Ethanol A Cautionary Tale - EPRINC · • 1980-1990: Rationalization of refining. – Closure of...

Ethanol

A Cautionary Tale Lucian Pugliaresi

Energy Policy Research Foundation, Inc.Aspen Institute

June 26-28, 2009

Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org1


EISA ’07 Renewable Fuels Standard

Source: DOE

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Cellulosic Advanced

Corn Ethanol / Other

EPACT 05

What Were They Thinking?• 15 billion gallon mandate easily achievable with growing

gasoline demand -- blend wall would not exceed 10% (2007 forecast environment).

• Gasoline prices would rise – making ethanol cost competitive – an antidote to high gasoline prices.

• Mandates were needed to overcome resistance from the petroleum industry.

• Rural renaissance .• And besides – it would deliver substantial benefits in lower

emissions of GHGs.

Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org 3

What did they miss?• Gasoline demand did not grow, prices fell

• RFS mandates were volumetric – driving fuel sector to the blend wall in next year or two.

• Ethanol not cost competitive under most scenarios.

• Ethanol substitutes for gasoline -- not crude oil --leading to refinery output inefficiencies

• Food versus fuel problem.

• Carbon benefits under attack.

Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org 4

What’s a Refinery?

Alkylation

Catalytic Reforming

Isomerization

Coking

Fluid Catalytic Cracking

Hydrocracking

Lubricants

Deasphalting

Hydrotreating

Vacuum Distillation

AtmosphericDistillation

gas oils

residue

distillates

naphthas

gasesFuel GasPropane

Gasoline Blendstocks

Jet Fuel

Diesel Fuels and Heating Oils

Gasoline and Distillate

Blendstocks

Lubricating Oils

Coke

Asphalt

U.S. Oil Refineries History: 1970 - Present

• 1970s: The Small Refiner Bias in the 1973 price control program encouraged the building of excess small refineries.

• 1979: Price controls end.• 1980-1990: Rationalization of refining.

– Closure of small, uneconomic units - adversely impacted by population and crude supply shifts.

– Capacity at existing, better-located facilities expanded.• Remaining refinery campuses become bigger, more efficient.

• Mid-1990s: Capacity grows; demand grows faster.• 2000s: More investment needed to expand existing refineries.

– Regulatory issues– Capital requirements and investment decisions

What happened to “Refining’s Golden Age?”

US Ethanol Consumption: 2000 - Present

• Quick ramp-up made it look easy—but really was displacement of MTBE• Ethanol does not displace much foreign oil. 6 bil gallons per year of

ethanol saves approx 100 million bbls of oil. • Corn prices have risen from $1.60 to $6.00. How much attributable to

ethanol driven demand? $1.00? $2.00?• At $1.00/bu, oil saved cost $130/bbl; at $2.00/bu, the figure is $230 per

bbl.• Current Ethanol Economics Looks Dicey—With high corn prices, low fuel

ethanol prices, existing plants earn losses. • Existing plants have 7 bil gal capacity; mandate calls for 2 bil more• Plants under construction and planned may not be completed/brought on

line• If corn prices remain stable at current levels, ethanol prices must rise by at

least $0.50 per gallon in order for ethanol to be sufficiently profitable to attract investment.

• More capacity needed to meet 9 bil gal mandate for 2008


U.S. Corn Ethanol Production

Source : EIA - http://tonto.eia.doe.gov/dnav/pet/pet_pnp_oxy_dc_nus_mbblpd_m.htmyyy

•Ethanol In Gasoline---Long history/Early start as gasohol•100,000 bd (150 million gal/yr) in 1998•Up-tick in mid-2006 due to MTBE phase-out•Present US production of 640,000 •“Run-rate” equivalent to 9.81 bil gal/yr—7.2% of 2009 Q1 national gasoline supplv

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• Compatibility issues have kept ethanol and blends out of petroleum pipelines.

• The industry is studying compatibility. While optimism is prevalent, if and to what extent ethanol and its blends will be deemed suitable for pipeline input is unclear.

• Ethanol movement by rail grows, with unit trains offering the best economics. Few ethanol plants and fuel terminals have sidings for rail cars/unit trains. Trucks commonly cover the “first” and “last” mile.

• New oil terminal facilities are configuring rail access where they can. Rail offers routes that suit ethanol transport geographically; pipelines more often are laid-out for Gulf Coast-North/NE transport.

– Ethanol needs to be supplied universally. Transport systems still need to be established for ESIA 2007 supply amounts.


Issues Identified in the EPRINC/EIA Workshop---Still Applicable to Future Ethanol Blending

• Corn will likely be the feedstock of choice until 2015. Will there be enough supply? And at what cost to the food supply? 5.5 billion bushels will be needed, as well as significant new production capacity.

