R-Squared Energy Blog

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Ethanol and Petroleum Imports

This is the concluding post in a series looking at the impact of increased ethanol production on petroleum imports. Previous posts concluded that there has been little measurable impact on our petroleum imports as a result of increased ethanol production. In this post, I provide a spreadsheet to all the data and graphics used, and delve a bit deeper into the issue.

Previous posts in the series were:

Does Ethanol Reduce Petroleum Imports?

Ethanol, Imports, and the MTBE Effect

The spreadsheet that was used to tabulate all of this information is archived here:

Oil Imports Versus Ethanol Production

(For some reason the graphs don’t show up in the Google Documents link. However the data and calculations are all there).

Audacious Claims

One of the most frequently cited reasons for our U.S. ethanol policy is that it will reduce our dependence on foreign oil. Some of the more audacious claims actually suggest that one barrel of ethanol will displace more than one barrel of foreign oil. Here is a sampling of some of the claims. From the Renewable Fuels Association’s (RFA) “Energy Facts”:

FACT: The production and use of 9 billion gallons of ethanol in 2008 displaced the need for 321.4 million barrels of oil. It also saved American consumers and taxpayers $32 billion, an average of more than $87 million a day. This is the equivalent of eliminating oil imports from Venezuela for 10 months, or looked at another way, it would mean that the U.S. would not have to import ANY oil for 33 days.

The RFA’s page on industry statistics shows that ethanol production in 2006 was 9 billion gallons, which is 214 million barrels. Once refined, a barrel of oil will turn into products with an average BTU value of 126,000 BTUs/gal, versus 76,000 BTUs/gal for ethanol; therefore 214 million barrels of ethanol contain the BTU equivalent of 129 million barrels of oil. (Source: ORNL). The claim then is that ethanol with an energy equivalent of 129 million barrels of oil (BOE) displaced more than twice that much oil – 321 million barrels!

The RFA’s source on that was the consulting firm LECG, where director John M. Urbanchuk consults for the Renewable Fuels Association and the National Corn Growers Association. Thus, Urbanchuk is expected to spin a positive ethanol story, but one would hope he could do so without completely sacrificing his credibility. He has also been quoted:

The production of nearly five billion gallons of ethanol means that the U.S. needed to import 206 million fewer barrels of oil in 2006, valued at $11.2 billion. This is money that stayed in the American economy.

Source: Contribution of the Ethanol Industry to the Economy of the United States in 2006 (PDF download)

Even grander claims have been made by the U.S. Government. From DOE Assistant Secretary Alexander Karsner’s keynote address to the RFA’s National Ethanol Conference (link now dead) in Tucson, Arizona:

Last year, we contributed something on the order of a displacing 500 million barrels of oil, oil that we didn’t have to import from regimes that are hostile to our interest or might leverage energy economics over our future.

Here’s the same claim (that link has also been taken offline) by Paul Dickerson, Chief Operating Officer at the DOE’s Office of Energy Efficiency and Renewable Energy:

Over 6 billion gallons of ethanol were produced in the United States last year, and we have an additional 5 billion gallons of refining capacity under construction.

That effort means 500 million fewer barrels of oil that we have to import from the Middle East.

That’s from the U.S. Department of Energy. Those are pretty bold claims. How on earth are people coming up with these numbers? More importantly, can we go to the data and actually see this impact?

Probing the Data

The import situation is complicated by several factors, the biggest of which is the rapid run-up in petroleum prices over the past few years. The increase in prices caused overall demand to fall, which can be seen in Figure 1 below:

Figure 1. Net Imports Versus Total Demand

It is important to note that “demand” includes all crude oil, natural gas liquids (ethane, propane, butane, etc.), ethanol, fuel gas (offgas from the refinery used as fuel or feedstock), and asphalt. (See the full list of products covered here). This is important to understand, because if ethanol displaces petroleum, it has no impact on overall demand – since it is already included. What you would see in that case is merely a shift between ethanol and gasoline, for instance, with total demand remaining constant (actually it would have to go up a little due to ethanol’s lower BTU content).

The conclusion one draws is also influenced by the time period over which one looks. In the first post in this series, I looked at imports, demand, and ethanol production over the time period 2002 through 2007. The reason for choosing that particular time period was that this was when ethanol was ramping up sharply.

I left off 2008 because of the very sharp drop in demand due to the recession. However, as one reader pointed out, since ethanol is included in the demand number, it doesn’t really matter whether demand went up, down, or stayed constant. If ethanol is displacing imports, we should see that effect even if demand drops sharply. For example, if demand fell by 1 million barrels a day, then all else being equal I would expect imports to fall by 1 million barrels a day. Now add in expanding ethanol production, and I expect imports to fall by more than 1 million barrels a day.

What I observed was that between 2002 and the end of 2007, our petroleum imports do not appear to have been impacted at all by the increase in ethanol production. But that time period is complicated by a couple of things. First, the largest increase in ethanol production took place in 2008. Thus, the largest impact would be expected to show up in 2008 – a year I left off because of the recession effect.

Second, the phase-0ut of methyl-tertiary-butyl-ether (MTBE) took place during this time. I went into detail on how this would have impacted the issue in the second post in this series. The bottom line was that even when MTBE was taken into account, it still did not appear that ethanol production had a measurable impact on petroleum imports.

However, the MTBE phase-out was completed in the first half of 2006. So for the rest of this post, I want to focus on 2007 and 2008. (And as I write this, I don’t know what the answer is; I will work it out as I put the rest of this post together).

During 2007 and 2008, total demand fell by 434 million barrels. Domestic production fell by 74 million barrels. (You can see all of the data in this spreadsheet; there are comments indicated where different data originated). So then all else being equal, I would expect imports to fall by 434 million barrels, but then they also need to make up for the 74 million barrel domestic production deficit. That modifies the expected import change to (-434 million + 74 million) = – 360 million barrels.

Over that two-year time period, net imports actually fell by 466 million barrels. This is the first time period I have looked at over which the import change was less than the demand change, which is what I would expect to see if ethanol was displacing imports. The change certainly isn’t the often exaggerated 200 million or 500 million barrels, but over the course of 2007 and 2008 imports did fall by 106 million more barrels (53 million barrels per year) than would be expected on the basis of demand and domestic production changes. Over the longer time frame of 2002 through 2008, the cumulative increase in imports (+207 million barrels) is very close to what would be expected based on changes in demand and domestic production (-225 million barrels), still implying no measurable impact from ethanol.

How much ethanol was produced over that period of time? Per the RFA’s ethanol statistics, a total of 15.5 billion gallons of ethanol was produced in 2007 and 2008, which amounts to 369 million barrels. On an energy equivalent basis, this is equal to about 215 million barrels of finished petroleum products. Yet the measured fall in imports was less than half that value.

One of the problems here is that we may be looking for a needle in a haystack. By that, I mean that the contribution of ethanol is so small relative to that of overall demand, that any actual displaced imports would be lost in the noise. Figure 2 illustrates:

Figure 2. Ethanol Production Versus Total Demand

For this graphic, I have put ethanol production on the same scale as total demand to show the relative contribution. The production for ethanol in 2008 amounted to 0.59 million barrels per day of a total demand of 19.5 million barrels per day. For people who claim that the oil companies are threatened by the ethanol companies, that graphic puts things in perspective.

One could argue that the ethanol impact should show up most strongly in a comparison with gasoline demand. Figure 3 shows that effect:

Figure 3. Ethanol Production Versus Gasoline Demand

In fact, gasoline demand* did dip in 2008 by 300,000 bpd. Ethanol may have been part of the reason, but the increase in ethanol production was quite a bit less than the fall in gasoline demand. Corrected for energy content, the ethanol increase was less than half the drop in gasoline demand (which can be mostly explained by higher prices and recession, as shown below).

One thing Figures 2 and 3 show is the dip in demand in 2008, which followed a flattening of demand for a few years prior. Recall that since ethanol is included in the demand number, ethanol can’t be a cause of the drop in demand. Figure 4 shows part of the culprit:

Figure 4. Average World Crude Price Versus Total Demand

As crude prices began to climb in 2004, crude demand flattened. As the price skyrocketed in 2008, we were also entering a recession. The combination caused a sharp drop in demand. One interesting thing to consider is that since ethanol is mandated in increasing volumes each year, it is not impacted by the drop in demand. While total demand fell by 1.2 million bpd in 2008 relative to 2009, “demand” for ethanol actually increased by nearly 200,000 bpd – because the mandated increase has no allowance for overall drops in demand.

Conclusions

What to conclude from this exercise? The easiest conclusion is that the claims of petroleum import displacement have been at a minimum grossly exaggerated. It may even be that ethanol hasn’t backed any petroleum imports out, or that the impact is so small as to be unnoticeable.

All of these conclusions, however, point toward a common theme: Even our biggest source of alternative fuel is taking very little bite out of our petroleum consumption. Much more effective has been high prices and recession. In fact, I believe it unlikely that any combination of biofuels will ever replace even 50% (net) of our present petroleum consumption. That points toward the need for conservation as a critical component of any major effort to wean off of fossil fuels. Perhaps some combination of conservation, electrification, mass transit, and biofuels can make a significant impact on our fossil fuel consumption. But the graphics above should demonstrate that it isn’t a trivial matter to significantly impact our petroleum consumption.

