BUSINESS
Oxygenated Fuels Mandate: Marketers Ponder Additive Strategy Colorado program starting in January gives MTBE the edge over ethanol; refiners and blenders are busy evaluating ways to comply with the rule Earl V. Anderson, C&EN New York
When Colorado created its mandatory oxygenated fuels program to combat cold-weather carbon monoxide pollution (C&EN, June 29, page 8), it did more than just take a giant step toward a cleaner environment. It created a training ground where refiners and producers of oxygenated fuel additives can sharpen their marketing skills for the time when other states and metropolitan areas also might decide to go the oxygenated fuels route. Certainly the Colorado oxygenated fuels program was a major reason why officials from more than a dozen states and cities, as well as scores of representatives from concerned companies, were attracted to last month's Conference on New Fuels for Cleaner Air, held in Arlington, Va. Although no one went away with definitive answers to all their questions—it's still too early, said many speakers—it became apparent that the Colorado oxygenated fuels market will develop into a one-on-one battle between ethanol and MTBE (methyl tert-butyl ether). The early line has MTBE the winner. The oxygen level of the fuel set by Colorado's new program probably gives MTBE the edge. But that's not necessarily what officials had in mind when they set the rules. In fact, Joshua Epel, state implementation plan coordinator of the Denver Metropolitan Air Quality Council, says an important consideration 14
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was that the program allow ethanol, MTBE, and possibly other oxygenates to compete. That way, he says, consumers would have a choice and no fuel would enjoy a monopoly. The Air Quality Control Commission, he says, tried to select an oxygen content that would create "an even playing field" and provide maximum carbon monoxide reduction. The commission set the minimum oxygen content (by weight) of all gasoline sold in Colorado's Front Range area at 1.5% for the first year and 2% for the remainder of the program's life. The reason behind mandating an oxygen fuel is simple—the more oxygen in the fuel, the less carbon monoxide emissions created. There's no doubt that the Front Range area has a carbon monoxide pollution problem. The area stretches from Fort Collins to Colorado Springs and includes Denver. The Denver metropolitan area competes with Los Angeles for the distinction of having the worst carbon monoxide pollution in the nation. Of all the possible strategies for combating carbon monoxide pollution, Colorado officials believe that a mandatory oxygenated fuel program during the winter months (when the problem is worst) is the best approach. The p r o g r a m is expected to reduce tailpipe carbon monoxide emissions 24 to 34%, depending on the type of vehicle and the kind of oxygenate in the fuel, Epel says. What kind of oxygenate is the question weighing on the minds of refiners, oxygenate producers, and fuel blenders. For the first year, when the program runs only from Jan. 1, 1988, until March 1, 1988, the minimum mandatory oxygen requirement is 1.5% by weight. This
is equivalent to 8% volume MTBE. For the remainder of the program's life, when it runs from Nov. 1 to March 1 each year, the minimum oxygen content is 2% by weight, or 11% volume MTBE. Ethanol faces a different situation. Colorado has established minimum oxygen contents. But the Environmental Protection Agency in its Clean Air Act waivers limits the maximum allowable oxygen contents of alcohols that can be used in unleaded gasoline. For ethanol, that upper limit is 10% by volume, which figures out to 3.5% oxygen by weight. As a matter of practical economics, marketers who use ethanol in their gasoline for the Colorado program are likely to blend at the 10% level, says Marilyn J. Herman, president of Herman & Associates, a Washington, D.C., energy and environmental consulting firm. That's because gasohol, a blend of 10% (volume) ethanol and unleaded gasoline, can claim a 6 cent-per-gal exemption from federal excise taxes. Although 10% (volume) ethanol blends containing 3.5% (weight) oxygen will give Colorado a greater reduction in carbon monoxide emissions than an MTBE blend with only 2% oxygen, it overshoots the prescribed minimum oxygen content. Experts say this may be a disadvantage in the eyes of the companies that have to market the fuel in the Front Range area. Colorado officials have projected that a 50-50 mix of 10% ethanol and 11% MTBE in the area during the second year of the program would reduce carbon monoxide levels 14%. But no one, says Herman, can predict accurately what the oxygenate mix will be in the Colorado market. Refiners and marketers are still busy evaluating their situations to
