STATE OF CALIFORNIA

ENERGY COMMISSION

P300-98-013ST

AF

F R

EP

OR

T

Gray Davis, Governor

FEBRUARY 1999

CALIFORNIAENERGY

COMMISSION

SUPPLY AND COSTOF ALTERNATIVES

TO MTBE INGASOLINE

CALIFORNIA ENERGY COMMISSION

Gordon Schremp, Technical Project ManagerTom Glaviano, Project ManagerGerry Bemis, Manager

FUEL RESOURCES OFFICE

H. Daniel Nix, Deputy Director

ENERGY INFORMATION AND ANALYSISDIVISION

STAT

E OF CALIFORNIA

ENERGY COMMISSIONP300-98-013

ST

AF

F R

EP

OR

T

Pete Wilson, Governor

OCTOBER 1998

CALIFORNIA

ENERGY

COMMISSION

SUPPLY AND COST

OF ALTERNATIVES

TO MTBE IN

GASOLINE

This report, Supply and Cost Alternatives to MTBE in Gasoline, was prepared in response to alegislative directive specified in Item 3360-001-0465 of the Supplemental Report of the 1997Budget Act. This directive states that the Energy Commission should submit a report giving adetailed evaluation of alternative additives and compounds which could be used in lieu ofMethyl Tertiary Butyl Ether (MTBE) in gasoline in California.

Energy Commission staff worked with the California Air Resources Board to examine theenvironmental impacts of any potential increase in air pollution that might result from the use ofan alternative oxygenate in gasoline. It should be noted, however, that this study does notinclude an assessment of the potential health impacts of exposure to MTBE or any otheralternative oxygenates. In addition to the Energy Commission’s report, the Governor andLegislature directed the Department of Health Services to determine the health impacts of MTBEin water and the California Air Resources Board to study the air quality and environmentalimpacts of discontinuing the use of MTBE.

This report is a result of work by the staff of the California Energy Commission. Neither theState of California, the California Energy Commission, nor any of their employees, contractorsor subcontractors, makes any warranty, expressed or implied, or assumes any legal liability orresponsibility for the accuracy, completeness, or usefulness of any information apparatus,product or process disclosed, or represents that its use would not infringe on privately ownedrights.

ACKNOWLEDGEMENTS

Fuels and Transportation Committee

Commissioner Jananne Sharpless, Presiding MemberCommissioner Michal C. Moore, Second Member

Fuels and Transportation Committee Advisors

Rosella Shapiro Laurie ten HopeSusan Bakker Shawn Pittard

Management

H. Daniel Nix, Deputy Director, Energy Information and Analysis DivisionGerry Bemis, Manager, Fuel Resources Office

Project Team

Thomas Glaviano, Jr., Project ManagerGordon Schremp, Technical Project Manager

Yvonne Nelson, Co-authorSherry Stoner, Co-author

Contributing Commission Staff

Jairam GopalRamesh GaneriwalChuanlong Tang

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Table of Contents

Page

EXECUTIVE SUMMARY

Background ............................................................................................................................. 1

Study Design............................................................................................................................ 1Refinery Modeling.............................................................................................................. 2Oxygenates Availability ...................................................................................................... 2Import Capability ............................................................................................................... 3State’s Infrastructure Capability ......................................................................................... 3

Results of Study....................................................................................................................... 3Cost, Availability and Timeframe........................................................................................ 4Air Quality and Environmental Impacts .............................................................................. 8Uncertainty......................................................................................................................... 9

KEY FINDINGS

Introduction ........................................................................................................................... 11

Oxygenates Chosen for Study................................................................................................. 11

Model Methodology............................................................................................................... 12

Distribution Infrastructure Improvements ............................................................................... 13

Near Term Analysis................................................................................................................ 15Ethanol............................................................................................................................. 16ETBE............................................................................................................................... 17TBA................................................................................................................................. 18Mixed Oxygenates............................................................................................................ 18Impacts of H.R. 630 ......................................................................................................... 18No Oxygenates Case ........................................................................................................ 18

Intermediate Term Analysis (Three Years) ............................................................................. 19Ethanol............................................................................................................................. 19ETBE............................................................................................................................... 22TBA................................................................................................................................. 23Mixed Oxygenates............................................................................................................ 23Impacts of H.R. 630 ......................................................................................................... 24No Oxygenates Case ........................................................................................................ 24

Table of Contents(Cont.)

Page

iv

Long Term Analysis (Six Years)............................................................................................. 25Ethanol............................................................................................................................. 25ETBE............................................................................................................................... 27TBA................................................................................................................................. 27Mixed Oxygenates............................................................................................................ 27Impacts of H.R. 630 ......................................................................................................... 28No Oxygenates Case ........................................................................................................ 28

Potential Impacts of U.S. MTBE Phase-Out........................................................................... 29

List of Abbreviations.............................................................................................................. 30

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Technical Appendices

Due to the size and number of appendices, they have been printed separately from the main bodyof the report. They are listed here for reference:

• Technical Documents, Purvin & Gertz, P300-98-013A • Report on the Oxygenate Market: Current Production Capacity, Future Supply Prospects,

and Cost Estimates, Energy Security Analysis, Inc., P300-98-013B

• Report on Tax Incentives for Ethanol, Energy Security Analaysis, Inc., P300-98-013C

• External CARB Gasoline Supply, Purvin & Gertz, P300-98-013D

• Adequacy Of Marine Infrastructure, Purvin & Gertz, P300-98-013E • Impacts on External Markets, Purvin & Gertz, P300-98-013F • Refinery Modeling Task 1: Specifying Scenarios And Methodology, MathPro, P300-98-

013G • Refinery Modeling, Task 2: Calibration of the Refinery Model, MathPro, P300-98-013H • Refinery Modeling, Task 3: Supply Scenario Modeling Runs, MathPro, P300-98-013I

• Ethanol Blending Properties for Task 3 Modeling Work, MathPro, P300-98-013J • Exhibits (P300-98-013K)

A. Updated Informative Digest, Amendments to the CaliforniaCleaner-Burning Gasoline Regulations

B. Oxygenate Information Sheets

C. Federal Register Document, Change in Minimum Oxygen ContentRequirement for Reformulated Gasoline

D. Bill Summary and Status for the 105th Congress, H.R. 630

1

Executive Summary

Background

Since 1992, oxygenates have been requiredfor use in California gasoline to help achievecompliance with both federal and state airquality regulations. Several oxygenates areavailable but Methyl Tertiary Butyl Ether(MTBE) has been the oxygenate of choicedue to its compatible blending properties andlower cost. Small volumes of MTBE haveactually been used in gasoline since the late1970s by refiners as an octane enhancer toreplace the lead being phased out ofgasoline. Recently, however, MTBE hasbeen detected in groundwater and at certainlevels may pose a public health risk or rendersome drinking water unpalatable. TheCalifornia Legislature held a hearing on May12, 1997, to consider discontinuing the useof MTBE. Staff of the Energy Commissiontestified that an immediate replacement ofMTBE would have a significant impact onCalifornia gasoline production, decreasingsupply produced by California refiners by 15to 40 percent. The probable temporaryshortages and resulting price spikes wouldhave a dramatic impact on Californiaconsumers.

Following the hearing, the Governor andLegislature directed the Energy Commissionto examine the potential impacts ofdiscontinuing MTBE on the production,price and supplies of gasoline in California.In conducting its comprehensive study, theEnergy Commission analyzed a broad set ofalternative oxygenates that could replaceMTBE in gasoline. Item 3360-001-0465 inthe Supplemental Report of the 1997Budget Act states that the Energy

Commission should submit a report to theLegislature that contains all of the following:

• A detailed evaluation of alternativeadditives and compounds which could beused in lieu of Methyl Tertiary ButylEther (MTBE) in gasoline in California.

• An evaluation of the relative air quality

and environmental benefits associatedwith each alternative additive orcompound when compared to MTBE.

• An estimate of the potential costs or

savings to the public in increases ordecreases in retail gasoline prices foreach alternative when compared toMTBE.

• An evaluation of the present and future

availability of each alternative ascompared to the availability of MTBE.

• An evaluation of the minimum time

frames within which one or morealternatives could be substituted forMTBE without resulting in significantdisruption of gasoline supply.

Study Design

In order to fulfill the requirements of theLegislature’s directive, the EnergyCommission studied the following areas: theoperation of the California refineryinfrastructure under various scenariossimulated through computer models (refinerymodeling), the supply and price of variouslevels of alternative oxygenates (oxygenatesavailability), the availability of the variouscomponents needed to make California’s

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gasoline (import capability), and the abilityof the existing distribution system to dealwith various MTBE substitutes (state’sinfrastructure capability).

Refinery Modeling

This portion of the study used a computermodel to look at the impacts of alternativeoxygenates, different economic andregulatory conditions, and changing rawmaterials processing requirements underseveral cases. Each case was designed tosimulate the statewide refinery operations tomeet the projected daily average gasolinedemand during the peak driving season (Maythrough August). The existing Californiarefinery infrastructure was then evaluated forits ability to respond to the various changesdescribed in each case.

The analyses were performed by first runningtwo base cases to determine baselineproduction costs for gasoline containingMTBE for the intermediate (three years) andlong term (six years) timeframes. Next, caseswere run with alternative oxygenates forboth timeframes and compared to theappropriate base case to calculate an averagegasoline price impact.

In addition to the alternative oxygenatecases, a case that reduces the amount ofMTBE currently used in gasoline andanother case that eliminates the use of alloxygenates were also examined. The firstcase is called “H.R. 630”, in reference to thepending federal legislation that would allowCalifornia refiners to reduce the use ofoxygenates in gasoline throughoutCalifornia. This refinery modeling case wasexamined to determine how much MTBEcould be removed from gasoline and whatthe cost impact to consumers would be.The other case looked at the potential impacton supply and price of gasoline if

discontinuance of MTBE was broadened toinclude all oxygenates. Since a great deal ofconcern has been expressed by some healthand water officials over the use of anyoxygenates in gasoline, an assessment of thepossibility of producing all the gasoline forthe state without the use of oxygenates wasundertaken in order to quantify the costimpacts of no oxygenates in the intermediateand long term timeframes.

