With the petroleum industry under political pressure to market cleaner fuels and refineries operating near capacity rates in the face of rising demand, markets for conventional and alternative transportation fuels appear robust.
Gasoline and diesel command the lion’s share of the transportation fuel market, but alternatives are expanding.
“Ethanol and biodiesel technologies should allow for the displacement of 5-10% of current [gasoline and diesel] consumption,” said analysts at Simmons & Co. International in a recent report. “Future technologies, such as cellulosic ethanol, could allow displacement of nearly 30%. Overall, we expect compelling growth from alternative fuels in the coming years.”
However, Jefferey A. Dietert, a research director at Simmons & Co., warned, “Gasoline demand is only up 0.3% for January-August 2006 vs. January-August 2005. While Department of Energy weekly stats suggest [a rise of] 3-4% compared to the hurricane-impacted 2005 [market] for September-November, I would not get carried away on how ‘strong’ gasoline demand growth is.”
Renewable resources currently provide just over 6% of total US energy, but officials of the Worldwatch Institute and the Center for American Progress in Washington, DC, expect that figure to grow rapidly. Global production of fuel ethanol more than doubled between 2000 and 2005, and biodiesel expanded nearly four-fold, they said in a joint report in late September.
A major stimulus for alternative fuels is the increasing renewable fuel standard (RFS) mandated by the Energy Policy Act of 2005. It would increase renewable motor fuel in the US to at least 7.5 billion gal in 2012 from 4.5 billion gal in 2006. “With the Democrats gaining control of the House and the Senate, an increase in the renewable fuels standard or more subsidies is a distinct possibility,” Dietert said.
Ethanol
Worldwide production of ethanol, the predominant alternative fuel, exceeds 12 billion gal/year. In the US, production last year totaled 4 billion gal, about 2% of gasoline consumption on a btu-equivalent basis.
US ethanol capacity is coming on stream quickly. Production is expected to exceed 7 billion gal/year by 2007, when the mandate will be 4.7 billion gal/year. Ethanol currently is blended in 40% of all US gasoline, having replaced methyl tertiary butyl ether (MTBE) in reformulated and oxygenated gasoline.
Along with the volumetric mandate, ethanol receives support from federal and state governments. The federal government provides a 51¢/gal tax credit to ethanol blenders, and all but four US states offer other incentives, including tax credits, to promote sales. The US also has an ad valorem tariff on imported ethanol of 2.5% of product value and imposes a secondary protective tariff of 54¢/gal.
The tariff expires next October. The Energy Information Administration (EIA) estimates that lifting the tariff, discussed briefly earlier this year when supplies were under strain, would increase imports by 10,000-20,000 b/d from 22,000 b/d currently. Industry analysts said Brazil-the world’s largest producer of ethanol-could increase exports to the US by only 5,000-7,000 b/d. They thought China, the third largest producer, would be most likely to step up ethanol exports to the US if protections eased.
The National Petrochemical & Refiners Association opposes government mandates for ethanol, biodiesel, and other renewables but not alternative fuels competitively priced without government subsidies. “We believe that alternative fuels will be a growing component of the nation’s future energy supplies as their economic viability improves,” said Bob Slaughter, NPRA president.
However, Dietert said, “It seems to me that ethanol is going to have to compete on a cost basis with refinery-produced gasoline in order to take market share.”
Meanwhile, the price of corn-the biggest US crop and one of the most heavily subsidized-shot up 63% during Aug. 16-Nov. 17, raising production costs of meat and poultry, sweeteners, breakfast cereals, and other packaged foods. Market analysts blamed increased production of ethanol, the third largest market for US corn behind livestock feed and exports. Nearly 13% of the 2005 US corn crop went into ethanol production. Ethanol producers’ demand for corn is expected to grow from 1.2 billion bushels in 2003-04 to 3 billion bushels in 2009-10.
Still, the International Energy Agency (IEA) in Paris claims that, even without subsidies and despite its lower energy density, ethanol from corn is cost-competitive with US gasoline in the US when oil is above $45/bbl-well below oil’s price in mid-2006.
Ethanol makers say cost reductions are possible with improvements in manufacturing and scale economies, asserting that a tripling of ethanol plant size can cut unit cost by 40%. Many ethanol plants now under construction have production capacity of 100 million gal/year, up from a typical earlier capacity of 40 million gal/year.
