Posted: June 01, 2008
Planet Profit Report: Fuel injected
Colorado's new energy economy: managing the combustible mix of industry, innovation and environmentRebecca Cole
While Colorado is building a ‘new energy economy,’ the impending arrival of ConocoPhillips’ training and technology centers underscores how much traditional oil and gas still power the state.
In a high-tech lab at the Colorado School of Mines, researchers manipulate beakers of slimy green algae in hopes of converting the organisms into an efficient source of liquid fuel.
Research into "green fuel" like algae is a throwback in Colorado to 1978, when the National Renewable Energy Laboratory studied thousands of species to determine which had the most potential as an alternative energy source. Back then, oil was cheap — only $20 a barrel — and with the comparative cost for algae biofuel prohibitively expensive, NREL shelved the project in 1996.
Fast forward to today. With oil now climbing past $125 a barrel, and federal laws mandating a fivefold increase in biofuel production over the next 14 years, School of Mines researchers like professor Matt Posewitz and his team are dusting off NREL’s pioneering research for another look at how the photosynthesizing wunderkinds can help offset the reliance on fossil fuels.
Investing in such technologies drives Gov. Bill Ritter’s promotion of Colorado as a clean energy hub. But the road to renewables — and the state’s financial fortunes — continues to be fueled by the traditional oil and gas industry. As much as Ritter has been successful in promoting a new energy economy, no economic boost from solar or wind compares to the coming arrival of ConocoPhillips, the country’s third-largest petroleum refining company with revenues last year of $178.5 billion.
As the renewable energy sector continues to grow and the U.S. seeks to wean itself off fossil fuels, many oil and gas veterans are dipping into biofuels. Although Posewitz’s work is helping fill the funnel, it will be years before companies like ConocoPhillips offer green fuel at the pump.
In February, ConocoPhillips purchased the 432-acre former StorageTek property in Louisville for $58.5 million to build a corporate training facility and global technology center.
"We knew we were running out of space on our two major campuses in Houston and Bartlesville, Okla.," says Mary T. Manning, ConocoPhillips’ general manager for global real estate and facilities services. "We wanted a place that would distinguish us from competitors and take us to the next level of success."
The company decided early on that it didn’t want to look at properties on either coast, and Colorado was quickly on its short list as an ideal location.
"Colorado is such an attractive place, and we want this to be distinctive in the marketplace when recruiting employees. And certainly the partnerships and the proximity to the universities were a big plus," Manning says. After the company looked at about 25 sites in the state, Louisville "kept coming to the top," as one of the best places to live and to raise a family.
Transformation in the works
Details are trickling out about how the company plans to utilize the site. In March, Steven R. Brand, ConocoPhillips’ senior vice president of technology, told a crowd gathered for Sen. Ken Salazar’s third annual energy summit that the company is in the process of transforming itself to eventually supply energy in alternative forms — and that Colorado will play a significant role in its plans.
"In 20, 40 and 50 years from now we’ll be a different company," he said. "We need to decide what that is."
Calling any effort to expand supplies "doomed" unless steps are taken to address the carbon impact, Brand said research and development is the key to building a viable energy future — but that ConocoPhillips isn’t moving away from oil and gas anytime soon.
"Half of all the oil ever discovered cannot be recovered with current technology," Brand said. "Even a 10 percent gain through better extraction methods would add hundreds of billions of barrels of recoverable oil, greatly improving the world’s energy outlook."
With oil and gas the state’s largest industry — surpassing even tourism — Colorado is just as securely bound to traditional energy. In 2005, the sector contributed $23 billion and more than 70,000 jobs to the state’s economy, according to a School of Mines report. Compare that with the renewable sector, which although growing, lags far behind. From 2004 to 2007, Denver metro-area renewable energy jobs more than doubled — from 5,760 to 13,940. The state is now ranked 10th in the country for renewable energy employment with more than 15,000 jobs, according to the Denver Metro Economic Development Council.