*Total gasoline demand contains the ethanol contribution. Therefore, Figure 3 shows gasoline after subtracting out the ethanol volumes.

Special thanks to the Energy Information Administration for answering some of my questions about the data.

October 15, 2009 Posted by | EIA, Energy Information Administration, ethanol, ethanol production, oil imports | 82 Comments

Coskata on Life Support?

Remember my story Coskata: Dead Man Walking? As I wrote in that essay six months ago:

I predict that Coskata’s suggestions that they will produce ethanol for less than $1/gal will look ridiculous in hindsight. The next few years will see a record amount of back-pedaling from most of the companies trying to establish a foothold in this space – and overpromising on their technology to do so.

Well, at the Wall Street Journal ECO:nomics Conference last week, Coskata CEO Bill Roe indicated that the company is having (recession-induced) troubles. Marc Gunther has the story:

GM’s woes: Bad news for clean energy

Talk to a banker and “all you get is a smile and a pat on the head,” Roe says. “There is no project finance today.”

Interestingly, Coskata, which is based outside Chicago, raised money as recently as December, reportedly getting a $40 million infusion from the Blackstone Group, the big private equity firm.

But GM, teetering on the verge of bankruptcy, didn’t pony up any dough. GM had announced its original investment in Coskata back in January, 2008, with some fanfare. Roe said then that the financing coming in from the auto giant is enough to make Coskata “a speed-to-market play.”

Now he’s waiting for a loan from the U.S. Department of Energy.

“That’s my only alternative at this particular point in time,” Roe says. “Absent getting that loan, we are stalled.”

This is exactly why you don’t overhype your technology. If you overhype, the expectations are high – so there can’t be any excuses for not delivering. As I said last year after the investment by GM was announced “GM can’t be wrong, can they?” (Checking GM stock; now trading at $1.76 which is slightly off its 52-week high of $24.24). If Coskata could really produce ethanol for under $1/gallon from biomass – as they claimed – they would be printing money. Yet they have now raised at least $76 million, and still no prospects for a commercial plant. Here is what Vinod Khosla had to say when he announced his investment in Coskata:

“As a nation, we’ve been dependent on oil for so long, we continue to think we will be dependent on oil to meet our future energy needs,” said Vinod Khosla of Khosla Ventures. “Scientists, technologists and entrepreneurs like Coskata are here to prove it doesn’t have to be this way. With the development of an economically-viable ethanol solution, Coskata has the propensity to change the types of fuel consumers find at the pump – providing fuel derived from widely-available national resources, rather than foreign imports.”

Coskata had estimated that a 100 million gallon plant would cost them $300 million, and later updated that to $400 million. I say that if Vinod Khosla is so confident of success, have him pony up the rest of the money. That’s a pretty big bet, but he has made some pretty bold claims about next generation biofuels.

While all that hype might help you pull in some investor (and taxpayer) money, it is going to make it a lot tougher for the next guy – who might have a better technology. But so many investors are going to get burned on second generations biofuels that in a few years nobody will want to touch this sector. Except for us taxpayers, of course.

CNN just published a related story:


Ethanol: Not dead yet

It was thought these companies would transition from corn-based ethanol – which drew fire for being inefficient and driving up food prices – to “second-generation” ethanol made from cheaper non-food crops and trash. Now that seems dead in the water.

“I think they might not be around to see the second generation,” said Cristoph Berg, an ethanol analyst with commodity research firm F.O. Licht in Germany.

But for years the commercialization of these biofuels has been “just around the corner.” It appears it still is. While it is certainly possible to make second-generation ethanol today, it remains too costly to make it commercially viable.

“All the risk capital has disappeared,” said Nick Gogerty, a portfolio manager at the hedge fund Fertilemind Capital. According to Gogerty, people are no longer chasing risky projects hoping to make a lot of money, they’re looking to invest in projects where they hope their money will be safe. “If anything, we’re further away,” he said.

Is anyone surprised by any of this? When I point this out, some accuse me of being a naysayer, of lacking the vision of some of these second generation pioneers, or just not understanding the breakthroughs these companies are making. Maybe someday these people might figure out that I wasn’t so clueless about this after all.

March 12, 2009 Posted by | Coskata, ethanol production, General Motors, Vinod Khosla | 47 Comments

Coskata on Life Support?

Remember my story Coskata: Dead Man Walking? As I wrote in that essay six months ago:

I predict that Coskata’s suggestions that they will produce ethanol for less than $1/gal will look ridiculous in hindsight. The next few years will see a record amount of back-pedaling from most of the companies trying to establish a foothold in this space – and overpromising on their technology to do so.

Well, at the Wall Street Journal ECO:nomics Conference last week, Coskata CEO Bill Roe indicated that the company is having (recession-induced) troubles. Marc Gunther has the story:

GM’s woes: Bad news for clean energy

Talk to a banker and “all you get is a smile and a pat on the head,” Roe says. “There is no project finance today.”

Interestingly, Coskata, which is based outside Chicago, raised money as recently as December, reportedly getting a $40 million infusion from the Blackstone Group, the big private equity firm.

But GM, teetering on the verge of bankruptcy, didn’t pony up any dough. GM had announced its original investment in Coskata back in January, 2008, with some fanfare. Roe said then that the financing coming in from the auto giant is enough to make Coskata “a speed-to-market play.”

Now he’s waiting for a loan from the U.S. Department of Energy.

“That’s my only alternative at this particular point in time,” Roe says. “Absent getting that loan, we are stalled.”

This is exactly why you don’t overhype your technology. If you overhype, the expectations are high – so there can’t be any excuses for not delivering. As I said last year after the investment by GM was announced “GM can’t be wrong, can they?” (Checking GM stock; now trading at $1.76 which is slightly off its 52-week high of $24.24). If Coskata could really produce ethanol for under $1/gallon from biomass – as they claimed – they would be printing money. Yet they have now raised at least $76 million, and still no prospects for a commercial plant. Here is what Vinod Khosla had to say when he announced his investment in Coskata:

“As a nation, we’ve been dependent on oil for so long, we continue to think we will be dependent on oil to meet our future energy needs,” said Vinod Khosla of Khosla Ventures. “Scientists, technologists and entrepreneurs like Coskata are here to prove it doesn’t have to be this way. With the development of an economically-viable ethanol solution, Coskata has the propensity to change the types of fuel consumers find at the pump – providing fuel derived from widely-available national resources, rather than foreign imports.”

Coskata had estimated that a 100 million gallon plant would cost them $300 million, and later updated that to $400 million. I say that if Vinod Khosla is so confident of success, have him pony up the rest of the money. That’s a pretty big bet, but he has made some pretty bold claims about next generation biofuels.

While all that hype might help you pull in some investor (and taxpayer) money, it is going to make it a lot tougher for the next guy – who might have a better technology. But so many investors are going to get burned on second generations biofuels that in a few years nobody will want to touch this sector. Except for us taxpayers, of course.

March 12, 2009 Posted by | Coskata, ethanol production, General Motors, Vinod Khosla | Comments Off on Coskata on Life Support?

Top 10 Energy Stories of 2008

Tis the season for Top 10 stories, and here are what I think were the Top 10 energy stories of the year.

1. Unprecedented volatility in the energy markets

Oil prices raced to nearly $150 a barrel, and then fell to the $30’s by year end. This marks the highest ever prices for oil, followed by the lowest prices in four years. Gasoline, diesel, and natural gas prices demonstrated the same kind of volatility. There are multiple factors behind the volatility. The role of speculation was hotly debated, and the economic collapse – fueled by cash-strapped consumers who had overextended themselves – resulted in a sharp drop in demand. Some even argued that the real reason behind the plunge in prices was closure of the so-called “Enron loophole.”

2. Oil price volatility fallout

A consequence of the incredibly volatility was the economic damage done at both ends of the price spectrum. At the upper end, airlines were going bankrupt and car companies were in deep financial trouble as consumers stopped buying the higher profit margin SUVs. After oil prices plunged, some non-integrated oil companies found themselves in financial trouble, including Flying J who declared bankruptcy.

3. Barack Obama elected

In a normal year, this would have been my #1 story, especially considering that the new administration is likely to attempt a major shift away from fossil fuels. My prediction is that reality is going to collide with enthusiasm, and while gains are likely to be made along several fronts, aggressive renewable energy targets will not be met.

4. Ethanol producers struggle

Despite production mandates and generous federal subsidies, ethanol producers struggled to make a profit. A combination of high corn prices followed by falling fuel prices pushed even some of the largest ethanol producers to bankruptcy. Corn growers fared much better, as higher prices and mandated demand from the ethanol industry provided them with the same sort of windfall seen recently by the oil industry (prompting some to ask whether a windfall profits tax on corn would be good for consumers). Xethanol finally ceased operations, as I had predicted in early 2007.

5. Somali pirates hijack supertanker

Somali pirates, emboldened by recent multi-million dollar ransom payments, hijacked a Saudi supertanker carrying $100 million worth of oil. At the time of this writing, the situation remains unresolved, although the value of the oil at current market prices is now considerably less than $100 million.

