Big Oil to ethanol: Build your own dang distribution, if you think E85 has blend-wall busting potential

Reform, repeal or compete: the options laid out for ethanol by Big Oil by Marathon’s Product Supply & Optimization Director in a frank keynote at the National Ethanol Conference.

The RFA’s Geoff Cooper and ISU’s Bruce Babcock respond.

In his keynote at the National Ethanol Conference this week in Orlando, David Whikehart, Product Supply & Optimization Director at Marathon began with a reminder to the delegates that “Bob Dinneen said that we should be open to the message of our customer. I also hope you see Marathon as a credible voice on RFS issues.”

That’s one way of asking a crowd to refrain from throwing tomatoes.

The message wasn’t a popular one — and was twofold. It has been elsewhere promoted by the American Petroleum Institute and the refiners’ association (AFPM). Not all oil giants agree (notably Shell and BP demur), but a broad group is clear on two points: One, the E10 blend wall is real, E15 and E85 are not credible workarounds – only RFS repeal or reform is possible. Two, for those who disagree, there’s the time-honored tradition of putting your own capital to work and building your own distribution.

It was politely put, as politely as you can fire a bullet. Er, pardon, sorry to disturb…bang.

A formidable customer they are, Marathon. In addition to a JV with The Andersons in three ethanol plants and an investment in Mascoma), Marathon has the 1400 Speedway owned-and-operated outlets and 5200 dealers under the Marathon brand, served through a network of 126 owned or independent terminals.

“For a number of years Marathon exceeded mandated ethanol volumes,” Whikehart said, “because it was profitable — and 10 percent of our distribution outlets are configured for E85.

“Marathon supports corn ethanol and opposes mandates,” Whikehart. added “The issue is a market distorting attempt that has resulted in E10 blend wall. The real effort to change transport fuels production includes the automotive change, which requires a 15-17 year fleet turnover and a 20 year investment cycle at retail. It takes decades. For now, we have mandates that distort and cause cost increases. One option offered for compliance is to increase blending of either e85 or e15. What we see after years of actual experience with E85 is that there is poor customer acceptance. The demand for e85 non existent at the rack, it’s just not not a silver bullet.

“We see E15 as a non starter for liability reasons. Irrespective of whether you agree with every report out there, there is research on the problems with E15 and vehicles, and that research would be used against retailers and refiners. We saw the same pattern with MTBE.

“Given the costs of compliance through the RIN system, the demand for E0 ethanol-free gasoline, and the impact on the economy of increasing gasoline exports — we believe that the RFS needs a waiver or repeal.

“If you, as the ethanol producer, think we are wrong — then you might well see an opportunity to partner with other stakeholders in the supply chain to grow the ethanol market, and put your own capital at risk, and build markets and consumer demand.”

RFA’s Geoff Cooper responds

“We have come to a political crossroads on the RFS. Some say, such as Marathon, that we have come to the end of the road on this policy. Others says that companies like Marathon are simply no longer in their comfort zone.

“We said it at the 2013 NEC, 2013 would be the first year that the RFS required fundamental change in the behavior of obligated parties.

What did we see? Rinsanity of $1.40 RINs for reasons that have not been fully explained. Reform and repeal bills. Hearings in both House and Senate. A Big Oil ramp up on a repeal or reform campaign. A NERA study predicting doom. Lawsuits, advetrtising, PR — all leading to a waiver request that has prompted an unexpected U-turn on federal policy by the Administration. In which they have dropped the advanced biofuels proposed RVO from 3.75 billion gallons to 2.2 billion, and from 14.4 billion gallons to to 13 in terms of corn ethanol.

“We’ve seen tortured logic at EPA as they have attempted to redefine their waiver authority from being based on inadequate supply of renewable fuels to inadequate distribution built by obligated parties and their partners to sell renewable fuels.

“In 2007, Congress explicity considered granting just such a waiver authority to the EPA, but rejected it in the final legislation, conclusing that it would be the end of the RFS if you could grant the EPA waiver authority should there simply be inadequate distribution built for renewable fuels, because you could simply as an obligated party escape compliance with the intent of the law by not building any distribution capacity.

“What we’ve seen in the marketplace is, in fact, the RFS is working as intended. When RIN prices rose, there is ample evidence that E85 sales soared when RIN prices rose, because it allowed retailers to discount the E85 price. When RIN prices fell, E85 sales fell.”

Iowa State’s Bruce Babcock responds

“There are two beliefs that I think we can generally ascribe to the oil industry. First, that drivers will not consume anything other than E10 ethanol [in terms of ethanol blends]. Second, that if EPA tries to force the market, retail fuel prices will increase. They appear to have reinforced this belief with lawmakers through extensive lobbying.

“Let’s look at that.

“What do we have in RFS. We have a clear roadmap for increasing the supply of renewable fuels. We have flexibility granted to the EPA in case the supply grows more slowly than expected. And we have a market-based mechanism in the form of RINs to create actual incentives to meet the targets.

