Monday, October 18, 2010

EPA E15 Decision

The EPA decision on the E15 waiver came as no surprise this week.  The EPA ruled that E15 gasoline blends were okay for 2007 and later year model vehicles in the US.  As we have stated numerous times in previous reports, a bifurcated market will not work.  For example, The National Association of Convenience Stores (NACS) told its members to exercise extreme caution on whether to sell E15 gasoline.  The NACS represents convenience stores and the petroleum retailing industry that sells an estimated 80% of the motor fuels in the US.  The NACS’s key issues with the EPA waiver is that it does not address the liability of using dispensing equipment not specifically certified to handle ethanol blends in excess of E10 and the liability exposure for engine damage and Clean Air Act emission violations caused by misfueling vehicles, even with appropriate labeling in place.  An excellent study commissioned by the American Petroleum Institute that we referenced several weeks ago sums up all the other regulatory barriers that must be dealt with before E15 can enter commerce officially.  Here is the link to that study:

The huge sticking point that is evident in the proposed rulemaking is that the 1.0 psi RVP waiver granted for E10 cannot be extended to E15 by agency rulemaking.  In 40 CFR 80.27, the law limits the waiver to gasoline containing between 9%-10% ethanol with no exception.  It can only be changed with an act of Congress.  In this week’s proposed rulemaking (here is the link -, the EPA is proposing that E15-blended gasoline will not  be granted this RVP waiver, forcing the blendstock that 15% ethanol is blended with to have a reduced vapor pressure and allowing the finished blend to meet summertime gasoline RVP without a waiver.  This means a refiner will be required to produce both an E10 blendstock and an E15 blendstock.  The rulemaking goes through an elaborate process to prevent comingling of E10 blendstock with E15 blendstock in order not to violate the RVP waiver language.  It is absurd to think the gasoline industry is going to go through these contortions to deliver E15 to the consumer.  There is no economic incentive for a refiner to produce a more expensive blendstock to accommodate E15.  In our opinion, these rules are completely unworkable, and it is going to take an act of Congress (hopefully with more input from industry) to clean up this mess. 

Ethanol Tax Credit Renewal

The impressive juggernaut called the ethanol lobby seems to be losing their grip on the political landscape – at least for the moment.  After spending almost the entire year staking out the position that renewal of the VEETC (Volumetric Ethanol Excise Tax Credit) and import tariff were a must-have from the US government, with no compromise, the ethanol lobby received little to no traction on this position.  In response to no movement by lawmakers on renewing ethanol’s tax credit, the key lobbying groups - RFA, Growth Energy and ACE - are now floating a compromise position.  The form of the compromise is outlined as follows:

· Reduce the existing 45 cpg blending tax credit by up to 50% for 2011
· Create a refundable producer tax credit to start in 2012 to last four years – there are no details available on how this would be calculated
· Reward ethanol producers who reduce their carbon footprint with higher producer credit levels – there are no details available on how this would be calculated
· Eliminate the import tariff, starting in 2012
· Accelerate deployment of flex-fuel vehicles by mandate and provide government grants for blender pumps at fueling stations
· Allow cornstarch ethanol to be considered for “Advanced Biofuels” status
· Suppress indirect land use penalties on cornstarch ethanol

Being a keen observer of today’s political environment, it is becoming highly unlikely that a lame duck session of the US Congress is going to deal with the ethanol industry tax credit issues.  A new Republican-controlled Congress in 2011 has the potential to be politically hostile to any attempt for an ethanol tax credit renewal.  We think our subscribers should at least prepare for expiration of the VEETC and the import tariff moving into 2011. 

The key impact will be pressure on discretionary ethanol blending that depends on ethanol/gasoline economics, and not mandated volumes.  We can estimate discretionary ethanol blending by calculating how much ethanol is used to produce ethanol-blended gasoline from the EIA, and compare that to a simple 12 billion gallons mandate divided by 365.  Using last week’s EIA production figures, 34 million gallons of ethanol were blended into gasoline.  This compares to the daily average the RFS2 mandates requires of 32.8 million gallons per day, which means only 1.2 million gallons per day of ethanol are discretionary.  The chart titled “Ethanol Blended vs Mandate” below uses this analysis and calculates the amount of ethanol blended into gasoline that is discretionary, i.e. more than mandated through September of 2010.  The total amount blended exceeding the mandate is 142 million gallons through September.  These numbers would suggest that losing the VEETC will have little impact, if any at all, on ethanol prices for next year.  A negative impact assumes that ethanol prices are higher than gasoline prices as they are today.  In addition, the mandate increases to 12.6 billion gallons, or 34.5 million gallons per day, of ethanol blending next year, and expands the available gasoline pool to include all the gasoline blended by small refiners that lose their exemption from RFS2 mandates starting in 2011. 

The expiration of the import tariff will have little or no effect, particularly due to the high prices in Brazil.  The LCFS in California may create demand for sugarcane-based ethanol, but that remains to be seen, and market participants do not anticipate any action until 2012 if the LCFS is still in place.