Friday, September 28, 2007

ADM and ConocoPhillips In Pact

Well that did not take long. In the morning I pondered what was up with ADM (ADM) and their recent restructuring along the lines of an energy company and only a few hours later get an answer.

Archer Daniels Midland and CononcoPhillips (COP) announced that they agreed to collaborate on the development of renewable transportation fuels from biomass, creating a partnership between the biggest U.S. ethanol producer and one of the biggest oil refiners. The collaboration will research and seek to commercialize two components of a next-generation biofuel production process:

* The conversion of biomass from crops, wood or switchgrass into biocrude, a non-fossil substance that can be processed into fuel; and
* The refining of biocrude to produce transportation fuel.

ADM will provide "biomass," or organic material left over from crops, wood or switchgrass and ConocoPhillips will convert the materials into "biocrude" fuel for transportation.

"ConocoPhillips believes that the development of next-generation biofuels is a critical step in the diversification of our nation's energy sources," said Jim Mulva, chairman and chief executive officer, ConocoPhillips. "We are hopeful that this collaboration will provide innovative technology toward the large-scale production of biofuels that can be moved efficiently and affordably through existing infrastructure."

Patricia Woertz, chairman and CEO of ADM, added, "As we advance our global bioenergy interests, this alliance with ConocoPhillips represents an important next step. Innovative collaboration like this will identify and bring to market feasible, economic and sustainable next-generation biofuels."

This is very interesting. There has been a ton of talk out there about "cellulostic ethanol" and while ADM is developing that technology, what they seem to be doing here is creating "cellulostic crude". The ramifications of the agreement between the two are far reaching. Big Oil has thus far rejected the biofuel industry and this agreement serves as that needed recognition. It also diversifies ADM's earnings profile away from ethanol and farther into the biodiesel and now biocrude areas that are growing at staggering rates.

Consider that just three years ago, only 25 million gallons of biodiesel were produced in the US. That number will top 250 million gallon this year and it is expected to double next year. Biodiesel burns cleaner and is 30% MORE mileage friendly than it's pure petroleum brethren.

What ADM and Conoco are doing is jumping into a thus far untouched market head first to dominate it. The fact they are even setting up the refining of the finished product says it is close to a reality.

Sound good shareholders? Me too.


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