Two Clues to ExxonMobil’s Algae Agenda

Algae-produced biofuel could be an attractive alternative to petroleum. It can be grown in reactor tanks, where it does not compete with agriculture for farmland. Algae also serve as a “carbon sink,” because they absorb CO2 as they grow.

Still, it is unclear why a company that consistently derives so much profit from oil would invest $300 million in generating a petroleum substitute.  On the SIRAN analyst call, Mr. Jacobs offered two clues about how algae fuel fits into XOM’s plans.

First, he said that the firm intends for algae to supplement, not supplant, its oil production.  This implies that gasoline-like biofuel is a way to sustain our existing liquid-fuel, internal-combustion-based transportation system. By (potentially) holding down the cost and carbon footprint of liquid motor fuel, algae fuel could forestall the emergence of an entirely new, cleaner infrastructure – like a system of rechargeable electric cars, for example.

Second, the viability of large-scale algae biofuel production is uncertain. Mr. Jacobs said that in about 10 years, XOM/SGI research will have advanced to a point where the company can judge if algae fuel is commercially viable.  If so, algae fuel output could be ramped up, and would then contribute to XOM’s bottom line.

But what if ExxonMobil instead decides that, according to its metrics, algae offers insufficient return on its investment? What will then happen to ten years of research?  The firm is unlikely to simply spin SGI off, either independently or to a competitor. ExxonMobil could potentially do to algae fuel what General Motors did to its EV1 electric car, snuffing it out before it ever reaches the mass market.

Algae a Small Green Part of a Gray Area

Other ExxonMobil initiatives raise questions about the ultimate environmental impact of its “green” projects. Mr. Jacobs mentioned the company’s support for hydrogen fuel-cell powered cars. Fuel cells release energy from a chemical reaction that emits no carbon. One sticking point is the need to produce large quantities of hydrogen. Mr. Jacobs said that ExxonMobil is exploring how to produce hydrogen from a supply of fuel in each car. It would seem, then, that the replacement for the gasoline-powered automobile could be…a gasoline-powered automobile.

ExxonMobil has also announced its commitment to expanding its “unconventional” gas business, also known as hydraulic fracturing.  As explained by previous ESG Insight articles, “fracking” produces relatively clean natural gas, but at the risk of contaminating groundwater supplies – potentially on a massive scale. With the Gulf of Mexico disaster still unfolding, the public will be leery of any further forays into the earth.

Investors Welcoming, But Wary

The tone of the ExxonMobil SIRAN call was respectful, and the assembled analysts expressed sincere gratitude for Mr. Jacobs’ calm, thorough explanations of his company’s work. Still, the picture he painted of XOM’s research agenda suggests that major oil companies, no matter how much they invest in alternative energy sources, might not be leaders of the post-oil energy economy.

Or as my colleague Alan Petrillo said, after the SIRAN call, “Big Hay didn't bring us the horseless carriage.”