Ethanol. Lucian Pugliaresi Energy Policy Research Foundation, Inc. Aspen Institute June 26-28, 2009

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1 Ethanol A Cautionary Tale Lucian Pugliaresi Energy Policy Research Foundation, Inc. Aspen Institute June 26-28, 2009 Energy Policy Research Foundation, Inc st St, NW Washington, DC

2 EISA 07 Renewable Fuels Standard Biomass based Diesel Any Advanced Billion Gallons Cellulosic Advanced Corn Ethanol / Other EPACT 05 5 Source: DOE Energy Policy Research Foundation, Inc st St, NW Washington, DC

3 What Were They Thinking? 15 billion gallon mandate easily achievable with growing gasoline demand -- blend wall would not exceed 10% (2007 forecast environment). Gasoline prices would rise making ethanol cost competitive an antidote to high gasoline prices. Mandates were needed to overcome resistance from the petroleum industry. Rural renaissance. And besides it would deliver substantial benefits in lower emissions of GHGs. Energy Policy Research Foundation, Inc st St, NW Washington, DC

4 What did they miss? Gasoline demand did not grow, prices fell RFS mandates were volumetric driving fuel sector to the blend wall in next year or two. Ethanol not cost competitive under most scenarios. Ethanol substitutes for gasoline -- not crude oil -- leading to refinery output inefficiencies Food versus fuel problem. Carbon benefits under attack. Energy Policy Research Foundation, Inc st St, NW Washington, DC

5 What s a Refinery? gases Fuel Gas Propane naphthas Isomerization Catalytic Reforming Gasoline Blendstocks Alkylation distillates Hydrotreating Jet Fuel Diesel Fuels and Heating Oils Atmospheric Distillation gas oils Fluid Catalytic Cracking Hydrocracking Gasoline and Distillate Blendstocks Vacuum Distillation residue Lubricants Coking Lubricating Oils Coke Deasphalting Asphalt

6 U.S. Oil Refineries History: Present 1970s: The Small Refiner Bias in the 1973 price control program encouraged the building of excess small refineries. 1979: Price controls end : Rationalization of refining. Closure of small, uneconomic units - adversely impacted by population and crude supply shifts. Capacity at existing, better-located facilities expanded. Remaining refinery campuses become bigger, more efficient. Mid-1990s: Capacity grows; demand grows faster. 2000s: More investment needed to expand existing refineries. Regulatory issues Capital requirements and investment decisions What happened to Refining s Golden Age?

7 US Ethanol Consumption: Present Quick ramp-up made it look easy but really was displacement of MTBE Ethanol does not displace much foreign oil. 6 bil gallons per year of ethanol saves approx 100 million bbls of oil. Corn prices have risen from $1.60 to $6.00. How much attributable to ethanol driven demand? $1.00? $2.00? At $1.00/bu, oil saved cost $130/bbl; at $2.00/bu, the figure is $230 per bbl. Current Ethanol Economics Looks Dicey With high corn prices, low fuel ethanol prices, existing plants earn losses. Existing plants have 7 bil gal capacity; mandate calls for 2 bil more Plants under construction and planned may not be completed/brought on line If corn prices remain stable at current levels, ethanol prices must rise by at least $0.50 per gallon in order for ethanol to be sufficiently profitable to attract investment. More capacity needed to meet 9 bil gal mandate for 2008

8 U.S. Corn Ethanol Production Thousand bpd Billion Gallons per Year Barrels Per Day Annual Run Rate Ethanol In Gasoline---Long history/early start as gasohol 100,000 bd (150 million gal/yr) in 1998 Up-tick in mid-2006 due to MTBE phase-out Present US production of 640,000 Run-rate equivalent to 9.81 bil gal/yr 7.2% of 2009 Q1 national gasoline supplv Source : EIA - Energy Policy Research Foundation, Inc st St, NW Washington, DC

9 Issues Identified in the EPRINC/EIA Workshop---Still Applicable to Future Ethanol Blending Compatibility issues have kept ethanol and blends out of petroleum pipelines. The industry is studying compatibility. While optimism is prevalent, if and to what extent ethanol and its blends will be deemed suitable for pipeline input is unclear. Ethanol movement by rail grows, with unit trains offering the best economics. Few ethanol plants and fuel terminals have sidings for rail cars/unit trains. Trucks commonly cover the first and last mile. New oil terminal facilities are configuring rail access where they can. Rail offers routes that suit ethanol transport geographically; pipelines more often are laid-out for Gulf Coast-North/NE transport. Ethanol needs to be supplied universally. Transport systems still need to be established for ESIA 2007 supply amounts. Energy Policy Research Foundation, Inc st St, NW Washington, DC