• E-10 is successfully operating in current model autos, most current model marine and small power applications. It was seen as the predominant fuel. Other higher blends were not seen as an option; a standardized E-85 product will absorb mandated ethanol amounts.

• Concern was expressed regarding the slow roll-out of E-85


Issues Identified in the EPRINC/EIA Workshop---Still Applicable to Future Ethanol Blending (Contd)

Lifecycle GHG Emissions

11Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org

Source: EPA, http://www.epa.gov/OMS/renewablefuels/420f09024.htm



Ethanol Subsidies


2008 Ethanol Subsidies $ MillionMarket Price Support on Domestic Production 2,240Market Price Support on Exports 30Volumetric Excise Tax Credit (Blender's Credit)* 4,335Reductions in State Motor Fuels Tax 440Federal Small Producer Tax Credit 170Excess of Acclerrated Over Cost Depreciation 680Federal Grants, Demonstration Projects, R&D 350Access to Tax-Exempt Solid Waste Bonds 110Deferral of gain on sale of farm refineries to coops 20Crop Support to Corn 730Crop Support to Sorghum 20Credits for Clean Fuel Refueling Infrastructure 20

Total: 9,145Total Subsidy Per Gallon of Ethanol: $1.08TotalSubsidy Per Gallon of Gasoline Displaced, BTU Equivilent $1.63(Total does not include cost of fuel, only the fuel subsidy), * = EPRINC Estimate, not all subsidies are listed

Source: http://www.globalsubsidies.org/files/assets/Brochure_-_US_Update.pdf , EPRINC calculated Blender's Credit

A Selection of Ethanol Subsidies


2008 Ethanol Subsidies $ MillionMarket Price Support on Domestic Production 2,240Market Price Support on Exports 30Volumetric Excise Tax Credit (Blender's Credit)* 4,335Reductions in State Motor Fuels Tax 440Federal Small Producer Tax Credit 170Excess of Acclerrated Over Cost Depreciation 680Federal Grants, Demonstration Projects, R&D 350Access to Tax-Exempt Solid Waste Bonds 110Deferral of gain on sale of farm refineries to coops 20Crop Support to Corn 730Crop Support to Sorghum 20Credits for Clean Fuel Refueling Infrastructure 20

Ethanol Subsidies


Total 2008 Ethanol Subsidies: $9.15 billion

Total Subsidy Per Gallon of Ethanol: $1.08

TotalSubsidy Per Gallon of Gasoline Displaced, BTU Equivilent $1.63

(Total does not include cost of fuel, only the fuel subsidy), * = EPRINC Estimate, not all subsidies are listed

Source: http://www.globalsubsidies.org/files/assets/Brochure_-_US_Update.pdf , EPRINC calculated Blender's Credit

Energy Independence and Security Act of 2007—

Mandated Ethanol Future


Billions of Gallons


EISA And Gasoline—Benchmarks

Materials 2008 2015 2022

Corn Ethanol 9 15 15

Cellulosic -- 3 16

Advanced for Mogas* -- 0.7 2

Total 9 18.7 33*Assumes Advanced is divided between diesel and motor gasoline.

• Not a commercial product now

• Focal point of a great deal of R & D– Many promising projects

– A number of corporate entities involved

– Still in the lab

• If Cellulosic moves beyond the lab, significant capital investment needed– 16 bgy = 1 million bbls per day. That is the amount of crude produced in Texas!

• Policy-makers have placed a bet on something that does not exist– If Cellulosic is not available as EISA mandates, EPA will likely issue a waiver


Cellulosic Ethanol?

E-85 Challenges


Product Prices and Share


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CBOT Ethanol Futures

NYMEX RBOB Futures

Ethanol Production's Share of Finished Motor Gasoline Supplied (%)

Source: EIA Data, CME Group, EPRINC Calculations. All prices are for front month futures contracts. Prices are not BTU adjusted.

The Blend Wall in a low RBOB World


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RBOB (NYMEX Futures: March Delivery) Ethanol's Value Relative to Gasoline Ethanol (CBOT Futures: March Delivery)

Corn Feedstock - $ per gallon of Ethanol All In-Cost of Ethanol Production

Falling values for ethanol will be mirrored by rising values for RINs

After serving its role as an oxygenate, ethanol must compete directly with gasoline

Estimated all-in cost for ethanol: corn + operating costs + capital costs*

Ethanol loses significant value as it moves into E85

Price difference between ethanol and RBOB

Blender's Credit: $0.45/gallon


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CAFÉ MPG

Passenger Car MPG

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Model Year CAFÉ and Vehicle MPG

Source: NHTSA, EIA

Take Away: Reality lags expectations. Mismatch between actual MPG and policy goals.