6. 2nd generation ethanol is delayed

The story this year was supposed to be “2nd generation ethanol production begins“, but alas the over-promise, under-deliver meme that I have been critical of continues. Range Fuels had initially intended to start producing in 2008, but that was delayed to 2009 and now production isn’t forecast to begin until 2010. Meanwhile, other 2nd generation ethanol companies continue to promise the world, including Coskata who claims they can make ethanol for “under US $1.00 a gallon anywhere in the world.” (I took a good look at those claims here.) Finally, according to this source (another here), of the six cellulosic ethanol projects selected to receive $385 million in federal funding in February 2007, almost two years later only one plant is actually under construction (Range Fuels).

7. Peak oil becomes fashionable, then unfashionable again

High oil prices demanded an explanation, and peak oil was ready to provide that explanation. 2008 was probably the year that the mainstream began to seriously discuss and debate peak oil. However, when prices began to plunge, the peak oil skeptics began to say “I told you so.” Others suggested that this was just a continuation of the normal cycles.

8. Gas stations in the southeast run out of gasoline in the wake of Hurricanes Gustav and Ike

Some major oil refineries that shut down in the face of Hurricane Gustav had to remain shut down with Hurricane Ike following closely behind. Gasoline inventories heading into the hurricanes were low, so it wasn’t long before spot outages began to show up across the southeast. As I predicted during a panel session at this year’s ASPO conference, the outages were likely to be short-lived, and inventories would recover as refineries came back online. This was in response to wide-spread concern, partially fueled by Matt Simmons’ presentation, that the outages were the beginning of something much more widespread. (I think my answer was literally “This situation is temporary. I expect inventories a month from now to be substantially higher.”)

9. “Drill here, drill now”

Momentum for more exploration and production in U.S. waters increased along with oil prices. This became a campaign theme for Republicans, who adopted the slogan “Drill here, drill now.” President Bush lifted a moratorium on offshore drilling. Democrats initially responded with calls for oil companies to be forced to drill on current leases before opening up new ones. However, Congress – facing constituents unhappy with high gas prices – ultimately followed suit and allowed the 25-year moratorium to expire. The response from then candidate Obama was that he wasn’t happy to see the moratorium expire, and that he favored “responsible” drilling as part of a broader energy package. My own proposal was to allow drilling and funnel the lease proceeds to alternative energy, mass transit, and other initiatives designed to reduce oil consumption. This proposal later received quite a lot of attention when Paris Hilton proposed the same thing.

10. Record profits by US energy companies

On the back of high oil prices, the integrated oil companies (those who produce both oil and refined products like gasoline and diesel) once again saw record profits. There was an interesting dichotomy, however, as downstream profits in the refining sector vanished as gasoline consumption fell. Pure refiners like Valero saw their profits crash.

That’s more or less what I think were the Top 10 stories of 2008. There were quite a few in the honorable mention category, such as T. Boone Pickens energy plan, the decision by OPEC to reverse direction and propose big production cuts, falling oil production in Russia and Mexico, and postponed investments in the wake of lower prices.

So, what did I miss? Which stories do you think should be ranked in a significantly different order?

In closing, Happy Holidays to all readers. I am now going offline to spend some good family time. Here’s hoping that you all have the same opportunity.

December 24, 2008 Posted by | Barack Obama, cellulosic ethanol, ethanol production, oil prices, Peak Oil, windfall profits, Xethanol | 42 Comments

Coskata Due Diligence

I hadn’t intended to spend the entire week talking about Coskata, but that’s the way things are shaping up. After Monday’s essay in which I expressed strong skepticism that Coskata could deliver, I received a number of e-mails and phone calls, and the essay received quite a few visitors. The story was picked up and reported via several outlets. People are certainly interested in the Coskata story, and they want to know whether the emperor has clothes. I had stated that based on my analysis of some of the published numbers, the emperor has no clothes, and this raised a number of eyebrows.

Some of the raised eyebrows were within Coskata. Following that essay I was contacted by Wes Bolsen, the Chief Marketing Officer & Vice President of Coskata. I give credit to Wes for stepping up and offering to answer questions in order to blunt my skepticism. After all, if my skepticism is unwarranted, then I may have brought undue suspicion on the company. I am always interested in getting the straight story, so I spent an hour and a half on the phone with Wes – and we dug deeply into the details. My previous post listed the questions I had in hand as we began our discussion. I won’t go line by line, but instead summarize the conversation from my perspective – and indicate a couple of areas in which I need to follow up.

Let me state for the record that I want Coskata, and for that matter Choren, LS9, Range Fuels, Virent, Nanosolar, and many more like them to be successful. The world needs solutions to our energy problems, and I applaud all of these companies for their efforts. But I never let what I want cloud my judgment when I am trying to determine what is true. In other words, even though I want Coskata to be successful, I still believe in scrutinizing their claims very closely, and stating for the record whether I believe their claims to be credible. And if they look to be the company best-suited for turning waste biomass into fuel, I will advise my contacts – some of whom are sitting on mountains of biomass – that this looks like an outlet they should explore.

Summary

Coskata’s intellectual property is focused on several areas. First, they have licensed five sets of patented organisms (bacteria). These are not Coskata patents, but are exclusively licensed to Coskata. Wes didn’t want to reveal the particular patents that are licensed, but they were developed at the University of Oklahoma and at Oklahoma State University. The nature of the organisms is that they consume syngas (carbon monoxide and hydrogen) which is the product of gasification of biomass (or coal, oil, or natural gas) and produce ethanol.

On the purification step, instead of a traditional distillation, they intend to use membrane separation. The same deal applies here as with the microbes; there is an exclusive license to Coskata, but Coskata does not own the patents.

While no patents have been granted to date to Coskata (understandable, since the company is only a couple of years old), they have multiple patents pending (as many as 18) around the bioreactors. They also have some pending around the microbes. While I have not yet done so, it should be easy to dig up their patent applications, which will provide additional details on the specific microbes in question.

I asked a lot of questions around the gasifier. I asked why they went with a relatively new technology like plasma gasification instead of one of the gasification technologies that has a long track record. Wes said that 1). Plasma gasification is much cheaper; and 2). The low operating pressures they use in their reactors (1 to 2 bar) are better suited for a low-pressure gasification technology like plasma gasification. I know that plasma gasification is used for waste disposal, but I asked if anyone is using it for the primary purpose of producing a fuel. The answer was no, they intend to be the first. He added that you wouldn’t use plasma gasification for a GTL or CTL plant because compression costs to go from low pressure to the pressure that FT runs at would be prohibitive. He also volunteered that an air separation unit (that’s a big ticket item) was required to provide high-purity oxygen to the gasifier. I asked if it took a lot of energy to maintain the plasma, and he said only 5% of the energy inputs into the gasification went into maintaining the plasma.

On the reactor, the gas makes a single pass through. There is no gas recycle, and the tail gas is used to provide energy for the separation. They use 1 gallon of water to make 1 gallon of ethanol, which would be a significant improvement over grain ethanol. Wes stated that the bacteria only produce ethanol; no byproducts. This would be a major advantage in the purification process. A very important point that Wes told me here is that the crude ethanol product is 3 to 4% ethanol in water. This got my attention, and I will explain why later.

I asked if their intent was to build plants or license the technology, and he said both. They would like to build 1 plant for every 8 licenses they grant.

I asked for a breakdown of the claim of $1/gallon production costs. Wes said everything except capital recovery is included in that cost. He said that almost half is feedstock costs. They have assumed $50 per dry ton of woody biomass, and a yield of (more than) 100 gallons per dry ton. Of the other 50 cents, 25 cents is maintenance and operating costs (including the gasifier), 25 cents is utilities and other. But if you charge the biomass costs to the gasification, the syngas cost is well more than half of that $1.00.

So, that suggests a sanity check that I have not yet had time to do. If you convert a ton of woody biomass into syngas under these assumptions, how do the syngas costs compare to syngas that you could purchase commercially? If it is much cheaper, then there are other implications, since syngas is in great demand for lots of commodity chemicals. If it is much more expensive, then that suggests that it may not be long before it becomes attractive to switch to natural gas as the gasification feed. But the gasification piece is not their focus. For all practical purposes, they could simply have a pipeline into their plant in which they were bringing syngas. The reactor and downstream technology is their focus.

However, I told Wes that I think the $1/gal claim is misleading, as most people I have talked to were under the impression that this is the total cost. It is not. Capital must paid for, and investors expect a return on capital. The total production cost is going to be very sensitive to overall capital costs, and that is a potential issue from my perspective (more on that below).

I asked about the scale of their lab facilities, as this is a very key issue. Coskata has a small pilot plant (what I would call lab-scale) outside of Chicago. They have an autothermal reformer (ATR) on the front end so they are producing their own syngas at the piloting facility. They are not dealing with cleanup processes of the syngas at this scale. After the ATR, the syngas feeds the fermenters which then go to a conventional distillation train. The operation runs 24/7, and the scale is gallons per day. I asked what they were doing with the ethanol product from that facility, but Wes wasn’t sure.