Oxygenates Availability

This portion of the study identifies eachalternative oxygenate, its availability, andcost for the intermediate term and the longterm. In addition the timeframe and cost toupgrade California’s petroleum distributionfacilities to make them compatible with eachalternative oxygenate were determined.

The Energy Commission, in conjunction withthe Air Resources Board, reviewed a numberof different oxygenates to determine whichones were likely to be viable alternatives toMTBE. The oxygenates were assessed basedon the following criteria: they are listed as acurrently approved oxygenate by the U.S.Environmental Protection Agency, eachpossesses desirable blending characteristics,and each demonstrates potential adequateavailability. Using these criteria, the EnergyCommission decided to examine twoalcohols, ethanol and TBA (tertiary butylalcohol) and two ethers, ETBE (ethyltertiary butyl ether) and TAME (tertiaryamyl methyl ether), as potential replacementsfor MTBE.All four alternative oxygenates werereviewed to determine if sufficient suppliescould be produced to replace MTBE ingasoline. The study examined the globalproduction capacities for the oxygenatescurrently being produced and examinedfacilities being constructed or in the planningstages to assess the potential availability of

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these new supplies in the intermediate andlong terms. Additionally, the costs toproduce, transport and distribute the variousoxygenates were examined and quantified.

Potential suppliers appear to have theproduction capacity and raw materialsnecessary to produce sufficient volumes ofethanol, ETBE and TBA under any of thevarious cases. TAME, however, does have araw material limitation and was eliminatedfrom consideration as a 100 percentreplacement for MTBE. It is recognized,however, that most refiners could producesome volume of TAME through normaloperations of their facility. Therefore, ratherthan eliminate it from considerationcompletely, staff examined TAME as part ofa “mixed oxygenates” case. An economicallyoptimal combination of ETBE, TBA andTAME was assessed to see if it would beless expensive than completely displacingMTBE with a single oxygenate.

Import Capability

This portion of the study estimated costs ofimporting various blending stocks andfinished petroleum products to the Californiamarket to make up for shortfalls that mayoccur under any of the cases. This workrequired the following:

• Examining and categorizing more than725 refineries worldwide to determinethe volume of gasoline blendingcomponents each refinery could producefor use by California refineries.

• Estimating the cost of gasoline blending

components supplied to Californiarefineries.

• Determining the availability and cost oftransporting gasoline blendingcomponents to California from severaldifferent regions of the world.

State’s Infrastructure Capability

This work involved a detailed survey ofCalifornia’s marine terminal and distributioninfrastructures to determine their ability toimport various oxygenates and gasolineblending components as well as their abilityto distribute gasoline that contained anoxygenate other than MTBE. Areasexamined include:

• The ability of the California marinetransportation infrastructure to handlesubstantial increases in imports ofoxygenates and other gasolinecomponents, and exports of refinerycomponents that can no longer beblended into gasoline.

• The ability to transport gasoline

containing different oxygenates throughthe pipeline distribution system.

• The ability of terminals to blend certain

oxygenates into gasoline. • The ability to transport and off-load

substantial volumes of ethanol viarailroad cars and marine tankers.

Results Of Study

This study examines the impact ofdiscontinuing the use of MTBE on supplyand price of gasoline to Californiaconsumers. The findings of this studyindicate that the cost impacts for consumersare directly related to the period of timepermitted for phasing out MTBE:

• If the use of MTBE were discontinuedimmediately, the consequences would bedire for consumers and catastrophic forCalifornia’s economy.

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• Allowing three years to transition to analternative oxygenate would be enoughtime for refiners and oxygenateproducers to take the necessary actionsto meet demand. Depending upon thealternative oxygenates used, the changein average cost of gasoline could rangefrom a decrease of 0.2 cents per gallon toan increase of 6.7 cents per gallon.Consumers could see either a savings of$30 million per year or an additionalexpense of $991 million per year.

• If six years is allowed to phase out theuse of MTBE, the change in average costof gasoline could range from a decreaseof 0.4 cents per gallon to an increase of2.5 cents per gallon, depending upon thealternative oxygenate used. Consumerscould see either a savings of $63 millionper year or an additional expense of $392million per year.

If the scope of replacing MTBE were to bebroadened to include the elimination of alloxygenates from gasoline, the cost impactfor consumers would be the greatest,regardless of the length of time allowed forthe transition, ranging up to 8.8 cents pergallon in the intermediate term and 3.7 centsper gallon in the long term. On an annualbasis these costs would amount to $1.3billion and $580 million, respectively.

Cost, Availability and Timeframe

The results of the study indicate a substantialvariation in gasoline prices under thetimeframes necessary to modify refineriesand increase production of alternativeoxygenates under various cases. The averagecost increase is a measure of how much moreexpensive California’s gasoline productionwould be compared to the production ofgasoline with MTBE. This study assumesthat any change in average cost would be

passed through directly to the consumer.Therefore, the retail price of gasoline wouldreflect this change. It should be noted thatretail prices reflect not only production costsbut also other market conditions which willinfluence the final price. If regulationsimposed are so stringent that Californiarefineries can no longer supply all orsubstantial amounts of the products the staterequires, then the impact on retail price couldbe even greater than just the average costincrease. Additional information concerningcosts, both average and marginal, is providedin Appendix I (Refinery Modeling, Task 3,Supply Scenario Modeling Runs).

The Energy Commission analysis considersthree timeframes: near term (immediate),intermediate term (three years), which allowsfor some modification and infrastructurechanges to accommodate a differentoxygenate, and long term (six years), whichallows for major refinery modifications toaccommodate a different oxygenate. Resultswere evaluated based on the availability ofthe oxygenates under consideration andgasoline blending components needed tomeet demand, the transportation andnecessary infrastructure modifications, andthe availability of shipping, trucking andpipelines to handle the distribution undereach timeframe.

Near Term. In the near term case, the studyshows that an immediate discontinuation ofthe use of MTBE could produce significantgasoline and diesel supply shortfalls and arapid increase in prices. MTBE not onlyoxygenates the gasoline but also helps todilute and offset the undesirable properties ofother gasoline components. Therefore,although MTBE itself accounts for only 11percent of the total volume of gasoline, itsabsence would mean that refiners wouldhave to replace these other components aswell, resulting in an anticipated 15 to 40percent shortfall.

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In April 1996, a fire at a refinery in northernCalifornia resulted in a temporary shortfall ingasoline production that was substantiallyless than 15 percent. This shortfall resulted inprices rising by about 30 cents per gallon. Ifprices were to rise proportionally during animmediate discontinuance of the use ofMTBE, the results would be drastic forconsumers and catastrophic for California’seconomy.

Refiners would need to acquire adequatereplacement oxygenates and imports, butthey would have insufficient time for asmooth, nondisruptive transition.Renegotiating contractual arrangements,resolving production capacity constraints,and overcoming inadequate transportationservices are just a few of the seriousproblems suppliers would face in attemptingto meet the dramatic change in demand.

Each alternative oxygenate has limitingfactors that would prevent an adequatesupply to meet California’s needs in the nearterm. Even if industry is able to overcomethese primary limiting factors and introduce areplacement oxygenate quickly, the pricewould still be very steep because demandwould exceed the readily available supply.

ETBE, TBA and TAME are not currentlyproduced in volumes adequate to meetCalifornia’s needs. Although the distributionsystem requires little, if any, modification tohandle any of these alternative oxygenates,modifications would have to be undertakenat existing MTBE plants to convert them toETBE or TBA production. This type ofwork would require between 12 and 24months for completion before necessary

volumes could be available for use inCalifornia. TAME, which is a by-product ofrefinery operations, is expected to be limitedto modest production volumes at refineries.

In the case of ethanol, the United Statesproduces about 80,000 barrels per day ofethanol to meet current demand for all uses.California currently produces approximately400 barrels per day. In the near term case,California would suddenly require themajority of ethanol that is being supplied toother users around the country. In order tosecure the necessary volumes, Californiarefiners will have to purchase the ethanol bybidding above and beyond what presentusers pay. This action would cause the priceof ethanol to increase significantly above itscurrent market price.

Even if enough of the current ethanolproduction in the United States were to bediverted for California’s projected needs,several other factors would impede theimmediate use of ethanol withoutconsiderable disruption to California’sgasoline market. The main limiting factor isthe lack of adequate blending equipment atthe distribution terminals. It would requirebetween 18 and 24 months to completenecessary modifications to storage tanks,unloading facilities and blending equipment.

If H.R. 630 were to pass and allowCalifornia refiners to reduce the amount ofoxygenates currently used in gasoline, thisadditional flexibility would certainly allowrefiners to reduce the amount of oxygenatesused in the intermediate and long term timeperiods, but it is doubtful that this legislationwill appreciably impact the dire conse-quences of an immediate discontinuance of

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the use of MTBE in the near term. Refinerswould be desperately trying to acquire asmuch alternative oxygenates as possible,struggling to minimize supply disruptions,rather than attempting to economize onrefinery costs as would be the case in thelonger time periods.

Eliminating the use of all oxygenates ingasoline in the near term would exacerbatean already dire situation. Prohibiting refinersfrom acquiring alternative oxygenates wouldworsen an already desperate setting wherebyrefiners would be scrambling to acquire asmuch additional gasoline components andalternatives to oxygenates as possible inorder to provide as much gasoline as theycould to compensate for the discontinuanceof all oxygenates.

Intermediate Term (3 years). In theintermediate term case, the supply impactswould be less dramatic but costly. Thechange in average cost of gasoline couldrange from a decrease of 0.2 cents per gallonto an increase of 6.7 cents per gallon,depending upon the oxygenate.