• Currently sold at roughly 2000 service stations. • Used in a disappointing few FFVs.• Mispriced – Current MPG/BTU adjusted price is $2.87 v. $2.69

for regular gasoline.– Market mechanism needs to price E85 correctly.– E85 should be priced to attract motorist use.

• E85 convenience factor – takes 3 fill-ups to go as many miles as 2 regular fill-ups.– Convenience factor needs to be priced.

• Bottom Line – Consumer needs a good reason to walk into a dealership and ask to buy a FFV.


Source: AAAFuelGaugeReport.com

E85 Rollout Moves Slowly

Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org 25Source: EIA Data, DOE Data, EPRINC Calculations

FFVs and E85 Usage

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Retail Fuel Prices


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E85 Price Per Gallon

E85 BTU Adjusted*

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Diesel*

*Price is per gallon of gasoline equivalent (BTU basis), according to DOE conversion standards: 1 Gallon of Gasoline = 1.333 gallons of E85 and 0.904 gallons of diesel. Source: DOE Data

Subsidies and Support to Electric Production by Selected Primary Energy Sources


Primary Energy Source

FY 2007 Net Generation (billion kilowatthours)

Subsidies and Support Allocated to Electric Generation (million FY 2007 dollars)

Subsidies and Support per Unit of Production (dollars/megawatt hour)

Natural Gas and Petroleum Liquids 919 227 0.247007617Coal 1946 854 0.438848921Hydroelectric 258 174 0.674418605Biomass 40 36 0.9Geothermal 15 14 0.933333333Nuclear 794 1267 1.595717884Wind 31 724 23.35483871Solar 1 174 174Refined Coal 72 2156 29.94444444

Source: EIA Data

Energy Subsidies Not Related to Electricity Production


Category Fuel Consumption (Quadrillion BTU)

FY 2007 Subsidy and Suppot (million 2007 dollars)

Subsidy per Million BTU

Coal 1.93 78 0.04Refined Coal 0.16 214 1.35Natural Gas and Petroleum Liquids 55.78 1921 0.03Ethanol/Biofuels 0.57 3249 5.72Geothermal 0.04 1 0.02Solar 0.07 360 2.82Other Renewables 2.5 184 0.14Hydrogen * 230 NMTotal Fuel Specific 60.95 6237 0.1Total Non-Fuel Specific NM 3597 NMTotal End-Use and Non-Electricity NM 9834 NM

Source: EIA Data


Obama Administration Proposing New Taxes on Oil and Gas Industry

A Selection of Proposed TaxesEstimated Average Annual Cost, 2010-2019 ($ millions)

Reinstate Superfund Taxes - Would Impose taxes on oil and chemical products and use revenues to help clean up contaminated sites. 1720.5Repeal LIFO - Limit the options to account for the flow of inventories for tax. Would require significant amounts to be treated as income. 6105.2Levy excise tax on Gulf of Mexico oil and gas - Impose an excise or severance tax on oil and gas production from federal offshore leases. 528.3Repeal expensing of intangible drilling costs - Eliminate the ability to immediately deduct certain costs associated with drilling and developing wells for tax purposes and instead recover such costs over some period of time. 334.9

Repeal deduction for tertiary injectants - Eliminate the ability to immediately deduct certain costs associated with tertiary recovery projects for tax purposes and instead recover such costs over some period of time. 6.2

Repeal passive loss exception for working interests - Would limit the ability for some taxpayers to fully use losses generated from their oil and gas properties against other income. 4.9Repeal Sec. 199 for oil and natural gas companies - Would deny taxpayers from claiming a deduction on their domestic oil and gas production and refining activities. 1329.3Increase G&G amortization period for independent producers to 7 years - Would require all taxpayers to recover the cost of geologic and geophysical costs over a seven year period in a manner that is similar to how these costs are treated by major integrated oil companies. 118.9

Repeal percentage depletion for oil and natural gas - This would require all taxpayers to recover their investment in mineral reserves as such reserves are produced rather than by a stated percentage each year. 825.1Fee on nonproducing leases ("use or lose") 115.6Total: 11088.9




Reinstate Superfund Taxes - Would Impose taxes on oil and chemical products and use revenues to help clean up contaminated sites. 1720.5

Repeal LIFO - Limit the options to account for the flow of inventories for tax. Would require significant amounts to be treated as income. 6105.2Levy excise tax on Gulf of Mexico oil and gas - Impose an excise or severance tax on oil and gas production from federal offshore leases. 528.3Repeal expensing of intangible drilling costs - Eliminate the ability to immediately deduct certain costs associated with drilling and developing wells for tax purposes and instead recover such costs over some period of time. 334.9Repeal deduction for tertiary injectants - Eliminate the ability to immediately deduct certain costs associated with tertiary recovery projects for tax purposes and instead recover such costs over some period of time. 6.2




