BP and Biofuels: Why the Verenium Buy is So Risky

(MoneyWatch)  With so much attention rightly focused on the Gulf oil spill, it's easy to forget that BP has other businesses. Take BP Biofuels North America, a division that announced last week it will pay $98.3 million for Verenium Corp.'s (VRNM) cellulosic biofuels business. Skeptics out there may look at this as a relatively cheap PR ploy. What better way to start boosting your oil-soaked beaches image than to snap up a business that's trying to commercialize advanced biofuels made from non-food stocks, right?

The purchase has nothing to do with the oil spill or BP's image. It's about cost control. Whether this is a worthwhile investment is another question altogether. BP and Verenium formed a 50-50 joint venture back in 2008 to develop commercial-scale cellulosic ethanol. Verenium, which started as a specialty enzymes developer and before it expanded into cellulosic biofuels, has struggled financially for years. More recently warned it wouldn't be able to make debt payments without an injection of capital.

As a result, BP is able to buy Verenium's cellulosic biofuels business on the cheap. The $98.3 million payment includes biofuels and enzyme technology developed by Verenium; a pilot plant in Louisiana and a demonstration-scale facility as well as research and development centers in San Diego. BP also will become the sole investor in Galaxy Biofuels and Vercipa Biofuels, two ventures formed with Verenium.

This would be a great deal for BP were it not for the high-risk still related to cellulosic ethanol and that it will take considerably more money to develop the business. Verenium, for example, was once considered a leader among the many start-ups trying to crack the cellulosic biofuels problem. Now Verenium's technology -- the same tech that BP just bought the rights to -- is seen as lagging behind its competitors, as Forbes recently noted.

Sure, $98.3 million is drop in the bucket for BP. But the purchase signals the company's commitment to cellulosic ethanol, which means it will spend a lot more in the coming decade. BP and Verenium were supposed to build a commercial-scale ethanol plant in Florida, a facility that will cost around $300 million. BP will continue with this venture and apply for a loan guarantee from the federal government.

Verenium is the real winner in this deal. The company finally gets to shed its money-losing cellulosic ethanol unit and focus on its enzymes business instead, which is actually generating revenues. Its enzyme product revenues in the first quarter represented some 89 percent of its total revenues. Verenium reported first quarter revenue of $11.6 million from its enzymes product sales, up from $10.6 million in same period last year.

Photo from BP