Ethanol sector braces for unwanted attention

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The refining industry says it warned Congress for years about the difficulty ethanol producers would have in offsetting the loss of MTBE, which accounts for about 10 percent of the volume of every gallon of gasoline with which it is blended.

“When it comes to ethanol, Congress is guilty of more irrational exuberance than on any other issue,” said Bob Slaughter, president of the National Petrochemical and Refiners Association.

California, New York and Connecticut have banned MTBE in recent years, but consumers from Virginia to New Hampshire, as well as in Texas, still depend on it.

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MTBE, a natural gas derivative, has been the oxygenate of choice since the mandate was established roughly 10 years ago as a byproduct of the Clean Air Act.

But MTBE also has been found to contaminate drinking water supplies and it may cause cancer, exposing the petroleum industry to lawsuits filed by water districts and municipalities on behalf of their citizens. After Congress refused to grant the industry protection from such lawsuits, refiners made clear their intention to stop using MTBE.

Valero Energy Corp., Exxon Mobil Corp. and Shell Oil Co., the U.S. subsidiary of Royal Dutch Shell Plc, all plan to cease using MTBE in gasoline by May 5, spokespersons for the companies said.

Valero, the country’s largest independent refiner, estimates the country’s total gasoline supply will shrink by 145,000 barrels per day, or about 1.5 percent, once MTBE is removed — a transition expected to be complete by May 5. That is when an obscure provision of the energy bill goes into effect, eliminating the need for a so-called oxygenate in gasoline.

Now it is up to ethanol producers to bridge the gap. While U.S. ethanol producers have the capacity to produce roughly 4.3 billion gallons per day in 2006, the near-term crunch means more imports will be needed from Brazil, Dinneen said. The United States imported more than 150 million gallons of ethanol in 2005.

Dinneen said part of the problem for the U.S. ethanol industry right now is that it was caught off guard by the oil industry’s faster-than-expected phaseout of MTBE. “Refiners made the decision to accelerate the removal of MTBE, not ethanol producers,” Dinneen said.

Perhaps the biggest issue is distribution.

Gasoline with or without MTBE can be shipped in large quantities through an extensive network of pipelines. But ethanol, which tends to corrode pipelines, must be transported on trucks, trains and barges in relatively small batches to storage terminals where it is then blended with gasoline.

“I suspect there will be enough ethanol, but that logistics — getting rail and truck transportation to furnish the ethanol to key markets — will be the nightmare that drives prices,” said Tom Kloza, an analyst at Oil Price Information Service in Wall, N.J.

The trucking industry is faced with a multiyear labor shortage and railroad capacity is tight because of strong demand to ship coal, grain and steel.

“Barges are in short supply too,” said Shore.

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