MTBE, ETHANOL ADVOCATES' SQUABBLE MAY COMPLICATE RFG IMPLEMENTATION

Feb. 13, 1995
Bob Williams Associate Managing Editor-News An ugly fight over public health concerns between proponents of two key fuel additives may complicate U.S. refiner/marketers' efforts to implement the U.S. government's reformulated gasoline (RFG) program. That should be of special concern to refiner/marketers that are grappling with the federal government's backpedaling on its RFG mandate by allowing 39 U.S. Northeast counties to opt out of the program over concerns of price spikes (OGJ,

Bob Williams
Associate Managing Editor-News

An ugly fight over public health concerns between proponents of two key fuel additives may complicate U.S. refiner/marketers' efforts to implement the U.S. government's reformulated gasoline (RFG) program.

That should be of special concern to refiner/marketers that are grappling with the federal government's backpedaling on its RFG mandate by allowing 39 U.S. Northeast counties to opt out of the program over concerns of price spikes (OGJ, Jan. 30, Newsletter).

Industry officials are not too concerned at this point over a possible collapse of the RFG program through an accelerated opt-out campaign spurred by claims of impaired health. But there remains the possibility of a snowball effect with increasing negative publicity leading the public to believe refiners may be creating a health hazard with the new gasoline formula.

Even with the new regulatory rollback focus of the U.S. Congress, now under leadership of Republicans for the first time in more than 40 years, there is only a faint prospect of the RFG program ultimately being dismantled.

But if that happens, it could render moot huge outlays-some estimates place the ultimate total capital spending for clean fuels as high as $37 billion-that U.S. refiners and marketers will have spent to comply with federal law implementing the new gasoline formula. Such a move also could cripple refiner/marketers' profits, which analysts long have predicted would surge with implementation of the RFG program.

ADDITIVES DISPUTE

How U.S. Production of MTBE, Ethanol Has Varied (21337 bytes)

The dispute largely focuses on conflicting health claims related to the additives, based on methanol and ethanol, that are required under federal and some state laws to boost the oxygen content of gasoline.

While that rivalry extends back a number of years over largely economic and technical issues, it has heated in the past year or so with reports of alleged health problems linked to introduction of increased levels of methanol based methyl tertiary butyl ether (MTBE) in gasoline in some areas.

Use of MTBE and ethanol or ethanol based ethyl tertiary butyl ether (ETBE) to boost gasoline's oxygen content predates the federal RFG mandate, required under the Clean Air Act amendments (CAAA) of 1990, notably in gasoline oxygenate programs in certain western states.

Ethanol receives a heavy subsidy from the U.S. government and some state governments in the form of tax exemptions.

The Energy Information Administration said, "Ethanol is uneconomical to blend into gasoline without tax subsidies provided by the federal government and some states.

How MTBE, Ethanol Price Trends Have Shifted (21471 bytes)

"Before Jan. 1, 1993, the federal government provided a 54/gal tax subsidy for ethanol, if it was used for at least 10 vol % of gasoline. After Jan. 1, 1993, the subsidy was changed for the oxygenated gasoline program to give a prorated amount for two other ethanol percentages: 7.7 vol % ethanol, which would bring the gasoline oxygen content up to the required 2.7 wt % level required in most carbon monoxide (CO) nonattainment areas, or 5.7 vol % ethanol, which would bring the oxygen content up to the 1.8 wt % oxygen level required in California.

"The tax situation of ETBE is less apparent. The tax subsidy the federal government provides may be used for offsetting federal excise taxes. Unlike ethanol, which economically can be splash blended downstream by companies who can use the tax credits, ETBE can be incorporated cheaply into gasoline in the refinery But many refiners cannot use the tax credit.

"Thus the future of ETBE blending remains unclear."

While ethanol has a heavy subsidy and double the oxygen content of MTBE, gasoline containing ethanol cannot be shipped by pipeline because of its affinity for water, which greatly complicates its deliverability.

Another concern refiners have about ethanol is its environmental effects. Its extremely high volatility has led it to being banned in certain areas during warm weather months because that is thought to contribute to ozone formation.

Phillips Petroleum Co. said, "Industry and government research has indicated that increasing ethanol production could aggravate some environmental problems such as global warming. That's because a large amount of energy is needed to plant, fertilize, and harvest corn used to make ethanol and to operate ethanol distilleries, increasing greenhouse gas emissions."

EARLY OXYGENATES PROGRAM

An early test of new federal fuels formula mandates occurred in November 1992, when CAAA rules called for introducing higher oxygen levels in CO nonattainment areas during winter months.

That introduction coincided with the first claims of headaches and nausea during vehicle refueling in Alaska, where MTBE was the oxygenate in question. Later tests by industry and the U.S. Environmental Protection Agency found no link between MTBE and the purported ill health effects. Nevertheless, since then, other such claims have arisen in New Jersey and Connecticut.

Under the CAAA simple model for RFG, gasoline sold in the nine worst ozone nonattainment areas as of Jan. 1, 1995, must have a minimum oxygen content of 2 wt %. Other nonattainment areas have the option to participate in the RFG program to reduce ozone emissions.

