Cleaning up in California

On July 11, oil major ExxonMobil announced it intends to switch to the use of ethanol as a clean-burning gasoline additive in California by early 2003, making it the fourth oil firm after BP, Shell and Phillips to do so.

ExxonMobil’s move came well in advance of the 2004 deadline set by the state for phasing out methyl tertiary butyl ether (MTBE) – the additive currently used in the state’s gasoline – in favour of ethanol. MTBE has been blamed for a number of water pollution incidents, and ExxonMobil cited environmental considerations, and the desire to increase compatibility with other refiners, as reasons for making the switch now. The four companies phasing out MTBE account for more than 60% of total gasoline sales in California.

But not everyone is convinced of the economic benefits of the switch. James Kendell, director of the oil and gas division at the Energy Information Administration (EIA), the statistical arm of the US Department of Energy (DoE), says: “We expect prices [at the pump] to rise by about four cents a gallon in 2002–2003 as companies switch to ethanol.” This is due to a combination of infrastructure and logistical issues, he adds.

The ethanol issue strikes at two of the US’s most sensitive social and political issues – gasoline prices and the environment – so it is perhaps not surprising it has been the subject of fierce debate.

The use of MTBE stems from the US Clean Air Act amendments of 1990, which require the use of reformulated gasoline (RFG) in areas of heavy pollution. RFG must have a 2% oxygen content, which is met by adding either MTBE or ethanol, a corn-based fuel.

Ethanol is currently used in the midwest, and there is no predicted supply shortfall for the foreseeable future. But Aaron Brady, manager for petroleum products at Boston-based analysts Energy Security Analysis Inc (Esai), says other issues need to be resolved. “There are some logistical issues still outstanding,” he says. “For example, ethanol cannot be transported through pipelines, so will probably have to be transported by train.

“Also, ethanol has to be stored separately from other components. There is no spare storage space in California, and it is difficult to build new storage tanks because of permitting problems,” he adds.

A spokesman for Washington-based lobby group the Renewable Fuels Association (RFA) disagrees. He refers to a DoE study released in March that found there were no infrastructure barriers to the transportation and use of
5 billion gallons of ethanol to the market.

But Esai’s Brady says an absence of barriers does not mean all the details have been thought out. The deadline for switching to ethanol in California was extended in March by a year to January 1, 2004. This was after a study ordered by the California Energy Commission (CEC), the state’s energy policy committee, found the initial deadline could cause supply shortfalls and big price increases. EIA’s Kendell says his estimate of a four-cent increase is based on the earlier date, but does not expect the delay to change his findings.

But the use of ethanol could grow, if a move to boost the use of renewable fuels passes into law as part of the energy bill currently in final negotiations in Congress. The legislation would replace the flat-rate 2% oxygen requirement with a ‘renewable fuels standard’, which would increase the total amount of renewables used in gasoline to 5 billion gallons in 2012 from 2 billion in 2003.

RFA’s spokesman says the change would benefit both ethanol producers – namely farmers – and oil refiners, by giving them greater flexibility in the production and use of ethanol. In addition to the support from these two powerful lobbying groups, the change is backed by a number of environmental groups, business and public health organisation.

One such body is the American Petroleum Institute (API), the Washington-based oil and natural gas trade association. The oil and natural gas industry has long opposed mandates that have dictated strict per-gallon inputs of additives to gasoline, but a spokeswoman for the API says the group supports the more flexible renewable fuels standard.

Esai’s Brady agrees that the switch to the renewable fuels standard is a step in the right direction. He says: “It will enable refiners to blend ethanol more effectively and for economic reasons, rather than just to conform to a 2% mark.”

But he adds: “MTBE is a single additive, and there is no one other component that has all the same benefits. Moving to ethanol makes it a lot more complicated to blend gasoline, because to replace MTBE you need to add other clean-burning fuels, and the question of where they will come from has not been resolved.”