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Report Cover Supply and Cost of
Alternatives to MTBE in Gasoline

STAFF REPORT

Publication Number: 300-98-013
October 1998

The executive summary of this report is available below. This publication can be downloaded in its entirety are an Adobe Acrobat Portable Document Format file. In order to download, navigate and print this PDF file, you will need a copy of the free Acrobat Reader software installed in and configured for your computer. The software can be downloaded from Adobe Systems Incorporated's Web Site.


Printed copies of this document can be obtained through the Energy Commission Publications Unit by calling 916-654-5200.


Disclaimer

This report, Supply and Cost Alternatives to MTBE in Gasoline, was prepared in response to a legislative directive specified in Item 3360-001-0465 of the Supplemental Report of the 1997 Budget Act. This directive states that the Energy Commission should submit a report giving a detailed evaluation of alternative additives and compounds which could be used in lieu of Methyl Tertiary-Butyl Ether (MTBE) in gasoline in California.

Energy Commission staff worked with the California Air Resources Board to examine the environmental impacts of any potential increase in air pollution that might result from the use of an alternative oxygenate in gasoline. It should be noted, however, that this study does not include an assessment of the potential health impacts of exposure to MTBE or any other alternative oxygenates. In addition to the Energy CommissionŐs report, the Governor and Legislature directed the Department of Health Services to determine the health impacts of MTBE in water and the California Air Resources Board to study the air quality and environmental impacts of discontinuing the use of MTBE.

This report is a result of work by the staff of the California Energy Commission. Neither the State of California, the California Energy Commission, nor any of their employees, contractors or subcontractors, makes any warranty, expressed or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information apparatus, product or process disclosed, or represents that its use would not infringe on privately owned rights.



Executive Summary

 

Background

Since 1992, oxygenates have been required for use in California gasoline to help achieve compliance with both federal and state air quality regulations. Several oxygenates are available but Methyl Tertiary Butyl Ether (MTBE) has been the oxygenate of choice due to its compatible blending properties and lower cost. Small volumes of MTBE have actually been used in gasoline since the late 1970s by refiners as an octane enhancer to replace the lead being phased out of gasoline. Recently, however, MTBE has been detected in groundwater and at certain levels may pose a public health risk or render some drinking water unpalatable. The California Legislature held a hearing on May 12, 1997, to consider discontinuing the use of MTBE. Staff of the Energy Commission testified that an immediate replacement of MTBE would have a significant impact on California gasoline production, decreasing supply produced by California refiners by 15 to 40 percent. The probable temporary shortages and resulting price spikes would have a dramatic impact on California consumers.

Following the hearing, the Governor and Legislature directed the Energy Commission to examine the potential impacts of discontinuing MTBE on the production, price and supplies of gasoline in California. In conducting its comprehensive study, the Energy Commission analyzed a broad set of alternative oxygenates that could replace MTBE in gasoline. Item 3360-001-0465 in the Supplemental Report of the 1997 Budget Act states that the Energy Commission should submit a report to the Legislature that contains all of the following:

Study Design

In order to fulfill the requirements of the Legislature’s directive, the Energy Commission studied the following areas: the operation of the California refinery infrastructure under various scenarios simulated through computer models (refinery modeling), the supply and price of various levels of alternative oxygenates (oxygenates availability), the availability of the various components needed to make California’s gasoline (import capability), and the ability of the existing distribution system to deal with various MTBE substitutes (state’s infrastructure capability).

Refinery Modeling

This portion of the study used a computer model to look at the impacts of alternative oxygenates, different economic and regulatory conditions, and changing raw materials processing requirements under several cases. Each case was designed to simulate the statewide refinery operations to meet the projected daily average gasoline demand during the peak driving season (May through August). The existing California refinery infrastructure was then evaluated for its ability to respond to the various changes described in each case.

The analyses were performed by first running two base cases to determine baseline production costs for gasoline containing MTBE for the intermediate (three years) and long term (six years) timeframes. Next, cases were run with alternative oxygenates for both timeframes and compared to the appropriate base case to calculate an average gasoline price impact.

In addition to the alternative oxygenate cases, a case that reduces the amount of MTBE currently used in gasoline and another case that eliminates the use of all oxygenates were also examined. The first case is called "H.R. 630", in reference to the pending federal legislation that would allow California refiners to reduce the use of oxygenates in gasoline throughout California. This refinery modeling case was examined to determine how much MTBE could be removed from gasoline and what the cost impact to consumers would be.

