API Conference Call on Biofuels

After missing about 10 API conference calls in a row, I finally found time yesterday to participate in one on biofuels. Participants per the API web site were:

Devil’s Advocate of Copious Dissent, Nate Hagens of The Oil Drum, Bruce McQuain of The QandO Blog, Robert Rapier of The Oil Drum and R-Squared, Geoff Styles of Energy Outlook, Gail Tverberg of The Oil Drum, and Brian Westenhaus of New Energy and Fuel.

Let me first say that I felt like I was in an episode of the Twilight Zone. The API was defending ethanol against an angry mob of bloggers who thought it was a bad idea. Nate Hagens actually asked “Did I hear you right? The API supports ethanol?”

Unfortunately, there were some technical difficulties, and only the first few minutes of the call were transcribed. First off, here were the questions I asked, and the answers:

00:02:54 ROBERT RAPIER: Hi, this is Robert Rapier. I’ve got a few questions. I am going to have to drop out at about the 45-minute mark, so just to warn you. Is there a change in the corn ethanol tax credit? Does that get phased down over the years here? I haven’t seen anything about that.

00:03:14 MR. MANNATO: Yeah, I’m not aware that it does. The tax credit is limited in nature, so it only goes for a couple years, but typically has been renewed on a very regular basis. So it’s due to sunset and I’m not sure when. It may be 2010. But again, it’s not like it’s ramping down.

00:03:41 MR. KOCH: Robert, this is Matt Koch. To take that a little further, as they worked through this last energy bill, there was a lot of attempts to – the numbers changed significantly and there was a lot of efforts to try to find how they were going to pay for these broader bills as they were moving through Congress. There was – we saw tax bills from anywhere from 14 billion (dollars) up to $28 billion that had come through Congress. And in an attempt to get these numbers to match up, there were discussions about do they extend that tax credit, do they phase it down to a lower number? A lot of that was just all that was in play in the fall as they worked through these trying to get a bill done. But nothing was ever completed; there was no tax component attached to this bill. So we never saw anything come to fruition.

00:04:33 MR. MANNATO: Right, those pieces were stripped out in the end.

So essentially, the corn ethanol credit runs out, and is renewed each time (unlike the wind and solar credits, which have a more difficult time of it).

00:08:05 MR. MANNATO: And this is Al Mannato again. The other point I’d make is I think part of that concern is reflected in the cap for conventional ethanol or corn ethanol that was put into the legislation. So they’ve attempted to deal with those substantive concerns you’ve raised in that technical way by putting a cap on the corn ethanol so it can’t continue to grow, and we won’t need 15 percent. In theory, that 15 billion (gallons) is where some say the sustainable level is; and some say we’re past that already with where we are. So that’s an ongoing debate. But that was the intent behind the cap.

00:08:47 MR. RAPIER: I’d like for you to talk about that cap just a bit. If it’s capped at 15 billion and the mandated limit keeps going up and we don’t have cellulosic ethanol in any commercial volumes, what happens then?

00:09:07 MR. MANNATO: Well, one of the things we really felt strongly about was we wanted a reasonable and workable standard. And the primary concern we had was the one you just mentioned. The technology doesn’t keep up with the promise. So what we have in the bill is a technology review in 2015 where the EPA will do a review of the technology that is out there in 2015 and determine how many billions of gallons of cellulosic ethanol will be produced in 2016.

And what the legislation allows the agency to do is to adjust the standard for cellulosic ethanol to be equal to the amount of production that they project for the following year. So we’re not looking forward five years and trying to predict what’s going to happen. The legislation requires the agency to look forward, in effect, just a few months into the following year and then peg the standard to be equal to the amount that will be produced. We think that’s an important safety valve that was built into this legislation and one that we pushed for very forcefully.

00:10:21 MR. RAPIER: Well, but at 2015, the RFS is already at 20.5 billion gallons. So if the cap is at 15, I mean, they’re saying we must have 5 billion extra gallons before we’re even going to review this. We’re not going to review it until 2015. I think you’re going to have a big problem.

00:10:41 MR. MANNATO: Yeah, I think that’s exactly right. And I think that’s one of the concerns we’ve got moving into the future. And we’re going to try and work through that through the regulatory process to see if we can get some flexibility built in for – there are other – in terms of the bio-diesel provision, which is a billion of that 5 billion you mentioned, that there is the ability to have waivers for that one billion if there are problems with the supply. And there are also general waiver provisions that provide if the fuel isn’t available, if there is a general availability issue, there are general waiver provisions. So there are some safety valves in there. But we will continue to work with the agency to better fine-tune those mechanisms.