Don Elliman, director of Colorado’s Office of Economic Development and International Trade, says one reason ConocoPhillips chose Colorado is that its "idea of what the future of energy ought to look like" dovetails the state’s new energy economy agenda.
"It’s a combination of existing fossil fuel resources, especially natural gas and coal, and the accelerating development of renewables," he says. "Along the way Colorado will have a much bigger footprint in traditional fuel research and development, including clean coal."
Louisville is already preparing itself for an influx of workers and ConocoPhillips employees traveling to the area for training. Malcolm Fleming, Louisville city manager, says the city is exploring options with the company to carve out a portion of the site for retail development and to lease or sell some property for a hotel. ConocoPhillips has yet to map out how the campus might look.
Brand says ConocoPhillips has doubled R&D spending in recent years, this year investing $500 million into new technology. And although he would not say for certain what innovations will be explored at the Louisville facility, possibilities include better seismic imaging of reservoirs; biotechnologies to remove unwanted contaminants from oil; carbon-capture and storage; and modernized, "green" extraction methods for heavy oil (i.e., oil from tar sands).
"I think we have a huge opportunity for competitive advantage on heavy oil," Brand says. "If we can come up with a way to extract that oil for a dollar or five dollars less, and get production up from 100 barrels to 300 barrels a day, it’s a huge competitive advantage for us."
Another technology likely to play a big role is clean-burning coal. ConocoPhillips’ E-Gas division has focused for the past five years on the gasification of coal into hydrogen syngas that can then be converted to ethanol. With an estimated 9.76 billion tons of recoverable reserves in Colorado, coal is also central to the state’s economy. Ritter’s Climate Action Plan, released late last year, aims to reduce greenhouse gases 20 percent by 2020 and 80 percent by 2050 and affirms a commitment to pursuing clean coal technologies.
Green-collar jobs and a ‘new-energy economy’
Ritter broached the "new energy economy" idea as part of his "Colorado Promise" made to voters during his campaign. Upon taking office, Ritter and the General Assembly pushed through several key pieces of legislation designed to bolster economic development and bring new "green-collar" jobs to the state.
As early as 2004, Colorado was making moves in that direction when voters approved Amendment 37. The first citizen-driven, renewable energy standard in the country, the amendment required the state’s largest utilities to secure 3 percent of their electricity from renewable resources by 2007 and 10 percent by 2015.
After the utilities met the goals last year, Ritter doubled the standards. Two months later, the Colorado Legislature appropriated $7 million a year from the state’s gaming coffers to create the clean energy fund — earmarking half to attract renewable energy investments to the state.
Ritter’s balancing act of appeasing environmentalists and attracting renewable technology companies versus the importance of traditional oil and gas is exemplified in the battle surrounding his proposed overhaul of the state’s drilling rules. Industry leaders and lawmakers say the regulatory uncertainty is causing traditional energy companies to cut back on their investments in Colorado.
Doug Hock, director of public and community relations for the Canadian oil and gas company EnCana, says the company has already diverted $500 million in capital to other states like Wyoming and Texas.
"We believe the potential changes coming down the pike will have a very definite impact," Hock says. "The types of things Colorado is considering I would call draconian measures that really inhibit our ability to even operate."
Hock says EnCana wells in the Piceance Basin in Garfield County, the company’s main site of operations, have decreased by about 25 percent this year. He cites new wildlife stipulations as the biggest red flag; the rules would force EnCana to suspend operations during a three-month window every year — costing the company $500,000 to remobilize each rig — to allow for wildlife habitat and migration.
"We certainly understand the need to protect the environment," Hock says. "We believe that can be done. But the rules they’ve set out aren’t the way to get there."
Calling it a "forced march," Meg Collins, president of the Colorado Oil and Gas Association, says the overhaul is unprecedented: a huge scope coupled with rushed deliberations. The last overhaul, in 1994, took five years to complete; Ritter’s regulations, formally introduced in March, are slated to go into effect in November.
"If these rules come out in such a way that will seriously erode the business environment we’ve enjoyed here in the past, reserves are going to be left in the ground," Collins says. "Companies will look at other states or countries where the regulatory environment is consistent, transparent and predictable. Colorado right now is not appearing to be the friendliest business climate for us."