The study assumes that in 2002, California’sgasoline demand will be about 965,000barrels per day (14.8 billion gallons peryear). California gasoline demand can be metby producing blending materials at California

refineries, importing additional blendingmaterials if needed, and importing theappropriate oxygenate. The results of theintermediate term case suggest that ethanol,ETBE and TBA will be available in sufficientvolumes to meet demand but at marketprices higher than in the long term case.TAME will not be available in sufficientvolumes to meet California’s needs by itself.Listed below are the results for theintermediate term (see Table 1).

• Ethanol. Beginning in 2002, California

refineries would require as much as75,000 barrels per day of ethanol and upto 142,000 barrels per day of additionalgasoline imports to meet demand. Theaverage cost increase is expected to be inthe range of 6.1 to 6.7 cents per gallonor $902 to $991 million per year.

• ETBE. Beginning in 2002, California

refineries would require as much as129,000 barrels per day of ETBE to meetdemand. No additional gasoline importswould be required. The average costincrease is expected to be about 2.5 centsper gallon or $370 million per year.

• TBA. Beginning in 2002, California

refineries would require as much as89,000 barrels per day of TBA and up to

TABLE 1Average Cost Change

Cents Per GallonIntermediate Term Long Term

Ethanol 6.1 to 6.7 1.9 to 2.5ETBE 2.4 to 2.5 0TBA 0.5 to 1.4 0.3 to 1.0Mixed Oxygenates -0.2 to 0.2 -0.3 to -0.4HR 630 -0.2 to -0.8 -0.3 to -1.5No Oxygenates 4.3 to 8.8 0.9 to 3.7One Pound Waiver 4.0 to 5.4 -0.8 to 1.0

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22,000 barrels per day of additionalgasoline imports to meet demand. Theaverage cost increase is expected to be inthe range of 0.5 to 1.4 cents per gallonor $74 to $207 million per year.

• Mixed Oxygenates. Beginning in 2002,

California refineries would require asmuch as 101,000 barrels per day of anoptimal combination of assortedoxygenates (excluding MTBE) to meetdemand. No additional gasoline importswould be required. The change inaverage cost is expected to be rangefrom a decrease of 0.2 cents per gallon toan increase of 0.2 cents per gallon.Consumers could see either a savings of$30 million per year or an additionalexpense of $30 million per year.

• H.R. 630. Beginning in 2002, California

refineries could reduce their use ofMTBE by over 30 percent if federallegislation were to allow them to makegasoline with less than the currentminimum oxygen content. As much as20,000 barrels per day of additionalgasoline component imports would berequired to meet demand. This additionalflexibility allows the average cost forgasoline to consumers to decrease in therange of 0.2 to 0.8 cents per gallon or$30 to $118 million per year in savings.

• No Oxygenates Case. Beginning in

2002, California refiners would requireas much as 355,000 barrels per day ofadditional gasoline component imports tomeet demand without the use of anyoxygenates. The average cost increase isexpected to be in the range of 4.3 to 8.8cents per gallon or $636 million to $1.3billion per year. This case would requirethe passage of H.R. 630.

Long Term (six years). The long term caseprovides the least cost option by allowingadequate time for the oxygenates market toachieve a new supply and demand balance ata lower price. In addition, refiners wouldhave sufficient time to modify theirequipment where appropriate. In response toachieving a normal supply and demandbalance, prices would moderate to anaverage cost difference ranging from adecrease of 0.4 cents per gallon to anincrease of 2.5 cents per gallon.

Over the long term, the availability ofalternative oxygenates will increase as moretime is allowed to increase productioncapabilities for ethanol, ETBE and TBA.Within six years, supplies of all threealternatives could be comparable to currentMTBE availability. TAME, which is a by-product of refinery operations, will not beavailable in sufficient volumes to meetCalifornia’s needs by itself.

The study assumes that in 2005, California’s

gasoline demand will be about 1,022,000barrels per day (15.7 billion gallons peryear). California gasoline demand can be metby producing blending materials at Californiarefineries, importing additional blendingmaterials if needed, and importing theappropriate oxygenate. Listed below are theresults for the long term (see Table 1).

• Ethanol. Beginning in 2005, Californiarefineries would require as much as79,000 barrels per day of ethanol and upto 113,000 barrels per day of additionalgasoline imports to meet demand. Theaverage cost increase is expected to be inthe range of 1.9 to 2.5 cents per gallonor $298 to $392 million per year.

• ETBE. Beginning in 2005, California

refineries would require as much as

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137,000 barrels per day of ETBE to meetdemand. No additional gasoline importswould be required. The average costincrease per gallon is expected to benegligible.

• TBA. Beginning in 2005, Californiarefineries would require as much as104,000 barrels per day of TBA and18,000 barrels per day of additionalgasoline imports to meet demand. Theaverage cost increase is expected to be inthe range of 0.3 to 1.0 cents per gallonor $47 to $157 million per year.

• Mixed Oxygenates. Beginning in 2005,

California refineries would require asmuch as 126,000 barrels per day of anoptimal combination of assortedoxygenates to meet demand. Noadditional gasoline imports would berequired. The average cost decrease isexpected to be in the range of 0.3 to 0.4cents per gallon or a savings of $47 to$63 million per year.

• H.R. 630. Beginning in 2005, California

refineries could reduce their use ofMTBE by over 20 percent if federallegislation were to allow them to makegasoline with less than the currentminimum oxygen content. As much as10,000 barrels per day of additionalgasoline component imports would berequired to meet demand. This additionalflexibility allows the average cost forgasoline to consumers to decrease in therange of 0.3 to 1.5 cents per gallon or$47 to $235 million per year in savings.

• No Oxygenates Case. Beginning in2005, California refiners would requireas much as 170,000 barrels per day ofadditional gasoline component imports tomeet demand without the use of anyoxygenates. The average cost increase is

expected to be in the range of 0.9 to 3.7cents per gallon or $141 to $580 millionper year. This case would requirepassage of H.R. 630.

Air Quality and EnvironmentalImpacts

Energy Commission staff worked with theCalifornia Air Resources Board (CARB) toexamine the potential increase in pollutantemissions that might result from the use ofan alternative oxygenate in gasoline. Itshould be noted, however, that this studydoes not include an assessment of thepotential health impacts of exposure toMTBE or any other alternative oxygenates ingasoline.

The use of alternative oxygenates inreformulated gasoline does not result in anincrease in air pollution as long as thegasoline recipe used by refiners passes thePredictive Model and none of the variousfuel qualities exceed the maximum levels setby CARB. ETBE, TBA and TAME are eachcomparable in air quality impacts to MTBE.Ethanol, at the current 7.0 pound maximumvolatility requirement, is also comparable.However, current state law exempts gasolinecontaining 10 percent ethanol from CARB’slimit on volatility unless CARB finds thatsuch gasoline, without volatility control,increases the ozone-forming potential ofvehicular emissions.

At this time, the preliminary results of avehicle test study performed by CARB showthat gasoline blends of 10 percent ethanoland a maximum volatility of 8.0 poundswould cause major increases in hydrocarbonemissions, the ozone-forming potential ofthose emissions, and benzene emissions--allmostly due to excess evaporative emissions.

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Higher exhaust emissions of nitrogen oxideswould also be expected.

The staff of CARB will present these resultsand other information to its Board. If theBoard makes a finding of greater ozone-forming potential for emissions from 10percent gasoline without volatility control,there will be no exemption from the volatilitylimit. Since the final adoption has notoccurred, the Energy Commission hasexamined a case of a one pound increase involatility over the 7.0 psi limit to see whatthe impact could be on the production costsof reformulated gasoline for Californiarefineries.

With an allowance for refiners to makegasoline with a higher volatility, the refinerymodeling results indicate that the feasibilityof this case hinges on which variation of thePredictive Model is used by refiners. Inaverage mode, refiners would be forced todecrease the amounts of sulfur, aromaticsand olefins to levels much lower than today’sgasoline in order to get a recipe of gasolineto pass the Predictive Model. This practicewould necessitate importing over 50 percentof our gasoline needs, significantly increasingthe price of gasoline for consumers.

Use of the average mode of the PredictiveModel leads to an infeasible case in both theintermediate and long term timeframes.

If refiners used the flat limit mode of thePredictive Model, complying gasoline can beproduced at an average cost increase of 5.4cents per gallon in the intermediate term and1.0 cents per gallon in the long term. Theseadditional costs would amount to nearly$800 million in the intermediate term and$157 million in the long term. As much as103,000 barrels per day of ethanol and

50,000 barrels per day of additional gasolineimports would be required to meet demand.

Another interpretation of the regulatorylanguage associated with the one poundvolatility waiver is a formulation ofreformulated gasoline that is similar to theflat limit recipe, except for a higher volatilityof 7.8 pounds and an oxygen content of 3.5weight percent. Refinery modeling resultsindicate that this blend of gasoline can beproduced at an average cost increase of 4.0cents per gallon in the intermediate term. Inthe long term, this blend of gasoline can beproduced at an average cost decrease of 0.8cents per gallon.

As to water quality, ongoing testing indicatesthat some other oxygenates have beendetected in some surface and ground watersources. Similar to MTBE, compounds suchas ethanol, ETBE, TAME and TBA are ableto mix with water, are difficult to removefrom contaminated water and cause water totaste and smell unpleasant even at very smallconcentrations. Additional results can befound in the study performed by theUniversity of California.

Uncertainty

Recent studies indicate that ETBE, TBA andTAME possess unpleasant characteristicssimilar to MTBE that could lead to odor andtaste problems in drinking water at very lowconcentrations. The two most preferredalternatives for phasing out MTBE,according to the UC study, would be eitherethanol or the use of no oxygenates. Thefindings in this study show that use of nooxygenates or ethanol to completely displaceMTBE would require substantial increases inimports of key gasoline blending componentssuch as alkylate. Concerns have been raisedthat these large volumes of alkylate and

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other gasoline components would either bemuch more expensive or unavailablealtogether.