I thought it was pretty interesting that there is a multi-billion gallon deficit between the corn ethanol cap and how much cellulosic must be produced by the time they get around to reviewing it. I would think they would have wanted to review just as soon as cellulosic was supposed to be scaling up. To use the hover car analogy, they aren’t trying to determine the feasibility after just a few hover cars have been mandated. They will review after demanding that we have a few million out flying around. So what’s going to happen? Lawmakers are going to scramble to undo the provisions when they find out that they can’t mandate technology breakthroughs.

There was a bit of confusion by one blogger.I will let you spot the problem:

00:04:37 DEVIL’S ADVOCATE: Hi, this is Devil’s Advocate from Copious Dissent. I’m going to be candid for just a moment. I really cannot figure out why the government is promoting ethanol in the first place. According to David Pimentel, a professor at the College of Agriculture at Cornell University, it takes 1.29 gallons of gasoline to produce one gallon of ethanol.

The API defended against this charge:

00:05:09 MR. MANNATO: In terms of that Pimentel analysis, I think there is a debate over that whole issue and there is various views about the energy balance and how much gasoline it does take to produce – or how much oil it takes to produce a gallon of ethanol. And I think the bottom line from our perspective is, we think that the net energy balance is slightly positive for ethanol because of a lot of byproduct issues. But again, it’s slightly positive, but I think there are policy reasons why Congress has moved forward with it – energy security reasons.

There were a lot of good questions asked, so it is too bad about the audio. Nate asked a great question about water usage. As I had to drop out early, I did e-mail them 3 additional questions, and I am told they will get back to me. They were:

1). Can you explain the anti-backsliding rules?

2). There was an outcry by certain politicians when ConocoPhillips received the tax credit for the renewable diesel project they are doing with Tyson Foods. A quote from Lloyd Doggett “There appears to be abuse that demands legislative correction.” My question: Were they successful in denying that credit for renewable diesel processes like hydrocracking?

3). Who is going to evalaute the greenhouse gas reduction? You can’t even get scientists to agree on the parameters, how is anyone going to stack hands on this? It will become a hot political issue.

That 3rd one relates to the fact that there is a requirement for a certain percentage GHG reduction for advanced biofuels. When you can’t even get agreement on the energy balance, how on earth will you get agreement on the GHG reduction?

26 thoughts on “API Conference Call on Biofuels”

  1. Lawmakers are going to scramble to undo the provisions when they find out that they can’t mandate technology breakthroughs.

    Since you are writing these pieces quickly, Robert, let me help out by filling in a few of the words you simply had to imply:

    “[Other] Lawmakers [some years in the future] are going to [be forced to] scramble to undo the provisions [that we passed today in order to get immediate kudos from some of our technologically-illiterate supporters] when they find out that they [i.e. we today — but they will get the blame for it in the future, suckers!] can’t mandate technology breakthroughs.”

    On the other hand, I have no sympathy for an entrepreneur who invests in an unsound project simply to pick up politically-driven taxpayer subsidies.

    Unfortunately, if we take away politically-driven taxpayer subsidies, there won’t be much left of the “renewable” energy industry. Look at what happened in California in the 1980s.

  2. Since you are writing these pieces quickly, Robert, let me help out by filling in a few of the words you simply had to imply

    Does it show? I have been working at least 12 hours a day, 7 days a week since January 1st. I need a break.

  3. Did you look at TWIP today? Very strange. Gasoline stocks are WAY up from last year well outside the average range of inventory. Crude supplies look relatively normal.

    Refinery margins are getting squezed pretty hard. This should have some downward effect on pricing (along with the Alon Big Springs refinery fire) but the speculators keep driving the price up.

    Very curious.

  4. Refinery margins are getting squezed pretty hard. This should have some downward effect on pricing (along with the Alon Big Springs refinery fire) but the speculators keep driving the price up.
    How is the fire supposed to put downward pressure on the prices?

    I think you overestimate the role of the speculators. They couldn’t drive prices up if there wasn’t an underlying nervousness.

    Your problem is whether the underlying nervousness is justified. Based on tight market conditions, I would say it is going to be a fact of life for years to come.

  5. any comment regards boone pickins statements today on CNBC–
    1]– … i don’t favor ethanol…but maybe it’s better to keep the TRILLION $$ we send out of country each year for oil here at home. ….can’t afford for the usa to keep this $$ flow leave country…in ten years it’s 5 TRILLION $$

    2]– …politicians better do SOMETHING!