I have been involved in several projects that went from the lab to pilot scale and up to commercial scale. One thing I can say from my experience: You can’t design a plant based on lab scale experiments. Why? Because all kinds of issues that were minor at the lab scale can become problematic at pilot scale and major headaches at commercial scale. This is why you scale up from the lab to a pilot plant to a commercial plant: To get a better handle on these issues, and to get a better estimate of costs. Many projects die at the piloting scale when capital costs start to pile up. And this is one issue that I would flag with Coskata: They have only run small lab scale tests – which have neither the plasma gasification front end nor the membrane separation back end – and that is the basis for an estimate of $400 million to build a 100 million gallon a year plant. I think as they learn things at the pilot scale, that estimate is at risk to grow. At least that’s always been my experience at the pilot scale. (In fact, here is an article from four months ago in which the quoted cost was $300 million).

Now for the stickiest issue of all for me: The energy balance. I asked about this, and I felt like Wes repeated something he has said a thousand times before: “The Coskata process yields up to a 7.7 net energy balance.” I asked “Did you get that from Michael Wang at Argonne?” He told me that yes he did, and I went on a 5-minute digression about my issues with the way his work has been (mis)used.

But I have enough information to determine whether that can possibly be true. Intuitively, I don’t think it can. Here’s why. If you start with a ton of woody biomass, and end up with 100+ gallons of ethanol – and have to purify from a 3.5% solution of ethanol in water – you can make a pretty good estimate of the energy balance. I haven’t had time to do this yet, but I will. However, a 3% alcohol solution is close to the region at which you would classify the stream as a waste stream and send it to wastewater treatment if you were in a chemical plant (and in fact, when I worked in a butanol plant we did send 3% butanol to the wastewater ponds). Why? Because the energy you could gain by removing all of that water is negated by all the energy you have to put into removing the water. Since Wes said that the membrane technology uses half the energy of distillation, I can make a pretty good stab at seeing whether the energy balance adds up.

I told Wes that I felt like there was a disconnect between a 3.5% alcohol solution and an energy balance of 7.7. This energy balance is in the region of sugarcane ethanol, and they are producing an ethanol solution in the 8-9% range (which takes much less energy to purify than a 3.5% solution). My guess is that this is the ‘fossil fuel’ balance and not a true energy balance. To put into perspective the difference, if you had 100 BTUs of biomass, and only ended up with 1 BTU of usable fuel, you would probably view that as a great waste of BTUs. But if you had to input 0.1 BTUs of fossil fuel into the process, you could claim that your (fossil) energy return was (1/0.1) or 10/1. In summary, it can be a misleading metric.

In response, Wes said that they were using waste heat to drive the separation. I said that I understood this, but that waste heat still came from the original BTUs in the wood, and I needed to close the energy balance to see if everything added up. To be completely fair, I have not yet had time to do this, so right now I only have a question mark over the energy balance. A ton of woody biomass will have an energy value of maybe 13 million BTUs, and 100 gallons of ethanol contain 7.6 million BTUs. Is the other 5.4 million BTUs enough to separate out the water (2857 gallons of water for a 3.5% ethanol solution)? I have to calculate that.

Conclusions

So, do I still think Coskata is a ‘dead man walking’? Let me say that I still see question marks. There are some good and novel things about their process, and I learned quite a lot from talking with Wes. He does know his material, and was very good at answering almost every question I threw at him (and I threw a lot at him). He said they have an estimate to build a 100 million gallon a year plant for $400 million. That would put them at a disadvantage to the capital costs for a corn ethanol plant, an oil refinery, or even GTL, but in much better shape than most capital estimates I have seen for biomass gasification.

I have question marks around several areas. One is the capital estimate to build the 100 million gallon plant. I don’t think you can make a very accurate estimate from only lab scale experiments, and they won’t have a well-defined capital estimate until they have some experience running their larger pilot plant. This 40,000 gallon per year plant will be built in Madison, Pennsylvania and will be operational in 2009. It may be early 2010 before they have a capital estimate that you can be really confident has covered all the potential snags.

The second major question mark I have is around the energy balance. The information I have is that one ton of dry woody biomass produces 100+ gallons of ethanol. The ethanol must be purified from a solution that is 96.5% water. The claimed energy balance is 7.7. That doesn’t sound right to me, but until I do the energy balance (and I will try to do it tomorrow if I have time) I will just flag it as something to look into.

The other things to note are that they are using several pieces of novel technology. Syngas is a very common raw material in the chemical industry, but it isn’t often produced via plasma gasification. Likewise, distillation is a core process in the refining and chemical industries. Yet next to nobody is using membrane separation for their purification needs. If Coskata is correct that membrane separation for ethanol requires half the energy of distillation, I have to wonder why ethanol producers everywhere aren’t flocking to exchange their distillation trains for membrane units.

Finally, I want to thank Wes and Coskata for spending time to educate me on the process. I suspect it won’t be the last time I speak with Wes, and I do hope Coskata is successful (despite my questions). I will follow up once I have had time to work through the energy balance.

August 21, 2008 Posted by | Coskata, ethanol production | 90 Comments

Coskata Responds

Following my previous essay explaining my skepticism that Coskata can make ethanol economically with their process, Wes Bolsen (see his profile here), the Chief Marketing Officer & Vice President of Coskata dropped by and made some comments.

One thing I believe in strongly is fair play, so I will provide his entire comments below without interruption. Wes and I plan to speak on Wednesday, and I will ask some pointed, and on the record questions. If you have a specific question that you would like to see me ask, let me know in the comments following this essay. I already have a list, and I can assure you that they are not to be found in Coskata’s FAQ. My questions will focus on things like the patents and patents pending, who is commercially using the plasma gasification technology and membrane separation technology, whether the yields and selectivities are public information, etc.

Without further ado, Wes’ response:

This is Wes Bolsen, CMO & Vice President of Coskata. I am really sorry that we were not able to talk before you posted this. I will always try to make myself available.

The division you did above was performed properly, you just didn’t have complete information. The ~$25 million project that Coskata is doing in Pennsylvania includes operating costs for approximately a year, capital for improvements to the Westinghouse site before we even get there, and other expenses not incurred on other plants. Either way, I agree with you, commercial demonstrations, even if the Capex were as low as $10 Million for Coskata’s portion is expensive. In fact, that is why we would never want to build a 1 or 2 Million gallon plant, or anything like this for making ethanol.

If you want the approximate capital cost for Coskata’s 100 Million gallon per year facility, it is approximately $400 million or $4 per gallon of installed cost. This is the engineering design that has been signed off by a major US engineering firm based on 2008 vendor quoted materials and process flow diagrams. The production cost is still looking to be less than $1/gallon, which is confirmed more and more every day that our pilot facility outside of Chicago runs. The Pennsylvania facility you are talking about is simply the final step in Coskata’s rapid commercialization.

Hopefully this additional information is helpful to you and the readers of the blog. Like I said, I am always willing to talk through our numbers, our strategy, and how Coskata is working to commercialize the technology. Feel free to contact me any time.

Sincerely,

Wes Bolsen
CMO & Vice President
wbolsen@coskta.com
630-657-5800

More from me after I speak with Wes.

August 19, 2008 Posted by | Coskata, ethanol, ethanol production | 96 Comments

Coskata: Dead Man Walking

Since the Coskata announcement that they were going to be able to produce ethanol for “under US $1.00 a gallon anywhere in the world” – documented here – I have gotten a number of requests for comments on the technology. After all, GM is on board! GM can’t be wrong, can they? Vinod Khosla’s enthusiasm couldn’t be misplaced either, could it? After crunching the numbers, my conclusion is that not only is this not the ‘slam dunk’ that is being projected, you probably have a better chance of hitting a blindfolded shot from mid-court than Coskata has of producing cost-competitive ethanol.

What leads me to this conclusion? Earlier today I provided some extensive analysis for someone, so I thought I would share it. I am naturally skeptical any time a company comes on the scene and claims – with no operating experience – they can do what Coskata claims (which is also something nobody else has been able to demonstrate). But I also believe in analyzing claims to the greatest extent possible to see if there is anything there. Sometimes this analysis involves reading through patents. Sometimes it involves crunching publicly available information. That’s what I will do in this case.

The source of the numbers is the following article, but is also available elsewhere:

Coskata Picks Pennsylvania for Pilot Plant

There are several pieces of data that are important to note:

Earlier this month, the company told Greentech Media that it already had begun building the 40,000-gallon-per-year plant…

Coskata said the project will cost $25 million, and will be located at the site of a pilot-plant gasifier owned and operated by Westinghouse Plasma Corp., a wholly owned subsidiary of Alter Nrg Corp.

They are building a 40,000 gallon per year pilot plant, which is about 2.6 barrels of ethanol a day. (The fact that they don’t even have an operating pilot plant should tell even the most optimistic supporter that they have little basis for their claims of producing ethanol for less than $1/gal).