Additional refinery modeling work wasundertaken to determine the impacts onaverage cost of gasoline if these importswere unavailable over the long term. Theresults of these new cases indicate thateliminating the need to import additionalalkylate by building additional refinerycapacity in California would add 0.2 centsper gallon to the ethanol cases and 0.6 centsper gallon to the no oxygenate cases.Although these cost increases are modest inthe long term, there is concern that if MTBEis phased out over a period of time that isinsufficient to allow refiners to makenecessary modifications, there will be anundetermined level of risk associated withimports of large volumes of alkylates. Thepotential risk in the intermediate termassociated with inadequate availability ofmarine vessels, higher costs of imports anddifficulty in obtaining sufficient volumes ofalkylate could lead to higher costs thanindicated in this study under the ethanol andno oxygenate cases.

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Key Findings

Introduction

This chapter summarizes the key findingsfrom this study. Detailed information foreach case is provided in the technicalappendices. To adequately respond toquestions raised by the Legislature, the studywas conducted for three separate timeperiods: near term, intermediate term andlong term.

Near Term. This case examines the impactsof an immediate replacement of MTBE inCalifornia only. Since this case would takeplace immediately within California, it isassumed that the rest of the country wouldnot have had a chance to follow suit. Theword “immediately” should be interpreted tomean that industry is given no phase-in timeto prepare and must deal with the existinghardware, regulations, terminals and fueldistribution system. The near term analysiswas performed qualitatively because thedramatic results of an immediatediscontinuance of the use of MTBE undercurrent regulations would be so severe thatlaying out any particular outcome wouldimply an accuracy of prediction that is notpossible.

Intermediate Term. This case examines theimpact of phasing out MTBE over a threeyear period, which allows for somemodification and infrastructure changes toaccommodate a different oxygenate.

Long Term. This case examines the impactof phasing out MTBE over a six year period,which allows for major refinerymodifications to accommodate a differentoxygenate.

The intermediate term and long termanalyses were done quantitatively andperformed under the assumptions thatMTBE is phased out and, unless otherwisespecified in a case run, all state and federalair quality regulations and tax credits remainin place.

Regardless of timing, the discontinuance ofthe use of MTBE would require refiners andgasoline blenders to use a replacementoxygenate. Under California Air ResourcesBoard (CARB) regulations, any gasolinesold in California must meet strict air qualityspecifications which normally includes theuse of oxygenates to ensure compliance withreformulated gasoline specifications. Byfederal law, oxygenates must be used in all ofCalifornia’s federal non-attainment areas.This requires about two-thirds of thequantity of gasoline sold in California tohave a minimum oxygen content of 1.8weight percent all year.

Oxygenates Chosen ForStudy

The Energy Commission, in conjunction withCARB, reviewed a number of differentoxygenates to determine which ones werelikely to be viable alternatives to MTBE. Theoxygenates were assessed based on thefollowing criteria: they were listed as acurrently approved oxygenate by the U.S.Environmental Protection Agency, eachpossessed desirable blending characteristics,and each demonstrated potential adequateavailability. Using these criteria, the EnergyCommission decided to examine twoalcohols; ethanol and TBA (tertiary butylalcohol) and two ethers; ETBE (ethyltertiary butyl ether) and TAME (tertiary

12

amyl methyl ether), as potential replacementsfor MTBE.

Methanol was found to be unacceptable as aviable alternative to MTBE because its usewould increase the vapor pressure ofgasoline to a level that would violate thevolatility standard of California’sreformulated gasoline specifications. Ethanolalso increases the vapor pressure of gasoline,but the effect is lower than with methanoland can be overcome (with difficulty) byusing different blending strategies. Methanol,as an additive, has an additional problem interms of its solubility with water. If the blendof gasoline with methanol comes in contactwith water, methanol separates from thegasoline, rendering the gasoline out ofcompliance.

The alternative oxygenates were reviewed todetermine if their potential productioncapacity was limited by raw materials orfeedstocks. Although ethanol, ETBE andTBA appear to have adequate feedstocksunder any of the various cases, TAME doeshave a raw material limitation. As a result,TAME was eliminated from consideration asa 100 percent replacement for MTBE. Werecognize, however, that most refiners couldproduce some volume of TAME throughnormal operations of their facility. Therefore,rather than eliminate it from considerationcompletely, we examined TAME as part of a“mixed oxygenates” case which looks at aneconomically optimal combination of ETBE,TBA and TAME to see if it is moreeconomically viable.

A great deal of attention has been placed onthe pending federal legislation (H.R. 630)that would permit California refiners to blendgasoline with oxygen content less than 1.8weight percent. Federal law currentlyrequires gasoline sold in all federal ozonenonattainment areas of California (applies toroughly two-thirds of the fuel sold in the

state) to contain at least 1.8 weight percentoxygen. Even though CARB regulationsallow refiners the flexibility to producegasoline blends containing oxygen at levelsbelow 1.8 weight percent, only a few of themare currently able to reduce their oxygenateuse (in the San Francisco Bay Area andlimited areas in northern California). If H.R.630 becomes law, refiners would be allowedto exercise this additional flexibilitythroughout the entire state. Additionalflexibility is expected to translate into lowercosts, primarily because the cost of MTBE isgreater than the cost of other gasolinecomponents that could be used in its place. Itwould be used as an octane booster, ratherthan a required response to a mandatedminimum oxygen content.

Although the primary focus of this study isto assess the impact on supply and price ofgasoline if MTBE were to be phased out, theEnergy Commission recognizes that thealternative oxygenates studied are notwithout controversy. As a result, the EnergyCommission examined the impact on supplyand price of gasoline in the event that alloxygenates were discontinued.

Model Methodology

The California reformulated gasolineregulations contain a compliance optionwhich a producer or importer of gasolinemay use called the California PredictiveModel. The Predictive Model is a computerprogram which consists of mathematicalequations which estimate changes in airpollution from exhaust emissions of vehicles.

The Predictive Model can be operated in twodifferent modes: “averaging” or “flat limit.”A refiner using the averaging version of thePredictive Model submits a gasoline recipeto CARB that demonstrates no increase inair pollution compared to the standard

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average gasoline formula. The refiner is ableto determine if the gasoline recipe complieswith CARB regulations by first entering thegasoline properties into the Predictive Modelcomputer program. If the calculated exhaustemissions are equal to or better than thestandard average gasoline formula, thecomputer model results will indicate a“pass”. If the emissions are greater, theresults will indicate a “fail.”

The concept is similar for the flat limitversion of the Predictive Model. The refinerwill first check with the computer programto make sure their gasoline recipe complieswith California regulations before submittingit to CARB.

The fuel properties under the averageversion of the Predictive Model are morestringent than the flat limit version becausethe refiner is allowed to produce a batch ofgasoline with a fuel property greater than theone submitted in their average gasolinerecipe. This is acceptable as long as therefiner compensates by later producing abatch of gasoline of equivalent size whosefuel property is lower than their averagerecipe.

On the other hand, under the flat limitversion of the Predictive Model the refiner isnever allowed to produce a gasoline with afuel property greater than the one submittedto CARB. If the gasoline is sampled andresults of the fuel analysis indicate ameasurement greater than any of theproperties submitted in the flat limit recipe,this batch of gasoline will be in violation andthe company will be subject to a fine. Inother words, the actual fuel properties of thegasoline being produced by a refiner usingthe flat limit version of the Predictive Modelare lower than the recipe submitted toCARB. The “margin of safety” gives refinersgreater assurance that the variabilitynormally associated with equipment used to

test properties of gasoline will be accountedfor, avoiding a costly fine.

For purposes of the Energy Commissionanalysis, the refinery modeling wasconducted using both versions of thePredictive Model (average and flat limit) inrecognition that refiners are currently usingone or the other to produce complyinggasoline.

Distribution InfrastructureImprovements

An assessment of California’s distributioninfrastructure was undertaken to determinewhat level of capital improvements would benecessary before gasoline containingalternative oxygenates could be dispensedthroughout the entire system. The findingsindicate that costs would only be incurred forthe cases involving ethanol. Currently, thedistribution system is able to accommodategasoline containing either ETBE, TBA orTAME without having to undergomodifications.

The distribution infrastructure consists of asystem of pipelines, storage tanks, railroadspurs, and tanker truck loading equipment.Most refineries in California have access topipelines that are capable of transporting avariety of refined petroleum products,namely gasoline, diesel and jet fuel. Thepipelines are connected to terminals locatedthroughout the state and permit refiners totransport their gasoline and other fuels toareas of the state at costs that are much lessthan transportation by rail or tanker truck.These terminals usually consist of severalstorage tanks and equipment used to loadtanker trucks before they haul the gasoline toa service station. A number of theseterminals are also able to receive shipmentsby rail. Some of the terminals located near

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water are also able to receive shipments frommarine vessels.

Except for ethanol, gasoline containingMTBE or any other oxygenate does notrequire any special handling before beingtransported by truck to the service station.Pipelines and most storage tanks usuallycontain small amounts of water thataccumulate over time as a result ofcondensation or minor contamination ofpetroleum products. The presence of thiswater is generally not a problem for gasolinebecause the two compounds do not have atendency to mix together. Refiners arereluctant to ship gasoline containing ethanolthrough the pipeline distribution systembecause ethanol has an affinity for water.

This attraction and ability to blend withwater means that ethanol in the gasolinewould have a tendency to pick up somewater and other contaminants suspended inthe water. In order to prevent a degradationof fuel quality, ethanol would not be mixedwith the gasoline until the fuel is loaded intothe tanker truck. This handling procedurenecessitates that the ethanol be stored insegregated storage tanks and special gasolineblending equipment be installed at theterminals. The special blending equipmentwould permit ethanol and gasoline to beloaded into the tanker truck eithersimultaneously or in sequence. Currently, themajority of terminals do not possess thiscapability.

