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Oil Refiner Valero Plows More Money into Renewables with Terrabon Investment

The ink has barely dried on Valero Energy's $477 million check for seven ethanol plants and a development site from bankrupt VeraSun and it's already investing more money into another renewable project. In this latest endeavor, Valero has become the lead investor in Terrabon, a company developing technology to convert trash from landfills into a renewable "green" gasoline.

The amount of the investment from Valero, the largest oil refiner in North America with a combined throughput capacity of about 3 million barrels a day, was not disclosed. What we do know is what Houston-based Terrabon plans on doing with the money.

The company, formed in 1995 to commercialize three technologies developed at Texas A&M University, will use the funds to hasten the commercial release of its MixAlco acid fermentation technology. Terrabon's technology converts non-food biomass - the solid waste in your municipal landfill - into chemicals that can be processed into a renewable gasoline. This is not ethanol, although it can be blended with gasoline. Its higher energy value than ethanol makes it more comparable to regular ol' gas.

The recently acquired ethanol plants have a clear and immediate effect on Valero's bottom line. They saved a ridiculous sum when they bought the plants - around 70 percent - and plan on running the plants at full capacity. That translates into about 780 million gallons of ethanol a year Valero won't have to buy from outside companies to meet the federal Renewable Fuels Standard. The RFS requires gasoline to be blended with 10 percent ethanol.

The ethanol plants still represent a small portion of Valero's business, although as company spokesman Bill Day pointed out in a recent LA Times story, it's "big for the ethanol industry." The Terrabon investment is likely pretty small and minuscule compared to its daily task of refining and selling oil at its 5,800 retail and wholesale outlets.

Still, it's interesting that Valero is choosing to invest in this start-up at all. It could be that Valero is trying to market itself as a "green" energy company.

"Valero is looking into other opportunity areas other than oil refining," Day said in a phone interview. Day wouldn't reveal how much they have invested into renewable energy projects. Valero also invested last year in Fort Collins, Colo,-based Solix, a company that makes biofuels from algae, and in January it gave money to ZeaChem, a cellulose-based biorefinery, Day said. Those investments stem from Valero's alternative energy and project development group, which it formed to explore those "opportunity areas."

The industry's cheap prices fueled its outlay of cash for the ethanol plants, Day said.

"There are definitely some advantages as far as finding assets at reasonable prices" he said.

Ethanol producers are expected to continue to suffer from weak margins, high feedstock costs and low gas prices. And cleantech start-ups with potentially valuable ideas also are struggling to find financing.

Enter Valero. The company has the cash to take advantage of bargain basement ethanol plants, which makes sense since the federal mandates are not going to go away. It still has enough leftover to take lead investment roles in other new fangled technologies that might not make money for years.

I expect Valero to continue on this path and Day confirms that with a "we're still looking for opportunities" statement.

I wonder when other oil refiners or even agri-producers like Archer Daniels Midland- already a large ethanol and biodiesel producer - and Cargill will take advantage of the same opportunities? With ethanol maker Aventine's recently announced bankruptcy and Pacific Ethanol running out of money there will likely be more inventory on the market very soon.