Note that the site already has a gasifier, which is one of the most expensive pieces of kit in a gasification plant. Yet the cost is still $25 million – for something that will produce less than 3 barrels a day. Now, take a good look at the graphic below:

Capital Costs of Fuel Facilities
Source: EIA Annual Energy Outlook 2006

Note that the capital costs for a corn ethanol plant are around $25,000 per daily barrel of production. (Caveats are that the graphic is for full-sized plants, and the numbers are a couple of years old). How does this compare to the Coskata announcement? If we look at the 2.6 barrels a day they are planning to produce – and the $25 million price tag – we find that the capital cost per daily barrel is $9.6 million per daily barrel. That is almost 400 times the cost of a corn ethanol plant, and 150 times the per daily barrel cost of a recently announced Neste biodiesel plant.

Of course this is pilot scale, but the capital costs would have to go down by a factor of 100 before they could even start to get competitive – and remember they haven’t even charged the gasifier to the project! To put this all into perspective ConocoPhillips built a 400 barrel per day GTL pilot plant (Coskata is also GTL, but the “L” is going to be ethanol instead of diesel) for $75 million. The cost of that facility was $188,000 per daily barrel – and those economics weren’t good enough to justify scaling up to commercial size.

One final thing I would point out is that the selectivity of these processes generally favors methanol over ethanol. They may be able to push the selectivity toward ethanol, but they will almost certainly end up producing mixed alcohols that will have to undergo purification to ethanol.

The technology will either need a drastic redirection or this is a dead end. Even with a drastic redirection, the present cost that is two orders of magnitude too high to be competitive says that over-hyped Coskata is quite a long-shot to make it to commercial production. Of course with large enough subsidies almost anything is possible.

My prediction? I predict that Coskata’s suggestions that they will produce ethanol for less than $1/gal will look ridiculous in hindsight. The next few years will see a record amount of back-pedaling from most of the companies trying to establish a foothold in this space – and overpromising on their technology to do so. There will be the normal litany of excuses – such as ‘the oil companies are suppressing the technology’ – but in the end the chemistry, physics, and most importantly the capital costs and logistical challenges will catch up with them. Yes, excuses will be made, but those who know a little about the technology will know what really happened. It’s going to be TDP all over again.

August 17, 2008 Posted by | Coskata, ethanol production, General Motors, Vinod Khosla | 95 Comments

Coskata: Dead Man Walking

Since the Coskata announcement that they were going to be able to produce ethanol for “under US $1.00 a gallon anywhere in the world” – documented here – I have gotten a number of requests for comments on the technology. After all, GM is on board! GM can’t be wrong, can they? Vinod Khosla’s enthusiasm couldn’t be misplaced either, could it? After crunching the numbers, my conclusion is that not only is this not the ‘slam dunk’ that is being projected, you probably have a better chance of hitting a blindfolded shot from mid-court than Coskata has of producing cost-competitive ethanol.

What leads me to this conclusion? Earlier today I provided some extensive analysis for someone, so I thought I would share it. I am naturally skeptical any time a company comes on the scene and claims – with no operating experience – they can do what Coskata claims (which is also something nobody else has been able to demonstrate). But I also believe in analyzing claims to the greatest extent possible to see if there is anything there. Sometimes this analysis involves reading through patents. Sometimes it involves crunching publicly available information. That’s what I will do in this case.

The source of the numbers is the following article, but is also available elsewhere:

Coskata Picks Pennsylvania for Pilot Plant

There are several pieces of data that are important to note:

Earlier this month, the company told Greentech Media that it already had begun building the 40,000-gallon-per-year plant…

Coskata said the project will cost $25 million, and will be located at the site of a pilot-plant gasifier owned and operated by Westinghouse Plasma Corp., a wholly owned subsidiary of Alter Nrg Corp.

They are building a 40,000 gallon per year pilot plant, which is about 2.6 barrels of ethanol a day. (The fact that they don’t even have an operating pilot plant should tell even the most optimistic supporter that they have little basis for their claims of producing ethanol for less than $1/gal).

Note that the site already has a gasifier, which is one of the most expensive pieces of kit in a gasification plant. Yet the cost is still $25 million – for something that will produce less than 3 barrels a day. Now, take a good look at the graphic below:

Capital Costs of Fuel Facilities
Source: EIA Annual Energy Outlook 2006

Note that the capital costs for a corn ethanol plant are around $25,000 per daily barrel of production. (Caveats are that the graphic is for full-sized plants, and the numbers are a couple of years old). How does this compare to the Coskata announcement? If we look at the 2.6 barrels a day they are planning to produce – and the $25 million price tag – we find that the capital cost per daily barrel is $9.6 million per daily barrel. That is almost 400 times the cost of a corn ethanol plant, and 150 times the per daily barrel cost of a recently announced Neste biodiesel plant.

Of course this is pilot scale, but the capital costs would have to go down by a factor of 100 before they could even start to get competitive – and remember they haven’t even charged the gasifier to the project! To put this all into perspective ConocoPhillips built a 400 barrel per day GTL pilot plant (Coskata is also GTL, but the “L” is going to be ethanol instead of diesel) for $75 million. The cost of that facility was $188,000 per daily barrel – and those economics weren’t good enough to justify scaling up to commercial size.

One final thing I would point out is that the selectivity of these processes generally favors methanol over ethanol. They may be able to push the selectivity toward ethanol, but they will almost certainly end up producing mixed alcohols that will have to undergo purification to ethanol.

The technology will either need a drastic redirection or this is a dead end. Even with a drastic redirection, the present cost that is two orders of magnitude too high to be competitive says that over-hyped Coskata is quite a long-shot to make it to commercial production. Of course with large enough subsidies almost anything is possible.

My prediction? I predict that Coskata’s suggestions that they will produce ethanol for less than $1/gal will look ridiculous in hindsight. The next few years will see a record amount of back-pedaling from most of the companies trying to establish a foothold in this space – and overpromising on their technology to do so. There will be the normal litany of excuses – such as ‘the oil companies are suppressing the technology’ – but in the end the chemistry, physics, and most importantly the capital costs and logistical challenges will catch up with them. Yes, excuses will be made, but those who know a little about the technology will know what really happened. It’s going to be TDP all over again.

August 17, 2008 Posted by | Coskata, ethanol production, General Motors, Vinod Khosla | 19 Comments

Ethanol Roundup

Couple of ethanol-related stories of note in the past few days:

Corn prices hurt ethanol industry

Iowa’s ethanol industry is being squeezed by high corn prices that are partly due to the estimated 3.3 million acres of crops that have been destroyed by spring floods, Iowa Secretary of Agriculture Bill Northey said Friday.

“These kinds of prices are not profitable to produce ethanol at the current ethanol price,” Northey said at a taping of Iowa Public Television’s “Iowa Press.” “There will probably be decisions of whether they want to keep processing or not at these prices.”

Farmers can replant and still be covered by crop insurance, but coverage levels drop with each passing day, and late-planted crops could face the threat of frost in the fall, ag officials said earlier this week.

That is ironic. It is sort of like the fact that high oil prices are hurting oil refiners.

The next one spells out some of the now realized implications of tying our food supply to our fuel supply:

Flooded corn crop to bring wave of higher food prices

NEW YORK – Raging Midwest floodwaters that swallowed crops and sent corn and soybean prices soaring are about to give consumers more grief at the grocery store.

Rod Brenneman, president and chief executive of Seaboard Foods, a pork supplier in Shawnee Mission, Kan., that produces 4 million hogs a year, said high corn costs are already forcing producers in his industry to cut back on the number of animals they raise.

“There’s definitely liquidation of livestock happening,” and that will cause meat prices to rise later this year and into 2009, said Brenneman, who is also the vice chairman of the American Meat Institute.

Brenneman’s cost for feeding a single hog has shot up $30 in the past year because of record high prices for corn and soybeans, the main ingredients in animal feed. Passing that increase on to consumers would tack an extra 15 cents per pound onto a pork chop.

It’s a similar story for U.S. beef producers, who now spend a whopping 60-70 percent of their production costs on animal feed and are seeing that number rise daily as corn prices hover near an unprecedented $8 a bushel, up from about $4 a year ago.

“This is not sustainable. The cattle industry is going to have to get smaller,” said James Herring, president and CEO of Amarillo, Texas-based Friona Industries, which buys 20 million bushels of corn each year to feed 550,000 cattle.

Corn’s prices were already rising before the floods, driven up 80 percent over the past year as developing countries like China and India scramble for grains to feed people and livestock. U.S. production of ethanol, an alternative fuel that can be made with corn, has also pushed prices higher, prompting livestock owners to lobby Washington to roll back ethanol mandates.

For the record, my Dad is in the cattle business, and he at first thought the ethanol mandates were a great thing. When I testified against the proposed Montana ethanol mandate in 2005, he told my Mom “I don’t understand why he would testify against farmers.” I warned him at the time that these mandates were likely to distort markets and drive up prices in unexpected ways. I told him that I favor incentives, but mandates were not the way to go. But the government was intent on “helping”, and of course they have such a good track record on energy policy…

June 23, 2008 Posted by | ethanol production, food prices | 14 Comments

Ethanol/Alternative Fuel FAQ

Of course you are against ethanol. You work for Big Oil.

Is ethanol reducing dependence on foreign oil?

