‘Technical Winner’
That shocked scientists who were confident they’d come up
with a process that would work, called solvent liquefaction,
according to Jim Stevens, a chemist who researched technologies
for 29 years at Chevron before being laid off in December 2010.
They’d constructed a contraption the size of a Winnebago
that used a chemical solvent to turn woody biomass into fuel. It
began producing in February 2010. “This was a real technical
winner,” Stevens said.
Catchlight roughed out the numbers for a $504 million
solvent liquefaction plant producing 92 million gallons a year
at a cost of $2.18 a gallon, according to a 2010 internal report
that laid out the technical and economic prospects for producing
biofuels on a commercial scale. Making gasoline costs between $2
a gallon and $2.75 a gallon when oil prices are $70 a barrel to
$100 a barrel, according to another Catchlight document.
‘Still Learning’
The joint venture never performed final tests on the
biofuels process, Stevens said. “They just quit trying.”
Chevron hasn’t stopped working on developing biofuels
products, according to Crinklaw, the company spokesman.
Taxpayers will help pay for future solvent liquefaction
research. It will be conducted at Iowa State University with a
$3.5 million federal
grant covering 80 percent of the costs, and
Catchlight the rest.
Catchlight is also supplying wood chips to
Pasadena, Texas-
based KiOR Inc., a biofuels producer that announced its first
shipment of cellulosic diesel in March. Chevron has a contract
to purchase some of KiOR’s renewable fuels. Weyerhaeuser is
happy with the joint venture’s status, said David Godwin, vice
president of minerals and energy products.
In October 2010, six months after Chevron and Weyerhaeuser
put the brakes on at Catchlight, Chevron ran television and
print ads about its work on non-petroleum fuels. “Something’s
got to be done. So we’re doing it,” the ads said. “We’re not
just behind renewables. We’re tackling the challenges of making
them affordable and reliable on a large scale.”
Chevron officials didn’t respond to questions about the
advertising campaign.
“We remain interested in the solvent liquefaction
technology but, like other biofuels production technologies, it
is early in its development, and we’re still learning about
it,” Crinklaw said in an e-mailed statement. “Unfortunately,
the technology hasn’t advanced as quickly as we hoped.”
To contact the reporters on this story:
Ben Elgin in San Francisco at
belgin@bloomberg.net;
Peter Waldman in San Francisco at
pwaldman@bloomberg.net
To contact the editor responsible for this story:
Gary Putka at
gputka@bloomberg.net