determine how they will comply with the new oxygenated fuel mandate. How each refiner meets the program's requirements will depend in large measure on its circumstances. Refinery location, processing equipment, tankage availability, pipeline restrictions, and a host of other factors are points they must consider. For the first two-month program (January and February 1988), most refiners that market in Colorado have committed themselves to MTBE in all their product grades, Herman says. Although ethanol compares favorably with MTBE on a cost-peroctane basis, MTBE has some handling and logistical advantages over ethanol that refiners can exploit immediately. MTBE, for instance, can be shipped through a pipeline as a fungible product. Ethanol can't. Even refiners firmly committed to MTBE must ask themselves other questions. Should they, for instance, also offer an ethanol-gasoline blend? Should they offer a suboctane, "oxygen free" gasoline that can be blended with ethanol later at the other end of the distribution chain? During the second year of the mandate, the program runs for four w i n t e r m o n t h s instead of two. At that time, the minimum oxygen content increases from 1.5% to 2% and MTBE requirements jump from a minimum of 8% to 11%. This, explains Herman, should improve
ethanol's comparative economics and increase its market penetration. Whatever the product mix, there's no doubt that Colorado's new oxygenated fuel program will increase demand for oxygenates in the Front Range area. In 1985,1.6 billion gal of gasoline were sold in Colorado, 80% of it sold in the Front Range area. For the two months that the program would be in effect during its first year, gasoline consumption is estimated at 190 million gal. In the second year, when the program runs four months, gasoline demand in the Front Range area is expected to be about 380 million gal. Simple number crunching gives an idea of oxygenate demand. According to Herman, it works out to 38 million gal of ethanol for 10% blending, or 42 million gal of MTBE. If ethanol were to capture the entire oxygenated fuel market in the Front Range area—which is extremely unlikely—the market would require 19 million gal of ethanol during the two-month period of the first year and 38 million gal during the four-month period of the second year. Those volumes represent 2% and 4%, respectively, of current U.S. ethanol capacity. During the first winter season in 1988, ethanol demand at 100% market penetration would represent a sevenfold increase over Colorado's ethanol sales in the similar 1986 period. Last year, only 2.7 million gal
In winter, cold air holds huge cloud of air pollution over Denver
of ethanol (27 million gal of gasohol) were sold in the state, Herman says. However, ethanol is only one of several oxygenates that can compete for the Colorado fuel market. It will never capture the entire market for oxygenated fuels. But even if it could command only 25% of the market during the first year and 50% of the market thereafter, ethanol demand in Colorado would be 4.8 million gal the first year. It would shoot up to a hefty 19 million gal starting the second year. If this scenario played out, would there be enough ethanol available? Herman thinks there would be. Although ethanol supply now is tight, she notes that, because of seasonal demand for high-fructose corn syrup, producers generally crank out more ethanol in the winter than in the summer. Because Colorado's mandatory oxygenated fuel program is in effect only in the winter, Herman sees no problem with ethanol supply. The other possible limit on ethanol's market potential is availability of oxygen-free gasoline. EPA will not allow ethanol to be blended with gasoline that contains more t h a n 2% MTBE, w h i c h may be present as a result of unintentional contamination in the distribution system. Colorado's 1.5% (weight) minimum oxygen mandate is equivalent to 8% (volume) MTBE. Thus, ethanol cannot be blended with gasoline containing this volume of MTBE. If most refiners jump on the MTBE bandwagon to comply with the Colorado regulations, there may not be enough oxygen-free gasoline available for ethanol blends. This, says Herman, could be a key factor in ethanol's market prospects. Colorado officials may have anticipated this situation. They noted that any attempt to limit the choice of oxygenates by limiting the supply (or price) of base fuels suitable for blending with ethanol or other oxygenates may constitute an illegal restraint of trade. If so, it could violate Colorado statutes. Meanwhile, Lance Hoboy, president of Tecnal Inc., spotlighted another possible problem. Ethanol delivered to the Denver market will come by tank transport or jumbo August 3, 1987 C&EN
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Business railcar. The largest ethanol producers, he says, have adequate railcars in their fleets. But he believes that MTBE also will be shipped in by rail. If it becomes the dominant oxygenate, he thinks that a railcar shortage will develop. Up to 200 cars may be needed to move MTBE into Denver during the mandate period, he says. But waiting lists of several months already exist for suitable railcars. D
