Chevron Invests in Biodiesel Deal

Chevron Corp. said Thursday that it would acquire a 22% stake in a Houston company that is building a plant to make diesel from vegetable oil.

Galveston Bay Biodiesel’s facility in Galveston, Texas, will produce up to 100 million gallons a year of biodiesel, a fuel that is made from components of soybean oil, San Ramon, Calif.-based Chevron said. The plant will boost U.S. biodiesel output by 54%.

Chevron’s statement did not list the value of its Galveston Bay Biodiesel investment.

The investment follows Chevron’s January announcement of plans to begin selling fuel made mostly from corn-based ethanol this summer in California. With crude oil approaching $75 a barrel, President Bush is encouraging production of biodiesel and ethanol as alternatives to petroleum-based fuels.

“There’s a good market for diesel and this will help diversify supply,” Chevron Chief Technology Officer Donald Paul said.

The Galveston plant will have an initial annual capacity of 20 million gallons at the end of this year, or 27% of total 2005 production of the fuel, Chevron said. Other investors in Galveston Bay Biodiesel include Contango Capital Biofuels Partners, Sultex and Mobius Risk Group.

“This is a niche sector for us,” Chevron spokesman Leif Sollid said.

A 100-million-gallon-a-year biodiesel plant costs $97.5 million to $195 million to build, according to Energy Department estimates. The Galveston plant will treat soybean oil with chemicals to extract esters, which will be processed into diesel that is indistinguishable from petroleum-based diesel, Paul said.

Shares of Chevron fell 17 cents Thursday to $62.71.

The federal government indirectly subsidizes the biodiesel industry by giving refiners a $1-a-gallon tax credit for diesel made from fresh vegetable oil and a 50-cent-a-gallon credit for each gallon made from recycled grease.

“Renewable fuels like biodiesel are only going to play a bigger role in American fuel markets as oil prices continue to rise,” said Jim Wyckoff, an independent commodities analyst based in Cedar Falls, Iowa. “We’re not going to see energy prices backing down anytime soon, and that just makes things like biodiesel more viable.”

U.S. biodiesel producers have the capacity to make about 12,000 barrels of the fuel a day, or about 184 million gallons a year, the Energy Department said. Daily production is expected to climb to 20,000 to 30,000 barrels by 2030, the department said in a February report.

In January, Chevron announced plans to build three filling stations in California to pump E85, a motor fuel made from 85% ethanol and 15% gasoline.

Chevron expects the stations to lose money during the first year of operation as the company learns what sort of special handling and equipment are needed. All three stations will be located at state highway installations to serve government-owned fleets of cars and trucks.

The federal government subsidizes ethanol use by giving refiners and fuel wholesalers a 51-cent tax break for each gallon of ethanol blended into gasoline. For E85, that works out to about 43 cents a gallon, more than eight times the 5.1-cent-a-gallon subsidy received for 10% ethanol blends.