“So, RIN prices close a gap between the price that is needed to get consumers to buy more ethanol, and the cost of producing and providing that ethanol. For example, if a consumer needs ethanol at $1.50 to choose E85 over gasoline, and ethanol prices are at $2.20 as they are today, you will need a $0.70 RIN price to give fuel retailers the incentive to close that price gap.

“Is E85 a failed fuel? No. It has a failed pricing strategy. We can see that in the data, where E85 has been consistently priced above the consumer parity line. In Brazil, we have seen that 40 percent of the market will choose ethanol when the prices are at parity.

“Now, one of the problems we have is that, although we have 14.6 million flex fuel vehicles they are most widely distributed in Texas, California, and Florida — wheras the vast majority of E85 ethanol is distributed in the Midwest. But let’s take what we know about fuel markets, flex-fuel cars and E85 outlets and build a model.

“What we know is that, based on the cars and the fuel sales based on parity prices, that we could expect 2.5 billion gallons of e85 to be sold if E85 was as widely available as E10 and at parity price or better. The reality is that E85 is not as widely available. In fact, only 5 million flex-fuel vehicles are within 5 miles of an E85 pump. Priced at parity, we can expect 600 million gallons in E85 sales; 800 million if E85 is sold at a discount.

“Will more stations appear? Consumption follows demand, and high RIN prices give an incentive to obtain more RINs, and to get more consumption. They break blend walls.

“Remember, we used to have the e5-e6 blend wall. Why did that go away? Because of the VEETC tax credit. We didn’t have RINs back then, but the tax credit changed the price of producing ethanol and made it more profitable to distribute more, and we don’t hear about the E5 blendwall any more, do we?

“Now, let’s look at this idea that rising RIN prices increase the cost of producing gasoline, and thereby the cost of fuel to the customer at the pump.

“I fully subscribe to the idea, expressed by the oil companies, that RIN prices increase the cost of producing gasoline, and incentivize producers to reduce the supply of gasoline. That makes sense in terms of how markets operate. But does that translate to a retail impact at the pump? We do see an 8 cent rise in the wholesale cost of gasoline for every dollar of RIN cost.

“But remember, consumers don’t buy gasoline, they buy E10. And so that $1 RIN translates into a $.10 discount in the 10 percent of ethanol content in what the consumer buys. That’s more than offsetting the increased cost of gasoline. In fact, a $1 RIN price produces a 2.8 cent cut in the cost of fuel at the pump, according to our model. Essentially, as the RIN price goes up the retail price stays level

Notes from the readership

After Big Oil to Ethanol was published, The Digest received this comment from Jim Russo, Founder, Fuel Guru:

“Having been associated with some of the top players in the fuels industry since 2005,especially with the ethanol industry,I can tell you what a disastrous mess of infighting between stakeholders (auto/oil/ethanol)the U.S. gasoline situation is, especially with upcoming Tier 3 regulations which will further reduce gasoline sulfur and available octane in the gasoline pool. Back in 2005 the ethanol industry demonized MTBE to their advantage, when in fact the problem that most real fuel experts realized was LUST-Leaking Underground Storage Tanks. This demonizing of MTBE by the ethanol industry for their benefit without ever addressing the problem of LUST, might be what makes breaking the ‘blend wall’ impossible for ethanol.

“In my opinion, there have only been a few real experts on the issue of fuels in the U.S. One is Joe Colucci, Retired Executive Director, GM R&D Center, and Co-Chairman of the U.S. Auto Oil Program. The other is the late Executive Director of Hart Energy, Fred Potter. Both of these men know/knew that ETBE would be the only answer to sustainably integrating ethanol into the U.S. gasoline supply. Both Joe and Fred led the last significant attempt to bring positive change to the U.S. gasoline supply by leading and hosting the 2011 D.C. Hart Energy Conference-The Future of Transportation Fuels in the U.S. :How Do We Optimize Over the Next 25-30 Years?

“The only significant player there from the ethanol industry, in my opinion, was Bob Casper, President of Poet Ethanol. It was clear to me at that point that our country really does not have an energy policy – we have energy politics, and a total lack of leadership in fuels. Both Joe Colucci and Fred Potter were real leaders in bringing very diverse interests together for the overall long term good of this country. Except for myself, I don’t see anybody else doing that work, or bringing the message of doing the right thing for the benefit of all. Bob Casper of POET Ethanol and I had numerous conversations about doing the right thing after the conference. Bob seems to be one of the few people in the ethanol industry that really ‘get’s it’, for the benefit of all. It appears that the message and game tactics of the ethanol industry are the same as they were in 2005/2006-politics and PR.

“I was fortunate to befriend Theron Cooper at an ASTM Meeting in 2006. Theron was Technical Services Manager at the time for the infamous Vera Sun Energy. My question to Theron at the time was: ‘who is doing your risk management?’ which was a complete joke because the ethanol industry was intoxicated by their own greatness, and total reliance on politics and PR. Maybe someday the ethanol industry will move beyond politics and PR and firmly establish itself in the future of transportation fuels in the U.S. for the next 25-30 years.