The other case looked at the potential impact on supply and price of gasoline if discontinuance of MTBE was broadened to include all oxygenates. Since a great deal of concern has been expressed by some health and water officials over the use of any oxygenates in gasoline, an assessment of the possibility of producing all the gasoline for the state without the use of oxygenates was undertaken in order to quantify the cost impacts of no oxygenates in the intermediate and long term timeframes.

Oxygenates Availability

This portion of the study identifies each alternative oxygenate, its availability, and cost for the intermediate term and the long term. In addition the timeframe and cost to upgrade California’s petroleum distribution facilities to make them compatible with each alternative oxygenate were determined.

The Energy Commission, in conjunction with the Air Resources Board, reviewed a number of different oxygenates to determine which ones were likely to be viable alternatives to MTBE. The oxygenates were assessed based on the following criteria: they are listed as a currently approved oxygenate by the U.S. Environmental Protection Agency, each possesses desirable blending characteristics, and each demonstrates potential adequate availability. Using these criteria, the Energy Commission decided to examine two alcohols, ethanol and TBA (tertiary butyl alcohol) and two ethers, ETBE (ethyl tertiary butyl ether) and TAME (tertiary amyl methyl ether), as potential replacements for MTBE.

All four alternative oxygenates were reviewed to determine if sufficient supplies could be produced to replace MTBE in gasoline. The study examined the global production capacities for the oxygenates currently being produced and examined facilities being constructed or in the planning stages to assess the potential availability of these new supplies in the intermediate and long terms. Additionally, the costs to produce, transport and distribute the various oxygenates were examined and quantified.

Potential suppliers appear to have the production capacity and raw materials necessary to produce sufficient volumes of ethanol, ETBE and TBA under any of the various cases. TAME, however, does have a raw material limitation and was eliminated from consideration as a 100 percent replacement for MTBE. It is recognized, however, that most refiners could produce some volume of TAME through normal operations of their facility. Therefore, rather than eliminate it from consideration completely, staff examined TAME as part of a "mixed oxygenates" case. An economically optimal combination of ETBE, TBA and TAME was assessed to see if it would be less expensive than completely displacing MTBE with a single oxygenate.

Import Capability

This portion of the study estimated costs of importing various blending stocks and finished petroleum products to the California market to make up for shortfalls that may occur under any of the cases. This work required the following:

State’s Infrastructure Capability

This work involved a detailed survey of California’s marine terminal and distribution infrastructures to determine their ability to import various oxygenates and gasoline blending components as well as their ability to distribute gasoline that contained an oxygenate other than MTBE. Areas examined include:

Results Of Study

This study examines the impact of discontinuing the use of MTBE on supply and price of gasoline to California consumers. The findings of this study indicate that the cost impacts for consumers are directly related to the period of time permitted for phasing out MTBE:

If the scope of replacing MTBE were to be broadened to include the elimination of all oxygenates from gasoline, the cost impact for consumers would be the greatest, regardless of the length of time allowed for the transition, ranging up to 8.8 cents per gallon in the intermediate term and 3.7 cents per gallon in the long term. On an annual basis these costs would amount to $1.3 billion and $580 million, respectively.

Cost, Availability and Timeframe

The results of the study indicate a substantial variation in gasoline prices under the timeframes necessary to modify refineries and increase production of alternative oxygenates under various cases. The average cost increase is a measure of how much more expensive California’s gasoline production would be compared to the production of gasoline with MTBE. This study assumes that any change in average cost would be passed through directly to the consumer. Therefore, the retail price of gasoline would reflect this change. It should be noted that retail prices reflect not only production costs but also other market conditions which will influence the final price. If regulations imposed are so stringent that California refineries can no longer supply all or substantial amounts of the products the state requires, then the impact on retail price could be even greater than just the average cost increase.

The Energy Commission analysis considers three timeframes: near term (immediate), intermediate term (three years), which allows for some modification and infrastructure changes to accommodate a different oxygenate, and long term (six years), which allows for major refinery modifications to accommodate a different oxygenate. Results were evaluated based on the availability of the oxygenates under consideration and gasoline blending components needed to meet demand, the transportation and necessary infrastructure modifications, and the availability of shipping, trucking and pipelines to handle the distribution under each timeframe.

