The following was written by Brent Willett, Executive Director of the Cultivation Corridor, and featured in the Business Record’s Business Professionals’ Blogs. Read the original article at iowabiz.com.
Why Iowa needs to think like an oil company
In its first quarter earnings rollout on April 30, oil giant Exxon Mobil Corp. revealed that its refining and chemicals units- think lubricants and chemical compounds used to produce things like plastic- together represented 48% of its profits in the first three months of 2015.
In 2014 those units represented just 19 percent of profits [oil and gas production made up the rest]. Across the pond, France’s Total SA, Europe’s largest refiner, said its first quarter refining and chemicals income improved three-fold while production earnings plummeted 56%. Similar trends jumped off earnings pages of oil companies across the globe.
What’s going on here? And what does it have to do with economic development in Iowa?
As oil production earnings continue a not-so-slow-motion collapse- oil prices have lost half their value since August- an emerging bright spot for the industry has been the durability of its higher-margin refining and chemicals units.
How big of a shift is this? In 2012 ConocoPhillips, amid an industry rush to decommission a refinery inventory thought to be over capacity, decoupled its chemicals and refining businesses from its drilling businesses in a loud-and-clear bet on long-term profitability in the business of oil and gas production.
It was a bad bet; the derivative business, Phillips 66, is now throwing off higher profits. For decades, the petroleum industry has honed a refining/chemicals product diversification strategy which not only offers a hedge against intense commodity market pressures like it’s experiencing today, but one which has produced a expansion and diversification model that biofuel-producing states like Iowa have begun to take notice of.
Currently, less than 10% of the world’s chemical industry is bio-based, but estimates suggest that could adjust upwards to close to 25% by the end of the next decade [creating as many as 20,000 new jobs in the US in the process] as rapid biochemical innovation and commercialization begins to create cost parity with petroleum-based solutions.
Iowa’s vast biofuels industry- and the biomass supply chain, physical infrastructure and research and human capital which has cropped up as a result- positions the state to capitalize on this growth industry more competitively than virtually any domestic peer.
Iowa’s more than 40 ethanol and biodiesel facilities- many in rural communities- in many cases represent potential buyer/supplier opportunities for a biochemical industry which has been rapidly developing in Europe for years and is poised to grow its relatively small position in the North American market.
In short, we’ve got a window to leverage Iowa’s dominant biofuels position to diversify into chemicals and materials derived from Iowa biomass.
That’s why economic development and industry groups like the Iowa Biotechnology Association, Iowa Chamber Alliance and the Cultivation Corridor are supporting a bill currently before the Iowa General Assembly to create a first-in-the-world economic development incentive specifically targeted at this nascent industry.
House File 656 would create a tax credit program administered by the Iowa Economic Development Authority to help support the growth of biochemical investment in Iowa over the coming years.
The bill would create a tax incentive for the production of a prescribed set ‘building block’ biochemicals which are derived from biomass feedstock abundant in Iowa as either raw materials or co-products of a bioproduction fuel or other process like starch, sugar and lignin.
As the legislature debates the merits of a bill, research and economic development efforts to firmly establish Central Iowa as a global center of excellence in biochemical and biomaterial research and, ultimately, production are well underway.
Take, for example, the Center for Biorenewable Chemicals [CBiRC] at Iowa State University in Ames, one of the nation’s largest multi-disciplinary and industry-led biochemical research installations, and the new Center for Bioplastics and Biocomposites [CB2] at Iowa State, a pioneering research partnership with Washington State University and private industry. Indexing these two superb research assets with the physical and supply chain assets already in place in Iowa and, potentially, a global first economic development incentive produces a compelling argument for Iowa to a new and important industry poised to expand.