What’s this EROI/EROEI/Energy Return Business?

Is EROEI the Same Thing as the Process Efficiency?

Isn’t the Energy Balance for Corn Ethanol Better than for Gasoline?

Does the Energy Balance/EROEI Matter?

Doesn’t the Ethanol Subsidy Actually Benefit Oil Companies?

Doesn’t Ethanol Usage Create Jobs and Provide Cash for Midwestern Communities?

Do We Have Enough Land to Grow Our Way to Energy Indendence?

If Brazil can do it, why can’t the U.S.?

Can’t Brazil and other tropical countries provide biofuels for the world?

What about the environmental benefits of using ethanol as fuel?

Isn’t ethanol useful as an oxygenate replacement for MTBE?

8/26/07 – Added section on environmental benefits.

8/5/07 – Added to section on the petroleum displacement claims. Building the section on Brazil.

8/4/07 – Updated section on the ethanol subsidy, and who it benefits. Also updated section on ethanol and job creation. Updated section on land requirements.

8/3/07 – Updated section on energy balance, and whether it matters.

I am starting to get a lot of traffic and e-mails off of this Rolling Stone article. A lot of the same questions/criticisms come up again and again, so I am finally being prompted to do something I have been meaning to do for a long time: Write a FAQ, where my position is summed up concisely, and is understandable by anyone. This is a work in progress, so if you can think of something that should be addressed, please speak up. I am going to throw them out there as I do them, and I will clean them up later. I hope to put up one or two new items a day, and if you find errors, I will certainly correct them. This will not be an opinion piece. It is going to be based on facts and numbers.

Of course you are against ethanol. You work for Big Oil.

This one is where opponents tend to go when they are lazy, or have no better arguments to offer. But not only is it an ad hominem argument, it is wrong on 2 counts. First, I have a long track record of being supportive of alternative fuels, I did my graduate school thesis on the subject, and in fact I have done a lot of work in this field. Many people who read this blog can attest to the fact that I have done a lot of pro bono work, on a lot of projects: From biodiesel to biobutanol, right through cellulosic ethanol and yes, even corn ethanol. Furthermore, I am currently involved in a cellulosic ethanol project.

But the second reason that this argument is invalid is that the corn ethanol industry is heavily dependent upon fossil fuels for the entire production process. These fossil fuels include gasoline and diesel, but are primarily natural gas embedded in the fertilizer for the corn, and for the distillation energy. Guess who produces this natural gas? Big Oil, and my company in particular, produces a tremendous amount of it. The tripling of natural gas prices since 2002 happened just as we had a dramatic increase in ethanol production. Coincidence? No. And this has been a windfall for Big Oil.

Don’t take my word for it. Here’s the view from Ethanol Producer Magazine:

Diversifying Energy Options

One source tells EPM that when ethanol production reaches 7.5 billion gallons (assuming all of that capacity was fueled by natural gas) demand from the industry could represent a 1.2 percent increase in total U.S. demand for natural gas. That’s a significant rise when you consider that the total increase in natural gas consumption from 2004 to 2005 was only about 1.4 percent. What happens if the ethanol industry goes to the apparent next production plateau at 12 billion gallons per year? Ultimately, increased natural gas use resulting from the ethanol industry’s expansion affects total U.S. demand of fossil energy, helping to keep supplies tight and prices elevated.

That’s right: Corn ethanol is a boon to Big Oil, because it has helped tighten up fossil fuel supplies, which has helped with the price increases – while displacing little to no fossil fuel itself. And I can tell you that a lot of people in the oil industry recognize the irony. A number of oil companies, including my own, have come out and endorsed ethanol. So my arguments against corn ethanol are actually contrary to the official position of my company.

Is ethanol reducing dependence on foreign oil?

There are many claims around these theme. From the Renewable Fuels Association’s (RFA) “Energy Facts”:

FACT: In 2006, the production and use of ethanol in the U.S. reduced oil imports by 170 million barrels, saving $11 billion from being sent to foreign and often hostile countries.

The RFA’s page on industry statistics shows that ethanol production in 2006 was 4.86 billion gallons. This is 116 million barrels. Oil has a BTU value of 138,000 BTUs/gal, versus 76,000 BTUs/gal for ethanol; therefore 116 million barrels of ethanol contain the BTU equivalent of 64 million barrels of oil. (Source: ORNL). The claim then is that 64 million barrels of oil equivalent (BOE) displaced 170 million barrels of oil.

The RFA’s source on that was the consulting firm LECG, where director John M. Urbanchuk has also been quoted:

The production of nearly five billion gallons of ethanol means that the U.S. needed to import 206 million fewer barrels of oil in 2006, valued at $11.2 billion. This is money that stayed in the American economy.


Source: Contribution of the Ethanol Industry to the Economy of the United States in 2006 (PDF download)

While you might expect to find such claims from the ethanol industry, even grander claims are being made by the U.S. Government. From DOE Assistant Secretary Alexander Karsner’s keynote address to the RFA’s National Ethanol Conference in Tucson, Arizona:

Last year, we contributed something on the order of a displacing 500 million barrels of oil, oil that we didn’t have to import from regimes that are hostile to our interest or might leverage energy economics over our future.

Here’s the same claim by Paul Dickerson, Chief Operating Officer at the DOE’s Office of Energy Efficiency and Renewable Energy:

Over 6 billion gallons of ethanol were produced in the United States last year, and we have an additional 5 billion gallons of refining capacity under construction.

That effort means 500 million fewer barrels of oil that we have to import from the Middle East.

That’s from the U.S. Department of Energy. That is the department of the U.S. government that is charged with formulating and carrying out U.S. energy policy. How on earth are people coming up with these numbers? Can 64 million barrels of oil equivalent displace 170 million, 206 million, or even 500 million barrels of oil? And recognize that we haven’t even touched upon the fact that the 64 million barrels is the gross output, and not the net. To get a true displacement number (for just petroleum), we have to subtract out all of the petroleum inputs that went into making those barrels of ethanol.

The way they are coming up with such unreasonable numbers is because they are making some invalid assumptions. They are assuming that since only 1/6th or so of the BTUs embedded in a BTU of ethanol come from oil (the rest are from natural gas or coal), that a barrel of ethanol can actually displace more than 1 barrel of oil. The higher estimates are also completely ignoring the fact that the half of the barrel of oil that doesn’t provide gasoline goes into diesel, jet fuel, heating oil, etc. In these analyses, those are simply unaccounted for. So when that barrel is “displaced”, we just lost a lot of fuel.

But consider this for a moment. Consider if only 1/100th of the inputs into ethanol were from oil. In this case your multiplier is 100 (instead of 6). Do you believe that a barrel of ethanol then displaces 100 barrels of oil? Consider that 1/1,000,000 of the inputs into ethanol were petroleum, and you quickly start to see the sleight of hand employed.

So how much oil can ethanol really displace? No more than the BTUs that are contained in the ethanol. A 1 to 1 BTU replacement is is the best you could get even if the ethanol was free of any energy inputs, and just available for pumping out of a well. That is the maximum theoretical displacement.

Since ethanol is a gasoline replacement, the displacement should be most pronounced if we look at the gasoline demand curve. As ethanol has ramped up exponentially since 2000, one might expect to see this in the gasoline demand curve. Yet there is no obvious inflection on the gasoline demand curve. As shown in the link, as ethanol has ramped up since 2000, not only has gasoline demand increased by 10 billion barrels per year, but there isn’t even any obvious effect from ethanol on the gasoline growth curve. Even as ethanol has ramped up, the data indicate that we have become more dependent upon petroleum.

U.S. dependence on foreign oil is a demand-side problem. It is not going to be fixed by producing more ethanol – false claims about the amount of displacement notwithstanding. And it is not going to be fixed unless we confront the reality of the situation instead of the political spin.

What’s this EROI/EROEI/Energy Return Business?

The EROEI, (Energy Returned on Energy Invested), EROI, and energy return all refer to the same idea. It is the ratio of usable energy returned from a process divided by the energy expended (consumed) in the production process. Or, simply put, if I expend a total of 1 BTU of energy in a process that yields 5 BTUs of energy, the EROEI is 5/1.

This is an area rife with misunderstand and garbled definitions. Depending on where the system boundaries are drawn, one can come up with very different definitions.

Is EROEI the Same Thing as the Process Efficiency?

No, and this is a big source of confusion. The process efficiency refers to the percentage of net energy yielded in the process. In the above example, 1 BTU was expended to produce 5 BTUs. The net energy is then 4 BTUs, and the efficiency of the process is (4/5), which is 0.8 or 80%. An EROEI can be greater than or less than 1. A process efficiency is always going to be less than 1 (i.e., you are always going to use up some of the energy value in the process).

Isn’t the Energy Balance for Corn Ethanol Better than for Gasoline?

I think most people are starting to accept this as a debunked myth. But let’s review the history, because I do still hear this claim occasionally. A few years ago, Michael Wang from Argonne National Labs invented a metric, which was fossil fuel inputs into both the ethanol and gasoline production processes. This metric was neither an EROEI nor an efficiency, it was a hybrid, and has led to a lot of apples and oranges comparisons between gasoline and ethanol.

