CHICAGO, Nov 27 (Reuters) – A month ago, Steve Walk was on
the brink of deals to sell two big oil refiners some of his
company’s specialized oil pumps, which serve up fuel that is 85
percent ethanol, a biofuel made mostly from corn.
Walk’s company, Protec Fuel, sells and installs the
equipment needed to dispense so-called E85. The deals would have
nearly doubled Protec’s business, he said. The number of
stations across the United States dispensing E85, which is a
rarity despite the growing use of biofuels, would have jumped by
10 percent.
But those deals are on hold after the U.S. Environmental
Protection Agency’s proposal earlier this month to slash the
minimum volume of ethanol to be used in the country’s gasoline
supply next year. The surprise move by the Obama administration
marks a retreat from the 2007 Energy Independence and Security
Act meant to push increased sales of biofuel. The proposal could
be approved following a 60-day period for public comment.
“It was just starting to get to the point where oil
companies were saying, ‘Fine, we’ll start putting in alternative
fuels,’” Walk, vice president of Protec Fuel in Boca Raton,
Florida, said of deals he had in the works to build or retrofit
pumps at some 450 stations.
“Now, those conversations have gone by the wayside. It’s not
canceled, but it’s on hold.”
For Walk, an estimated $5 million in potential revenue hangs
by a thread. But his stalled deal is just one example of the
blows suffered by the nascent E85 industry, which has relied
heavily on the road map laid out in the federal Renewable Fuel
Standard (RFS) program.
The regulation, supported by two U.S. presidents and
designed to promote vehicles running on homegrown biofuel, could
be slashed for the first time.
While still vital to the $131 billion farm economy, ethanol
is less of a priority in Washington as declining fuel demand,
lower energy costs and booming North American oil production
result in waning support for a biofuel program tied to becoming
less dependent on foreign oil.
E85 is the fuel that, in theory, could boost ethanol content
in gasoline fast enough to meet a government-mandated target of
selling 18.15 billion gallons of biofuels by 2014.
Currently, the EPA caps the volume of ethanol in a gallon of
gasoline for use by conventional vehicles at 10 percent (E10
fuel). But E10 has become so commonplace that refiners have run
up against the “blend wall,” the point at which the market is
saturated with E10 fuel.
With U.S. gasoline consumption at its current 133 billion
gallons a year, the blend wall with a conventional 10 percent
blend is 13.3 billion gallons of ethanol. In 2012, about 13.7
billion gallons of ethanol were consumed in the U.S., and 2013
production could top 14 billion gallons.
Oil refiners complained that it is impossible to inject more
ethanol into the U.S. gasoline pool without risking damage to
engines or voiding some manufacturers’ warranties.
E85 represented a path to a compliance – and a way to boost
revenue – with the Renewable Fuel Standard. By blending and
selling more E85, which can be used in flex-fuel vehicles that
can run on conventional gasoline or higher blends of biofuels,
energy companies could have met higher biofuel quotas by, in
effect, jumping over the blend wall.
“If there were ever a time E85 might begin to move, it is
now, and the EPA RFS level would remove any incentive to grow
E85,” said Wally Tyner, an energy economist at Purdue University
in Indiana.
STIFLED, NOT KILLED
Under pressure from the oil industry and from meat
processors complaining that demand for corn-based ethanol is
raising commodities prices, the EPA on Nov. 15 proposed reducing
the targeted amount of biofuel to be blended next year. The new
target was set at 15.21 billion gallons of biofuel in the
nation’s fuel supply in 2014, down from the current mandate of
18.15 billion gallons.
Corn growers, biodiesel companies and ethanol producers have
blasted the EPA for caving in to the complaints. But no group
relied more heavily on the biofuel mandate than those who market
and sell E85.
The EPA deal will not “kill (E85), but it will certainly
stifle it,” said Mike Irmen, vice president of commodities and
risk for ethanol at The Andersons Inc, which runs four
ethanol plants and is among the top sellers of E85.
