COMMENT: Increased US ethanol production requires dedicated pipelines

Sept. 17, 2007
Increased ethanol production capacity in the US requires a new transportation paradigm.

Increased ethanol production capacity in the US requires a new transportation paradigm. Boutique production facilities serving regional hubs via truck or short line rail are not a sufficient or realistic solution. Dedicated ethanol and ethanol blend pipelines are the only option that is safe, efficient, and cost effective, but only if legal, technical, and financial problems are addressed in a coordinated manner.

Several oil and pipeline companies are already looking at such pipelines as an investment opportunity. Private equity funds and investment banks will likely follow. Legal, technical, and economic problems are manageable, provided that government and industry closely coordinate efforts.

This article provides an overview of the current technical and regulatory state of dedicated ethanol pipelines.

Background

In 1980, there were only about 10 ethanol fuel production facilities in the US, producing roughly 50 million gal/year. By 1985, production had increased by an order of magnitude, with nearly 100 domestic facilities in 26 states producing more than 500 million gal/year.

Although lower oil prices through the 1990s made competition difficult, ethanol production continued, with significant help from federal subsidies. By the turn of the century, market forecasters and the US Congress projected a record of 5 billion gal of US ethanol production by 2012.

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US ethanol production, however, reached 5 billion gal in 2006, not in 2012, with production jumping more than 30% between 2005 and 2006 (Fig. 1). Current estimates have US ethanol production capacity, already the largest in the world (Fig. 2), growing to more than 10 billion gal/year by 2009, if not earlier.

The US uses alternative fuels for around 6% of its transportation energy demand, while countries such Brazil use a much higher percentage. Supply and demand-aided by subsidies-are both likely to increase in the US especially once cellulosic ethanol is perfected.

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In January 2007, US Pres. George W. Bush established a new goal of reaching 35 billion gal/year of ethanol production by 2017. Ethanol is already present in nearly half of all gasoline sold in the US, as a component of various gasoline-ethanol blends, making attainment of Bush’s goal likely.

Transportation

While political entities, market analysts, and others have focused on ethanol production and end use, only recently has discussion centered on transportation of ethanol fuel from producer to consumer. When production took place at the boutique level, truck, barge, and rail transportation was adequate.

As recently as 2 years ago, ethanol producers maintained that regional production facilities would meet local needs, implying that transportation of the fuel was not a major problem. Producers deemed use of ethanol pipelines as too costly to justify the anticipated returns. Industry’s rapid growth, however, has changed the nature of the transportation issue and available options.

An extensive 2002 report on ethanol infrastructure options noted appropriately (at that point in time) that it appeared there would be “no major movements of ethanol via pipeline.” Pipeline transportation remained too expensive for the volumes involved, despite being the most cost effective mode of transportation. Only 5 years later, logistics and economics have changed.

Trucking ethanol will inevitably play a role in the supply chain, but trucking is not cost efficient or feasible for the volumes now anticipated. Rail transport, similarly, will play a role in the supply chain, but there are both volume and cost limitations to rail as an option.

Barge shipments are more cost effective, but less time efficient. A serious question also exists about the availability of Jones Act vessels (those built and registered in the US, as required by law for shipment within US boundaries) or vessels that comply with the requirements of the 1990 Oil Pollution Act.

Pipelines are the safest, most efficient, and most cost effective mode of transport for ethanol. Whether the infrastructure exists or warrants the significant investment necessary to establish it, however, remains an open question.

Pipeline problems

The need to maintain quality control and avoid cross contamination of product prevents ethanol from being effectively batched with petroleum products in pipeline transport. Ethanol’s solubility in water further requires that dedicated ethanol pipelines prevent water infiltration.

Petroleum products, by contrast, tolerate water infiltration with little problem, any contact water from infiltration or condensation being removable at tankage facilities.

Blends of ethanol and petroleum products are only marginally more flexible for transportation than pure ethanol, the degree to which this is the case depending on the proportion of ethanol being piped.

Industry and agencies will need to agree on the gasoline-ethanol blends to be most used moving forward because of its effect on transportation alternatives. Higher concentrations of ethanol increase concern for water infiltration, contamination from pipe residue, and such metallurgical issues as stress corrosion cracking.