I have dealt with this claim several times in this blog. I addressed it here in response to a claim from the Minnesota Department of Agriculture (which they seem to have since removed):

In summary, the finished liquid fuel energy yield for fossil fuel dedicated to the production of ethanol is 1.34 but only 0.74 for gasoline. In other words the energy yield of ethanol is (1.34/0.74) or 81 percent greater than the comparable yield for gasoline.

I addressed it here, in response to a letter from a reader in which Michael Wang and Vinod Khosla were both copied, and both got involved in the debate:

If your assessment of the ethanol fuel cycle energy balance (and its comparison with the petroleum fuel cycle energy balance) is right, then not only is Vinod Khosla wrong, but many others of us in the energy community — including the U.S. Department of Energy and Argonne National Laboratory (see attached summary) must also be wrong.

Now I will address it here for the last time. What’s the issue? For Wang’s metric, the inputs aren’t considered in a consistent manner. For instance, the fossil fuel inputs into the ethanol process are burned. Gone. The fossil fuel inputs he is considering for gasoline production includes the barrel of oil that gets turned into liquid fuels. So, he is including only expended fossil fuels in the ethanol case (which is what you want to do for an EROEI) but in the case of gasoline he is also including fossil fuels that were not consumed and are still available as fuel. What Wang has done, by defining his metric as he has, is to measure the EROEI of ethanol – at 1.3, versus the efficiency of gasoline, which according to Wang’s most recent modeling, is 0.8 (from crude in the ground to gasoline in your gas tank). And I can tell you that this is reasonably accurate. But to compare the two different metrics causes the kind of confusion that you might expect.

So, let’s compare EROEI to EROEI and efficiency to efficiency. At an ethanol EROEI of 1.3, that means that burning 1 BTU to produce 1.3 BTUs only results in a net of 0.3. Therefore, the efficiency is 0.3/1.3, or 23%, versus Wang’s estimate of 80% for gasoline. Comparing EROEIs, an 80% efficiency for gasoline means that to produce 1 BTU consumed 0.2 BTUs, for a net of 0.8. The EROEI for gasoline then – the energy return over energy invested – is 1 BTU/0.2 BTUs, or 5/1. This was the source of the claim to that effect in the Rolling Stone article.

In summary:

EROEI of producing ethanol – 1.3/1
EROEI of producing gasoline – 5/1

Efficiency of producing ethanol – 23%
Efficiency of producing gasoline – 80%

Does the Energy Balance/EROEI Matter?

It depends. A society that operates with a high average EROEI is going to look quite a bit different from a society that doesn’t. In the former, a relatively small proportion of the overall economy can be involved in the production of energy which drives the rest of society. But as the EROEI of a society decreases, the energy production of the society must increase. Society becomes more dependent upon energy production. For instance, the world uses 85 million barrels of oil a day. If the EROEI of society is 10/1, then 8.5 million of those barrel equivalents were used to produce the oil. For the sake of this exercise, let’s assume that oil was used to make oil. That leaves us with a net of 76.5 million barrels. Now, drop the EROEI of that same society to 1.3 to 1. Now, in order to net 76.5 million barrels of oil, we have to consume 76.5/1.3, or 59 million barrels per day. In the high EROEI society, it takes 85 million barrels of total production to sustain it. In the low EROEI society, it takes 76.5 + 59, or 135.5 million barrels per day to sustain it.

But what if, in the second case, we could use biomass as our energy source (but not for the first case)? Or what if, in the first case there are lots of other negative externalities that go along with the energy source? Or what if the second case utilizes a very cheap energy source to make a fuel that sells for a much higher value? In reality, EROEI is a part of the overall evaluation, but by itself does not tell you much.

Consider that your goal is merely to make money. You may be able to make lots of money with a process having an EROEI of less than 1. You can take a BTU of coal and use it in an ethanol process to make less than a BTU of ethanol. Considering only your energy inputs, you have increased the $ value of your BTUs by a factor of 10. So, even if you take 1 BTU of coal and convert that into 0.7 BTUs of ethanol, there may be plenty of economic incentive to do it, despite the energy returns.

EROEI matters. Sometimes. And as a part of the overall context.

Doesn’t the Ethanol Subsidy Actually Benefit Oil Companies?

Here’s Vinod Khosla from a story in Wired, Six Ethanol Myths:

Yes, ethanol producers and blenders share in a 51-cent-a-gallon federal credit that costs taxpayers about $2 billion a year. The majority of that accrues to oil companies, not farmers.

Before pondering this too much, consider for a moment just who has lobbied to keep the credit intact. Has it been oil companies? No. Has it been politicians from oil states like Texas and Alaska? No. The groups always arguing in favor of the ethanol tax credit have historically been farm state politicians, ethanol lobbying groups, and corn lobbying groups.

Last year I documented the reaction of Brian Jennings, the executive vice president of the American Coalition for Ethanol, when ExxonMobil (XOM) CEO Rex Tillerson called for an end to the subsidies. Jennings said “it is outrageous for an executive for big oil to actually suggest getting rid of the tax credit for ethanol.” That’s very odd behavior if Big Oil is actually the beneficiary.

But of course as you might guess, Jennings isn’t making the case for Big Oil, because Big Oil isn’t the actual beneficiary. Here’s what’s going on. The blender’s credit does in fact accrue to the purchaser of the ethanol. That’s because the wholesale price of ethanol, at only 67% the energy content of gasoline, historically has been more higher than that of gasoline. (At times ethanol has traded cheaper than gasoline, but never on an average annual basis in the past 27 years. See the chart in this essay). So, without the incentive, it would not be economical for oil companies to purchase ethanol for blending. The blender’s credit has resulted in an artificial inflation of the price that ethanol producers can get for their product, which is why they are defensive about keeping it.

However, I have noted a change in attitude from oil companies lately with respect to this credit. Whereas they were once strongly against it, I think the fact that ethanol is now mandated has some of them changing their tune.Even the American Petroleum Institute has changed their tune. I recently posed the question to API president Red Cavaney on the API’s stance on the subsidy, and he stated that they are agnostic on the issue.

Why the change? Because now, with ethanol mandated, eliminating the credit would mean that oil companies would be forced to pay the true price for ethanol without getting a credit, meaning they will have to pass these costs on. This would result in an increase in the cost of gasoline (consider that this would cause the price of E85, for instance, to rise by 85% of the value of the subsidy – $0.43/gal). This would likely reduce overall product demand. So oil companies may be realizing that with mandated ethanol, they are better off with the credit in place – even if the primary beneficiaries are ethanol interests.

Doesn’t Ethanol Usage Create Jobs and Provide Cash for Midwestern Communities?

Of course it does. But how are jobs created? If we mandated that everyone had to consume a pound of potatoes or a pineapple each week, it would also create jobs and revitalize communities. So why don’t we do this?

We don’t do this because the jobs are created by flowing money out of one region of the country into another. If job creation had no impact on jobs in other regions, we could just enact one mandate after another, forcing us to buy various products until everyone was happily employed. But the economy doesn’t work that way. The jobs that are created in Iowa are a result of money flowing out of the rest of the country.

Paul Rogers, a reporter for the San Jose Mercury News, gives the following account in which he asked Iowa governor Tom Vilsack why the rest of the country should be forced to use ethanol:

“Because it helps farmers from my state expand their markets, Vilsack explained. ‘So I guess you’d support a new federal law to require everybody in Des Moines to buy a computer, to help people in Silicon Valley expand their markets?’ I asked. He didn’t concur.”

That’s a pretty good example of why job creation isn’t free. Forcing people in Iowa to buy computers would result in less money to spend on other things. It is just less obvious with ethanol, because the money is extracted in smaller increments.

Do We Have Enough Land to Grow Our Way to Energy Indendence?

Again, Vinod Khosla from Wired, Six Ethanol Myths, addressing the “myth” that the U.S. doesn’t have the available land:

Former secretary of state George Schultz and ex-CIA director R. James Woolsey estimate that 30 million acres can replace half our gasoline. I estimate that 40 million to 60 million acres can replace our gasoline needs. By taking land now used to grow export crops and instead planting energy crops, it’s feasible to eliminate our need to import oil for gasoline.

Let’s think about that for a minute. Presume that gasoline demand doesn’t grow at all from today’s 140 billion gallons. Now consider that, because ethanol only contains 67% of the energy of gasoline, it’s going to take 210 billion gallons of ethanol. In Khosla’s “worst case”, he would have 210 billion gallons of ethanol being produced on 60 million acres. This would require an ethanol yield of 3500 gallons per acre, around 10 times the current per acre ethanol yields. While you will sometimes hear of ethanol yields of 500 gallons per acre of corn, the nationwide average yield is around 350 gallons per acre.

So, we require an improvement in yields by a factor of 10 if we use corn, or we need something that has a better ethanol yield per acre than corn. But let’s assume for a second that it can be done. Now, here is where the EROEI issue becomes important. That 210 billion gallons of ethanol is the gross amount of ethanol required. But, how much energy is required to produce that much ethanol? At the current EROEI of 1.3 (with animal feed byproducts included), it would take the BTU equivalent of 210 billion/1.3, or 162 billion gallons worth of ethanol just to drive the process. In reality, we are treating animal feed by-products as BTUs that can be burned for transportation. If we were only considering fossil fuel inputs in and ethanol BTUs out, it would take pretty close to 200 billion gallons of ethanol equivalent to drive the process.