Most of the terminals in California wouldrequire some degree of modification beforegasoline containing ethanol could bedispensed. These modifications wouldinvolve work that would enable theoperators of the terminal to receive, storeand blend ethanol. The costs associated withthese modifications are estimated to totalapproximately $60 million and require aslong as two years to complete. These

additional capital expenditures wouldcontribute about 0.1 cents per gallon to theaverage cost of producing gasolinecontaining ethanol.

Terminal operators would have to makecertain modifications to their facilities so thatthey would be able to receive shipments ofethanol by either rail or tanker truck, sincethe ethanol will not be shipped separatelythrough the pipeline. Modifications toupgrade existing rail facilities and constructnew facilities are estimated to cost nearly$10 million and take up to two years tocomplete. Some terminal facilities do nothave access to rail and are expected toreceive ethanol shipments by tanker truck.Modifications to upgrade existing facilitiesand construct new truck unloading facilitiesare estimated to cost less than $9 million andrequire up to two years to complete.

Ethanol would have to be stored in separatetanks prior to being blended into thegasoline. To allow for the segregation ofethanol, terminal operators would employtwo different strategies. One approach wouldbe to store ethanol in a tank that was onceused for some type of petroleum product.These modifications are estimated to costless than $4 million and require up to a yearto complete. The other strategy would be toconstruct brand new storage tanks at anexpense estimated to be over $12 million.This work would require up to two years tocomplete.

The single greatest cost element involves theinstallation of blending equipment that wouldpermit blending of ethanol into gasoline asthe tanker trucks are being loaded. Thesecosts are estimated to be less than $25million and would involve modifications tonearly 150 truck loading lanes. This workwould require up to two years to complete.No new truck loading lanes are expected to

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be constructed as a result of blendinggasoline with ethanol at the terminals.

Near Term Analysis

For the purposes of this analysis, it isassumed that:

• The California Legislature immediatelyremoves MTBE from use in any gasolinesold for use in the state, but it is still usedin the rest of the country.

• Any EPA-approved oxygenate other than

MTBE could be used. Hence, ethanol,TAME ETBE and TBA all would beavailable as blendstocks from a legal andregulatory point of view.

• Refiners would be required to produce

the new gasoline immediately. However,refiners, marketers and service stationowners would still be permitted to sellexisting inventories of gasolinecontaining MTBE until such inventoriesare depleted.

• New production of gasoline will flush out

any remaining amounts of MTBE fromthe distribution system.

• There would not be enough time to allowrefinery modifications such as majorequipment changes or minordebottlenecking, or any modifications tothe distribution infrastructure that couldbe required for the use of certain types ofoxygenates.

• There would not be enough time to allowMTBE facilities to be converted to theproduction of another oxygenate. Theonly exception is for facilities thatcurrently have the option to produceeither MTBE or ETBE.

The Energy Commission provided testimonyin May 1997 that an immediatediscontinuance of the use of MTBE couldcause a shortfall of 15-40 percent of gasolinesupplies in California. The EnergyCommission’s current analysis supportsthese initial findings.

Since the presence of MTBE helps to dilutesome of the less desirable properties ofgasoline (for example, benzene), removingMTBE from gasoline (which is 11 percent byvolume) would leave refiners with acombination of gasoline blendingcomponents that would result in gasolinethat does not comply with Californiaregulations. Refiners would have to takeadditional actions if the use of MTBE werenot permitted.

One of these actions would involve changingthe combination of gasoline blendingcomponents mixed to make gasoline. Certainblending components contain high levels ofundesirable properties and would have to beused in other petroleum fuels or exported. Inaddition, some blending components are alsolow in octane, forcing refiners to seek higheroctane substitutes from outside California toensure all grades of gasoline can beproduced.

As a direct result, the loss of Californiagasoline production capability would exceedthe 11 percent volume represented by theabsence of MTBE alone. The immediateabsence of MTBE would affect somerefineries more than others, but the endresult is a total decline in productioncapability as high as 40 percent.

Disallowing the use of MTBE in gasoline inthe near term would be so disruptive thatresulting market conditions would be faroutside any experience. Since even a modestshortfall in available fuel triggers substantialprice increases, the major shortfall that may

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develop from an immediate halt in the use ofMTBE is expected to result in the mostsevere price disruptions that have ever beenexperienced in California’s gasoline market.Prices would have to rise to the level thatenough demand is discouraged so thatremaining demand is balanced with availablesupply. The upward price movements wouldbe so large as to overcome any conceivableeconomic barrier to any action that couldextend supplies of fuel. Supplies would belimited by physical and regulatoryconsiderations.

The disruptions arising from severeshortages of fuels most probably would leadto suspension of all environmentally-drivenfuel quality programs. While this outcomeviolates one of the case assumptions, itshould be noted that over some period oftime, probably measured at least in months,this would be the inevitable outcome of animmediate discontinuance of the use ofMTBE. It is believed that under existinglegal authority both the state and federalprograms could be suspended. Onceprograms are suspended the supply anddemand balance in California could berestored in fairly short order usingproduction and imports of conventionalgasoline (MTBE-free gasoline that can belegally sold in the U.S.).

Following are the results of the near termanalysis for each of the alternative oxygenatecases studied:

Ethanol

Discontinuing the use of MTBE removes110,000 barrels per day of volume fromCalifornia gasoline, replacing it with about50,000 barrels per day of ethanol. However,because MTBE is a desirable blendingcomponent that is used in part as a diluent,acceptable gasoline components used in

conjunction with MTBE would now becomeundesirable when used in conjunction withethanol. These components which need to bereplaced could amount to as much as anadditional 100,000 barrels per day. Thiswould require importing over 150,000barrels per day of acceptable blendingcomponents or finished gasoline to meetCalifornia’s demand.

The United States produces about 80,000barrels per day of ethanol to meet currentdemand for all uses. In addition, another30,000 barrels per day of spare productioncapacity is idle. California currently producesapproximately 400 barrels per day ofethanol. With an immediate need for areplacement for MTBE, California wouldsuddenly require the majority of ethanol thatis being supplied to other users around thecountry. In order to secure the necessaryvolumes, California refiners will have topurchase the ethanol by bidding above andbeyond what present users pay. This actionwould create significant pressures, increasingthe price of ethanol well above its currentmarket price.

The ethanol market is not entirely flexible,however. Many ethanol producers havecontractual obligations to supply theirtraditional customers and some of theethanol cannot be immediately bid away. Inaddition, the long-standing ethanol market inthe midwest includes state tax incentives ontop of the federal subsidy. Many ethanolproducers may view the potentially short-term selling opportunity in California as arisky business decision and not enter thismarket. This will reduce the amount ofethanol immediately available to California.

In the near term, California refiners have fewalternatives to buying ethanol. Suppliers haveno obligation to sell, and the price could riserapidly. The structure of the ethanol industrymay reinforce this possibility, as the top five

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producers in the country control nearly 65percent of production capacity. Onecompany alone controls nearly half of allU.S. ethanol production. With theconcentration of ethanol production in thehands of relatively few suppliers, consumersmay further be harmed by the lack ofcompetitive market forces.

In addition, transportation costs by rail fromthe Midwest, where the majority of ethanolproduction is centered, will addapproximately 15 cents per gallon to theprice of ethanol. Ethanol has to be broughtover by rail since there are no pipelinesconnecting California to the Midwest. Dueto the cost involved, it is unlikely thatethanol would be transported by rail to theGulf and from there transported by ship toCalifornia.

Outside of the United States, spare ethanolproduction capacity is extremely limited.Brazil dominates the industry and producesabout 250,000 barrels per day. About 85%of this ethanol cannot be exported, eitherbecause of law or because it is currentlycommitted for use within the country. Allgasoline in Brazil must contain a mixture of24% ethanol and many cars run on 100%ethanol. Brazil currently has higher thannormal inventories of ethanol which could bedrawn down to more normal levels and soldto California (equaling about 9,000 barrelsper day). Added to the 30,000 barrels perday of temporary surplus production inBrazil, this brings the total ethanol availablefor export to California to about 39,000barrels per day.

Assuming a demand in California of 50,000barrels per day of ethanol, Brazil couldsupply part of California’s requirements forclose to nine months. Brazilian ethanolimported into the United States, however, issubject to a 54 cent/gallon import duty inaddition to transportation charges. While it is

possible that enough ethanol can be importedto meet California’s requirements in the nearterm, it will only be available to California atvery high prices.

Currently, ethanol is available for about$1.02 per gallon on the Brazilian spotmarket. Charges for freight, port andinsurance would add $.23 per gallon to thatprice. The U.S. tariff of $.54 per gallonwould bring the total price to about $1.79per gallon. Compared to the current price ofdomestically produced ethanol, which isabout 70 cents per gallon less, this is clearlyan expensive alternative. Once the surplusethanol market in Brazil returns to a normalbalance, it will become even more expensive.

ETBE

Currently, the United States produces only asmall quantity of ETBE but has about 51,000barrels per day of ETBE capacity. Californiawould require about 115,000 barrels per day.ETBE production would be complicated bythe fact that each gallon of ETBE requires afeedstock of 43 percent ethanol. Further,conversion of large scale MTBE productioncapacity cannot be completed overnight, norwithout considerable cost in many cases.ETBE manufacturing would probably becentered around the U.S. Gulf Coast, wheremost U.S. ether facilities are located.

Ethanol would need to be transported fromthe Midwestern producer states to the GulfCoast for ETBE production and thenfinished ETBE would be shipped toCalifornia. Hence, wide scale ETBEproduction to supply California wouldinvolve many of the same problems discussedabove for ethanol. Suddenly ether producerswould need to secure large quantities ofethanol currently being supplied to other endusers. However, ETBE has very goodblending characteristics and requires very

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few refinery modifications to accommodateits use.

Another consideration is that since ETBEproduction will involve taking over MTBEproduction facilities, MTBE production forthe rest of the marketplace will be “crowdedout.” Gasoline blenders around the countrywill have fewer supplies, and may competewith ethanol or ETBE, further bidding up theprice of oxygenates in general.