Collins says she’s thrilled about ConocoPhillips choosing Colorado and that it will add "vibrancy" to all that’s going on with R&D in area universities and NREL. "It will put some real muscle into a variety of research efforts, not just renewable research but across all sorts of disciplines that relate to oil and gas."
But, adds Collins, "It’s just unfortunate that great news is against the backdrop of what is a very difficult rulemaking process."
For the past several years Colorado has seen a boom in drilling, with 32,000 active oil and gas wells in the state today and 40,000 more planned for the next decade. Last year, nearly 6,400 permits were issued by the Colorado Oil and Gas Conservation Commission, a 7.8 percent increase over 2006, which itself was a record 35 percent greater than 2005. In 2007, the state received $123 million in federal mineral payments, according to the Bureau of Land Management.
Ritter is also proposing to increase the severance taxes levied on oil and gas companies, bringing Colorado’s 5.7 percent tax rate more inline with other Rocky Mountain energy-producing states such as Wyoming’s 11.2 percent rate and New Mexico’s 9.4 percent rate. The governor plans to funnel the additional revenue into higher education and funding for renewable technologies. But he faces an uphill battle convincing industry players to go along with the plan.
By many measures, Ritter’s efforts to gin up Colorado as a renewable energy hub are showing signs of success. Big-name national and international energy players, drawn here by the state’s abundant natural resources — wind, solar, geothermal, biomass — and the partnership opportunities offered through the area’s intellectual capital, are staking a claim on Colorado as the new "Silicon Valley" of energy.
"Clearly it’s the hottest attraction segment of the economy right now in Colorado," Elliman says. "We’re trying to package our assets as aggressively as we can to keep this sector growing here faster than it’s growing anywhere else."
Companies besides ConocoPhillips that are betting on Colorado include Vestas Americas, a division of the Denmark-based maker of wind turbine blades. With revenues in 2007 of nearly 5 billion euros, the company’s first U.S. plant in Windsor is predicted to bring more than 600 jobs to the area.
Range Fuels, a Vinod Khosla-backed alternative fuels company headquartered in Broomfield, is building the world’s first cellulosic biofuel plant in Soperton, Ga. Founded by former Apple executive Mitch Manditch, the company has already garnered more than $100 million in private financing. Many other small and medium-sized startups are also viewing Colorado as the right place to bring their renewable innovations to fruition.
Sen. Salazar was among those who recognized NREL as an underutilized crown jewel in the state’s competitive offering. Long the U.S. Department of Energy stepchild, NREL is now the go-to lab in the hunt for developing commercially viable alternative energy solutions. Last year, the DOE allocated $378 million for NREL, partly for new facilities — a jump from the $209 million provided in 2006. The infusion of cash resulted in the hiring of more than 100 new staff at the lab in the past year.
Industry partnerships are critical for NREL. "We’re not people who are out selling products, or making products, or in touch with the consumer in any way," says George Douglas, an NREL spokesman. "ConocoPhillips is; and so are all the others we work with. We want their help, their advice, their special understanding of products and the market."
In early 2007 the state legislature established a partnership between NREL, the University of Colorado, Colorado State University and the School of Mines to spur cross-fertilization among the institutions and simplify how they work with private companies. Called the Colorado Renewable Energy Collaboratory the entity receives up to $2 million in matching funds from the state, to attract research grants and contracts from federal and private sources.
Although this type of cooperative research is nothing new in Colorado, the state funding has provided incentives for companies to invest here.
"We want to create the world’s most powerful renewable energy research center," says David Hiller, executive director of the Collaboratory. "We’ve wrapped up these institutions into a single point of contact, and created a culture of cooperation. That’s the magic."
Last July, the first Collaboratory center was launched: the Colorado Center for Biorefining and Biofuels, or C2B2. A research venture between businesses and the Collaboratory institutions to develop new applied biorefining and biofuel technologies, C2B2 is one of several planned Collaboratory centers.