However, opponents of renewable-fuel mandates question whether the energy provided by biofuels exceeds the energy required to make them. They claim biofuels produced from low-yielding crops and processes fueled by fossil energy potentially could generate as much greenhouse gas emissions as petroleum fuels do or more.
When ethanol is mixed in a stronger 85:15 blend with gasoline, it becomes E85, the fuel for a new generation of “flexible-fuel” vehicles being produced with the help of tax incentives in 2007. If the RFS is increased and federal and state subsidies continue, Simmons analysts said, “Corn-derived ethanol [in the US market] could reach 16 billion gal in 10 years (7% of the total gasoline pool on a btu-equivalent basis).” However, they said, “For ethanol to grow beyond that, cellulosic technology needs to gain traction.”
The Worldwatch Institute disputes claims that biofuels require more energy to make than they provide. “Thanks to technological advances throughout the production process, all of today’s biofuels have a positive fossil energy balance,” it said in its study report. “If bioenergy is increasingly used for feedstock processing and refining as well, the balance sheet tips further in bio- fuels’ favor.” However, it acknowledged, “Producing half of US automotive fuel from corn-based ethanol would require 80% of the country’s cropland. Thus, large-scale reliance on ethanol fuel will require new conversion technologies and feedstock.”
The largest US producers of ethanol are Archer Daniels Midland, VeraSun, Hawkeye, Aventine, and Cargill. Together they account for 36% of total US capacity. “Today’s corn-based ethanol industry leaders are best positioned to co-opt the new technologies, having logistics management experience and customer relationships,” said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va.
Cellulosic ethanol
Ethanol made from the nonfood portions of plants expands the potential supply while reducing competition with food. A joint study by US Departments of Agriculture and Energy concluded the nation has enough biomass resources to satisfy a third of US petroleum needs if cellulosic technologies and resources are employed.
The potential to produce low-cost cellulosic ethanol from various alternative agricultural feedstocks and processes “is truly remarkable,” Rousseau said. However, he sees “a number of technological, operational, and economic issues to overcome before this industry makes a successful transition from research and development to genuine large-scale, commercial operations.”
There are only a handful of cellulosic ethanol pilot plants around the world with capacities of 5 million gal/year or less but no operating plants of a size to suggest mainstream commercial viability. Moreover, the low sugar density of cellulosic feedstock requires plants to be located near large supplies of feedstock. The high processing cost and inherent risks of such projects make it difficult to obtain financing, so many companies seek government grants and loan guarantees. Therefore, Rousseau said, “Commercial economics for cellulosic ethanol production is likely still several years away.”
Although cellulosic ethanol has the best growth potential for the biofuel market, its current production cost of $2.25/gal ($3.38/gal of gasoline equivalent) is uneconomic, Simmons analysts said.
Biodiesel
The biodiesel market is far smaller than ethanol and concentrated primarily in Europe. But it is the fastest-growing fuel in the US, according to the joint study by the Worldwatch Institute and the Center for American Progress in Washington, DC. The US produced 75 million gal of biodiesel in 2005, up from 500,000 gal in 1999, according to the National Biodiesel Board, which says production might reach 150 million gal this year. It puts current US production capacity, which is growing rapidly, at 580 million gal/year from 85 plants. Plants under construction and expansion will add 1.4 billion gal/year to total capacity.
Biodiesel uses monoalkyl esters from vegetable oils and animal fats. Soybeans are the predominant feedstock in the US. But biodiesel has a greater number of potential feedstocks than other fuels do, as well as the flexibility to be shipped by pipeline, which cannot be done with ethanol-gasoline blends.
Biodiesel can be blended with conventional diesel at any concentration. Most diesel vehicles can run on blends of up to 20%, and a few engine warrantees allow for 100% biodiesel. More than 600 vehicle fleets now use biodiesel. The US Navy, the world’s biggest diesel consumer, has begun processing its used cooking oil into biodiesel.
Still, said Simmons analysts in their September report, “The cost to produce biodiesel is $2.40/gal ($2.64 on a diesel gal-equivalent basis), which is substantially higher than conventional diesel at [the then-current price of] $1.80/gal.”
The Worldwatch report acknowledged, “Costs must continue to fall if biodiesel is to be used widely.”
