'OPT IN' PROVISIONS TO PLAY KEY ROLE IN ALCOHOL, ETHER MARKETS

Sufficient supplies of oxygenates and alcohols were available to meet Phase 1 oxygenated-fuels requirements for the 1992 wintertime driving season.

Likewise, ample quantities should be available when reformulated gasoline is required in areas with severe and extreme ozone conditions, assuming that the U.S. Environmental Protection Agency (EPA) manages "opt in" provisions properly and anticipated methanol, ethanol, and oxygenate facilities come on stream.

These were the findings of a study by the California Energy Commission (CEC). In response to concerns raised by fuel suppliers and automobile manufacturers, the CEC studied the effects of transportation fuel programs implemented by the EPA and the California Air Resources Board (CARB).

The CEC analysis, initiated in February 1992, examined the impacts of these regulations on the prices and availabilities of alcohols and ethers for oxygenated fuels and methanol fuels.

Government agencies represented in CEC are the EPA, CARB, Caltrans, and the U.S. Department of Energy. Industry representatives contributing to the CEC report are Chevron U.S.A. Inc., Economics Insight Inc., Exxon Co. U.S.A., Tosco Refining Co., New Energy Co. of Indiana, and Southern California Gas Co. Independent agencies making contributions were Renewable Fuels Association and California Renewable Fuels Council.

FUELS PROGRAMS

The EPA and CARB developed the following programs to reduce atmospheric levels of carbon monoxide, nitrogen oxide, and hydrocarbons:

• EPA and CARB wintertime oxygenated gasoline program, which started in Fall 1992

• Phase 1 of EPA's reformulated gasoline program, starting in 1995

• The California Pilot Program for alternative-fuel vehicles, starting in 1996

• CARB's reformulated gasoline program, starting in March 1996 (This is Phase 2 of California's clean-fuel program.)

Table 1 shows an implementation schedule for these oxygen-content regulations.

OXYGENATES

The primary oxygenates to be used to comply with the EPA and CARB programs are methyl tertiary butyl ether (MTBE) and ethanol. MTBE has been used as an octane enhancer in the U.S. since the late 1970s.

Reformulated gasoline regulations stipulate that regions not mandated to use reformulate gasoline can "opt in" to the program. The EPA's management of these "opt-ins" will determine whether MTBE supplies are sufficient to meet surging demand. Fig. 1 shows three opt-in scenarios: none, 11 planned," and 100% opt-ins. Planned opt-ins include the ozone nonattainment areas designated moderate and serious by the EPA.

If methanol feedstock supplies are adequate and opt ins proceed as currently planned, the U.S. has the capacity to meet MTBE demand through 1994 (Fig. 1).

As can be seen by Fig. 2, the global MTBE supply also should be sufficient to meet anticipated demand during the U.S. wintertime driving season. The outlook until year-end 1994 is a potential oversupply of MTBE, as new plants come on stream.

California's demand for MTBE is expected to increase from 450 million gal/year in 1992 to 593 million gal/year in 1994 (Fig. 3). California, U.S., and world MTBE demand projections, assuming no opt ins, are shown in Fig. 3.

Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Virginia, and Washington D.C. have already applied to opt in to the reformulated gasoline program during 1995-97. Including these states in estimates of reformulated gasoline demand produces the MTBE requirements shown in Fig. 4.

If all states choose to opt in to the program, MTBE demand would soar, as shown in Fig. 5.

CALIFORNIA

The U.S., and California alone, will rely on MTBE and ethanol to produce both oxygenated fuel for the wintertime driving season and reformulated gasoline.

Other ethers may become more important in the future, but industry has yet to make a strong commitment to the construction of facilities to produce these oxygenates-namely ethyl tertiary butyl ether (ETBE) and tertiary amyl methyl ether (TAME). MTBE plants can be converted to ETBE plants by doing little more than changing the alcohol feedstock to ethanol.

California has 4,500 b/d of installed MTBE capacity, according to the CEC report. Although this number is expected to increase to 13,200 b/d by 1995, present production capacity can supply only about 18% of the state's MTBE needs.

In 2000, the year-round use of reformulated gasoline will cause MTBE demand to reach 1.7 billion gal/year (about 111,000 b/d). The projected MTBE capacity for California in 2000 will supply only 10.1% of the state's needs. Imports of MTBE into the state will increase to about 24 million bbl/year (65,000 b/d) with the introduction of reformulated gasoline in 1995.

Because California's Petroleum pipeline system is divided between Northern and Southern California, the state will have some unusual distribution problems. Unusually large amounts of MTBE may have to be stored before each driving season.

Because of the independent pipeline systems in the two halves of the state, any shortages between the two areas will have to be trucked or shipped along the coast.

ETHANOL

Ethanol has been used as a gasoline entender in the U.S. since the early 1970s. Primarily, it has been used in the form of "gasohol" (10% ethanol, 90% gasoline). Ethanol can be used as a fuel directly, or it can be used to boost gasoline oxygen content. It can also be converted to ETBE.

The U.S. government encourages the use of ethanol through a 5.4cts/gal subsidy for gasohol blenders. Blenders' income tax credit will continue through 2000.