    3]– …NAT GAS can provide some of this solution.

    comment/reaction please.

    fran

  6. 2). There was an outcry by certain politicians when ConocoPhillips received the tax credit for the renewable diesel project they are doing with Tyson Foods. A quote from Lloyd Doggett “There appears to be abuse that demands legislative correction.” My question: Were they successful in denying that credit for renewable diesel processes like hydrocracking?
    RR,
    As far as I know, they limited the subsidy to 60 million gal/year per facility. Let us know if you get a different answer.

    More importantly: In December 2007, Tyson and ConocoPhillips started turning beef tallow into renewable diesel fuel. Production started at 100 barrels a day and is now operating at 300 to 500 barrels a day. So the project is up and running.

    And unlike FOOD -> FUEL schemes, this one is actually adding value to the product!

  7. 2]– …politicians better do SOMETHING!
    NOOOOOO!

    Trust me, less is more when it comes to politicians. They pretty much screw up anything they touch, and that applies to the geniuses from both parties.

  8. 3]– …NAT GAS can provide some of this solution.
    Negative #2: Nat gas markets are extremely tight, not to mention volatile, inside the US. Importing is an option, but not a widely favored option.

  9. 1]– … i don’t favor ethanol…but maybe it’s better to keep the TRILLION $$ we send out of country each year for oil here at home. ….can’t afford for the usa to keep this $$ flow leave country…in ten years it’s 5 TRILLION $$
    STRIKE 3!

    Ethanol is a good way to make EVERYBODY poor. Just look at the current market conditions:
    1. Food inflation due (in part) to corn ethanol. This obviously hits the poor hardest.
    2. Ethanol refiners can’t make much profit, due to high feedstock costs.
    3. As a result many ethanol plants (or expansions) have been scratched.
    4. Even at today’s record oil and gasoline prices, ethanol is even more expensive, when one corrects for the lower energy content. So adding ethanol to gasoline is making driving more expensive.
    5. Due to the pitiful volumes of ethanol we produce (compared to US oil consumption), the ethanol has no significant effect on oil/gasoline prices. This is confirmed by the continued rise in the price of oil/gasoline.

    All-in-all corn ethanol is worse than the problem it is supposed to solve…

  10. Maybe corn ethanol is a bad idea. But cellulosics seem to be coming on.
    “Syntec Biofuel Inc (OTCBB: ‘SYBF’), a company developing biomass to fuel conversion technologies, announced that it has achieved a yield of 105 gallons of alcohol (ethanol, methanol, n-butanol and n-propanol) per ton of biomass.”

    That was a release today.

    Also, the biggest solar plant ever was announced today for installation outside Phoenix. Enough juice for 70,000 homes.
    Really, I think we are turning the corner on the “energy shortage.”
    It does not help that OPEC is cutting, cutting production, but even so, the corner is being turned.
    In the USA, we will see energy demand fall, not rise, going forward.
    If cars use less gasoline, and buildings use less electricity, then you have negative grwoth, or “Peak Demand” in 2007.
    Yes, corn ethanol was a lousy first step towards energy independence.

    Hopefully, we can slowly correct this mess. Farmers (maybe I should say agribusiness) are terrific lobbyists, and welfare queens. They make the lady in a Cadillac using food stamps look like a piker. Going to be tough to end corn ethanol.

    But, energy demand is falling. That is good news, and that news will keep getting better for a long, long time.

  11. “Negative #2: Nat gas markets are extremely tight, not to mention volatile, inside the US. Importing is an option, but not a widely favored option.”

    Natural gas markets are extremely price sensitive. That is not to be confused with tight (as in supply cannot meet demand). The big gas markets are also not very volatile. The only extreme volatility we’ve seen in gas markets was during/after the 2005 hurricane season and in regards to seasonal deliverability issues in places like New York.

    Natural gas production would explode with sustained prices above 10.00 per million BTU’s (which would still be a 7.00 discount to crude). As it stands now, there are fewer rigs drilling in North America for gas as there were a year ago. Natural gas is certainly a better alternative to gasoline than ethanol. The only problem would be encouraging/financing adoption.

  12. That is not to be confused with tight (as in supply cannot meet demand).
    Oh, I don’t know. U.S. Natural Gas Wellhead Price averaged under $2/1,000 ft^3) until about the year 2000. For 2006 the average was $6.40/kcft. (As you mention, 2005 was even higher.) That’s a nice 220% increase and certainly creates the impression that supply cannot meet demand at $2/kcft.

    Why would we be looking at all these natural gas import projects if local natural gas production had the potential to “explode”? And why are so many electrical power companies looking to build coal power plants, after building almost exclusively natural gas plants for the last 15 years?

  13. “Why would we be looking at all these natural gas import projects if local natural gas production had the potential to “explode”?”