Near Term. In the near term case, the study shows that an immediate discontinuation of the use of MTBE could produce significant gasoline and diesel supply shortfalls and a rapid increase in prices. MTBE not only oxygenates the gasoline but also helps to dilute and offset the undesirable properties of other gasoline components. Therefore, although MTBE itself accounts for only 11 percent of the total volume of gasoline, its absence would mean that refiners would have to replace these other components as well, resulting in an anticipated 15 to 40 percent shortfall.

In April 1996, a fire at a refinery in northern California resulted in a temporary shortfall in gasoline production that was substantially less than 15 percent. This shortfall resulted in prices rising by about 30 cents per gallon. If prices were to rise proportionally during an immediate discontinuance of the use of MTBE, the results would be drastic for consumers and catastrophic for California’s economy.

Refiners would need to acquire adequate replacement oxygenates and imports, but they would have insufficient time for a smooth, nondisruptive transition. Renegotiating contractual arrangements, resolving production capacity constraints, and overcoming inadequate transportation services are just a few of the serious problems suppliers would face in attempting to meet the dramatic change in demand.

Each alternative oxygenate has limiting factors that would prevent an adequate supply to meet California’s needs in the near term. Even if industry is able to overcome these primary limiting factors and introduce a replacement oxygenate quickly, the price would still be very steep because demand would exceed the readily available supply.

ETBE, TBA and TAME are not currently produced in volumes adequate to meet California’s needs. Although the distribution system requires little, if any, modification to handle any of these alternative oxygenates, modifications would have to be undertaken at existing MTBE plants to convert them to ETBE or TBA production. This type of work would require between 12 and 24 months for completion before necessary volumes could be available for use in California. TAME, which is a by-product of refinery operations, is expected to be limited to modest production volumes at refineries.

In the case of ethanol, the United States produces about 80,000 barrels per day of ethanol to meet current demand for all uses. California currently produces approximately 400 barrels per day. In the near term case, California would suddenly require the majority of ethanol that is being supplied to other users around the country. In order to secure the necessary volumes, California refiners will have to purchase the ethanol by bidding above and beyond what present users pay. This action would cause the price of ethanol to increase significantly above its current market price.

Even if enough of the current ethanol production in the United States were to be diverted for California’s projected needs, several other factors would impede the immediate use of ethanol without considerable disruption to California’s gasoline market. The main limiting factor is the lack of adequate blending equipment at the distribution terminals. It would require between 18 and 24 months to complete necessary modifications to storage tanks, unloading facilities and blending equipment.

If H.R. 630 were to pass and allow California refiners to reduce the amount of oxygenates currently used in gasoline, this additional flexibility would certainly allow refiners to reduce the amount of oxygenates used in the intermediate and long term time periods, but it is doubtful that this legislation will appreciably impact the dire conse-quences of an immediate discontinuance of the use of MTBE in the near term. Refiners would be desperately trying to acquire as much alternative oxygenates as possible, struggling to minimize supply disruptions,

TABLE 1

Average Cost Change

Cents Per Gallon
 

Intermediate Term

Long Term

Ethanol

6.1 to 6.7

1.9 to 2.5

ETBE

2.4 to 2.5

0

TBA

0.5 to 1.4

0.3 to 1.0

Mixed Oxygenates

-0.2 to 0.2

-0.3 to -0.4

HR 630

-0.2 to -0.8

-0.3 to -1.5

No Oxygenates

4.3 to 8.8

0.9 to 3.7
     

rather than attempting to economize on refinery costs as would be the case in the longer time periods.

Eliminating the use of all oxygenates in gasoline in the near term would exacerbate an already dire situation. Prohibiting refiners from acquiring alternative oxygenates would worsen an already desperate setting whereby refiners would be scrambling to acquire as much additional gasoline components and alternatives to oxygenates as possible in order to provide as much gasoline as they could to compensate for the discontinuance of all oxygenates.

Intermediate Term (3 years). In the intermediate term case, the supply impacts would be less dramatic but costly. The change in average cost of gasoline could range from a decrease of 0.2 cents per gallon to an increase of 6.7 cents per gallon, depending upon the oxygenate.

