BUSINESS
ETHANOLS SUNNY DAY Corn processors scramble to supply an enormous California fuel additive market
A
BRIGHT DAY FOR CORN-BASED
ethanol dawned when methyl tert-butyl ether, or M T B E , began showing up in groundwater in the early 1990s. It turned out that MTBE, the most widely used oxygenate—a high-oxygen compound added to gasoline to make it burn more cleanly—had been leaking out of underground gas storage tanks. MTBE makers pointed out that the bad-tasting additive is an indicator of a bigger problem—leaking storage tanks. Nevertheless, legislators in California and other states began pushing for t h e elimination of MTBE as a fuel additive. The 1990 Clean Air Act requires 2% oxygen by weight in gasoline in regions where pollution exceeds certain limits. Only two compounds are produced on a scale that makes them candidate oxygenates: MTBE, derived from natural gas, and ethanol, most ofwhich is produced by fermentation of corn. Rather than switch to ethanol, California authorities requested a waiver of the oxygenate requirement, contending that they should be allowed to use a nonoxygenated gasoline formulated to reduce pollution. But their request was turned down by the Environmental Protection Agency in midJune, opening the door for ethanol. According to the National Corn Growers Association (NCGA), if MTBE is phased out of gasoline across the country by 2005, the demand for ethanol will about double. Encouraged by such projections, several companies, including the giant Archer Daniels Midland (ADM) and a host of smaller firms, are gearing up to meet the demand. Ethanol is more expensive than MTBE. However, federal and state subsidies help support it. The main ethanol subsidy is a 53-cent-per-gal exemption from the 18.4% excise tax on gas for typical "gasohol" containing 10% ethanol; this exemption, which doesn't apply to the synthetic alcohol made by chemical companies, amounts to a subsidy of 53 cents per gal of ethanol. Because of its size, California is a vast potential market for fuel ethanol. It is expected to consume about 580 million gal of ethanol per year— about one-third of current U.S. production. Ten other states HTTP://PUBS.ACS.ORG/CEN
have also enacted bans or restrictions on use of MTBE. THE MOST PRESSING issue related to making the oxygenate switch is whether ethanol supplies are sufficient to meet the needs of U.S. consumers. Though California officials fear there will not be enough ethanol to supply their huge market, producers and corn-state lawmakers are sanguine about their ability to meet demand. "I don't think there's a problem at all," says John McClelland, director of energy and analysis at NCGA. Production has doubled in the past five years, he notes, and is expected to double again in the next five.
STEADY GROWTH Corn-based ethanol growth continues unabated Fuel ethanol from corn, billion gal 2.0
•••il
1.5 1.0 0.5 0
MINIMI llllllllllll 1991 92
93 94 95 96
97 98 99 00 01a
a Estimate. SOURCES: National Corn Growers Association, Renewable Fuels Association
Indeed, the impact of the California ruling on ethanol plant construction was immediate. With uncertainty removed, dozens of proposed plants will now move forward, claims McClelland, and capacity will soar over the next year and a half. For example, A D M , the largest U.S. ethanol producer, is completing a 50 million-gal-per-year expansion in Peoria, 111., and is considering further capacity hikes. With 850 million gal of capacity, A D M accounts for about half of the U.S. ethanol output; it expects to produce 900 million gal in 2001. Although ADM dominates the market, most of the nation's current and proposed ethanol plants are in the hands of farmerowned cooperatives. One example is Tall Corn Ethanol, a cooperative that is beginning construction of a 40 million-gal-peryear plant in Coon Rapids, Iowa. In all, 12 new ethanol plants are under
construction and 34 existing facilities are being expanded, according to the Renewable Fuels Association (RFA). These capacity additions mean that the industry will be able to supply an additional 300 million gal of ethanol by the end of this year. Based on current and approved construction, RFA expects U.S. ethanol capacity to reach 3.5 billion gal by the end of 2003. Building ethanol facilities was not always so easy to justify Several years ago, investors struggled to find financing for high-risk projects, even with government incentives. Since the rough years in the mid-1990s, however, events have broken in ethanol's favor. THE ETHANOL BOOM is creating other opportunities as well. Williams Bio-Energy, the number two ethanol producer and marketer, is capitalizing on California's needs by entering agreements with farmer cooperatives and other small producers to distribute and market their ethanol. Williams' theory is that gasoline blenders prefer to buy large quantities from a single supplier, rather than small parcels from many smaller suppliers. Williams has combined production at several plants of 220 million to 230 million gal, to which it adds about 100 million gal through purchases from small regional producers. "To the refiner, we appear to be a 300 millionplus-gal producer," says Ronald H . Miller, vice president of Williams Bio-Energy The firm recently announced that it has made arrangements to store ethanol at a terminal in Carson, Calif, so that it can sell into the Los Angeles and San Diego markets about a year ahead of the Dec. 31, 2002, deadline for California to switch to ethanol. "We went ahead with the terminal in Southern California because we felt it was important to jump-start the market," Miller says. Another big ethanol producer, High Plains Corp., is also widening its business to include distribution and marketing. While it expands its \brk, Neb., facility from 36 million to 50 million gal per year and considers boosts at its three other ethanol plants, High Plains has signed marketing and consulting agreements with four independent producers, totaling about 60 million gal of ethanol. Ten years ago, MTBE was a boom business for chemical and oil companies. Now it may be ethanol's turn. This time, though, Midwest farmers and grain processors are benefiting and the chemical industry is out in the cold.-KAREN WATKINS C & E N / JULY 2 3 , 2 0 0 1
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