Joint Venture for Second-Generation Biofuels

BP and Verenium's deal will see the building of production facilities in the US, and potentially throughout the world. Under the initial phase of the agreement Verenium will receive $90 million (E63.5 million) from BP for the rights to current and future technology held within the partnership.

Given the potential benefits of cellulosic ethanol it is unsurprising that a large oil company such as BP is seeking to accelerate its development. Whereas first-generation biofuels are made from crops such as rapeseed and sugar cane, cellulosic ethanol can be made from waste biomass such as sugarcane waste, switchgrass and wood chips. In essence, this means that second-generation biofuels are cheaper to produce, have less of an impact on the environment and are therefore more politically acceptable.

Shell has also been active in the development of second-generation biofuels. In 2002 it purchased a 26.3% share in Canada-based Iogen Corporation, which it has since increased to 50%. Iogen Corporation specializes in the research and development of second-generation fuels and, in July 2008, Shell and Iogen agreed to extend their commercial alliance to accelerate the development and deployment of cellulosic ethanol.

Preem Petroleum in Sweden is the other example of a company that has invested in second-generation technology. In June 2008 it took a 60% stake in SunPine along with Sveaskog Forvaltnings, a supplier of sawlogs, pulpwood, and bio-fuel, and Sodra Group AB, a provider of forestry services and a producer of wind power.

The potential benefits for the first company that successfully develops the technology to produce second-generation biofuels on a large scale are significant. As well as benefiting from cheaper biofuels for their own petrol and diesel, revenues from the intellectual property rights would act as a strong contribution to the company's bottom line.

BP's partnership with Verenium is likely to be a good move for the company, especially as current methods of producing biofuels are unsustainable, leaving the future of biofuels reliant on second-generation technology. Furthermore, if the partnership is a success, and BP is the first oil company to develop second-generation biofuels, the company will gain a significant strategic advantage over its competitors.

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