TBA

TBA is in a similar position to ETBE.Currently, the United States productioncapacity for TBA is about 35,000 barrels perday. California would require about 80,000barrels per day. TBA production is verylimited (approximately 60,000 barrels perday of capacity around the world), with onecompany controlling most of this capacity.TBA production is far short of the volumerequired by California to replace MTBE, andwould require many California blenders tobid for TBA from at most one or twosuppliers. This situation presents a likelihoodof higher prices for TBA.Mixed Oxygenates

Currently, the United States has the capacityto produce about 23,000 barrels per day ofTAME. California would require about112,000 barrels per day. TAME is presentlyproduced in fairly small volumes in scatteredlocations around the U.S. and in someforeign countries.

Even at full production capacity(approximately 47,000 barrels per dayworldwide), there would not be enoughTAME to supply the California market’s fulloxygenate requirement. California blenderswould have to bid for this very limited supplygenerally from refiners with TAME units attheir refineries. These refiners might be

reluctant to supply the California market, asthey would then need to find replacementoxygenates themselves for gasoline blendingpreviously accomplished with TAME.

Impacts of H.R. 630

An immediate halt to the use of MTBEwould have a drastic impact on the price ofgasoline for consumers. If refiners could useless than the minimum oxygen content that isrequired by federal law, it is possible thatthese consequences could be marginallyimproved. Since H.R. 630 or some similarfederal legislation has not been passed at thistime, it is very unlikely to expect such federallegislative action to coincide with animmediate halt to the use of MTBE inCalifornia. For this reason, further analysisof the potential merits of H.R. 630 in thenear term were not examined.

No Oxygenates Case

If MTBE were to be discontinuedimmediately, refiners would at least be leftwith the option of trying to acquire someadditional volumes of alternative oxygenatesas quickly as possible to try and recoversome portion of their reduced gasolineproduction. If California were to broaden thescope to include discontinuing alloxygenates, the drastic impacts on supplyand price of gasoline for Californiaconsumers would be even more extreme.

Intermediate Term Analysis(Three Years)

Two to three years is assumed to besufficient to allow the markets for alternativeoxygenates to develop and attain a new levelof supply and demand balance. Refinerswould not have time to undergo majorequipment modifications, but would still

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have time to modify certain processoperations that would improve their ability tomeet product demand without the use ofMTBE.

Staff assumed that construction permitswould be obtained without significant delays.Based on surveys, marketers throughout thedistribution infrastructure state that, underthis scenario, they have sufficient time tomodify any terminals, truck loading racksand marine facilities to support the use ofanother oxygenate.

In the intermediate term, demand forgasoline in California is expected to be965,000 barrels per day. As shown in Tables2A and 2B, the amount of materialsproduced at the refinery or imported willvary depending upon the oxygenate. Table 3displays the resulting changes in cost. Belowis a discussion of each oxygenate case.

Ethanol

Ethanol is the most expensive of thealternative oxygenates studied, increasingaverage costs in the intermediate term by 6.7cents per gallon compared to MTBE. Underthis case, California gasoline demand is metby producing about 748,000 barrels per dayof blending materials at California refineries,importing an additional 142,000 barrels perday of these gasoline components, andimporting 75,000 barrels per day of ethanol.Equipment modifications to terminals willrequire approximately 18 to 24 months tocomplete before the distributioninfrastructure is fully capable of dispensinggasoline containing ethanol.

The majority of the ethanol imported toCalifornia in the intermediate term isassumed to originate from the midwestregion of the United States. although nearly3,000 barrels per day of California ethanol

production is being assessed or is in aplanning stage, no construction has begun atthis time. It is possible that additional ethanolcapacity could eventually be built inCalifornia, especially since the facilitiesshould benefit from a 10 cent per gallon (orgreater) transportation advantage comparedto producers in the Midwest. For purposesof the intermediate term, potential additionalethanol supplies from a California sourcewere not included because the three-yeartime period was assumed to be too short toallow for the planning, design, financing,permitting and construction of brand newethanol facilities.

Even though a gallon of ethanol costs morethan a gallon of MTBE, refiners wouldpartially offset this price increase by usingless in each gallon of gasoline. Since ethanolcontains more oxygen than MTBE, lessvolume is required to reach the desiredoxygen content, reducing costs by over $1.1million per day. Besides reducing theiroxygenate costs, refiners also decrease theamount of crude oil purchased for theirrefineries, saving nearly $2.2 million per

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TABLE 2AResults from Alternative Oxygenates Study

Demand and Supply of CARB Reformulated GasolineUsing Predictive Model - Average Mode

(Thousand Barrels Per Day)Supply

Oxygenate CasesDemand forCARB RFG

Blending MaterialsProduced at

California Refineries

ImportedBlendingMaterials

ImportedOxygenates Total

IntermediateTerm

Base Case 965 846 11 108 965Ethanol 965 738 152 75 965ETBE 965 825 11 129 965TBA 965 843 33 89 965Mixed 965 853 11 101 965HR 630 965 847 24 94 965No Oxygenates 965 599 366 0 965

Long TermBase Case 1,022 896 11 115 1,022Ethanol 1,022 819 124 79 1,022ETBE 1,022 874 11 137 1,022TBA 1,022 888 30 104 1,022Mixed 1,022 885 11 126 1,022HR 630 1,022 901 21 100 1,022No Oxygenates 1,022 841 181 0 1,022

*Blending materials consist of CARBOB, alkylates and isomerates.

TABLE 2BResults from Alternative Oxygenates Study

Demand and Supply of CARB Reformulated GasolineUsing Predictive Model - Flat Limit Mode

(Thousand Barrels Per Day)Supply

Oxygenate CasesDemand forCARB RFG

Blending MaterialsProduced at

California Refineries

ImportedBlendingMaterials

ImportedOxygenates Total

IntermediateTerm

Base Case 965 846 11 108 965Ethanol 965 779 111 75 965ETBE 965 825 11 129 965TBA 965 870 11 84 965Mixed 965 864 11 90 965HR 630 965 859 31 75 965No Oxygenates 965 704 261 0 965

Long TermBase Case 1,022 896 11 115 1,022Ethanol 1,022 845 98 79 1,022ETBE 1,022 874 11 137 1,022TBA 1,022 907 16 99 1,022Mixed 1,022 885 11 126 1,022HR 630 1,022 917 14 91 1,022

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No Oxygenates 1,022 880 142 0 1,022*Blending materials consist of CARBOB, alkylates and isomerates.

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day. But all of these savings are surpassed bycosts amounting to nearly $5.8 million perday for the following reasons:

• Since ethanol has a higher oxygencontent than MTBE, the final volumerequired to be blended is a little morethan half that of MTBE (7.8% versus11.5%). This difference must be made upwith expensive import components,mostly alkylates. Further, ethanolblending into gasoline results in a highervolatility effect which violates Californiagasoline specifications. To offset thiseffect, other gasoline components mustbe removed and replaced with moredesirable imports such as alkylates.

• Fewer barrels of crude oil processed by

refineries translate into lower output ofrefined products, namely diesel. Thisshortfall of 40,000 barrels per day mustbe imported at a cost of more than $1.0million per day.

• Costs for modification to the refineries to

handle additional movement of gasolineblending components equate to 0.8 centsper gallon.

• Because of ethanol’s affinity for water, itcannot be shipped by pipeline like MTBE

and other oxygenates. Ethanol must betransported by truck or rail to theterminal for blending into gasoline. Thisrequires special blending equipment andsegregated storage tanks to be modifiedor built. These modifications wouldamount to $60 million, increase theaverage cost by 0.1 cents per gallon, andrequire approximately 18 to 24 monthsto complete.

• The modest fuel economy penalty that

results from using the slightly lowerenergy content of gasoline containingethanol adds about 1.0 cents per gallonto the average cost of gasoline.

The lower end of the average cost increasefor ethanol is 6.1 cents per gallon. Thisresults from using a flat limit variation of thePredictive Model. The lower cost of the flatlimit modeling run demonstrates oneoutcome of the additional flexibility that isafforded refiners who are able to utilize thisversion of the predictive model. Thedecrease from 6.7 to 6.1 cents per gallon isprimarily accomplished by cutting back onimports of more expensive gasoline blendingcomponents and reducing exports of lessvaluable refinery components that can nolonger be used to make gasoline, diesel or jetfuel in California.

TABLE 3Average Cost Change

Cents Per GallonIntermediate Term Long Term

Ethanol 6.1 to 6.7 1.9 to 2.5ETBE 2.4 to 2.5 0TBA 0.5 to 1.4 0.3 to 1.0Mixed Oxygenates -0.2 to 0.2 -0.3 to -0.4HR 630 -0.2 to -0.8 -0.3 to -1.5No Oxygenates 4.3 to 8.8 0.9 to 3.7One Pound Waiver 4.0 to 5.4 -0.8 to 1.0

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One Pound Volatility Waiver. Currentregulations allow refiners to producegasoline containing 10 percent ethanol with avolatility of 7.8 pounds, but CARB wouldfirst have to make a determination that thisgasoline blend would not result in anyreduction of air quality benefits. At this time,preliminary results of 10 percent ethanolblends in vehicles tested by CARB show thatthe volatility of 7.8 pounds would causemajor increases in hydrocarbon emissions,the ozone-forming potential of thoseemissions, and benzene emissions--all mostlydue to excess evaporative emissions. Higherexhaust emissions of nitrogen oxides wouldalso be expected.

If these findings are adopted later this yearby CARB, the regulatory option of a onepound waiver for 10 percent ethanol blendswould be precluded. Since the final adoptionhas not occurred, the Energy Commissionexamined a case of a one pound waiver tosee what the impact could be on theproduction costs of reformulated gasoline forCalifornia refineries.