Along with other industry giants like Archer Daniels Midland, Chevron, Shell and Suncor, ConocoPhillips paid $50,000 this year to be a founding sponsorship member. In all, 27 members — about 10 of which paid $50,000 while those with less than 500 employees paid $10,000 — have invested in C2B2 and the opportunity to "sit at the table, helping us direct research and be involved in developments as they happen," Hiller says.
By 2022, about one in eight gallons will need to be biofuel, says John Dorgan, professor of chemical engineering at the Colorado School of Mines and the site’s C2B2 director: "ConocoPhillips clearly doesn’t want to lose one-eighth of their business."
Long road to green fuels
Dorgan says that 30-year veterans of the oil and gas industry today are looking for a primer on biofuels.
"Fundamentally, it’s about making a transition in the next 15 to 50 years away from fossil sources," he says. "We need multiple energy sources that can be sustained on a timescale of millennia — which is certainly not possible with fossil fuels."
That’s where Posewitz’s research with algae and other photosynthetic bacteria comes in. Since algae grow in any body of water — fresh, salt, even polluted wastewater — the lowly, single-celled pond scum is seen not only as an alternative to fossil fuels, but as a way to take food out of the picture in the biofuel debate. And, because they consume carbon dioxide as they grow, algae could be used to help pull the heat-trapping greenhouse gas out of the atmosphere.
"Algae have the ability to produce a whole bunch of bioconversions just using sunlight and water," Posewitz says. "That’s as good as it gets. We just need to improve the yields and increase their natural ability to convert a photon of sunlight to an energy molecule."
The real challenge is replicating it in a large-scale commercial application.
"To get 10 percent solar conversion efficiency to satisfy the liquid fuel needs in the U.S., you’d need 100,000 square miles (about the size of Nevada) growing corn 12 months a year," Posewitz says. "For algae, we would need the size of Lake Michigan to get to about 5 percent; if we grow it offshore in the ocean it’s not totally fantasy.
"We’re going to have to do a lot of work," he says. "Even if we can get to 1 percent that’s a huge achievement and worth a lot of money. There are so many people in this game who realize the potential."
Colorado may be firmly in the game yet both Hiller and Dorgan mention the difficulties of competing with other states such as Iowa, Minnesota, California and Texas that are throwing millions of dollars a year at renewable energy research.
Don Elliman cites as a competitive advantage the quality of the labor force and Colorado’s ability to attract green-collar workers. "Recruiting post-doctoral researchers and highly educated workers to Colorado is not hard," he says. "And once they get here they tend not to leave."
Tom Plant, director of the Governor’s Energy Office, says with advanced research capabilities and energy sources (both renewable and traditional) scattered throughout the state, Colorado enjoys a unique economic position. "We don’t have hundreds of millions of dollars to lure companies to come here, but that’s not to say we can’t put a good package together. We are already becoming a new energy hub with a reputation around the world."
Back in the 1970s, when NREL first started exploring algae biofuel technology, the U.S. imported roughly 30 percent of the county’s oil; today it’s 60 percent.
"We’ve gone in the wrong direction," Hiller says. "The price of oil is through the roof. And with some of that money finding its way into the hands of the wrong people there’s a national security implication here."
Breaking the country’s reliance on fossil fuels while bringing renewable technologies online won’t happen overnight. Filling up the tank with algae is light-years away. And although oil and gas is here to stay in the near term, renewable energy technologies are no mere fad and will redefine the energy industry. By laying the groundwork today, Ritter, Salazar and others hope to tap an economic opportunity to promote Colorado as a renewables leader.
"With biofuels or any of the renewables, nothing’s on the right side of the spectrum," Brand says. "It’s all either in embryonic or inching to the middle — you’re not going to take something and adjust it. It’s all pure innovation."
Rebecca Cole is the online editor at Rocky Mountain Institute, a non-profit "think-and-do" tank that drives the efficient use of energy and resources. Learn more about RMI's latest initiative, Reinventing Fire, to move the U.S. off fossil fuels by 2050.