Status and Impact of State MTBE Ban
Background
As a result of the Clean Air Act Amendments of 1990 (CAAA90), the year-round use of reformulated gasoline (RFG) has been required in cities with the worst smog problems since 1995 (Figure 1).One of the requirements of RFG specified by CAAA90 is a 2-percent oxygen requirement, which is met by blending “oxygenates,” [1] including methyl tertiary butyl ether (MTBE) and ethanol, into the gasoline.MTBE is the oxygenate used in almost all RFG outside of the Midwest. Ethanol is currently used in the Midwest as an oxygenate in RFG and as an octane booster and volume extender in conventional gasoline.
Several years ago, MTBE was detected in water supplies scattered throughout the country, but predominantly in areas using RFG.MTBE from RFG was apparently making its way through leaking pipelines and underground storage tanks into ground water.The discovery of MTBE in ground water and concerns for water quality touched off a debate about the use of MTBE in gasoline, and subsequently the oxygen requirement itself. Discussions of removing the oxygen requirement on RFG have often been linked to the concept of a renewable fuels standard that would assure a certain level of ethanol blending. MTBE blended into RFG adds oxygen, extends the volume of the gasoline and boosts octane, all at the same time.In order to meet the 2-percent oxygen requirement (by weight), MTBE is blended into RFG at approximately 11 percent by volume.If the use of MTBE is reduced or banned, refiners must find other measures (e.g., blending ethanol and/or other petroleum-based products such as alkylate) to maintain the octane level of gasoline and still meet all Federal requirements. Ethanol currently receives a Federal excise tax exemption of 52 cents per gallon, which is schedule to decline to 51 cents in 2005.Legal authority for the Federal tax exemption expires in 2007, but this exemption has been renewed several times since it was initiated in 1978.Blending with ethanol, which is primarily produced from corn, is also encouraged by tax incentives in 17 States to help bolster agricultural markets.Some of the characteristics of ethanol have made it less attractive to refiners than MTBE as an oxygenate, primarily higher volatility which makes it more difficult to meet emissions standards.On the other hand, ethanol contains more oxygen so only about half as much ethanol (by volume) is needed for RFG.EIA recently published a study, Supply Impacts of an MTBE Ban,[2] which analyzed refineries’ options to supply MTBE-free gasoline, including the likely use of ethanol.
Status of State MTBE Bans
Legislation that would ban or restrict the use of MTBE in gasoline has already been passed in 16 States: California, Colorado, Connecticut, Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, New York, Ohio, South Dakota, and Washington.In addition, Maine has passed legislation that contains a goal of phasing out MTBE.Of these States, only five currently rely on MTBE (California, Connecticut, Kentucky, Missouri, and New York); together, they account for approximately 45 percent of the Nation’s MTBE consumption.Table 1 provides a summary of these State MTBE bans.
Some other States either have introduced or are likely to introduce bills limiting or banning MTBE.For example, Rhode Island Sen. Leo Blais introduced a bill (S.B. 31) that would phase out MTBE starting July 2004.[3] Rhode Island consumes approximately 1.0 percent of the total MTBE in the Nation.However, it is unclear if any new State MTBE ban(s) in addition to the States listed in Table 1 would be enacted soon enough to have a significant near-term impact on the market, since approximately 43 percent of the MTBE would be phased out of the market in about a year.