With an allowance for refiners to makegasoline with a higher volatility, the refinerymodeling results indicate that the feasibilityof this case hinges on which variation of thePredictive Model is used by refiners. Inaverage mode, refiners would be forced todecrease the amounts of sulfur, aromaticsand olefins to levels much lower than today’sgasoline in order to get a recipe of gasolineto pass the Predictive Model. This practicewould necessitate importing over 50 percentof our gasoline needs, significantly increasingthe price of gasoline for consumers.

Use of the average mode of the PredictiveModel leads to an infeasible case in both theintermediate and long term timeframes.

If refiners used the flat limit mode of thePredictive Model, complying gasoline can be

produced at an average cost increase of 5.4cents per gallon in the intermediate term and1.0 cents per gallon in the long term. Theseadditional costs would amount to nearly$800 million in the intermediate term and$157 million in the long term. As much as103,000 barrels per day of ethanol and50,000 barrels per day of additional gasolineimports would be required to meet demand.

Another interpretation of the regulatorylanguage associated with the one poundvolatility waiver is a formulation ofreformulated gasoline that is similar to theflat limit recipe, except for a higher volatilityof 7.8 pounds and an oxygen content of 3.5weight percent. Refinery modeling resultsindicate that this blend of gasoline can beproduced at an average cost increase of 4.0cents per gallon in the intermediate term. Inthe long term, this blend of gasoline can beproduced at an average cost decrease of 0.8cents per gallon.

ETBE

ETBE is a less expensive option thanethanol, but its use will still increase theaverage cost of gasoline by 2.4 cents pergallon compared to MTBE. Under this case,California gasoline demand is met byproducing about 825,000 barrels per day ofblending material at California refineries andimporting 129,000 barrels per day of ETBE.

ETBE has more desirable blendingcharacteristics that allow refiners to eliminatethe need for additional imports of gasolinecomponents and thereby reduce anyinvestments at the refinery and distributioninfrastructure. In addition, the increased useof ETBE allows refiners to slightly reducetheir use of crude oil, which will save nearly$940,000 per day.

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These savings are offset by the increasedcosts of $1.4 million per day for the totalvolume of ETBE required to meet thedesired oxygen content. In addition, themodest fuel economy penalty that resultsfrom use of the slightly lower energy contentof gasoline containing ETBE adds 0.5 centsper gallon to the average cost increase.

Operating the refinery model in the flat limitmode appears to have little impact on theaverage cost, actually increasing it from 2.4to 2.5 cents per gallon.

TBA

TBA is slightly less expensive, increasingaverage costs by only 1.4 cents per gallonmore than gasoline containing MTBE. Underthis case, California gasoline demand is metby producing about 843,000 barrels per dayof blending materials at California refineries,importing an additional 22,000 barrels perday of gasoline components, and importing89,000 barrels per day of TBA.

Similar to ethanol, the use of TBA allowsrefiners to reduce their total oxygenate costand slightly reduce the amount of crude oilpurchased for processing at the refinery.These savings of more than $930,000 perday are nearly offset by the cost of $723,000per day to import additional volumes ofgasoline components. Refiners must alsoexport, at a net loss, approximately 3,000barrels per day of refinery components thatare no longer suitable for use in gasoline,diesel or jet fuel. In addition, refiners wouldhave to make close to $12 million inmodifications to accommodate the use ofTBA in gasoline.

Operating the refinery model in the flat limitmode also reduces the average cost for usingTBA, decreasing from 1.4 to 0.5 cents pergallon. The additional flexibility allows

refiners to eliminate the need to importadditional gasoline blending components andeliminate the need to export undesirableblending components. Refinery investmentbecomes unnecessary in this case, saving $12million. Finally, there is a slight fuel economybenefit that reduces the cost by about 0.2cents per gallon.

Mixed Oxygenates

An economically optimal combination ofmore than one type of oxygenate turns out tobe the least costly of all the alternativesstudied, increasing the average cost ofgasoline by only 0.2 cents per gallon whencompared to using MTBE in gasoline. In thiscase, California gasoline demand is met byproducing about 853,000 barrels per day ofblending materials at California refineries andimporting a combined 101,000 barrels perday of ETBE and TBA. No volume ofTAME was selected for this case because thecost of this oxygenate was greater thaneither TBA or ETBE.

These results are not surprising consideringthe fact that the supply of TAME is limitedto small volumes located at individualrefineries scattered throughout the country.The diffuse nature of the TAME supplytends to increase the costs for gathering andtransporting this alternative oxygenate toCalifornia, so much so that ETBE and TBAbecome less expensive in comparison toTAME.

The refinery modeling results indicate thatthe combination of 66,000 barrels per day ofETBE and 35,000 barrels per day of TBAused in gasoline would allow refiners toreduce their crude oil use by some 9,000barrels per day, saving over $170,000 perday. Since the type of gasoline produced inthis case has a slightly lower energy contentthan gasoline containing MTBE, the average

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cost increases by 0.1 cents per gallon.Similar to the ETBE case, refiners do nothave to make any modifications to theirrefineries or distribution infrastructures andcan eliminate the need to import additionalvolumes of more expensive gasolinecomponents. The additional costs associatedwith purchasing these two oxygenates totalnearly $26,000 per day.

Operating the refinery model in the flat limitmode afford additional flexibility, allowingthe average cost impact to change from anincrease of 0.2 cents per gallon to a decreaseof 0.2 cents per gallon.

In this case, California gasoline demand ismet by producing about 864,000 barrels perday of blending materials at Californiarefineries and importing a combined 90,000barrels per day of ETBE and TBA. Thesavings of over $510,000 per day fromreduced use of oxygenates are more thanenough to overcome the $340,000 per daycost of higher crude oil purchases.

Impacts of H.R. 630

Staff examined the impacts of allowing thewhole state to make gasoline with less thanthe minimum oxygen content currentlyrequired and found that the average cost forproducing gasoline containing smalleramounts of MTBE decreased by 0.2 centsper gallon. If refiners were to use the flatlimit variation of the Predictive Model, theaverage cost decrease would be 0.8 cents pergallon. The impact of H.R. 630 on theaverage costs of other alternative oxygenatescould be similar for the two timeframes.

No Oxygenates Case

If all oxygenates were discontinued for use ingasoline, the cost impact would be evengreater than any of the alternative

oxygenates studied under the intermediateterm. Findings indicate that the average costincrease of gasoline for California consumerswould range from 4.3 to 8.8 cents per gallon.The lower value is a result of the refinersusing the flat limit variation of the PredictiveModel. This case would require the passageof H.R. 630.

Under this case, California gasoline demandis met by producing about 599,000 barrelsper day of blending material at Californiarefineries and importing 355,000 barrels perday of additional gasoline components.Eliminating the need to import oxygenatesand reducing the use of crude oil by about120,000 barrels per day saves the refinersmore than $6.3 million per day. Even with anadditional fuel economy benefit of 0.5 centsper gallon, these savings are still notsufficient to overcome the costs ofapproximately $12.3 million per day ofimports of gasoline components and 54,000barrels per day of additional diesel and jetfuel. In addition, over 200,000 barrels perday of refinery components must be exportedbecause they are unsuitable for blending intogasoline, diesel or jet fuel in California.

Under the flat limit mode of the PredictiveModel the average cost increase declinesfrom 8.8 to 4.3 cents per gallon. Under thiscase, average costs are significantly lowerprimarily because imports of additionalgasoline components have been reduced by105,000 barrels per day at a savings of over$3.2 million per day. The potential burden onthe marine terminal infrastructure is alsolessened because exports of refinerycomponents have been reduced from203,000 to 126,000 barrels per day.

It should also be noted that these largevolumes of imports and exports could placea substantial strain on the marine terminalinfrastructure, most notably a potentiallimitation of U.S. tankers required to move

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much of these petroleum products from theGulf Coast to California.

Long Term Analysis (SixYears)

The long term analysis examines the impactof phasing out MTBE over a six year period.All assumptions used in the intermediateterm are in effect with two exceptions:

• In addition to minor debottlenecking,refiners would have sufficient time tomake major process unit modificationssuch as equipment replacement orcapacity expansions.

• Additional new oxygenate capacity could

be brought on line with the constructionof new facilities.

In the long term, demand for gasoline inCalifornia is expected to be 1,022,000barrels per day. As shown previously inTables 2A and 2B, the amount of materialsproduced at the refinery or imported willvary depending upon the oxygenate. Table 3displays the resulting changes in averagecosts. Below is a discussion of eachoxygenate.

Ethanol

Ethanol is the most expensive of thealternative oxygenates studied, increasingaverage costs in the long term by 2.5 centsper gallon compared to MTBE. Under thiscase, California gasoline demand is met byproducing about 819,000 barrels per day ofblending materials at California refineries,importing an additional 113,000 barrels perday of these blending materials, andimporting 79,000 barrels per day of ethanol.

The majority of the ethanol imported toCalifornia in the long term is assumed tooriginate from the midwest region of theUnited States. although nearly 3,000 barrelsper day of California ethanol production isbeing assessed or is in a planning stage, noconstruction has begun at this time. It ispossible that additional ethanol capacitycould eventually be built in California,especially since the facilities should benefitfrom a 10 cent per gallon (or greater)transportation advantage compared toproducers in the Midwest. For purposes ofthe six-year timeframe, potential additionalethanol supplies from a California sourcewere not included because the productioncosts of new facilities using corn were notcompetitive with either existing or newethanol plants in the Midwest.

In addition, production costs of potentialnew ethanol plants in California usingalternative biomass sources (such as ricestraw by the proposed Gridley Project) havenot yet been quantified on a commercialscale basis. Staff assumed that these facilitieswould be competitive if they are able toproduce and deliver ethanol to Californiarefiners at a price below that of Midwestsuppliers.

