PREPARED BY:

JOHN M. URBANCHUK
AUS CONSULTANTS
155 GAITHER DRIVE
MOORESTOWN, NEW JERSEY 08057
(856) 234-9200 - TELEPHONE
(856) 234-0733 - FAX MACHINE

MARCH 20, 2000

The U.S. ethanol industry is capable of expanding to meet the demand for oxygenates that would result from a total withdrawal of Methyl Tertiary Butyl Ether (MTBE) from the domestic marketplace. In response to rising national concern about the presence of MTBE in groundwater and potential risk to public health and the environment, the U.S. Environmental Protection Agency (EPA) convened a Blue Ribbon Panel to assess policy options for MTBE. The Blue Ribbon Panel recommended that the use of MTBE be dramatically reduced or eliminated. EPA has subsequently stated that MTBE should be removed from all gasoline.

The replacement of MTBE with ethanol will increase the demand for ethanol to nearly 3.2 billion gallons by 2004 from an estimated 1.3 billion gallons this year. As shown in the following table the U.S. ethanol industry can virtually double capacity within a two-year timeframe and has the ability to exceed the increased demand created by the phase out of MTBE. The increased capacity will come from improvements in production efficiency leading to increased utilization of existing plants; expansion of existing operating facilities; new construction in place, and proposed facilities currently in various stages of development.

There do not appear to be any material constraints to increasing ethanol capacity in the near or long-term. Consequently the need to expand domestic ethanol production to replace MTBE will not lead to a shortfall of oxygenate supply that could result in an increase in gasoline prices.

The cost to add the new ethanol capacity to replace MTBE is estimated at nearly $1.9 billion. The level of construction activity associated with this expansion combined with the increased demand for corn and other grain to produce the additional ethanol will add $11.7 billion to real GDP by 2004, increase household income by $2.5 billion, and generate more than 47,800 new jobs throughout the entire economy.

A ban on the use of MTBE in all gasoline accompanied by retention of the minimum oxygenate requirement in reformulated gasoline will increase the demand for ethanol as ethanol replaces MTBE. Reformulated gasoline makes up about one-third of all gasoline sold in the United States. MTBE has been the dominant oxygenate in reformulated gasoline; virtually all of the MTBE supply is used in reformulated and oxygenated gasoline. Ethanol is the dominant source of oxygen in oxygenated gasoline although this accounts for only about half of total ethanol use. Demand for gasohol blending and to improve octane in conventional gasoline make up the remainder of ethanol use. According to the Energy Information Administration of the Department of Energy (EIA), oxygenated gasoline accounts for about 5 percent of the gasoline sold during the winter months, or about 1.3 percent over the full year. As shown in Table 1 the EIA reported that 3.9 billion gallons of MTBE were used to oxygenate 40.3 billion gallons of reformulated gasoline (RFG) in 1997. Ethanol use in reformulated and oxygenated gasoline in 1997 was estimated by EIA at 695 million gallons, or about 55 percent of total use. Ethanol demand for gasohol and to enhance octane in conventional gasoline accounted for the remaining 45 percent of total use.

The demand for MTBE and ethanol in the absence of any regulatory action will depend on the use of reformulated and oxygenated gasoline. Table 1 also shows the projected baseline demand for MTBE and ethanol through 2004. The U.S. Department of Energy projects long-term gasoline demand in the United States to grow at an annual rate of 1.4 percent over the next two decades. Applying this growth rate to 1997 RFG use suggests that demand for reformulated gasoline will reach 45.6 billion gallons by 2004. An estimated 4.3 million gallons of MTBE would be required to oxygenate this quantity of RFG.

Under baseline conditions where MTBE is available for use, ethanol demand for RFG is expected to increase to 417 million gallons by 2004. Demand for oxygenated gasoline to achieve carbon monoxide standards in the winter months is expected to decline modestly through 2004 as cities and municipalities come into compliance. However, demand for ethanol to enhance octane in conventional gasoline is expected to increase along with overall gasoline demand.

