Oil Giants Wade Into Renewables Pool

(MoneyWatch)  It's not a free-for-all, yet. But more oil producers and refiners -- even the ones who have dragged their feet for years -- are testing the renewable energy waters. Oil companies have primarily dipped their toes into ethanol, once the bane of refiners' existence, including Valero's bid earlier this month for a number of ethanol plants owned by bankrupt-plagued VeraSun and energy giant BP's partnership with Verenium to build a cellulosic ethanol plant. It makes sense that Valero, the largest U.S. refiner, would take advantage of VeraSun's predicted fire sale of assets. Valero, along with the rest of the refining industry, is mandated to blend ethanol into the gasoline it produces. Those mandates are not going away and the percentage of ethanol in gas will likely continue to edge up despite pleas against it.

Even with the huge drop in crude prices, oil companies are still making money and are the most likely candidates to buy the increasingly large number of failing ethanol production companies. The acquisition could bode well for Valero, a company known for buying cheap assets and then turning them into profitable businesses. The company has even hinted at expanding the plants to include cellulosic technology if it becomes available, which probably means once it is economically viable. Valero has covered all of its bases with its investment last month into cellulosic start-up ZeaChem, which is still on track to begin construction on its biorefinery this year.Valero hasn't shied away from other renewable energy projects either, including an investment in the algae-fuel company Solix Biofuels and its development of wind farms through Sunray Wind,one of its subsidiaries. Valero has already spent more than $100 million to develop its Moore County, Texas wind farm.

As the willingness to fund renewable energy projects slows, as it has the past several months -- especially those related to ethanol -- look for more large oil companies to open up their wallets. Big oil has the big three, as Cascadia Capital's CEO Michael Butler noted in a recent news articles: money, global reach and distribution.

Take Exxon. The company is loaded with nearly $40 billion in cash and up until now has avoided direct investment in renewable energy. The company has said it is committing funds to in-house research. There is plenty of speculation Exxon will take advantage of depressed oil prices and cheap shares to buy up other oil companies. It's far more likely Exxon will buy resources at a bargain, such as large stakes in Canada's oil sands. It's easier, for one, and the company won't face the same regulatory hurdles. It's also a perfect time for the company to pick up a few beleaguered ethanol producers.

The big question for Valero and other large refiners is diesel. Diesel is expected to sell at a discount by April, dropping below gas for the first time since July 2007. The global recession is expected to dampen demand for diesel,hurting refiners like Valero and Marathon Oil, which together are spending at least $6 billion to increase diesel output. Some are predicting Western Europe's thirst for diesel will drive demand back up as well as prices in a few months, preserving margins for companies like Valero. If demand for diesel fails to materialize and supplies increase, Valero could have far less cash to put into other projects including renewable energy.