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Two years ago, BP plc started BP Biofuels America with the goal of becoming a major player in the shift toward renewable sources of energy. Since that time, it has committed $1.5 billion to business operations and research and development efforts in three main segments: developing biofuels from Brazilian sugar cane, researching and commercializing biobutanol and developing cellulosic biofuels from non-food grasses.

Though BP believes Iowa can play a role in helping develop new commercially viable models for advanced biofuels, it also sees warmer regions as becoming the biggest players in this new industry, with the development of new grasses for biomass such as miscanthus, energy cane, switchgrass and sweet sorghum. Susan Ellerbusch, president of BP Biofuels based in the Chicago area, shared these thoughts and more with the Business Record while in town for the Iowa Farm Bureau Federation’s annual meeting last week.

When did BP make biofuels a priority?

BP realized that biofuels were going to be, in our view, one of the most near-term solutions to sustainable renewable fuels, and we made a call in 2006 that we wanted to form an independent business associated with biofuels, which is actually quite unique in BP. We don’t form new businesses frequently. We came out of a strategic project that was called Future Fuels, and as part of Future Fuels, we were making some analyses and some evaluations of different potential businesses that could be the next wave of renewables, and that’s when the idea of biofuels came up to be what we viewed as near-term scalable options.

How does this unit fit in with a company primarily focused on oil?

I think BP is a different kind of energy company, and I stress the word “energy.” We really think about the fact that oil and gas are still at the core of who we are, but we realize that part of delivering energy security is about delivering a diversity of energy solutions. We also feel that it’s very critical to deliver sustainable solutions.

Explain the three segments your company is focused on.

We’ve really looked at the fact that there’s a continuum of biofuels that we believe is occurring. We have good biofuels today, but they may not be the perfect solution for the future. So our focus is on creating better biofuels faster, and by better we mean more sustainable.

Our focus today is around sugar-based biofuels rather than grains. We’ve created a joint venture (in Brazil), Tropical Bioenergia (S.A.), where we’ve committed half a billion dollars in investment over the next several years to develop two facilities. Each (ethanol refinery) will be about 115 million gallons, the first of which became operational in September of this year.

We’re also looking at advanced molecules. Ethanol was a good start, and we admire a lot of what’s actually come from Iowa. They were at the forefront of creating an industry, but we think there are opportunities to create advanced molecules that would be better biofuels in the market. One in particular is our (E.I.) du Pont (de Nemours & Co.) relationship to develop biobutanol, which could be blended at higher levels into the fuels and be worked easier into the infrastructure that exists for traditional fuels. We’re in the midst of building a demonstration facility in the (United Kingdom), and we would hope that we would be able to then demonstrate the technology and be able to bring it into commercial facilities around the 2012 period.

Finally our focus is on sustainable biofuels for the future. We see cellulosic biofuels as a significant opportunity for developing a broader future biofuels business within the United States, and that’s been supported by the RFS (Renewable Fuel Standard) that was passed last year. We took our first move in August of this year by creating a partnership with Verenium Corp. That partnership, at least in this first phase, is focused on taking their existing technology and bringing that to the point where we think it’s going to be commercially viable at a large-scale facility. They already commissioned a demonstration facility in Louisiana earlier this year, and they’ll become fully operational toward the end of this year, early next year.

Has BP just been investing or taking part in research?

We think we’re taking a bit of a different stance than some of the others that have been participating in the industry in that we are quite active in our partnerships. We realize we have a fundamental understanding of fuels and the fuel-value chain. We also at the core of our company are explorers; we’re used to going out and finding new sources of energy.

But the whole aspect of farming is something that’s completely new to us, and even some of the aspects of the technology are not core to what we’ve been working on. We recognized early that we need to partner with people that had expertise in farming, in growing crops, and we also needed to partner with people that understood biotechnology and how you apply that into the energy field. We don’t do that as a passive investor. We create 50/50 partnerships.

Will BP look beyond these three main areas and form more partnerships?

I think you’ll probably hear about more partnerships, particularly in the technology area, because we think there are other technologies beyond biobutanol that could add advances to advanced biofuels, none of which I can talk about yet today.

Where does Iowa fit in with BP’s objectives?