A ban on the use of MTBE accompanied by the retention of the minimum oxygenate requirement in RFG will increase the demand for ethanol. Since ethanol provides roughly twice the oxygen content of an equivalent volume of MTBE, half as much ethanol would be required to oxygenate the same amount of RFG. As outlined in Table 2, assuming that a phase out of MTBE would be gradually implemented (20 percent reduction in 2000, 40 percent in 2001, etc. to a full phase out by 2004), the amount of ethanol required to replace MTBE would increase from an estimated 396 million gallons in 1999 to almost 2.3 billion gallons in 2004. When the volume of ethanol used as an oxygenate to meet CO attainment and to enhance octane in conventional gasoline is added to this, total ethanol demand is projected to increase from an estimated 1.3 billion gallons in 1999 to 3.2 billion gallons by 2004.

Table 2
Ethanol Demand to Replace MTBE
(Million Gallons per Year)

The U.S. ethanol industry will produce an estimated 1.5 billion gallons of ethanol on a base capacity of 1.85 billion gallons in 2000. The difference between production of 1.53 billion gallons and estimated demand of 1.3 billion gallons is accounted for by ethanol inventories in storage. These inventories, currently at record levels, are immediately available to meet the demand of replacing MTBE. Forty-five firms, including farmer-owned cooperatives, currently operate 58 ethanol plants in 19 states. Current ethanol capacity by state is illustrated in Figure 1. Existing plants are identified by operator, location, nameplate capacity, and principal feedstock in Table 3.

Figure 1
Ethanol Capacity by State, March 2000

Table 3 (Continued)
Ethanol Production Capacity
March 2000

• Expansion to Existing Plants

• Several of the largest ethanol producers including ADM and Williams Energy have indicated a willingness to significantly expand existing ethanol production facilities if ethanol is used to replace MTBE in reformulated gasoline.
• Other industry participants report that most mid-sized ethanol facilities could readily be expanded by at least 20 percent. Some wet mill ethanol facilities have the potential to increase ethanol production by a larger amount.

• Discussions with ethanol plant designers and builders indicate that most small ethanol plants, particularly the new and relatively new dry mill ethanol plants in the 10 to 15 million gallon per year range, would likely be expanded to the 30 million gallon limit imposed by the small ethanol producer credit.
• One major engineering firm reported that several corn wet milling plants that currently do not produce ethanol have expressed interest in redirecting some of their starch conversion to ethanol production. Combined with additions of new ethanol capacity to these plants, this could represent an additional 200 million gallons of ethanol production annually.

• According to the major U.S. ethanol engineering and construction firms interviewed for this study, there are no technical, machinery, or equipment constraints that would inhibit or otherwise restrain the ability of existing ethanol producers to expand capacity.
• Expanding existing capacity is less expensive than building new capacity. Industry sources suggest that the cost to bring a new dry mill ethanol plant on line amounts to $1.25 to $1.50 per gallon and that expanding an existing facility costs about half that amount. Considering this, the industry-wide cost of adding 1.2 billion gallons of new production by expanding existing plant capacity would cost $874 million ($0.75 per gallon times 1,166 million gallons).

2.  Production Capacity Currently Under Construction

Industry sources indicate that an estimated 134 million gallons of new ethanol capacity (121 million gallons of production at a 90 percent utilization rate) is currently under construction and will be brought on line within the next 12 to 18 months. These facilities are listed in Table 4.

Table 4
Ethanol Production Under Construction, March 2000

3.  Proposed Ethanol Projects

In addition to the feedstocks discussed above significant potential exists to use sugar for ethanol production. U.S. sugar production reached record levels last season resulting in stock accumulation and declining domestic prices. As a consequence, sugar processors have begun forfeiting on non-recourse loans under the 1996 Farm Bill and sugar is transferring to government ownership. Industry estimates indicate that the government may acquire as much as 350,000 metric tonnes of sugar through loan defaults. This is the equivalent of 56 million gallons of ethanol. Additionally, the world sugar situation points to continued large stocks and declining prices which will further pressure domestic sugar producers and processors. Sale of this sugar to ethanol manufacturers may provide an opportunity to limit net budgetary outlays this year and next. The use of this sugar in ethanol production has not been considered in our supply and demand estimates, but this is another factor supporting the potential for higher ethanol output.