The study assumes that in 2002, California’s gasoline demand will be about 965,000 barrels per day (14.8 billion gallons per year). California gasoline demand can be met by producing blending materials at California refineries, importing additional blending materials if needed, and importing the appropriate oxygenate. The results of the intermediate term case suggest that ethanol, ETBE and TBA will be available in sufficient volumes to meet demand but at market prices higher than in the long term case. TAME will not be available in sufficient volumes to meet California’s needs by itself. Listed below are the results for the intermediate term (see Table 1).

Long Term (six years). The long term case provides the least cost option by allowing adequate time for the oxygenates market to achieve a new supply and demand balance at a lower price. In addition, refiners would have sufficient time to modify their equipment where appropriate. In response to achieving a normal supply and demand balance, prices would moderate to an average cost difference ranging from a decrease of 0.4 cents per gallon to an increase of 2.5 cents per gallon.

Over the long term, the availability of alternative oxygenates will increase as more time is allowed to increase production capabilities for ethanol, ETBE and TBA. Within six years, supplies of all three alternatives could be comparable to current MTBE availability. TAME, which is a by-product of refinery operations, will not be available in sufficient volumes to meet California’s needs by itself.

The study assumes that in 2005, California’s gasoline demand will be about 1,022,000 barrels per day (15.7 billion gallons per year). California gasoline demand can be met by producing blending materials at California refineries, importing additional blending materials if needed, and importing the appropriate oxygenate. Listed below are the results for the long term (see Table 1).

Air Quality and Environmental Impacts

Energy Commission staff worked with the California Air Resources Board (CARB) to examine the environmental impacts of any potential increase in air pollution that might result from the use of an alternative oxygenate in gasoline. It should be noted, however, that this study does not include an assessment of the potential health impacts of exposure to MTBE or any other alternative oxygenates.

The use of alternative oxygenates in reformulated gasoline does not result in an increase in air pollution as long as the gasoline recipe used by refiners passes the Predictive Model and none of the various fuel qualities exceed the maximum levels set by CARB. ETBE, TBA and TAME are each comparable in air quality impacts to MTBE. Ethanol, at the current 7.0 pound maximum volatility requirement, is also comparable. However, current regulations allow refiners to produce gasoline containing 10 percent ethanol with an additional one pound volatility allowance to 8.0 pounds, but CARB would first have to make a determination that this gasoline blend would not result in any loss of air quality benefits.

At this time, the preliminary results of a vehicle test study performed by CARB show that gasoline blends of 10 percent ethanol and a maximum volatility of 8.0 pounds would cause major increases in hydrocarbon emissions, the ozone-forming potential of those emissions, and benzene emissions--all mostly due to excess evaporative emissions. Higher exhaust emissions of nitrogen oxides would also be expected.

If these findings are adopted later this year by CARB, the regulatory option of a one pound waiver for 10 percent ethanol blends would be precluded. Since the final adoption has not occurred, the Energy Commission has examined a case of a one pound waiver to see what the impact could be on the production costs of reformulated gasoline for California refineries.

With an allowance for refiners to make gasoline with a higher volatility, the refinery modeling results indicate that the feasibility of this case hinges on which variation of the Predictive Model is used by refiners. In average mode, refiners would be forced to decrease the amounts of sulfur, aromatics and olefins to levels much lower than today’s gasoline in order to get a recipe of gasoline to pass the Predictive Model. This practice would necessitate importing over 50 percent of our gasoline needs, significantly increasing the price of gasoline for consumers.

Use of the average mode of the Predictive Model leads to an infeasible case in both the intermediate and long term timeframes.

If refiners used the flat limit mode of the Predictive Model, complying gasoline can be produced at an average cost increase of 5.4 cents per gallon in the intermediate term and 1.0 cents per gallon in the long term. These additional costs would amount to nearly $800 million in the intermediate term and $157 million in the long term. As much as 103,000 barrels per day of ethanol and 50,000 barrels per day of additional gasoline imports would be required to meet demand.

As to water quality, ongoing testing indicates that some other oxygenates have been detected in some surface and ground water sources. Similar to MTBE, compounds such as ethanol, ETBE, TAME and TBA are able to mix with water, are difficult to remove from contaminated water and cause water to taste and smell unpleasant even at very small concentrations. Additional results can be found in the study being performed by the University of California. This study is expected to be released later this year.



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