When EPA recently allowed some areas to opt out of the RFG program, the result was reduced total demand for RFG and squeezed margins for refiner/marketers at yearend 1994.

Perhaps a more immediate concern for U.S. refiner/marketers is how all this controversy will affect the Clinton administration's proposal calling for EPA to require by 1996 that at least 30% of oxygenates in gasoline be renewable, in effect, requiring ethanol or its derivatives. That is the subject of a federal lawsuit by industry groups led by the American Petroleum Institute and National Petroleum Refiners Association that is to be heard in Washington, D.C., this week (see related story, opposite page).

API and NPRA challenged the rule in court last year, and a federal appeals court in late September 1994 granted the associations a stay of the EPA rule.

While the petroleum industry uses both additives, it generally opposes a government mandate favoring one over the other. A widespread backlash against MTBE over health claims could help build the case for an ethanol mandate, thus limiting refiner/marketers' competitive choices and almost certainly adding to gasoline costs, industry officials contend.

HEALTH CLAIMS BACKGROUND

The dispute heated in November 1992 when oxygenated fuels containing 15 vol % MTBE were introduced in Alaska and 30 urban areas in the Lower 48. While there were no noteworthy incidents outside Alaska, the fuel's introduction there resulted in complaints of nausea, headaches, dizziness, and irritations of eyes, nose, and throat.

Although standard animal studies had found no indications of health effects at much higher concentrations than those experienced by motorists, other studies were conducted on the possible effects of MTBE.

The Oxygenated Fuels Association (OFA) said those studies, involving detailed surveys of workers exposed routinely to fuels and volunteers exposed for 1 hr in clinical studies, failed to find any harmful effects or explain the reports of complaints by Alaskan consumers.

OFA noted that although the tests were adequate for Lower 48 inhabitants, they took into account neither the Alaskan cold, dark winters, with people physiologically acclimated to high latitude environments, nor the type of fuel used in Alaska.

OFA gave a grant to researchers at the University of Alaska-Fairbanks to assess the effect of the other factors. The researchers tested under cold conditions the odor characteristics of gasolines produced in Fairbanks and in the Lower 48 blended with MTBE and with isopropyl alcohol.

Researchers found an eightfold increase in the ability of volunteers to detect odors from the MTBE gasoline produced from Alaskan North Slope crude vs. that associated with gasoline produced in the Lower 48. The same concentration of MTBE in the Lower 48 gasoline did not produce the odor effects that it did in the Fairbanks gasoline. Researchers noted that North Slope crude has a much higher proportion of aromatics than typical Lower 48 fuels.

Williams Cain, author of a clinical study on MTBE at Yale University, said, "The UAF study helps clarify why MTBE seemed so much more evident to consumers in Alaska. That oxygenate made the particular gasoline in Fairbanks smell more potent. It was a bit like placing your nose 50% closer to your tank when you filled your car."

ARCO Chemical Co.'s Art Zadrozny later was quoted as saying that much of the "misinformation" about MTBE started in Alaska.

"We did some research and found that the odor is much more pronounced in gasoline used in Alaska than in the Lower 48," he said. "The most recent research by the University of Alaska found that it was the gasoline they use, not the oxygenate, that caused the problem."

In late January, EPA released a new health risk assessment of MTBE that found MTBE is safe when blended into RFG and effective in improving air quality

Those findings notwithstanding, Anchorage in mid-January became the first U.S. city to require that all gasoline sold there contain 10 vol % ethanol during Jan. 1-Mar. 1 in an effort to comply with CAAA rules. In addition, Fairbanks is testing about 200 automobiles to ascertain any differences between ethanol blended gasoline and conventional gasoline.

Further, the New Jersey assembly is mulling legislation that would require the state's department of environmental protection and energy to amend or withdraw its regulations on standards for oxygenated fuel. There are other RFG/oxygenates complications still to come this year (see story above).

LOBBYISTS AT WAR

Since the first MTBE related health claims surfaced in Alaska, a war by press release and news conference has erupted between methanol and ethanol lobby groups that culminated last month in a critical report aimed at MTBE on the ABC television news magazine program Day One.

The war gathered momentum following the appeals court stay of EPA!s renewable oxygenate standard (ROS).

Fuels for the Future (FFF), a New York lobby group, cited press reports quoting a former director of toxicology for Mobil Corp. as saying that consumers should not be exposed to MTBE. The New York newspaper Newsday reported he was fired by Mobil after he allegedly told Mobil's Japanese subsidiary it was processing gasoline containing too much benzene. The toxicologist, Myron Mehlman, sued Mobil and was awarded a reduced, multimillion dollar sum under a New Jersey whistleblower law, and both sides appealed, the newspaper reported.

Newsday also reported Mehlman, a year before his firing, sent MTBE samples to an Italian physicist, Cesare Maltoni, who is conducting studies of MTBE as a possible carcinogen. Maltoni also was featured on the Day One program and reiterated his claims of increased incidence of tumors in rats exposed to MTBE.

