Refiners Rally Against Higher Ethanol Blend

Refiners Rally Against Higher Ethanol Blend

Nov 10, 2009

By Naureen S. Malik
A DOW JONES NEWSWIRES COLUMN

Several U.S. oil refiners may have stepped up their investments in ethanol production this year to meet regulatory requirements, but at the same time the refining industry is waging a battle against a waiver that would allow more of the biofuel to be blended into gasoline.

The U.S. Environmental Protection Agency is considering a waiver that would allow the percentage of ethanol that could be blended into gasoline for conventional vehicles and power equipment to rise to 15% from 10%. The EPA has a Dec. 1 deadline on whether to grant this request, which was submitted in March by Growth Energy, a pro-ethanol industry group representing 54 producers that is headed by retired U.S. Army General Wesley Clark. Among the companies backing the organization are POET LLC, ICM Inc., Western Plains Energy LLC and Green Plains Renewable Energy (GPRE).

Proponents say more blending of ethanol into gasoline is good for the environment and will foster a greener economy. But a wide coalition of refiners, food producers and marine-engine manufacturers say engine technology isn't ready for more ethanol in gasoline, and food prices will increase if more of the corn-based fuel is produced. Moreover, refiners fear that higher ethanol blending would cut into gasoline consumption even more. The refining industry has been struggling with narrow margins all year due to sharply lower demand amid the economic downturn for refined products--and experts predict that gasoline consumption in industrialized countries will likely stagnate for decades to come. "All we are saying is 'Whoa, wait!', wait until the testing comes in and wait until this stuff can be used in safe quantities" in conventional engines, said Charles Drevna, president of the National Petrochemical and Refiners Association.

Both sides disagree on the science. Growth Energy, a group promoting for expanded use of ethanol through policy reform and grassroots campaigning, argues that increasing ethanol blending to 15% is safe for conventional engines and would reduce greenhouse-gas emissions equal to removing 10.5 million vehicles from U.S. roads. Plus, the move would create more than 136,000 "green" jobs and inject $24.4 billion into the U.S. economy annually, as well as help to curb dependence on foreign oil, the coalition says.

"Our expectations are that EPA will meet the statutory deadline to make a decision, and they'll accept the overwhelming scientific, economic and technical data proving an increase to E15 makes sense," said Growth Energy spokesman Chris Thorne.

Critics of the waiver say the research for using 15% ethanol in conventional engines is incomplete and that this blend of the fuel increases emissions of nitrogen oxide, a compound contributing to air pollution, Drevna said. Left to its own means, the refining industry expected to "break the E10 blend wall sometime in year 2012" to 11% to 13% ethanol blending, given higher biofuel mandates that kick in annually amid lower gasoline demand.

The renewable-fuels mandate requires the amount of biofuels blended into gasoline to rise to 36 billion gallons in 2022 from nine billion in 2008. Conventional ethanol derived from corn starch will be capped at 15 billion barrels in 2015. To meet those demands, several refining companies, including Valero Energy Corp. (VLO), Sunoco Inc. (SUN) and Murphy Oil Corp. (MUR), snapped up ethanol-making plants from struggling ethanol producers.

During the third quarter, ethanol was a bright spot for Valero, which operated its seven newly acquired plants at near-full capacity, and for blenders such as Delek US Holdings Inc. (DK), thanks to cheap prices and a tax credit of 45 cents a gallon.

Drevna added that use of gasoline with a higher ethanol blend could create huge liabilities by voiding out warranties on vehicles and power equipment that contain coverage on fuel that includes up to 10% ethanol. Ethanol causes engines to heat up to a higher degree than gasoline alone and can corrode gaskets, which is hazardous in marine equipment since water causes ethanol to separate from gasoline, he said.

Talk about the waiver has also resurrected the old food-versus-fuel debate. Kraft Foods Inc. (KFT) spokeswoman Susan Davison said the food giant joined the opposition to raise concerns about the food-for-fuel trade off and higher food costs.

But proponents of the waiver, such as Matt Hartwig, spokesman for the Renewable Fuels Association, said the U.S. produces a surplus of corn every year and that stronger prices save the government millions of dollars in subsidy payouts.

(Naureen Malik covers the crude-oil refining industry for Dow Jones Newswires. She can be reached at 212-416-4210 or by email at naureen.malik@dowjones.com.)

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