10 Issues Identified in the EPRINC/EIA Workshop---Still Applicable to Future Ethanol Blending (Contd) Corn will likely be the feedstock of choice until Will there be enough supply? And at what cost to the food supply? 5.5 billion bushels will be needed, as well as significant new production capacity. E-10 is successfully operating in current model autos, most current model marine and small power applications. It was seen as the predominant fuel. Other higher blends were not seen as an option; a standardized E-85 product will absorb mandated ethanol amounts. Concern was expressed regarding the slow roll-out of E-85 Energy Policy Research Foundation, Inc st St, NW Washington, DC

Lifecycle GHG Emissions Source: EPA, http://www.epa.gov/oms/renewablefuels/420f09024.

11 Lifecycle GHG Emissions Source: EPA, Energy Policy Research Foundation, Inc st St, NW Washington, DC

12 Energy Policy Research Foundation, Inc st St, NW Washington, DC

13 Energy Policy Research Foundation, Inc st St, NW Washington, DC

14 Ethanol Subsidies 2008 Ethanol Subsidies $ Million Market Price Support on Domestic Production 2,240 Market Price Support on Exports 30 Volumetric Excise Tax Credit (Blender's Credit)* 4,335 Reductions in State Motor Fuels Tax 440 Federal Small Producer Tax Credit 170 Excess of Acclerrated Over Cost Depreciation 680 Federal Grants, Demonstration Projects, R&D 350 Access to Tax-Exempt Solid Waste Bonds 110 Deferral of gain on sale of farm refineries to coops 20 Crop Support to Corn 730 Crop Support to Sorghum 20 Credits for Clean Fuel Refueling Infrastructure 20 Total: 9,145 Total Subsidy Per Gallon of Ethanol: $1.08 TotalSubsidy Per Gallon of Gasoline Displaced, BTU Equivilent $1.63 (Total does not include cost of fuel, only the fuel subsidy), * = EPRINC Estimate, not all subsidies are listed Source: EPRINC calculated Blender's Credit Energy Policy Research Foundation, Inc st St, NW Washington, DC

15 A Selection of Ethanol Subsidies 2008 Ethanol Subsidies $ Million Market Price Support on Domestic Production 2,240 Market Price Support on Exports 30 Volumetric Excise Tax Credit (Blender's Credit)* 4,335 Reductions in State Motor Fuels Tax 440 Federal Small Producer Tax Credit 170 Excess of Acclerrated Over Cost Depreciation 680 Federal Grants, Demonstration Projects, R&D 350 Access to Tax-Exempt Solid Waste Bonds 110 Deferral of gain on sale of farm refineries to coops 20 Crop Support to Corn 730 Crop Support to Sorghum 20 Credits for Clean Fuel Refueling Infrastructure 20 Energy Policy Research Foundation, Inc st St, NW Washington, DC

16 Ethanol Subsidies Total 2008 Ethanol Subsidies: $9.15 billion Total Subsidy Per Gallon of Ethanol: $1.08 TotalSubsidy Per Gallon of Gasoline Displaced, BTU Equivilent $1.63 (Total does not include cost of fuel, only the fuel subsidy), * = EPRINC Estimate, not all subsidies are listed Source: EPRINC calculated Blender's Credit Energy Policy Research Foundation, Inc st St, NW Washington, DC

17 Energy Independence and Security Act of 2007 Mandated Ethanol Future Energy Policy Research Foundation, Inc st St, NW Washington, DC

18 EISA And Gasoline Benchmarks Billions of Gallons Materials Corn Ethanol Cellulosic Advanced for Mogas* Total *Assumes Advanced is divided between diesel and motor gasoline. Energy Policy Research Foundation, Inc st St, NW Washington, DC

19 Cellulosic Ethanol? Not a commercial product now Focal point of a great deal of R & D Many promising projects A number of corporate entities involved Still in the lab If Cellulosic moves beyond the lab, significant capital investment needed 16 bgy = 1 million bbls per day. That is the amount of crude produced in Texas! Policy-makers have placed a bet on something that does not exist If Cellulosic is not available as EISA mandates, EPA will likely issue a waiver Energy Policy Research Foundation, Inc st St, NW Washington, DC

