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The new ethanol: A debate over corn, oil and progress

Published: Monday, Oct. 22, 2012 8:58 a.m. CDT
Caption
(Photo by Kevin G. Hall/MCT)
Corn is dropped from a truck at the Abengoa Bioenergy ethanol plant in Madison, Illinois, on August 20, 2012.

(MCT) — WASHINGTON — The Obama administration must decide in coming weeks if it will temporarily lift requirements to blend ethanol into the nation’s gasoline supply. The issue has been largely dormant on the campaign trail, but it’s critical to the success or failure of the next generation of biofuel plants under construction today that won’t rely on corn to make fuel.

A public comment period ended in early October, and now the administration must decide by Nov. 13 whether or not to temporarily suspend the Renewable Fuel Standard, created in 2005 and modified in 2007 to help the ethanol industry get off the ground by requiring its use in gasoline.

Ethanol is required to be blended into gasoline to help keep pollution down, and it has the added benefit of lowering dependence on crude oil, about half of it imported and the other half drilled domestically.

The governors of Arkansas, North Carolina and several other states want the ethanol mandate suspended amid rising corn prices brought about by this summer’s punishing drought. Governors of corn states are opposed.

The administration is widely expected to reject the request for a one-year suspension of ethanol mandates, but the move is actually just an opening salvo in a much larger fight that’s coming in the next Congress over the Renewable Fuel Standard. That debate comes just as the ethanol industry readies to launch commercial-scale, next-generation biofuels.

Also at issue: Whether mandates, passed in 2005 when oil demand was at its peak, are realistic given falling energy consumption, a boom in low-cost natural gas production, rising corn prices and improvements in the fuel efficiency of cars.

The ethanol industry this year lost, as part of deficit reduction efforts, federal subsidies that had surpassed $20 billion. And the mandates requiring future use of ethanol in the fuel supply are both complex and controversial. They currently call for ethanol to comprise 10 percent of the nation’s fuel supply, or about 13.2 billion gallons. But that volume is scheduled to grow to 15 billion by 2015 and 36 billion by 2022. The 36 billion gallons, half of which must come from non-corn sources, would still represent just 7 percent of anticipated future U.S. fuel consumption.

The mandates were passed in an era before the deep financial crisis and improvements in fuel efficiency. At the time, gasoline demand was expected in the neighborhood of 160 billion gallons annually. It’s far from that today.

“It was never supposed to be ‘130 billion gallons and falling.’ And it will continue to fall because of the CAFE standards,” which require in years ahead more miles per gallon from automobile manufacturers, said Kevin Book, an energy analyst for researcher ClearView Energy Partners. “The actual pool (of gasoline) is getting smaller as requirements (for ethanol use) are getting larger.”

This contradiction is called the “blend wall,” akin to a perfect storm on ethanol producers right as the next-generation product is about to come to market. By 2022, at least half of the nation’s ethanol must come from non-corn sources, and that depends on next-generation cellulosic ethanol.

“We’re in the age of cellulosic. The key question still is going to be increased volume and a competitive price,” said Daniel Yergin, the Pulitzer Prize-winning oil historian and author of “The Prize: The Epic Quest for Oil, Money & Power,” and its recent sequel, “The Quest: Energy, Security, and the Remaking of the Modern World.”

Oil companies, which sell less product when ethanol is blended, want to roll back the blending requirements. Ethanol producers, who consume about 40 percent of the nation’s corn crop, argue that the solution is raising the amount of ethanol required to be blended into fuel, somewhere in the ballpark of, say, 15 percent or 20 percent. The Environmental Protection Agency has approved sale of gasoline composed of 15 percent ethanol, or E15, for use in newer cars. It is not required, however.

President Barack Obama has made ethanol a key part of his “all of the above” strategy for energy production. Campaign rival Mitt Romney, the former governor of Massachusetts, released a white paper on agriculture on Oct. 9, also supporting the existing Renewable Fuel Standard.

Most ethanol produced in the United States is made from corn, but several expensive bio-refineries are under construction to produce cellulosic ethanol. These refineries will use as their feedstock corn stover, essentially the leftover corn stalk after corn cobs have been harvested. In the future, this product won’t compete with food crops.

What happens with the fuel standard is also a jobs issue. Not only is the ethanol market huge for corn growers, it creates all sorts of related jobs, from farm products to the truck drivers who deliver corn around the clock to ethanol plants.