Light gasoline-ethanol blends may be able to move in existing pipeline infrastructure with no modifications, while higher concentration blends will require increased pipe cleaning and maintenance. Pure ethanol will likely require dedicated, if not new, pipeline infrastructure.

Such technical issues, however, are clearly addressable. Brazil and South Africa have been successfully transporting ethanol by pipeline for some time, and various US companies have proven its feasibility in test projects using both pure ethanol and ethanol blends.

The US Department of Transportation’s Pipeline & Hazardous Materials Transportation Administration regulates all interstate pipelines transporting natural gas, hazardous liquids (including petroleum), and carbon dioxide. PHMSA promulgates rules governing pipeline design, construction, operation, and maintenance. In the past few years, at the direction of Congress and the White House, PHMSA has promulgated new rules requiring improved integrity management planning for pipelines, raising the bar for operation and maintenance of all existing and new petroleum product pipelines.

Ethanol is not currently within PHMSA’s jurisdiction, but in a Federal Register notice dated Aug. 10, 2007, PHMSA proposed to subject ethanol to the same regulations governing petroleum pipelines. PHMSA stated that it finds “all biofuel-gasoline blends” to meet the definition of “petroleum products” subject to its pipeline regulations. The notice also stated PHMSA’s intent to regulate transportation of all “unblended ethanol and other biofuels.”

Although not expressly proposed in the notice, simply including ethanol and biofuels in the list and definition of hazardous liquids subject to PHMSA rules at 49 C.F.R. 195.2 would accomplish its regulation, making all ethanol pipelines subject to the design, construction, operation, and maintenance standards of PHMSA. It is likely that additional rule changes, requiring actions specific to ethanol transport will also occur, but the PHMSA regulations are well suited to this evolution.

Several other federal agencies also have potential jurisdiction over interstate ethanol pipelines. The Department of Energy provides informational and research and development support, but defers to PHMSA on oversight and operational regulation.

The US Environmental Protection Agency also regulates ethanol as a hazardous substance, which-like oil-requires reporting and response when released to the environment. EPA currently has a higher threshold for reporting ethanol releases than for oil, but this may change.

The US Bureau of Alcohol, Tobacco and Firearms has additional regulatory oversight for ethanol production activities (due to potential illegal consumption issues), but not for ethanol transportation. Among these agencies, the legal framework governing ethanol pipelines is already in place, with PHMSA likely taking the lead. Coordination of agencies should not be a significant obstacle to infrastructure development.

The remaining piece waiting to fall in place is the financial investment for ethanol pipelines. Some companies are planning to convert existing petroleum pipelines to ethanol-blend use. Such efforts will be cost effective, but higher blends or pure ethanol transport will likely require new pipe and increased system integrity reconfiguration and maintenance.

Infrastructure opportunity

New, dedicated ethanol pipelines will be costly to install. There may, however, be cost savings available in creating this new energy infrastructure.

Some ethanol pipelines could be placed within existing oil and gas pipeline rights-of-way, minimizing the costs of obtaining new ROW and permitting. The existing petroleum pipeline infrastructure is also aging and nearing capacity, with construction of a new ethanol infrastructure providing a potential opportunity to replace or upgrade certain adjacent existing lines or segments, thereby realizing economies of scale.

In areas of increasing population growth around the US, notably the South and West, dedicated ethanol pipelines could also follow the routes of new or reconfigured federal highway projects. Such construction projects will have already obtained all necessary ROW, and the environmental impact statements obtained for transportation purposes would shorten project review and permitting delays, and decrease costs.

Bibliography

Downstream Alternatives Inc., 2002
Energy Information Administration (www.eia.doe.gov).
Renewable Fuels Association (www.ethanolrfa.org).

The author

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Robert E. Hogfoss is a partner in the law firm Hunton & Williams LLP. His practice focuses exclusively on energy, environmental, and administrative law, with an emphasis on the Pipeline Safety Act, Clean Water Act, Oil Pollution Act, the National Environmental Policy Act, Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation, and Liability Act, and Toxic Substances Control Act. Hogfoss has represented some of the largest oil pipelines in the US on Pipeline Safety Act, Clean Water Act, and other enforcement actions. He received his JD (1986) from the Northwestern School of Law of Lewis and Clark College, Portland, Ore., and his BA (1980) in anthropology from Reed College, also in Portland.