Since ethanol contains more oxygen pergallon than MTBE, less volume is requiredto reach the desired oxygen content.Consequently, refiners are able to save about$1.7 million per day in oxygenate costs.Besides these savings, refiners also decreasethe amount of crude oil purchased for therefineries, saving about $1.2 million per day.However, these savings are surpassed bycosts amounting to nearly $3.8 million perday for the following reasons:

• Since ethanol has a higher oxygencontent than MTBE, the final volumerequired to be blended is a little more

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than half that of MTBE (7.8% versus11.5%). This difference must be made upwith expensive import components,mostly alkylates. Further, ethanolblending into gasoline results in a highervolatility effect which violates Californiagasoline specifications. To offset thiseffect, other gasoline components mustbe removed and replaced with moredesireable imports such as alkylates.

• The modest fuel economy penalty that

results from using the slightly lowerenergy content of gasoline containingethanol adds about 0.7 cents per gallonto the average cost of gasoline.

• Unlike the intermediate term, thisscenario allows for some refineryinvestment for major processmodifications. In the case of ethanol,these investments total $59 million.

• Refiners would need to make certainmodifications to storage tanks andgasoline blending equipment located atvarious points in their distributioninfrastructure so that gasoline containingethanol could be dispensed throughoutthe state. These modifications wouldamount to $60 million, increase theaverage cost by 0.1 cents per gallon, andrequire approximately 18 to 24 monthsto complete.

The lower end of the average cost increaserange for ethanol is 1.9 cents per gallon. Thislower cost is the result of operating therefinery model using a flat limit variation ofthe Predictive Model. The lower cost ofthese flat limit modeling runs demonstratethe additional flexibility that is affordedrefiners who are able to utilize this version ofthe Predictive Model. The decrease from 2.5to 1.9 cents per gallon is a result of refinerscutting back on imports of more expensive

gasoline blending components by usinglocally produced components and reducinginvestment in refinery modifications from$59 to $38 million.

One Pound Volatility Waiver. With anallowance for refiners to make gasoline witha higher volatility, the refinery modelingresults indicate that the feasibility of this casehinges on which variation of the PredictiveModel is used. In average mode, refinerswould be forced to decrease the amounts ofsulfur, aromatics and olefins to levels muchlower than today’s gasoline in order to get arecipe of gasoline to pass the PredictiveModel. This practice would necessitateimporting over 50 percent of our gasolineneeds, significantly increasing the price ofgasoline for consumers. Use of the averagemode of the Predictive Model leads to aninfeasible case in both the intermediate andlong term timeframes.

If refiners used the flat limit mode of thePredictive Model, complying gasoline can beproduced at an average cost increase of 5.4cents per gallon in the intermediate term and1.0 cents per gallon in the long term. Theseadditional costs would amount to nearly$800 million in the intermediate term and$157 million in the long term. As much as103,000 barrels per day of ethanol and50,000 barrels per day of additional gasolineimports would be required to meet demand.

ETBE

ETBE is a less expensive option thanethanol. Compared to MTBE, the cost ofusing ETBE is roughly the same. Under thiscase, California gasoline demand is met byproducing about 874,000 barrels per day ofblending materials at California refineries andimporting 137,000 barrels per day of ETBE.

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ETBE has more desirable blendingcharacteristics that allow refiners to eliminatethe need for additional imports of gasolinecomponents and avoid any investments at therefinery or throughout the distributioninfrastructure. In addition, the increased useof ETBE allows refiners to slightly reducetheir use of crude oil, which will save over$930,000 per day.

These savings are offset by the increasedcosts of nearly $1 million per day for thetotal volume of ETBE required to meet thedesired oxygen content. In addition, themodest fuel economy penalty that resultsfrom use of the slightly lower energy contentof gasoline containing ETBE adds 0.5 centsper gallon to the average cost increase.Operating the refinery model in the flat limitmode appears to have little impact on theaverage cost, which shows no increase ordecrease in both cases.

TBA

In the long term, TBA is less expensive thanethanol, increasing average costs by only 1.0cents per gallon more than gasolinecontaining MTBE. Under this case,California gasoline demand is met byproducing about 888,000 barrels per day ofblending materials at California refineries,importing an additional 18,000 barrels perday of these materials, and importing104,000 barrels per day of TBA.

Similar to ethanol, the use of TBA allowsrefiners to reduce their total oxygenate costand slightly reduce the amount of crude oilpurchased for processing at the refineries.These savings of over $510,000 per day areoffset by the need to spend nearly $592,000per day to import additional volumes ofgasoline components. In addition, refinerswould have to make close to $38 million

worth of modifications to their facilities toaccommodate the use of TBA in gasoline.

Operating the refinery model in the flat limitmode also reduces the average cost for usingTBA, decreasing from 1.0 to 0.3 cents pergallon. In other words, the flat limit modewould allow refiners to make gasoline withTBA for nearly the same cost compared toproducing gasoline with MTBE. Thisadditional flexibility allows refiners to reducetheir need to import additional gasolineblending components. Refinery investmentalso declines from $38 to less than $2million, saving $36 million. A slight increasein the amount of crude oil purchased byrefiners, an additional cost of $623,000 perday, is nearly offset by the $500,000 per daysaved in the cost of oxygenates. Finally,there is a slight fuel economy benefit thatreduces the average cost by about 0.2 centsper gallon.

Mixed Oxygenates

An economically optimal combination ofmore than one type of oxygenate turns out tobe the least costly of all the alternativesstudied, actually decreasing the average costof gasoline by 0.3 cents per gallon whencompared to using MTBE. Under this case,California gasoline demand is met byproducing about 885,000 barrels per day ofblending materials at California refineries andimporting a combined 126,000 barrels perday of ETBE and TBA. No volume ofTAME was selected under this case becausethe cost of this oxygenate was greater thaneither TBA or ETBE, for the same reasonscited in the intermediate term discussion.Results indicate that the combination of101,000 barrels per day of ETBE and 25,000barrels per day of TBA used in gasolinewould allow refiners to reduce their crude oiluse by some 30,000 barrels per day at asavings of over $570,000 per day. Similar to

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the ETBE case, refiners do not have to makeany modifications to their refineries orimprovements to their distributioninfrastructures and can eliminate the need toimport additional volumes of more expensivegasoline components.

The additional costs associated withpurchasing oxygenates total a little morethan $500,000 per day. Since the type ofgasoline produced in this case has a slightlylower energy content than gasolinecontaining MTBE, the average cost increasesby 0.3 cents per gallon.

Operating the refinery model in the flat limitmode changes the results from a decrease of0.3 to 0.4 cents per gallon. The onlysignificant difference between the two casesis the slightly lower fuel economy penalty of0.2 cents per gallon.

Impacts of H.R. 630

In the long term, the benefits of allowingrelaxation of the federal minimum oxygenrequirement through passage of H.R. 630could benefit California consumers byreducing the average cost of gasolinebetween 0.3 and 1.5 cents per gallon. Underthis case, California gasoline demand is metby producing about 901,000 barrels per dayof blending materials at California refineries,importing an additional 10,000 barrels perday of these materials, and importing100,000 barrels per day of MTBE. Thebenefit of H.R. 630 is the additionalflexibility which allows refiners to reducetheir use of MTBE by 13 percent.

Under the flat limit variation of thePredictive Model, the average cost declinesfrom 0.3 to 1.5 cents per gallon savings forconsumers. The bigger savings are primarilya result of decreasing the use of oxygenatesby 9,000 barrels per day and eliminating

7,000 barrels per day of additional gasolinecomponent imports. The additional benefit ofH.R. 630 under the flat limit mode is that itallows refiners to reduce their use of MTBEby nearly 21 percent.

No Oxygenates Case

In the long term, a complete ban on alloxygenates would result in the greatestaverage cost increase for gasoline for thistime period compared to all of the otheralternatives studied. These cost increasesrange from 0.9 to 3.7 cents per gallon. Thelower value is a result of refiners operatingunder the flat limit variation of the PredictiveModel. This case would require the passageof H.R. 630.

Under this case, California gasoline demandis met by producing about 841,000 barrelsper day of blending materials at Californiarefineries and importing 170,000 barrels perday of additional gasoline components.Eliminating the need to import oxygenatessaves the refiners a little more than $4.0million per day. Even though the cost ofimports is roughly the same at $5.3 millionper day and a fuel economy benefit of 0.9cents per gallon is achieved, refiners wouldneed to make significant investments tomodify their facilities, totaling over $1.1billion. This is the primary reason for theaverage cost increase.

Under the flat limit mode of the PredictiveModel the average cost increase declinesfrom 3.7 to 0.9 cents per gallon. Under thiscase, average costs are significantly lowerprimarily because refinery investment hasbeen reduced by over $710 million andimports of additional gasoline componentshave been reduced by 39,000 barrels per dayat a savings of over $1.1 million per day.

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Potential Impacts Of U.S.MTBE Phase-Out

The Energy Commission recognizes that ifMTBE were to be phased out of use inCalifornia, the rest of the United States couldfollow suit. Staff intends to examine thepotential impacts of this case in greater detailand present these findings in the FuelsReport to be published by the EnergyCommission following completion of the thisstudy. As part of the preparation of the mainbody of this additional work, we haveexamined the implications of a phase out ofMTBE in the rest of the U.S. on the supplyand price of various oxygenates. As anexample, we have also included the refinerymodeling results of this case, with ethanol asthe alternative. These findings indicate thatthe higher level of demand that would resultincreases the cost of ethanol to California,thereby increasing the total oxygenate costsfor refiners. Directionally speaking, theaverage cost of California gasoline increasesfrom 6.7 to 11.7 cents per gallon in theintermediate term and from 2.5 to 3.7 centsper gallon in the long term. Impacts on theaverage costs of the other alternativeoxygenate cases are expected to be similar tothis example.

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List Of Abbreviations

CARB California Air Resources BoardCARBOB California Reformulated Gasoline Blendstock for Oxygen BlendingEPA Environmental Protection AgencyETBE Ethyl Tertiary Butyl EtherMTBE Methyl Tertiary Butyl EtherRFG Reformulated GasolineRvp Reid Vapor PressureTAME Tertiary Amyl Methyl EtherTBA Tertiary Butyl Alcohol