BP gains new power in U.S. chemicals market By finally acquiring in June the 45% of minority shares outstanding in Cleveland-based Standard Oil Co. for $7.9 billion, British Petroleum has become the third largest U.S. oil company, b e h i n d Shell and Exxon, and a significantly stronger international competitor. Its international aggressiveness is scheduled to get a further boost this autumn when the U.K. government sells its 31.7% holding in BP, the largest company in Britain. The sale will be linked to a $2.4 billion share issue by BP ($1.00 = f 0.625 on July 23), designed to reduce BP's debt from nearly 45% of equity to about 33%. The result, according to BP's plans, will be a greater flexibility to make future acquisitions. As Sir Peter Walters, chairman of BP, says, "The whole thinking behind the acquisition of the Standard minority has been to create a base for even further expansion. This is now what we are in business to do—both here in the states, and throughout the world." That is especially true for BP Chemicals International, which accounts for about 8% of corporate sales. By late last month, it had worked out how it intends to merge the two chemical operations (C&EN, July 27, page 8) with BPCI, headquartered in London, and its new Sohio division based in Cleveland. Combined annual sales are nearly $3.3 billion—$2.7 billion from BPCI and more than $500 million from Standard. Beyond just size, however, the operations are complementary, suggests Ray Knowland, managing director 16
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of BPCI. "Had BPCI had no holdings in Standard, and had we been looking for acquisitions in the U.S., Standard Oil Chemicals would have been high on our hit list," he says. It would bring major strengths in a petrochemicals area—acrylonitrile— in which BP had some expertise but not nearly the market share of Sohio. "We are among the market leaders in polyethylene and acetals, and now we have another major product worldwide, acrylonitrile," says Knowland. Certainly, Standard is the biggest acrylonitrile supplier in the U.S., with a total of 425,000 metric tons capacity at its Lima, Ohio, and Green Lake, Tex., facilities, if not the largest supplier internationally. With BPCI's own capacity, that brings the new total to more than 500,000 metric tons per year. Scheduled debottlenecking over the next two years at Lima and Green Lake will add another 100,000 metric tons of capacity. Moreover, Sohio is an active licenser, with about 20 licensees worldwide, and their technology is used in more than 90% of acrylonitrile production worldwide. Perhaps most important, however, he believes, is a new sense of purpose that the merged units have. "The acquisition has brought us brand-new technology, a brand-new strategic arm, and a critical mass in chemicals in the U.S. The states are now significantly more interesting, with our new base in chemicals." Knowland outlined his thoughts on the restructuring of BPCI, following the Standard Oil Chemicals merger, at a press briefing in London. He also discussed two other major segments of the firm's business— ethylene oxide and polyethylene. BPCI's ethylene oxide capacity was abruptly halved when a serious explosion on July 3 took out one of the units in its 150,000 metricton-per-year ethylene oxide plant in Antwerp, Belgium. The explosion affected one end of the ethylene oxide/glycol complex; some neighboring plants, including glycol esters and ethers; and steam lines. The company has restarted some operations at the complex. However, repairs on the rest of the plant will take from days (for simple repairs such as ensuring that steam is available) to months, depending on prox-
imity to the explosion. Still down are operations for ethylene oxide and derivatives, glycol derivatives, and polyols, and a few other assorted products. Two investigations are under way: an official Belgian one, and an internal BPCI investigation. Until those investigations come up with some conclusions, he adds, the company can't count the costs of the explosion. "We need to know how to rebuild to avoid this happening again. We've already told our insurers 'tens of millions of pounds,' but whether that means 10 million or 30 million, we can't tell. We must check every piece of equipment to make sure it is all right." As to polyethylene and the rumors of industry restructuring that surface regularly, Knowland says, "We all know we need to restructure. There are 17 producers of polyethylene in Europe, and the leader has only about 10 to 12% of the market. We've talked to a lot of people about rationalization—the talks come down to our asking: 'Will you get out? because we have no intention of doing so'—but we generally wind up saying no." And although Italy's EniChem indeed has been one of those people (C&EN, July 20, page 34), "we are not talking to anybody right now." One of the problems, he adds, is the general difficulty of shutting down a basic chemical operation, given the integration of the industry's basic chemicals, derivatives, and so on. However, BP's current first priority is "getting our deal with Bayer on Erdôlchemie," giving BP the marketing rights to the products put out by BP-Bayer joint venture Erdôlchemie, through the Commission of the European Community's directorate for competition. "Without their acceptance, we can do nothing. Restructuring is like diplomacy: If you do it in public, you get nowhere fast," he adds. "As of today, there is literally zero overcapacity. But we all know it will change—things go up, things go down. More worrisome than capacity is the number of producers," he believes. "If all of them decide to build at once, it won't look so good!" Patricia Layman, London