Ultralow-sulfur diesel
As of Oct. 15, the sulfur content of 80% of highway diesel sold in the US could not exceed 15 ppm, down from 500 ppm previously. All but the smallest refiners had to start making ultralow-sulfur diesel (ULSD) last June, and several are processing to well below the specified level to offset contamination by residual sulfur in distribution systems.
“We were nervous about the rollout of this program. It’s going smoothly. We haven’t seen problems in supplies or vehicle performance,” said Alfonse Mannato, fuels issues manager in the American Petroleum Institute’s downstream department at that group’s annual meeting in October (OGJ Online, Oct. 17, 2006). US refiners spent $8 billion, and pipelines and terminal operators spent hundreds of millions more to bring ULSD to market.
Despite earlier fears, Adam Dreiblatt, senior manager of BearingPoint Inc., McLean, Va., said, “There were little to no supply disruptions due to ULSD implementation. Refiners are putting out fuel at a lower sulfur levels than they estimated prior to implementation.”
However, the Societe Generale corporate investment-banking group said Nov. 22, “Diesel stocks continue to tumble, apparently undermined by this year’s new, cleaner specification.”
Dreiblatt told OGJ, “There still does seem to be some confusion among industry participants with the logistics of the regulations as well as the interpretation of the regulations for nonstandard situations (e.g., importing of some undesignated materials), but these seem to be working themselves out as they gain experience,” However, the “true test” will come, he said, when “designate and track” (D&T) reporting begins, with the first report due Feb. 28 to designate the classifications of distillate flowing through US pipelines and track the progress of various batches.
“It will not be until this time that the majority of the potential hiccups in the regulatory scheme will be exposed,” Dreiblatt said. “Things to watch out for are variances in the handoff volumes between custody holders. While we know of some industry participants who plan to prevalidate their planned submissions with their business partners, we doubt that this step will occur through most of the industry. Thus, there could very well be a ‘February surprise’ when it comes to D&T reporting.”
Ultralow-sulfur gasoline
At the start of 2006, specifications for gasoline content changed from the previous 500 ppm sulfur ceiling for RFG outside of California to a required 30 ppm annual average and a cap of 80 ppm/gal for most gasoline, with some delays for gasoline produced in the Rocky Mountain area or produced by small refiners.
Desulfurization will make regular gasoline more like reformulated fuel, proponents say. Early this year, US refiners were estimated to have spent $8 billion to reduce sulfur levels in gasoline.
CNG and LNG
It’s estimated that 22 bcf of natural gas, just 0.1% of total US gas demand, was used to fuel transportation in 2005. Natural gas vehicle fuels have been cheaper than gasoline and diesel through much of this year. Most natural gas engines already meet 2007 emission standards and can satisfy the more stringent 2010 requirements “with relatively inexpensive modifications,” Simmons analysts said. “CNG and LNG also produce significantly lower emissions than biodiesel and ethanol.”
Simmons said, “CNG holds solid promise as a low-cost, clean fuel that can compete with diesel for commercial fleets. However, we do not expect widespread retail adoption due to the challenges of establishing a gaseous fuel infrastructure as well as the long-term supply challenges for natural gas.”
Building a new CNG fueling station costs $750,000-1.5 million, while retrofitting an existing station with a CNG option would cost $200,000, said the Simmons study.
Propane
Late in the 20th Century, when a government program required the posting of notifications of alternative fuel suppliers along US highways, the first sign erected in Houston was for a propane outlet.
Propane or LPG has been fueling automobiles, pickup trucks, and other light vehicles in the US for more than 60 years. More than 200,000 propane-fueled vehicles are on US roads, primarily in fleet operations. The fuel also has the largest distribution network for any alternative fuel in the US, with more than 3,000 propane fueling stations.
A Battelle Institute study said propane is the most economic alternative fuel for fleet vehicles on a per-mile basis. The National Propane Gas Association claims the higher octane rating (104-112) and low carbon and oil-contamination characteristics help engines last three times longer than those fueled by gasoline. Vehicle conversion costs are relatively cheap at $1,500-3,000 and can be partially offset through tax deductions or other incentives available through local, state, and federal programs.
But while the public will use propane to fuel their outdoor grills, Simmons analysts said, “We do not expect to see widespread acceptance of propane as a transportation fuel due to engine availability and infrastructure requirements.”