Most of the attention concerning State MTBE bans has been focused on California, which consumes approximately 32 percent of the Nation’s MTBE.Originally California was set to ban all ethers (including MTBE) by January 1, 2003.That deadline has been postponed for a year until January 1, 2004, out of concerns for potential supply disruptions.Even though several major refiners announced their intention to phase out MTBE by January 1, 2003, only ConocoPhillips has already completed the switch.Shell, BP, and ExxonMobil indicated their intention to switch out of MTBE blended gasoline inCalifornia markets by the first quarter of 2003.Valero, ChevronTexaco, and Tesoro do not intend to produce MTBE-free gasoline until California’s MTBE ban comes into effect next January.[4]
In April 1999, California petitioned the U.S. Environmental Protection Agency (EPA) to waive the Federal oxygen requirement for areas of the State required by CAAA90 to use RFG, [5] but the waiver request was denied by EPA in June 2001. An oxygen waiver would allow the State flexibility of using oxygenate-free RFG in case of unexpected ethanol supply disruptions.EPA also recently rejected a request from several trade groups for the California market, which would have allowed refiners and distributors to mix ethanol and MTBE-blended gasoline during the transition.[6] Commingling of ethanol and MTBE-blended gasoline is believed to increase VOC (volatile organic compounds) emissions, although the magnitude and importance, in terms of its contribution to ozone, could vary depending on the season or geographical region in focus.[7]
New York is currently scheduled to phase out MTBE at the same time as California.While California has been largely self-sufficient in RFG supplies in the past, New York (and in general New England states) traditionally imported some RFG to supplement the production by domestic refiners (both from foreign sources and from other refining regions).In 2001, approximately 18 percent of the RFG consumed in New England and Mid Atlantic States was imported.[8] When MTBE is banned in New York and Connecticut, the RFG imports could decline as some foreign suppliers may not be able to provide MTBE-free RFG or RBOB[9] in the short term.The reduced RFG and RBOB imports would need to be made up by additional supply from the domestic refiners, likely from the Gulf Coast refineries and at additional costs.
New York would also be affected by the new EPA Mobile Source Air Toxics (MSAT) rule.Refineries traditionally supplying RFG to the New England and Mid Atlantic states, where RFG represents approximately two-thirds of the gasoline sales in those markets, have relatively “clean” baselines for toxic emissions accounting.[10] Blending with ethanol results in a slight increase in the emissions of toxics, which must be compensated by other blending changes in order to comply with “anti-backsliding” regulations under MSAT.In order to comply with MSAT, some refineries might opt for reducing the production of RFG, which might result in a temporary supply shortage.
In anticipating the State MTBE bans, the U.S. MTBE consumption has been declining since 2000. Table 2 shows annual MTBE consumption since 1993.[11] It is important to monitor the declining trend of MTBE as the 17 States start making the transition to MTBE-free gasoline in 2003 and 2004.
Supply of Ethanol
One key factor for transition out of the MTBE-blended RFG is the availability of ethanol, the likely oxygenate alternative.[12] A recent EIA study, Renewable Motor Fuel Production Capacity Under H.R. 4,[13] concluded that the ethanol industry is able to supply the volumes of ethanol required to phase out the use of MTBE under the State MTBE bans.According to the study, the Nation will have about an annual 2.86 billion-gallon (187,000 barrels per day) ethanol production capacity (2.4 billion gallons of existing capacity and 0.46 billion gallons of capacity under construction) available by the end of 2003.The State MTBE bans require a projected demand for ethanol of 2.73 billion gallons (178,000 barrels) in 2004.[14]
In a recent, separate EIA study, Review of Transportation Issues and Comparison of Infrastructure Costs for a Renewable Fuels Standard,[15] several inter-regional ethanol transportation issues were raised, even though most logistical issues could be overcome with proper planning. A few major items in the ethanol delivery infrastructure will be required.Rail terminals able to spot more than a few cars, constraints on the Inland Waterway System,[16] and a possible shortage of OPA90 compliant Jones Act Vessels[17] are some of the issues that must be dealt with to ensure adequacy of gasoline supplies, particularly in California.
Impact on Gasoline Prices
From the EIA study, Renewable Motor Fuel Production Capacity Under H.R. 4,[18] the State MTBE bans are projected to increase average national motor gasoline prices by 1.8 cents per gallon in 2004, compared to a reference case with no State MTBE bans.In addition, the State MTBE bans would have a larger impact on national average RFG prices – 3.6 cents per gallon in 2004. Although State-level projections are not available, it is generally expected that the increase in RFG prices in California, New York, and Connecticut would be significantly higher than the national average as a result of the MTBE bans. Table 3 shows the impact on RFG prices and the associated ethanol supply and RFG consumption at PADD[19] levels.
The long-term equilibrium analysis of the EIA studies is based on an assumption of sufficient lead-time for investments and assumption of perfect foresight for investors.In reality, some market participants may respond to uncertainty by delaying investment decisions, creating the possibility of supply imbalance and price spikes during the MTBE phase-out.
[Revised March 27, 2003. Updates were made to Tables 1 and 2 with associated text revisions.]