“It’s an economic issue, and we simply want the issue to be decided based upon the facts. We want people to think about those unanticipated consequences,” said Chris Standlee, executive vice president of Abengoa Bioenergy in Chesterfield, Mo., operator of six bio-refineries capable of producing 400 million gallons of ethanol annually. “What happens if you take actions to reduce that, not only what happens now to the economy and health of rural America, but a year from now if ethanol is reduced and oil prices go back to $150 a barrel? That’s not good for anybody.”

Standlee estimates there are about 1,500 jobs created around his plants, beyond the company’s own hires. McClatchy toured the bustling Abengoa plant in Madison, Ill., in August, before the drought led to refinery closures across the country. The Madison plant is now idled for maintenance. Soaring corn prices have idled plants across the country, as the feedstock prices erode profitability. Corn for future delivery now fetches around $7.73 a bushel vs. an average price of $2.13 a bushel in 2002. One bushel yields about 2.75 gallons of ethanol.

On the presidential campaign trail, ethanol is a background issue. Both presidential candidates tout plans to boost the growing domestic production of oil, particularly in the promising Bakken formation oil deposits buried beneath shale rock in Montana and North Dakota.

What the candidates don’t say is that the amount of ethanol already in production today is almost four times the amount of oil that the Bakken oilfields are currently producing.

“Today’s ethanol industry produces 3.8 times the cited production (in 2010) for Bakken shale oil. Today’s ethanol industry produces 1.67 times the volume that is slated to come in from Canada through the current Keystone Pipeline. … So ethanol is a big part of our existing fuel supply,” said Standlee. He’s referring to current ethanol capacity vs. the last full year of reliable Bakken production, and also the latest Keystone volume estimates.

Interviewed at company headquarters in the St. Louis suburb of Chesterfield, Standlee was optimistic about his company’s first commercial-scale U.S. cellulosic ethanol refinery being built in Hugoton, Kan. At $250 million, it is not a cheap investment.

When operational late next year, the Hugoton plant will be able to produce 25 million gallons of ethanol, derived from about 350,000 tons of biomass, in this case corn stover, although the plant is being built to accept other feedstocks.

Cellulosic ethanol refiners manufacture lab-created enzymes that break down starches into a fuel source. These enzymes can work with a wide range of plants and plant residue, including wood chips, sawdust and abundant inedible plants such as switch grass.

Chemical giant DuPont also has a commercial-scale cellulosic plant that’ll produce 28 million gallons annually in Nevada, Iowa.

“The technological risk, as far as we’re concerned, is gone. … We get the yield that we want, we get the cycle times that we want, we get the productivity that we want,” said James Collins, president of industrial biosciences for DuPont. “The technology is there, and that is not to be taken for granted; it took quite a few years.”

The time is now for next-generation ethanol, said Collins, and the challenge is locking in suppliers.

“We’re really in supply-chain development. We’re not studying it anymore. Compared to other supply chains that other big industries use, this is relatively straightforward,” he said.

Both DuPont and Abengoa have forged contracts with large farmers to take a portion of the stover left on their corn fields, leaving enough to restore soil health. DuPont estimates there is enough extra stover to make between 1 billion and 2 billion gallons of ethanol annually.

“The encouraging thing to me is that farmers really like it. It works well in the farmer’s operation. They can see it is sustainable in their operation, and it is something they can continue doing,” said Jan Koninckx, DuPont’s global business director for bio-refineries.

A pullback now from the fuel standards, just as profit margins change because of soaring corn prices, could be disastrous. And not just for producers.

“Today ethanol sells for 60 cents per gallon less than gasoline at the rack, so every gallon of ethanol lost will cost the consumer at the pump,” Standlee said. “Recent studies indicate total consumer savings generated by ethanol in 2011 were between 84 cents and $1.07 per gallon.”

Ethanol producers fear some in Congress, at the behest of the oil lobby, may undo incentives such as the fuel standard that helped build an industry from scratch.

“We don’t want change to impact the investment in cellulosic,” said Standlee.

Added DuPont’s Koninckx, “We wouldn’t work on this if we thought it would be permanently dependent on government support.”

To turn a profit on cellulosic ethanol, producers need to see crude oil trading at a floor price of $70 or $80 a barrel, he said, confident that ambitious goals for cellulosic ethanol can be met.

“If you put yourself back in 2005, you’d say, ‘I’m not sure that could ever be done.’ But it was done. I think (the goal) is quite doable,” Koninckx said.

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