20 E-85 Challenges Energy Policy Research Foundation, Inc st St, NW Washington, DC

21 Product Prices and Share cents per gallon % CBOT Ethanol Futures NYMEX RBOB Futures Ethanol Production's Share of Finished Motor Gasoline Supplied (%) Dec/05 Mar/06 Jun/06 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Sep/08 Dec/08 Mar/09 Source: EIA Data, CME Group, EPRINC Calculations. All prices are for front month futures contracts. Prices are not BTU adjusted. Energy Policy Research Foundation, Inc st St, NW Washington, DC

22 The Blend Wall in a low RBOB World 2.5 Estimated all-in cost for ethanol: corn + operating costs + capital costs* 2 $/gallon Price difference between ethanol and RBOB After serving its role as an oxygenate, ethanol must compete directly with gasoline % of Gasoline Pool Ethanol loses significant value as it moves into E85 Blender's Credit: $0.45/gallon Falling values for ethanol will be mirrored by rising values for RINs RBOB (NYMEX Futures: March Delivery) Ethanol's Value Relative to Gasoline Ethanol (CBOT Futures: March Delivery) Corn Feedstock - $ per gallon of Ethanol All In-Cost of Ethanol Production Energy Policy Research Foundation, Inc st St, NW Washington, DC

23 Model Year CAFÉ and Vehicle MPG MPG CAFÉ MPG Passenger Car MPG Light Trucks/SUV MPG Take Away: Reality lags expectations. Mismatch between actual MPG and policy goals. Source: NHTSA, EIA Energy Policy Research Foundation, Inc st St, NW Washington, DC

24 E85 Rollout Moves Slowly Currently sold at roughly 2000 service stations. Used in a disappointing few FFVs. Mispriced Current MPG/BTU adjusted price is $2.87 v. $2.69 for regular gasoline. Market mechanism needs to price E85 correctly. E85 should be priced to attract motorist use. E85 convenience factor takes 3 fill-ups to go as many miles as 2 regular fill-ups. Convenience factor needs to be priced. Bottom Line Consumer needs a good reason to walk into a dealership and ask to buy a FFV. Source: AAAFuelGaugeReport.com Energy Policy Research Foundation, Inc st St, NW Washington, DC

FFVs and E85 Usage 7 10.00% Million Vehicles 6 5 4 3 2 1 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% Light Duty E85 FFV's In Use % of FFV's Actually Operating on E85 0 0.

25 FFVs and E85 Usage % Million Vehicles % 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% Light Duty E85 FFV's In Use % of FFV's Actually Operating on E % Source: EIA Data, DOE Data, EPRINC Calculations Energy Policy Research Foundation, Inc st St, NW Washington, DC

26 Retail Fuel Prices $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 E85 Price Per Gallon E85 BTU Adjusted* Gasoline Diesel* $0.00 4/1/00 11/1/00 6/1/01 1/1/02 8/1/02 3/1/03 10/1/03 5/1/04 12/1/04 7/1/05 2/1/06 9/1/06 4/1/07 11/1/07 6/1/08 1/1/09 *Price is per gallon of gasoline equivalent (BTU basis), according to DOE conversion standards: 1 Gallon of Gasoline = gallons of E85 and gallons of diesel. Source: DOE Data Energy Policy Research Foundation, Inc st St, NW Washington, DC

Subsidies and Support to Electric Production by Selected Primary Energy Sources Primary Energy Source FY 2007 Net Generation (billion kilowatthours) Subsidies and Support Allocated to Electric

27 Subsidies and Support to Electric Production by Selected Primary Energy Sources Primary Energy Source FY 2007 Net Generation (billion kilowatthours) Subsidies and Support Allocated to Electric Generation (million FY 2007 dollars) Subsidies and Support per Unit of Production (dollars/megawatt hour) Natural Gas and Petroleum Liquids Coal Hydroelectric Biomass Geothermal Nuclear Wind Solar Refined Coal Source: EIA Data Energy Policy Research Foundation, Inc st St, NW Washington, DC