After the Newsday report, API Vice Pres. Arthur Wiese wrote to Newsday, seeking to refute some of the claims in its story on MTBE. "The article barely mentions that the majority of the scientific data available on MTBE shows no indication of any public health threat from the exposure to MTBE in gasoline," he wrote. "Unfortunately, the article emphasizes unreviewed data and unsupported allegations by individual activists."

Citizen Action's Edwin Rothschild, a longtime, high profile nemesis of the petroleum industry, entered the fray with a letter to the New York Times in October that sought to pin the blame for gasoline price increases predicted this winter in the U.S. Northeast on major refiners opposed to using ethanol in gasoline in lieu of MTBE.

In October testimony before the New Jersey Assembly's regulatory oversight committee, Jack Snyder, professor of toxicology at Thomas Jefferson University, said, "From a scientific and medical perspective, there is no basis for the contention that exposure to MTBE causes objectively verifiable human health effects." Earlier, Snyder said that from a health effects standpoint, there is no reason to distinguish between ethanol and MTBE.

Also in late October, the American Methanol Institute (AMI) challenged the ethanol industry to document its own safety record. More than 40 tests by government, industry, and academic institutions have confirmed methanol/MTBE to be safe when used as intended, while ETBE remains essentially untested, AMI said.

"Especially hypocritical is the industry's reason for not studying ETBE," AMI said, "which is that because MTBE has been shown to be safe, ETBE must be safe, too. There is no logic at all in that argument."

Perhaps the low point in the squabble came in late December, when FFF cited an incident in Mexico in which at least 28 persons died and several others were blinded after drinking a mix of mescal and methanol at a funeral wake. FFF then listed a series of published warnings of methanol's toxicity.

AMI countered that salvo with a press release that attacked FFF's press release as the "latest in a series of repetitious and contrived attacks against natural gas based methanol, a product used extensively to improve air quality through its gasoline additive MTBE."

After citing the benefits of MTBE, AMI claimed the ethanol industry "has resisted testing of is product, although U.S. Poison Control Centers statistics indicate that ethanol may pose a greater public health threat than either methanol or gasoline." It then offered statistics showing ethanol poison exposures in 1992 more than triple those for gasoline and methanol combined.

REFINER/MARKETERS RESPOND

Outlook For 1995 U.S. Oxygenate Supply (22334 bytes)

The controversy is making some U.S. refiner/marketers a bit queasy, not the least over how it might evolve into a de facto ethanol mandate regardless of what happens with industry's lawsuit against EPA's ROS.

That's true even for refiners who use ethanol and ETBE in gasoline as well as MTBE.

API estimates the ethanol mandate would cost refiners another $460 million/year in the higher cost of producing fuels with such mandated oxygenates, converting MTBE plants to produce ethanol based oxygenates, modifying product terminals, and higher transportation costs. That is in addition to the extra 5-10/gal cost of making RFG with MTBE compared with conventional gasoline costs.

API said a large part of the ethanol mandate's cost may be concealed because each gallon of ethanol sold in RFG is exempt from 54 in federal gasoline excise taxes and a portion of some state gasoline taxes. API estimates lost federal taxes alone could total $340 million/year, cutting funds usually dedicated to bridge, highway, and mass transit projects. Ethanol currently incurs $750 million/year in state and federal fuel tax exemptions for the sale of gasohol, which is conventional gasoline blended with ethanol.

Amoco Corp. has been manufacturing ETBE at its 53,000 b/d Yorktown, Va., refinery in small commercial volumes since 1990-91 and markets MTBE in gasoline where oxygenated fuels are required in winter use areas. It also blends ethanol in selected market areas.

"We're not in favor of one vs. the other. We use both," said Amoco's David Polk regarding the MTBE vs. ethanol controversy "From our perspective, there is no controversy. Which one to use depends on economics and logistics."

He clarified that the subsidy for ethanol provided by the government tax exemptions plays a role in the economics of a choice for ethanol.

"We have had no reports of illnesses. We believe MTBE does not pose a health hazard," Polk said.

Phillips produces MTBE and has a capacity of 3,000 b/d of the oxygenate. At the same time, it blends ethanol where oxygenates are required in the winter and receives a large volume of gasoline with oxygenates blended in on exchange, said Gary Schoonveld, Phillips fuels regulatory director.

Phillips markets ethanol blend gasoline in a number of markets where "if there is customer acceptance of ethanol ... the subsidy is a factor."

Schoonveld does not think the current controversy over MTBE necessarily will spark an acceleration of the RFG opt-out campaign. But logistical and marketing problems could arise if an ethanol mandate ROS or de facto-becomes widespread, he warns.

Because the more volatile ethanol has a much higher Reid vapor pressure (Rvp) rating, summertime RFG base gasoline Rvp would have to be reduced by at least 1 psi to accommodate it. That, in turn, will hike gasoline prices still further, Schoonveld said.

He noted Phillips has had no reports of illness related to MTBE and thinks the Day One segment and reports of the Italian health studies "have been sensationalized to the extreme."

"We favor neutrality of (regulatory treatment) additives," Schoonveld said. "Once you take out one of the competitors among the oxygenates, you undercut the stability of the market."

Copyright 1995 Oil & Gas Journal. All Rights Reserved.