* Navy seeks to help create competitive biofuels industry
* Lawmakers balk at $26-a-gallon prices
* Analysts say biofuel effort may have merit
By David Alexander
WASHINGTON, July 2 (Reuters) - A U.S. Navy oiler slipped away from a fuel depot on the Puget Sound in Washington state one recent day, headed toward the central Pacific and into the storm over the Pentagon's controversial green fuels initiative.
In its tanks, the USNS Henry J. Kaiser carried nearly 900,000 gallons of biofuel blended with petroleum to power the cruisers, destroyers and fighter jets of what the Navy has taken to calling the "Great Green Fleet," the first carrier strike group to be powered largely by alternative fuels.
Conventionally powered ships and aircraft in the strike group will burn the blend in an operational setting for the first time this month during the 22-nation Rim of the Pacific exercise, the largest annual international maritime warfare maneuvers. The six-week exercise began on Friday.
The Pentagon hopes it can prove the Navy looks as impressive burning fuel squeezed from seeds, algae and chicken fat as it does using petroleum.
But the demonstration, years in the making, may be a Pyrrhic victory.
Some Republican lawmakers have seized on the fuel's $26-a-gallon price, compared to $3.60 for conventional fuel. They paint the program as a waste of precious funds at a time when the U.S. government's budget remains severely strained, the Pentagon is facing cuts and energy companies are finding big quantities of oil and gas in the United States.
Navy Secretary Ray Mabus, the program's biggest public booster, calls it vital for the military's energy security.
But to President Barack Obama's critics, it is an opportunity to accuse the U.S. leader of pushing green energy policies even if they don't make economic sense. The bankruptcy of government-funded solar panel maker Solyndra last year was a previous example of that, they say.
Senator John McCain, the top Republican on the Senate Armed Services Committee, expressed outrage over the costs of the fuel at a hearing earlier this year.
"I don't believe it's the job of the Navy to be involved in building ... new technologies," he said. "I don't believe we can afford it."
But the U.S. Defense, Energy and Agriculture departments are moving ahead with their plans, jointly sponsoring a half-a-billion-dollar initiative to foster a competitive biofuels industry.
Mabus and officials at the Energy and Agriculture departments announced on Monday that they would make $30 million in matching funds available for companies working to produce large-scale biofuels plants. A second phase some time next year is expected to provide another $70 million in follow-on funding.
FIELD OF DREAMS?
The biofuels effort is one of the most ambitious Pentagon energy programs since then-Defense Secretary Donald Rumsfeld set up a task force in 2006 to find ways to reduce the military's fossil fuels dependency, involving more than 300,000 barrels a day.
"The reason we're doing this is that we simply buy too many fossil fuels from either actually or potentially volatile places on earth," Mabus told a conference on climate and security last month.
He says the Pentagon can use its buying muscle - it is the largest single consumer of petroleum in the world - to guarantee the demand needed for biofuel businesses to produce at a scale that will eventually drive down costs.
"We use 2 percent of all the fossil fuels that the United States uses," Mabus told the conference. "And one of the things that this means is that we can bring the market. And to paraphrase the old 'Field of Dreams' line, if the Navy comes, they will build it."
Mabus, a former Mississippi governor and ambassador to Saudi Arabia, aims for biofuels to supply about half of the Navy's non-nuclear fuel needs by 2020, about 8 million barrels a year.
His main tool in pushing the effort is the Defense Production Act, a measure passed in 1950 in the early stages of the Korean War to help the president mobilize the civilian economy for the war effort.
The act lets the Pentagon provide funding or loan guarantees to ensure production of critical defense needs. Since the 1970s it has been used to do things like bolster beryllium production and develop a specialized integrated circuit.
AT WHAT COST?
But the initial small-batch cost of some biofuels has raised eyebrows on Capitol Hill, even among lawmakers used to dealing with billion-dollar defense cost overruns.
The Pentagon paid Solazyme Inc $8.5 million in 2009 for 20,055 gallons of biofuel based on algae oil, or $424 a gallon.
Solazyme's strategic advisers, according to its website, include T.J. Glauthier, who served on Obama's White House Transition team and dealt with energy issues, but also former CIA director R. James Woolsey, a conservative national security official.