Additional state subsidies have further encouraged the use of ethanol. These subsidies take the form of a reduced motor gasoline tax, a reduced sales tax, or tax incentives for ethanol production within a state.

The national average for ethanol content in the collective gasoline pool is 6.6%. In states offering additional subsidies, ethanol constitutes a larger-than-average share of the gasoline pool.

Reformulated gasoline regulations call for decreased gasoline volatility to reduce emissions of volatile organic compounds. Because of ethanol's high volatility, gasohol has an Rvp 0.5-1.0 psi higher than gasoline. This high volatility may limit ethanol's role in the oxygenate market.

The U.S. government, however, has proposed a number of changes to reformulated gasoline rules. These changes could increase the potential use of ethanol in gasoline, after 1995. The government actions include:

• The ability of states to discourage ethanol use by setting maximum oxygen levels will be limited. However, if states can show reduced pollution levels as a result of maximum oxygen levels less than 2.7%, the maxima will be allowed.

• The U.S. Treasury Department has made the ethanol content of ETBE eligible to receive the blender income tax credit.

• Gasoline blended with ethanol has been granted a 1.0-psi volatility waiver. For Northern U.S. cities, the waiver applies to 30% of the market share of ethanol-blended reformulated gasoline. (The Rvp of all gasoline in Northern cities will be reduced by 0.3 psi to 7.8 psi to compensate for any additional smog-forming emissions that might result from increased ethanol use.

• Southern cities wishing to opt into ethanol-blended reformulated gasoline will be granted a 1.0-psi volatility waiver for 20% of the market share. (The volatility of the gasoline pool will be reduced by decreasing the gasoline Rvp by 0.2 psi.)

• The U.S. government will support legislation to make the benefits of the blender tax credit nontaxable, which would give ethanol an effective tax credit of approximately 80cts/gal. Legislation to extend the credit, on a prorated basis, to ethanol blends of less than 10% has already been signed.

U.S. ethanol demand in 1991 was 0.8 billion gal (about 52,000 b/d). CEC projects this demand will increase to 0.9 billion gal/year (59,000 b/d) in 1992 and 1.8 billion gal/year (117,000 b/d) in 1993.

By 2000, ethanol demand is expected to be 2.0 million gal/year, or 130,000 b/d-an increase of 130% over 1991 levels.

A 10% blend of ethanol in gasoline has an oxygen content of 3.5%.

California's wintertime oxygen limit of 2.2% will reduce the demand for gasohol.

Table 2 shows ethanol demand for transportation fuel for California and for the U.S., excluding California. U.S. demand for all uses is also given.

Low and high-demand cases are presented.

The CEC report predicts that U.S. ethanol supply will be sufficient to fulfill demand through 2001 (Fig. 6).

METHANOL

The outlook for methanol is of concern because of its uses as an MTBE feedstock and as an alternative fuel for both traditionally powered vehicles and diesel vehicles.

If the regulatory goals of the California Pilot Program are met, the number of alternative-fuel vehicles in California will reach 1 million-4.2% of the state's total vehicle population-by 2000.

The CEC study found that methanol demand will increase substantially because of its use as an MTBE feedstock. With the acceptance of methanol-powered engines in the diesel and automobile market, the demand could be increased even more.

By 2000, the U.S. may require about 4.4 billion gal (about 290,000 b/d) of methanol annually, for transportation uses. The study projects that the U.S. will lead the world in methanol production by the same year. The Asia/Pacific region will be the second largest producing region.

But even with expanded domestic methanol production, the U.S. will continue to be a net importer of the chemical.

Fig. 7 shows world nameplate methanol capacity for 1992-2000. Global capacity is predicted to grow at 5.5%/ year during the period.

Methanol demand in California, for motor fuel and oxygenate production, is expected to reach 1.6 billion gal/year (about 104,000 b/d) by 2000. Fig. 8 shows CEC's methanol demand predictions, assuming no states opt in to the reformulated gasoline provisions. These figures were based on the combined methanol demand for MTBE, M85 (85% methanol/15% gasoline), and methanol used for buses.

Under the "planned opt-in scenario," methanol demand increases (Fig. 9).

The world methanol market will be tight in the mid-1990s. Unless new capacity comes on stream, however, methanol could be in short supply after 1997 if opt-ins to the reformulated gasoline program are high.

CALIFORNIA IMPORTS

By the end of the decade, California will be importing 152,000 b/d of methanol and oxygenates (Table 3).

The move toward cleaner-burning fuels will increase demand on California's infrastructure because of the requirements for transporting, storing, and handling these fuels.

For example, projected MTBE imports will require a unit train of 70 tank cars holding 30,000 gal (714 bbl) each, every 57 hr, to meet the demand for the 1992/93 driving season.

Future prices of methanol and oxygenates will depend largely on government policy and industry investment decisions affecting supply availability.

Uncertainty over whether regulations will be suspended or relaxed have created uncertainty in MTBE and methanol demand forecasts. This has led investors to hesitate in financing additional production capacity. Until these details are ironed out, the future of the markets is unclear.

Copyright 1993 Oil & Gas Journal. All Rights Reserved.