The Cost of Clean Fuel

California is about to get competition for ethanol-blended gasoline, and it could mean higher prices for motorists.

Starting Jan. 1, New York and Connecticut will join California in banning MTBE as an anti-pollution fuel additive and switching to ethanol as the smog-reducing ingredient instead. Demand for what’s known as the “clean barrel” of gasoline -- the kind suitable for blending with ethanol -- will skyrocket, pitting the West Coast against the East. And if supplies are tight, prices will have only one way to go.

“We know we’re going to have to pay more,” said Pat Fitzgibbon, a Long Beach-based fuel trader for Trafigura Beheer, a Swiss commodities firm. “We just don’t know if it’s going to be a big deal or a little deal.”

The trouble -- if there is any -- will probably hit around mid-February. That’s when California refiners start switching to a formula tailored to curb smog during the warm summer months, which are ruled by stricter emissions controls than other months of the year.

Although ethanol is used year-round, its presence in gasoline is more problematic in the “summer” season -- in California, that’s eight months long -- because it increases gasoline’s tendency to evaporate in higher temperatures. To offset the effects of the ethanol, refiners have to remove certain other ingredients to create a formula that stays within emission limits.

That blend is harder and more costly to make than the basic ethanol mix, Fitzgibbon said. And next year, “if there are any disruptions, and there usually are, your resupply prospects are more complicated than they were in the past because New York and Connecticut are going to be competing for the high-quality blend stocks,” said Gregg Haggquist, a fuel consultant in Monterey, Calif.

“I don’t want to be an alarmist, but just the pure logistics and the tightness of supply indicate that you could have more volatility this year than you ever had.”

Some say that volatility will only get worse in the coming years, as California’s need for gasoline imports grows and more MTBE bans kick in across the country, increasing competition for ethanol and cleaner-burning fuel blends.

“It’s fair to say that all states that are still using MTBE are looking at banning MTBE,” said Joanne Shore, senior oil market analyst at the Energy Information Administration, an arm of the Energy Department. States that still use large amounts of MTBE gasoline include Maryland, Massachusetts, New Jersey, Pennsylvania, Virginia and Texas (though Texas, home to MTBE producers, is expected to be a holdout).

“This is not going to go away,” said Claudia Chandler, assistant executive director at the California Energy Commission, of the state’s supply troubles. “It’s just going to get more and more challenging.”

Oil companies serving California were ordered to remove MTBE, or methyl tertiary-butyl ether, because it poses a health threat when it spreads to groundwater from fuel spills or leaky underground storage tanks.

MTBE dissolves easily in water and migrates faster and farther in the ground than other gasoline components, including ethanol, according to the Environmental Protection Agency.

As California refineries began phasing out MTBE early this year, they had little competition when they needed to buy up extra loads of ethanol-compatible blends. Lured by soaring pump prices, refineries sent supplies from as far away as Dubai, the Virgin Islands and the east coast of Canada when production at domestic refineries here faltered.

More than 40% of the clean-fuel imports came to California from Irving Oil, a privately owned refinery in New Brunswick, Canada. The refinery, 15 days away by tanker ship, emerged as the state’s dominant supplier, providing twice as much fuel as Dubai at No. 2, according to the Energy Information Administration.

Next year, things will be different. Irving Oil, for instance, could opt to send its clean-fuel cargos to the New York Harbor -- a far shorter trip, lowering the risk of prices changing dramatically while the gasoline is en route.

It may cost Irving about 3 cents a gallon in freight costs to ship fuel into New York, and about 10 cents a gallon to send the same tanker to Los Angeles, experts say. The difference is still more when you factor in the added difficulty of making California’s unique fuel and the likelihood that any tanker docking in Los Angeles is going to leave empty, without a paying customer for the return trip, said Haggquist, the fuel consultant.

“It’s definitely going to be more difficult to attract barrels into California,” Fitzgibbon said. “If New York starts to pay dearly, then we’re going to have to pay dearly to steal some of those barrels away.”

Jennifer Parker, Irving Oil’s spokeswoman, said the company was so proud of making the difficult California blend that it passed out crates of California oranges to its employees after loading up one of its first shipments bound for Los Angeles. But there are no guarantees for next year.

“Where we send our gasoline is going to depend on the different opportunities, and where we get the best economic return,” Parker said. With New York and Connecticut banning MTBE, she added, “it certainly gives us more options.”

California’s fate depends, to some extent, on how many East Coast refineries make upgrades in time to send the ethanol blend to New York and Connecticut in 2004 and how smoothly the switch goes, said the EIA’s Shore.

“The biggest single factor is when the flag drops, who is there to supply that [East Coast] market,” Shore said. “If they come up short in New York and Connecticut, there may be more pull on supplies that have gone to California in the past.”

California, now the largest single market for fuel ethanol, was the biggest consumer of MTBE until state officials decided to ban the additive because of a growing problem with water contamination. Oil companies say they have phased out use of MTBE ahead of the year-end deadline.

The last four California refineries to make the change -- ChevronTexaco Corp.’s Richmond refinery, Tesoro Petroleum Corp.’s Martinez plant and Valero Energy Corp. refineries in Wilmington and Benicia -- made their last batches of MTBE gasoline in early and mid-November, according to the companies. Pipeline and fuel terminal operator Kinder Morgan Energy Partners said last week that it has completed the changeover in its terminals and tanks.

Over time, more refiners will adjust to the new fuel landscape and boost production of the cleaner fuel blends to meet market demand, just as ethanol producers have ramped up new plants to serve states with new MTBE bans, regulators and others say.

“People have to live through the transition, which is hard to do,” said the EIA’s Shore, “but then things tend to settle down.”