    Because natural gas can be produced abroad at wellhead prices of less than a dollar per million btu’s. It all depends on the price.

    “And why are so many electrical power companies looking to build coal power plants, after building almost exclusively natural gas plants for the last 15 years?”

    Because coal is cheaper if you externalize the pollution costs… Coal has always been very attractive aside from the higher capital costs.

    “Oh, I don’t know. U.S. Natural Gas Wellhead Price averaged under $2/1,000 ft^3) until about the year 2000. For 2006 the average was $6.40/kcft. (As you mention, 2005 was even higher.) That’s a nice 220% increase and certainly creates the impression that supply cannot meet demand at $2/kcft.”

    Of course we can’t meet demand at 2 dollars per million BTU’s. But oil is closing in on 18 dollars per million BTU’s right now. You have to think in terms of the alternatives.

    Oilfield service costs also doubled over that time period and there wasn’t enough transmission capacity in places like the Rockies (so prices there were still 2 dollars per million BTU’s). Although most importantly was the reality that putting people and capital to work on projects to find oil became far more profitable than on projects to find gas.

    Finally, there is the issue of the seasonality of heating demand that is not as big a problem for vehicle transportation demand. The reality is that once gas storage on the continent is full your production is worth almost nothing and last year storage was only 500bcf away from being meeting the EIA’s estimate of the maximum storage capacity.

  14. Our host wrote:
    Does it show? I have been working at least 12 hours a day, 7 days a week since January 1st. I need a break.

    No, it does not show, Robert. I was being light-hearted, and apologize if my remark caused any offence.

  15. Anonymous wrote:
    Because natural gas can be produced abroad at wellhead prices of less than a dollar per million btu’s.

    What is the relevance of that? Oil is produced in some Middle Eastern countries for a few dollars per barrel — that cost of production obviously does not affect the market price in consuming countries. One of the corollaries of the theory that price is set by the marginal producer — the low cost producer can have a very good margin.

    A major issue in US natural gas supply is the negative effect of regulations. There is lots of gas in the Rocky Mountains, but in many areas it is practically impossible to get the multiple approvals necessary to drill. Or to build the necessary pipeline network.

    Someday, the people of the US will have to decide — do we want to keep our top-heavy regulatory system, or would be rather have the energy?

  16. “What is the relevance of that? Oil is produced in some Middle Eastern countries for a few dollars per barrel — that cost of production obviously does not affect the market price in consuming countries. One of the corollaries of the theory that price is set by the marginal producer — the low cost producer can have a very good margin.”

    The relevance is that large oil and gas companies would a) like to put a lot of money to work and b) like to make a large return on that money. Large LNG projects abroad allow them to meet both of those desires better than the opportunities present in the US and Canada. The development of LNG facilities in the US and abroad is not indicative of a depletion of US natural gas, it is indicative of a depletion of cheap US natural gas relative to almost completely undeveloped reserves abroad. Furthermore, a lot of big gas projects can be had in countries with low political risk. The Gorgon LNG project is a shining example.

    Please look at the situation objectively in your response rather than responding with irrelevant dogma. The discussion was about why companies were investing in import facilities for foreign LNG despite opportunities for United States gas development.

  17. any comment regards boone pickins statements today on CNBC–
    1]– … i don’t favor ethanol…but maybe it’s better to keep the TRILLION $$ we send out of country each year for oil here at home. ….can’t afford for the usa to keep this $$ flow leave country…in ten years it’s 5 TRILLION $$

    Importing oil at these prices is idiotic.

    3]– …NAT GAS can provide some of this solution.

    Importing natural gas is no improvement.

    Oil costs about a dime per mile, incremental oil consumption is pure import. NG costs about a nickel per mile today, but a fleet of NG cars would push NG to oil equivalency price, so we’re back to a dime per mile. Incremental NG consumption is all import.

    Wind costs a penny per mile. Wind is domestic and doesn’t fund radical Islam. Future generations will look back in amazement on our stupidity.

  18. Anonymous wrote, anonymously:
    The relevance is that large oil and gas companies would a) like to put a lot of money to work and b) like to make a large return on that money. Large LNG projects abroad allow them to meet both of those desires better than the opportunities present in the US and Canada.

    If you are going to take the time to comment on things, please first take the time to get informed.

    You would note that “large oil & gas companies” are now almost entirely National Oil Companies, owned by governments such as Saudi Arabia & Venezuela. The 10 largest shareholder-owned oil companies put together today account for less than 20% of global oil production.

    Also note that the Companies Formerly Known As Big Oil are buying back their own shares — they have run out of places where they can invest their cash flow. Can’t invest in much of the Middle East, because the governments there shut them out. Can’t invest in much of North America, because the governments here regulate them to death.

