Ethanol: California needs it, but can it get it? Monday July 16, 3:30 PM EDT

By Soo Youn

NEW YORK, July 16 (Reuters) - A Bush administration decision that opened the door to the widespread use of the motor fuel additive ethanol in California's gasoline has ensnared the Golden State in a web of problems.

In just 18 months, the place which epitomizes America's love affair with the car has to ensure that more than half a billion gallons of ethanol gets to California from the Midwest corn belt. Some warn this may fuel a sharp rise in gasoline prices and political turmoil in a state still recovering from a power shortage.

"With logistical problems, with short supply, with the variety of things that can fairly be seen as possibly or likely to go wrong with this scenario, gasoline could go up as much 50 cents per gallon at the pump -- that's the gloom scenario," said William Rukeyser, Assistant Secretary of the California Environmental Protection Agency (Cal/EPA), which regulates pollution issues for the state.

The rub is that each traditional mode of cross-country transportation -- rails, ships and pipelines -- has intricate knots that will probably take much longer than a year-and-a-half to untangle.

An Environmental Protection Agency (EPA) ruling last month forces California to use an oxygen-enhancing chemical like ethanol to make its ultra-clean-burning gasoline. The alternative, MTBE (methyl tertiary butyl ether), is now the 'oxygenate' of choice in California, but has been banned in the state beginning in 2003 because it has been found to pollute groundwater.

Legally, the federal ruling leaves California with ethanol as the only available oxygenate for use in its gasoline. But the question remains: is ethanol really a viable alternative?

TRANSPORTATION WOES LOOM.

Unlike other oil products, ethanol can't travel through pipelines because it mixes too easily with water. In addition, no pipelines currently exist to serve California's gasoline market. So ethanol must be shipped, trucked or railed to California, where it will be blended into the finished motor fuel and trucked to gas stations.

Mindful of his state's 2003 ban on MTBE, California Gov. Gray Davis ordered a 90-day study of his options when he learned that the EPA, through its ruling, effectively forced the state to use ethanol.

"Abandoning the decision to phase out MTBE is not an option, but altering the timetable is something that would definitely be considered," said Cal/EPA's Rukeyser.

The problems with ethanol center on the very qualities that the corn-derived additive's promoters boast -- that most is made in the American heartland by American farmers, and that its use thereby cuts U.S. dependence on foreign energy supplies.

In contrast, more than 90 percent of California's MTBE is imported -- from Saudi Arabia and Asia. At most, the U.S. Gulf Coast supplies only 10 percent of the state's demand.

The ethanol industry asserts that instead of taking 88 days for MTBE to travel from Saudi Arabia, it will only take 22 days to ship ethanol from the Gulf Coast.

"In the end ethanol will be cheaper than using MTBE" because of its domestic origins, said Monte Shaw, a spokesman with the Renewable Fuels Association (RFA), an ethanol industry trade group.

"We're delivering 150 million gallons to California (by rail and barge) this year. We're in terminals all across the state right now. When the experts compare it to what the MTBE folks are doing right now, quite frankly they think it'll be easier," Shaw added.

Some experts disagree.

The ethanol California currently uses is transported by barge or railcar to the U.S. Gulf Coast, then transferred to large ocean vessels nimble enough to pass through the narrow Panama Canal into the Pacific Ocean.

But the present ethanol demand will quadruple to 580 million barrels by 2003, cutting into what is already a tight supply of available ships, rail cars and terminals.

STRICT DOMESTIC SHIPPING RULES

The bedrock of U.S. domestic shipping, the Jones Act of 1920, requires boats moving between U.S. ports to be built in the United States, owned and crewed by U.S. citizens and registered with an American flag. These requirements, coupled with a 1990 law which accelerated the retirement schedule for ships, severely crimps the number of available vessels.

Compared to MTBE, half as much ethanol is required by volume in gasoline, a fact ethanol supporters seize on by suggesting it may be twice as easy to transport only half the product.

But blending motor fuel is much more complex than just taking out MTBE and replacing it with ethanol. Simply put, if half as much ethanol is required, California will effectively be left with a shortfall of at least 60,000 barrels per day, or 6 percent of the state's 1 million barrels per day of gasoline demand, analysts said.

To make up the gap, supplies of gasoline blending components will have to be shipped from the Gulf Coast, creating additional demand for vessels which already looks difficult to meet.

"They'll all be competing with each other for shipping," gasoline blending consultant Drew Laughlin said.

Because ethanol doesn't mix well with other petroleum products, the tankers will most likely have to unload the additive, then return to the Gulf Coast empty, further adding to costs and complications.

Even if the physical availability of ships were not an issue, tight scheduling is. Sending ships on the three-week voyage to California may cause problems for other states that don't have pipelines, and depend on shipped gasoline, like Florida.

"It's not just ships available," explained Laughlin, "But do they have time to do this?"

NOWHERE TO UNLOAD

The other option is to rail ethanol though the Rocky Mountains to California, which Shaw says will take seven days, a claim California officials dismiss.

"That's assuming there are unit cars a mile long carrying nothing but ethanol," Cal/EPA's Rukeyser said.

But railing spawns more problems.

Even if the cars did exist, California doesn't have the facilities to unload ethanol by rail or by ship. The exception is one receiving facility near San Francisco that blends for Tosco Corp. (TOS), which began switching from MTBE to ethanol earlier this year.

"The problem is there aren't enough sitings or open land for sitings available to off-load that much ethanol," Rukeyser said.

One option is to convert existing MTBE storage into ethanol storage, but the tanks cannot hold both products interchangeably, and so even more time will be lost in the transition.

The labyrinth of problems is causing many to look to mid-September with baited breath, when the Cal/EPA will present its findings to Gov. Davis, and await his decision to stick to the state's scheduled ban of MTBE.

In the meantime, the problem has raised the concern of federal officials.

"Our position is that the supply and demand situation is very tight," U.S. Energy Under Secretary Robert Card said at a Senate Energy Committee hearing on June 21. "It could create a problem."

http://money.iwon.com/jsp/nw/nwdt_rt.jsp?cat=USMARKET&src=201&feed=reu§ion=news&news_id=reu-n16345408&date=20010716&alias=/alias/money/cm/nw

-- Martin Thompson (mthom1927@aol.com), July 16, 2001

Answers

1. Certainly California could grow its own corn to make ethanol.

2. Mexico could also be a source. I'm sure Mexico could produce ethanol and create a pipeline to california as a joint effort with oil companies.

-- John Littmann (johntl@mtn.org), July 17, 2001.