First, we’re here because we’re looking to actually learn. We spent the last year and a half trying to understand farmers, and Iowa is particularly interesting because they’re at the forefront. They work together to drive industry, and we’re quite interested in talking to them about potential models and testing of some other concepts. While they may not be applied to Iowa on the cellulosic side, we hope to gain valuable insights, and you never know what can occur in cross-fertilization.

I also think there could be some value to our biobutanol agenda. Biobutanol does not require you to have to build a new plant, so the technology with butanol can be looked at as a softer change to the unit. I think producers are searching for things that can give them higher-value products and some differentiation, and butanol can offer that going forward.

Have BP’s efforts changed given the current economic situation or the decrease in the price of oil?

We made a commitment from the strategic standpoint that we think biofuels are going to be the near-term material solution to energy security and climate change, and we think that will continue regardless of where the oil price is today. We take a much longer-term view about biofuels than near-term commodity fluctuations. I think while oil prices may be low, we have a very struggling economy globally. Businesses like biofuels are truly new industries and you very rarely have new industries coming into the United States anymore. You mostly have industries dying. So a renewable-energy industry does create jobs, and we think it is a stimulus that will continue to be supported going forward.

Are there some outside factors that will determine whether BP can meet its goals?

I do think that this is an industry that has been formed with some of the support from mandates and tax credits. We would think that we’re going to need some continued support to continue to grow. In particular, look at cellulosic biofuels. That technology is in need of advancement both from the feedstock side and the farming side as well as the production-technology side. So when the RFS put a mandate in and carved up some volume for cellulosic biofuels, it did help us accelerate our development plans. We always knew we wanted to move toward cellulosic, but it gave us an ability to take a greater chance on technology and put some higher-cost structures potentially in place today. The RFS probably accelerated us by at least three years. We think there’s value in a package of support now, which will help us fund the ability to make this industry self-sustaining long-term.

Where does this unit fit in with BP’s future?

We are now a producer, because we’re producing in Brazil. Of course it’s not anything to the scale we are as the oil and gas we produce, but it’s early days for us. We truly believe that if you look at what’s estimated – biofuels would be 10 to 20 percent of the fuel pool going forward by 2030 – we actually think that with the development of advanced molecules and things like cellulosics that you could see that move to 30 percent by 2030. So it could be a material part of our business.

Do you have a prediction as to where this industry might develop in the future?

I think Iowa and the Midwest will have some benefits; there are producers looking at how you use ag waste and corncobs, et cetera. But we think the “on purpose” markets (where non-food grasses grow best) will start to move toward the South and that will be some of our focus areas going forward. This is an area that has such rich soils for food production. This may be more of an optimal area to make sure that food continues to be produced, and you’re looking at areas that may have a better fit climate-wise in terms of the alternative crops.

Why is BP interested in sugar cane over grain?

We’ve looked at today’s production technology, and sugars are actually a quite efficient feedstock source. Sugars are economically produced in Brazil and competitive at a $40 a barrel oil price. And a lot of the technology we’re developing fits with the way the Brazilian market is structured around sugars.

Will agriculture have to adjust to this new industry?

We’re talking about putting a new type of crop in. Energy grasses are a new feedstock. It’s not a vastly proven commercial crop and so there will need to be new agricultural models put in place. We think farmers here would help us think through those challenges and help find ways to develop new solutions.

Are you getting involved in the infrastructure side of research?

I should mention we do have an investment in biotechnology through the University of California, Berkeley, the University of Illinois and the Lawrence Berkeley National Laboratory. It’s called the Energy Biosciences Institute and we’ve invested $500 million in that. Part of what we’re doing with that is a development effort around miscanthus, an effort at University of Illinois, and some of the work they’re doing is looking at storage, harvesting, et cetera.

We know we’ve got to come from the entire package of developing the seed to how you actually plant to then how you grow, how you harvest, how you store, essentially the entire value chain. We’ve got to come through with solutions so that we can help farmers understand the value in this for them and help them understand then how you manage a model like this going forward.

Do you have a budget?

There’s always a budget. We’ve spent a billion and half dollars to date in the last few years we’ve been involved, and I wouldn’t expect us to stop.