For the Great Green Fleet demonstration, the Pentagon paid $12 million for 450,000 gallons of biofuel, nearly $27 a gallon. There were eight bidders for that contract, it said.
Republican lawmakers are pushing measures that would bar the Navy from spending funds on alternative fuels that are not priced competitively with petroleum and are accusing Mabus of failing to provide Congress with a full analysis of the cost and time it would take to create.
"They couldn't answer some of the very fundamental questions that you would want on that issue," said Randy Forbes, a Republican on the House Armed Services Committee who says studies show that biofuels would always be more expensive than petroleum.
Mabus rejects the criticism, saying that as production rises, costs will come down. He notes that prices have fallen dramatically over the past few years, even with the Navy buying only small test batches of alternative fuels.
"Of course it costs more," he told the climate conference. "It's a new technology. If we didn't pay a little bit more for new technologies, we'd still be using typewriters instead of computers. ... And the Navy would never have bought a nuclear submarine, which still costs four to five times more than a conventional submarine."
Alternative fuel manufacturers see two promising avenues for creating so-called "drop-in" fuels that can be used in petroleum engines without any changes to the system. For now, they both have drawbacks.
One, called the Fischer-Tropsch process, is used to convert coal, natural gas or biomass into fuels. But the side effect is high levels of greenhouse gas emissions, said James Bartis, an energy researcher at the RAND Corporation think tank who has analyzed the Pentagon's alternative fuel effort.
Alternatively, lipids and fatty acids produced by animals and plants can be treated with hydrogen in a refinery process similar to that used for oil to produce fuel, Bartis said.
Camelina seeds, rendered chicken fat and algae oils are some substances currently being used in this process, and they produce a very clean-burning fuel, Bartis said.
The problem, he said, is that most of the seed- and animal-based oils cannot be produced at the scales the Pentagon needs.
The United States consumes about 19 million barrels of oil per day, with the Pentagon using about 321,000 barrels per day in 2011. Bartis estimated maximum fuel production using chicken fat would be about 30,000 barrels per day, while camelina seed might eventually produce 40,000 to 50,000 barrels daily.
"That's a drop in the bucket," he said. "It's a dead end. You can't make much."
He said algae appeared to offer the best potential for large-scale production, but current efforts were aimed at genetically modifying algae to be more efficient.
"It's not a tomorrow problem," he said. "It's a decade away."
ALL OF THE ABOVE
The Navy disagrees. Instead of focusing on one feedstock, it is pursuing an all-of-the-above approach, open to using any biofuel that meets its specifications, regardless of whether it is produced with seed oil, animal fat or woody biomass.
"We need to pursue all the ones that seem to have promise to be able to deliver for us," said Tom Hicks, deputy assistant secretary of the Navy for energy. "What we're trying to say is if it can meet the criteria that we have ... then we're an interested buyer. And so that leaves open a whole range of opportunities."
So far the Navy has used fuels based on algae, camelina, agricultural waste oils and food waste oils, Hicks said in an interview. Municipal solid waste could be an option at some point, as could woody biomass, he said.
He said researchers estimate that some biofuels could be cost-competitive before the end of the decade once they move to large-scale production.
A Defense Department study conducted with LMI consulting last year noted the Pentagon could take steps, like long-term contracting, that would speed up creation of a competitive biofuels market by providing certainty to growers and helping manufacturers gain access to capital to build refineries.
"Although DoD has requested 20-year contracting authority, similar commercial industry efforts have suggested that even 10 years would represent the tipping point for more mature renewable fuel producers to obtain financing to build the necessary infrastructure and plants," the report said.
Some industry participants believe Mabus is correct in asserting that the Navy's purchasing clout and other powers can be used to create a breakthrough in the biofuels industry that will eventually lead to competitive pricing.
"We've actually looked at that precise question and we believe they can in fact create that market," said Dr. Ray Johnson, a senior vice president at Lockheed Martin, which is looking at investing in the Navy's proposals.
Mabus remains undeterred in his pursuit of alternative fuel.
The Navy has been at the forefront of energy innovation for over a hundred years, Mabus says, transitioning from sail, to coal, to oil and then to nuclear from the 1850s to the 1950s.
"Every single time there were naysayers," he said recently. "And every single time, every single time, those naysayers have been wrong, and they're going to be wrong again this time."