    Anyway, the idea that gas owners such as the government of Qatar want to sell their gas really cheaply is laughable. LNG schemes are very large long-term commitments, and a government like Qatar (which is responsible for most planned LNG production capacity) wants to get the highest price it can for its resource — quite rightly!

  19. doggy wrote:
    Oil costs about a dime per mile … Wind costs a penny per mile.

    If that were true, we would all be driving wind-powered vehicles and politicians would be screaming for bigger taxes on Big Wind. It would be impossible to write a sentence which included the words “wind” and “subsidy”.

    Get real!

  20. You clearly can’t stop yourself from straying from the topic and weaving a narrative of little use or meaning. I didn’t come here into getting into a moronic argument about semantics. My point was just that natural gas is a cheaper and cleaner vehicle fuel than oil or ethanol and that production could be increased to meet increased demand at prices less than those currently presented by ethanol and oil.

  21. If that were true, we would all be driving wind-powered vehicles

    Right, because lags and market distortions don’t exist. One day technological progress and rising commodity prices combine to make wind cheaper than oil, the next morning we wake to find 100,000 wind turbines sprouted overnight and our cars grew batteries and electric motors. Furthermore, we find the batteries are fully charged! Adam Smith’s invisible hand not only worked flawlessly and instantaneously, it also reached into our garages and plugged in our newly-transformed cars!

    Since capitalism immediately delivers the low price solution every time, the fact we don’t all drive wind cars proves my numbers are wrong. Your dogma trumps my math, as it were. I wonder, does your logic also “prove” nuclear is more expensive than natural gas, since no new nukes are coming online vs. lots of new NG powerplants? Or is nuclear a “special case” to which capitalism’s omnipotence does not apply?

    It would be impossible to write a sentence which included the words “wind” and “subsidy”.

    Like it’s impossible to write a sentence which includes “oil” and “subsidy” today? Let me try. We import about 5 billion barrels of oil per year and spend about 150b annually on military and diplomatic efforts to stabilize the world’s most productive oil region. That’s $30/bbl, and since we get roughly 30 gallons of transport fuel per barrel it conveniently comes to $1 per gallon or 4 cents/mile.

    Wind tax credit is 1.8 cents/kWh, which covers 4 miles of driving. The wind subsidy is thus 0.45 cents per mile, roughly one tenth the oil subsidy. But even that’s not right, because the wind subsidy only lasts for the first 10 years of a turbine’s 30 year life. Levelized subsidy is thus about 0.15 cents/mile.

    I know, I know. It’s just math. Mere numbers. Doesn’t prove a thing. You’re 100% correct. I bow to your superior dogma.

  22. doggy wrote:
    You’re 100% correct. I bow to your superior dogma.

    Thank you for that graceful acceptance, doggy. But I have to admit that I am not 100% correct — trying to get there, but still learning.

    Your arithmetic on oil is foolish. Did you even read RR’s diatribe about the lady on the Huffington Post? Your arithmetic completely ignores that oil is a net tax-payer, whereas wind is a net subsidy-recipient.

    We all have lots to learn, but there is no need for anyone to be willfully ignorant, doggy.

  23. Of course they like ethanol.

    What Oil group wouldn’t support the expansion of coal-to-liquids, thats been effectively pitched to the public as a “green” technology.

    Biomass Gasification and Coal Gasification are the same.
    http://greyfalcon.net/coskata

    And even though we don’t have enough biomass, we have plenty of coal to blithely ignore peak oil for atleast another good 50 years or so.
    greyfalcon.net/fossilenergy.png
    http://greyfalcon.net/biolimits.png

    What Oil group wouldn’t like the sound of that?

  24. Kinu,

    Oil company taxes are not relevant to my argument. I have no problem with US oil companies or with domestic oil extraction. My issue is oil imports, which now cost the US almost $500b/year directly plus $150b/year in military/diplomatic spending. A few billion of which leaks into Wahabbi madrassas and radical Islamic groups who want to destroy us.

    How much would it cost to eliminate the $600b/year drain and help de-fund the radicals? In mass production a PHEV costs $5k more than a comparable gas-only car. With 16 million new cars annually that’s $80b/year. It takes 1 kW of wind turbine capacity to supply each PHEV (3000 kWh = 10-12k miles). Wind costs a little more than $1/W, so figure $1250/PHEV or $20b/year. $80b + $20b is $100b per year.

    Spending $100b/year to save $600b/year while de-funding radical Islam makes sense to me. I have yet to hear a coherent argument to the contrary.

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