Repeal passive loss exception for working interests - Would limit the ability for some taxpayers to fully use losses generated from their oil and gas properties against other income. 4.9Repeal Sec. 199 for oil and natural gas companies - Would deny taxpayers from claiming a deduction on their domestic oil and gas production and refining activities. 1329.3Increase G&G amortization period for independent producers to 7 years -Would require all taxpayers to recover the cost of geologic and geophysical costs over a seven year period in a manner that is similar to how these costs are treated by major integrated oil companies. 118.9

Repeal percentage depletion for oil and natural gas - This would require all taxpayers to recover their investment in mineral reserves as such reserves are produced rather than by a stated percentage each year. 825.1Fee on nonproducing leases ("use or lose") 115.6

Total: 11088.9


Cost and Effectiveness of Cash for Guzzlers Program

Baseline=18 mpg, 12,000 VMT

Voucher Value

Program Cost for One Million Vehicles

Gallons Saved Per Vehicle, Annually

Total Fuel Savings for One Million Vehicles Over Eight Years, Gallons

Cost Per Gallon Saved Over Eight Years

Fleet Fuel Consumption Reduction Compared to 2008 Rate

New Car, +4 MPG $3,500 $3,500,000,000

121.2 969,600,000 $3.61 0.0882%

New Car, +10 MPG $4,500 $4,500,000,000

238.1 1,904,800,000 $2.36 0.1733%

New Light Truck/SUV, +2 MPG

$3,500 $3,500,000,000

66.7 533,600,000 $6.56 0.0485%

New Light Truck/SUV, +5 MPG

$4,500 $4,500,000,000

144.9 1,159,200,000 $3.88 0.1054%

Sources: EIA Data, EPA Data, EPRINC Calculations




Fleet Tailpipe Emission Reductions

Replacing 1 million vehicles from…..

Reduces total CO emissions by…..

Reduces total VOC emissions by…..

Reduces total NOx emissions by…..

1980 0.1050% 0.1203% 0.8004%

1990 0.0000% 0.1088% 0.3446%

2000 0.0000% 0.0576% 0.1223%




Repeal passive loss exception for working interests - Would limit the ability for some taxpayers to fully use losses generated from their oil and gas properties against other income. 4.9Repeal Sec. 199 for oil and natural gas companies - Would deny taxpayers from claiming a deduction on their domestic oil and gas production and refining activities. 1329.3Increase G&G amortization period for independent producers to 7 years -Would require all taxpayers to recover the cost of geologic and geophysical costs over a seven year period in a manner that is similar to how these costs are treated by major integrated oil companies. 118.9

Repeal percentage depletion for oil and natural gas - This would require all taxpayers to recover their investment in mineral reserves as such reserves are produced rather than by a stated percentage each year. 825.1Fee on nonproducing leases ("use or lose") 115.6

Total: 11088.9

Domestic Crude Oil Supply and Demand


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U.S. Field Production of Crude Oil (Thousand Barrels per Day)

Source: EIA Data


What it takes to offset 1 gigaton of carbon…

Source: DOE Climate Change Technology Program

TODAY’S TECHNOLOGY Actions providing 1 Gt mitigation/year

Coal-fired power plants Build 1,000 “zero-emission” 500 MW coal-fired power plants

Geologic sequestration Install 3,700 sequestration sites like Norway’s Sleipnerproject (0.27 MtC/year)

Nuclear Build 500 new nuclear plants, each 1 GW in size

Efficiency Deploy 1 billion new cars at 40 miles per gallon (mpg) instead of 20 mpg

Wind energy Install capacity to supply 50 times the current global wind generation

Solar photovoltaics Install capacity to supply 1000 times the current global solar PV generation

Biofuels for transport Convert a barren area 15 times the size of Iowa’s farmland (30 million acres) to biomass production

CO2 storage in forests Convert a barren area 30 times the size of Iowa’s farmland to new forest


If global demand increases without adequate investment in new production capacity, given natural decline rates, there is risk of a significant liquids supply gap.

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Source: CSIS, National Petroleum Council

Demand mitigation in the short-term


Projected Petroleum Imports

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U.S. Crude Oil Net ImportsWorst-Case Economic Scenario: 0% Annual GDP Growth Through

2020With Crude Oil Prices Rising 3% Annually

Positive Economic Growth, GDP +2.5%/yr

No Economic Growth, GDP +0%/yr

0% GDP Growth and RFS is met in 2020

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Ethanol A Cautionary Tale - EPRINC · • 1980-1990: Rationalization of refining. – Closure of...

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