28 Energy Subsidies Not Related to Electricity Production Category Fuel Consumption (Quadrillion BTU) FY 2007 Subsidy and Subsidy per Million Suppot (million 2007 BTU dollars) Coal Refined Coal Natural Gas and Petroleum Liquids Ethanol/Biofuels Geothermal Solar Other Renewables Hydrogen * 230 NM Total Fuel Specific Total Non-Fuel Specific NM 3597 NM Total End-Use and Non-Electricity NM 9834 NM Source: EIA Data Energy Policy Research Foundation, Inc st St, NW Washington, DC

29 Obama Administration Proposing New Taxes on Oil and Gas Industry Estimated Average Annual Cost, A Selection of Proposed Taxes 2019 ($ millions) Reinstate Superfund Taxes - Would Impose taxes on oil and chemical products and use revenues to help clean up contaminated sites Repeal LIFO - Limit the options to account for the flow of inventories for tax. Would require significant amounts to be treated as income Levy excise tax on Gulf of Mexico oil and gas - Impose an excise or severance tax on oil and gas production from federal offshore leases Repeal expensing of intangible drilling costs - Eliminate the ability to immediately deduct certain costs associated with drilling and developing wells for tax purposes and instead recover such costs over some period of time Repeal deduction for tertiary injectants - Eliminate the ability to immediately deduct certain costs associated with tertiary recovery projects for tax purposes and instead recover such costs over some period of time. 6.2 Repeal passive loss exception for working interests - Would limit the ability for some taxpayers to fully use losses generated from their oil and gas properties against other income. 4.9 Repeal Sec. 199 for oil and natural gas companies - Would deny taxpayers from claiming a deduction on their domestic oil and gas production and refining activities Increase G&G amortization period for independent producers to 7 years - Would require all taxpayers to recover the cost of geologic and geophysical costs over a seven year period in a manner that is similar to how these costs are treated by major integrated oil companies Repeal percentage depletion for oil and natural gas - This would require all taxpayers to recover their investment in mineral reserves as such reserves are produced rather than by a stated percentage each year Fee on nonproducing leases ("use or lose") Total: Energy Policy Research Foundation, Inc st St, NW Washington, DC

30 Obama Administration Proposing New Taxes on Oil and Gas Industry A Selection of Proposed Taxes Estimated Average Annual Cost, ($ millions) Reinstate Superfund Taxes - Would Impose taxes on oil and chemical products and use revenues to help clean up contaminated sites Repeal LIFO - Limit the options to account for the flow of inventories for tax. Would require significant amounts to be treated as income Levy excise tax on Gulf of Mexico oil and gas - Impose an excise or severance tax on oil and gas production from federal offshore leases Repeal expensing of intangible drilling costs - Eliminate the ability to immediately deduct certain costs associated with drilling and developing wells for tax purposes and instead recover such costs over some period of time Repeal deduction for tertiary injectants - Eliminate the ability to immediately deduct certain costs associated with tertiary recovery projects for tax purposes and instead recover such costs over some period of time. 6.2 Energy Policy Research Foundation, Inc st St, NW Washington, DC

31 Obama Administration Proposing New Taxes on Oil and Gas Industry A Selection of Proposed Taxes Estimated Average Annual Cost, ($ millions) Repeal passive loss exception for working interests - Would limit the ability for some taxpayers to fully use losses generated from their oil and gas properties against other income. 4.9 Repeal Sec. 199 for oil and natural gas companies - Would deny taxpayers from claiming a deduction on their domestic oil and gas production and refining activities Increase G&G amortization period for independent producers to 7 years - Would require all taxpayers to recover the cost of geologic and geophysical costs over a seven year period in a manner that is similar to how these costs are treated by major integrated oil companies Repeal percentage depletion for oil and natural gas - This would require all taxpayers to recover their investment in mineral reserves as such reserves are produced rather than by a stated percentage each year Fee on nonproducing leases ("use or lose") Total: Energy Policy Research Foundation, Inc st St, NW Washington, DC

32 Cost and Effectiveness of Cash for Guzzlers Program Baseline=18 mpg, 12,000 VMT Voucher Value Program Cost for One Million Vehicles Gallons Saved Per Vehicle, Annually Total Fuel Savings for One Million Vehicles Over Eight Years, Gallons Cost Per Gallon Saved Over Eight Years Fleet Fuel Consumption Reduction Compared to 2008 Rate New Car, +4 MPG $3,500 $3,500,000,0 00 New Car, +10 MPG $4,500 $4,500,000,0 00 New Light Truck/SUV, $3,500 $3,500,000,0 +2 MPG 00 New Light Truck/SUV, +5 MPG $4,500 $4,500,000, ,600,000 $ % ,904,800,000 $ % ,600,000 $ % ,159,200,000 $ % Sources: EIA Data, EPA Data, EPRINC Calculations Energy Policy Research Foundation, Inc st St, NW Washington, DC