The government’s proposal follows a bipartisan vote two
years ago in Congress to strip $6 billion in subsidies from the
ethanol industry.
While companies such as The Andersons and Green Plains
Renewable Energy Inc are expected to formally object to
the proposal during the comment period, the market for ethanol
credits, known as RINs, shows traders are figuring the EPA’s
proposal will move forward.
CRUCIAL CREDITS
Oil companies say there is scant demand for E85. “We’re not
opposed to anyone who wants to sell it,” said Carlton Carroll, a
spokesman for the American Petroleum Institute.
However, some oil companies began considering installing E85
pumps earlier this year after the price of RINs surged nearly
3,000 percent, to a record $1.50, this summer on worries about
meeting an expanded biofuels target next year.
A RIN (short for Renewable Identification Number) credit is
created for each gallon of biofuel produced in the country.
Producers of the fuel can sell the credits to other energy
stakeholders such as refiners or importers that purchase the
RINs in order to come into compliance with the law’s requirement
for biofuel production.
As RINs prices rose, the cost of investing in E85 systems
began to make sense. So long as the fuel mandate was in place, a
fuel blender could collect a large number of increasingly
valuable RINs simply by selling the ethanol-rich fuel.
Critics of the RFS program say the spike in RINs was a sign
that the biofuel law was broken. Proponents countered that the
higher cost of credits was the price producers paid for not
building the infrastructure needed to dispense more biofuels.
A reduced RFS would cut demand for RINs. Prices have fallen
to around 25 cents, still higher than the 5 cents or so of last
December, but analysts figure that price reflects the fact that
some traders are guarding against the possibility of a
successful legal challenge to the EPA proposal.
“Definitely, if the current (EPA) proposal holds true, the
RIN value will be essentially nothing, and that’s what was
really driving retail equipment investment and overall volume in
E85,” said Robert White, director of market development for the
biofuels trade group the Renewable Fuels Association.
Protec’s Walk says RINs are a factor for his potential
customers. They are “moderately interested, but if the RINs were
higher, they’d be pulling the trigger.”
UNCOMPETITIVE AT THE PUMP
The number of fuel stations offering E85 has slowly grown
from a handful in 1995 to more than 3,000 today, out of more
than 100,000 fuel stations in the country. They are concentrated
in Corn Belt states such as Iowa and Minnesota, where filling up
with ethanol can be a political statement.
Automakers, led by General Motors, can adapt a
conventional car into a flex-fuel vehicle simply by adding extra
equipment – enhancements in hoses, censors and fuel pumps – that
cost a few hundred dollars.
Customers in search of “green” transportation have shown
interest in purchasing the vehicles. Some 15 million flex-fuel
vehicles are on the road today, up from fewer than 1 million in
2000.
But when it comes time to fill those vehicles, many drivers
decline to gas up with E85 fuel.
In large measure, that is because cars using the higher
ethanol mix generally get about 25 percent fewer miles per
gallon than they do with standard gasoline, due to the lower
energy content of the blended fuel.
For E85 to make economic sense for a driver, the fuel
generally must sell at a discount of at least 25 percent from
the cost of gasoline. The average discount this week across the
United States was only 17 percent, according to the fuel
monitoring website E85prices.com.
The average E85 gallon was priced at $2.70, compared with
$3.25 per gallon for gasoline, the website’s data showed -
making it more costly to run a vehicle on E85 despite its lower
price.
“The price difference is too small – 99.9 percent (of
drivers with flex-fuel vehicles) fill up with gas,” LMC
Automotive analyst Mike Omotoso said of drivers.
Biofuel boosters still hold out hope. E85 sales have
increased more than 30 percent this year as the fuel became more
widely available, according to a Renewable Fuels Association
survey.
An expanded RFS coupled with a record U.S. corn crop – 40
percent of which is used to make ethanol – would have made 2014
the fuel’s best chance to succeed.
(Additional reporting by Karl Plume in Chicago; Editing by
Peter Henderson, Grant McCool and Douglas Royalty)