33 Energy Policy Research Foundation, Inc st St, NW Washington, DC

34 Energy Policy Research Foundation, Inc st St, NW Washington, DC

35 Fleet Tailpipe Emission Reductions Replacing 1 million vehicles from.. Reduces total CO emissions by.. Reduces total VOC emissions by.. Reduces total NOx emissions by % % % % % % % % % Energy Policy Research Foundation, Inc st St, NW Washington, DC

36 Obama Administration Proposing New Taxes on Oil and Gas Industry A Selection of Proposed Taxes Estimated Average Annual Cost, ($ millions) Repeal passive loss exception for working interests - Would limit the ability for some taxpayers to fully use losses generated from their oil and gas properties against other income. 4.9 Repeal Sec. 199 for oil and natural gas companies - Would deny taxpayers from claiming a deduction on their domestic oil and gas production and refining activities Increase G&G amortization period for independent producers to 7 years - Would require all taxpayers to recover the cost of geologic and geophysical costs over a seven year period in a manner that is similar to how these costs are treated by major integrated oil companies Repeal percentage depletion for oil and natural gas - This would require all taxpayers to recover their investment in mineral reserves as such reserves are produced rather than by a stated percentage each year Fee on nonproducing leases ("use or lose") Total: Energy Policy Research Foundation, Inc st St, NW Washington, DC

37 Domestic Crude Oil Supply and Demand Million bbl/d U.S. Product Supplied of Crude Oil and Petroleum Products (Thousand Barrels per Day) U.S. Field Production of Crude Oil (Thousand Barrels per Day) 0 Jan-1963 May-1965 Sep-1967 Jan-1970 May-1972 Sep-1974 Jan-1977 May-1979 Sep-1981 Jan-1984 May-1986 Sep-1988 Jan-1991 May-1993 Sep-1995 Jan-1998 May-2000 Sep-2002 Jan-2005 May-2007 Source: EIA Data Energy Policy Research Foundation, Inc st St, NW Washington, DC

38 Energy Policy Research Foundation, Inc st St, NW Washington, DC

39 What it takes to offset 1 gigaton of carbon TODAY S TECHNOLOGY Coal-fired power plants Geologic sequestration Nuclear Efficiency Wind energy Solar photovoltaics Biofuels for transport CO 2 storage in forests Actions providing 1 Gt mitigation/year Build 1,000 zero-emission 500 MW coal-fired power plants Install 3,700 sequestration sites like Norway s Sleipner project (0.27 MtC/year) Build 500 new nuclear plants, each 1 GW in size Deploy 1 billion new cars at 40 miles per gallon (mpg) instead of 20 mpg Install capacity to supply 50 times the current global wind generation Install capacity to supply 1000 times the current global solar PV generation Convert a barren area 15 times the size of Iowa s farmland (30 million acres) to biomass production Convert a barren area 30 times the size of Iowa s farmland to new forest Source: DOE Climate Change Technology Program Energy Policy Research Foundation, Inc st St, NW Washington, DC

40 If global demand increases without adequate investment in new production capacity, given natural decline rates, there is risk of a significant liquids supply gap. MILLION BARRELS PER DAY Demand mitigation in the short-term Existing Production Capacity Required New Capacity MBOE/D MBOE/D Unconventional and biofuels Conventional non OPEC Conventional OPEC Source: CSIS, National Petroleum Council Energy Policy Research Foundation, Inc st St, NW Washington, DC

41 Projected Petroleum Imports 25 History Projections 20 million barrels per day Consumption Domestic Supply 60% Net Imports 54% Source: EIA/AEO 2008 Energy Policy Research Foundation, Inc st St, NW Washington, DC

42 13 U.S. Crude Oil Net Imports Worst-Case Economic Scenario: 0% Annual GDP Growth Through 2020 With Crude Oil Prices Rising 3% Annually mbd Positive Economic Growth, GDP +2.5%/yr No Economic Growth, GDP +0%/yr % GDP Growth and RFS is met in 2020 Energy Policy Research Foundation, Inc st St, NW Washington, DC

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