So with the generous assumption on by-products, the actual energy production required in this scenario is 210 billion gallons of ethanol, plus 162 billion gallons worth of BTUs to drive the process for a total of 372 billion gallons. Furthermore, you would end up with more animal feed by-product than you know what to do with.

Clearly, it is a stretch to presume we could supply U.S. demand by using corn, which means another biomass source will be required. That technology is not presently commercially available. Furthermore, if/when such a technology does become available, unless the EROEI is much improved we will find ourselves in the position of having to produce almost twice as much energy as we do now, just to have the same amount of net energy at the end of the process.

If Brazil can do it, why can’t the U.S.?

First off, let me state that I think sugarcane ethanol is a good solution for Brazil. Brazil is located in the tropics, and receives far more solar insolation than temperate locations like the U.S. Furthermore, a study commissioned by The Netherlands Agency for Sustainable Development and Innovation concluded that sugarcane ethanol production in Brazil is sustainable. I wrote an essay addressing that situation:

Report: Brazilian Ethanol is Sustainable

So, if Brazil can do it, why can’t the U.S.? I have heard the claim many times that Brazil has shown us the way to a bio-fueled future. I have also addressed the fallacy of these arguments in the following essays:

Lessons from Brazil

Daschle and Khosla Ethanol Propaganda

Letter to CNN on Inaccuracies

For the purpose of this FAQ, I will briefly summarize the issues. First, Brazil still relies on oil for 90% of their transportation needs. Ethanol in fact only serves 10% of the market there. Their “energy independence miracle”, as Mr. Khosla has referred to it, actually happened as a result of a major oil find by Petrobras. The following short report shows the stark contrast between the amount of oil Brazil produces, and the amount of ethanol Brazil produces:

Brazil Achieves Energy Independence Through Increased Domestic Crude Oil Production

So that’s the first issue: The contribution of ethanol has been exaggerated. The second issue is that the per capita oil consumption in Brazil is about 4 barrels per person per year. In the U.S., per capita consumption is about 27 barrels per person per year. Given that Brazil produces a little over 3 barrels per person per year, they have a very small gap to close, and sugarcane ethanol helps close that gap. In the U.S., we produce a lot more oil than does Brazil – around 11 barrels per person per year – but we then have a gap of 16 barrels per person per year to close. In other words, we would need to close a gap of more than 16 times that of Brazil, and do so in a temperate climate.

So, the answer to the question of why the U.S. can’t do “it” just depends on the definition of “it.” If “it” means cutting our oil consumption down to the level of Brazil’s, or for that matter even just cutting it in half (which would still be triple that of Brazil’s), then the U.S. could do “it.” But if “it” simply refers to growing our way to energy independence – as many biofuels proponents have suggested, then Brazil can’t serve as the model for what we wish to do in the U.S. If a dramatic cut in oil consumption is not part of the equation, then the U.S. and Brazil are apples and oranges.

Can’t Brazil and other tropical countries provide biofuels for the world?

What works well for Brazil does not necessarily scale to the rest of the world. As shown in the previous section, Brazil has much lower per capita energy consumption than the U.S. (and the European Union). Scaling up to supply the world with biofuels is already having some undesirable consequences:

Losing Forests to Fuel Cars

The issue is not, as some have suggested, that Brazil is cutting down rain forest to make way for sugarcane plantations. It is a bit more complicated than that.

In the past four decades, more than half of the Cerrado has been transformed by the encroachment of cattle ranchers and soybean farmers. And now another demand is quickly eating into the landscape: sugarcane, the raw material for Brazilian ethanol.

The roots of this transformation lie in the worldwide demand for ethanol, recently boosted by a U.S. Senate bill that would mandate the use of 36 billion gallons of ethanol by 2022, more than six times the capacity of the United States’ 115 ethanol refineries.

In addition, as use of corn-based ethanol grows in the United States, rising prices are influencing American soybean farmers to switch to corn. And as the United States, the world’s largest soybean producer, cuts soybean plantings, buyers are looking to Brazil, the No. 2 soy producer, to expand its production. Brazilian soybean production is already at record levels and is predicted to increase another 4.5 percent this year, according to Abiove, an industry association.

To summarize, the issue is that land in the Cerrado, a tropical savanna with a great deal of biodiversity, is being deforested at a much faster rate than is the Amazon. The expansion of ethanol into the Cerrado is pushing cattle ranchers and soy farmers into unspoiled regions of the Cerrado, and in the case of soy it is pushing soy farmers into the Amazon:

An interview with tropical biologist William F. Laurance

Soy farming is having a huge impact in the Amazon right now, for three reasons. First, industrial soy farmers are themselves clearing a lot of forest. Second, soy farmers are buying up large expanses of cleared land from slash-and-burn farmers and cattle ranchers, and the displaced farmers and ranchers often just move further out into the forest, maintaining a lot of pressure on frontier areas. Finally, the soy farmers are a very powerful political lobby that is pushing for major expansion of roads, highways, river-channelization projects, and other transportation that will criss-cross large expanses of the Amazon. This infrastructure is acting like Pandora’s box–it is opening up the frontier to spontaneous, unplanned colonization and exploitation by ranchers, farmers, hunters, and illegal gold miners.

Brazil already exports ethanol to other parts of the world. In the case of the U.S., this comes despite a $0.54/gallon tariff in place to protect U.S. corn ethanol producers. So, whether or not Brazil can supply more biofuels to the rest of the world is not the key question. In my mind, the key question is “Given the potential for deforestation, do we want them to?”

What about the environmental benefits of using ethanol as fuel?

There are environmental benefits, but also negative environmental consequences from using ethanol as fuel. If the ethanol is produced from industrial corn farms, more negative environmental consequences can be added.

Because of ethanol’s marginal energy balance, there is a marginal reduction in greenhouse gas emissions per distance driven. Researchers have also found that ethanol produces less carbon monoxide when it is burned in an internal combustion engine.

On the other hand, ethanol raises the vapor pressure when blended with gasoline, which causes an increase in smog. In an August 1, 2007 article in the Houston Chronicle (now archived, but available at the following link):

Five questions with Cal Hodge

Q: We’re already using more ethanol in our fuel now, because of the outcry over the fuel component methyl tertiary butyl ether or MTBE and its propensity to foul groundwater. You had warned that replacing MTBE with ethanol could hamper efforts in cities like Houston to improve air quality because of these problems with volatile organic compounds and nitrogen oxides. So has that actually happened?

A: Yes, it has happened. Los Angeles is the cleanest example. They began switching from MTBE to ethanol in 2001. But when they made their major switch in 2003, there was a significant decrease in air quality. They basically stopped making progress toward attainment on EPA’s ozone standards when they switched to ethanol. When using MTBE, with the cars getting cleaner each year, coupled with a very clean fuel, Los Angeles was on a straight-line path toward attaining EPA’s air standards by about 2002 or 2003. Now that they have switched to ethanol, the trend line indicates nonattainment for many years to come.

A 2007 research paper by Stanford University professor Mark Jacobson echoes that claim:

Effects of Ethanol (E85) Versus Gasoline Vehicles on Cancer and Mortality in the United States

In this paper, Professor Jacobson studied the potential impact to air quality as more E85 vehicles hit the roads, and he concluded:

“In sum, due to its similar cancer risk but enhanced ozone health risk in the base emission case, a future fleet of E85 may cause a greater health risk than gasoline. However, because of the uncertainty in future emission regulations, E85 can only be concluded with confidence to cause at least as much damage as future gasoline vehicles.

Because both gasoline and E85 emission controls are likely to improve, it is unclear whether one could provide significantly more emission reduction than the other. In the case of E85, unburned ethanol emissions may provide a regional and global source of acetaldehyde larger than that of direct emissions.”

In addition to the mixed environmental impact of directly burning ethanol as fuel, industrial corn farming has significant negative environmental impacts. From a 2006 paper that evaluated ethanol and biodiesel:

Environmental, economic, and energetic costs and benefits of biodiesel and ethanol biofuels

Both corn and soybean production have negative environmental impacts through movement of agrichemicals, especially nitrogen (N), phosphorus (P), and pesticides from farms to other habitats and aquifers (9). Agricultural N and P are transported by leaching and surface flow to surface, ground, and coastal waters causing eutrophication, loss of biodiversity, and elevated nitrate and nitrite in drinking-water wells. Pesticides can move by similar processes.

The markedly greater releases of N, P, and pesticides from corn, per unit of energy gain, have substantial environmental consequences, including being a major source of the N inputs leading to the ‘‘dead zone’’ in the Gulf of Mexico (11) and to nitrate, nitrite, and pesticide residues in well water. Moreover, pesticides used in corn production tend to be more environmentally harmful and persistent than those used to grow soybeans.

Two additional factors not discussed in the article are 1). Industrial corn farming depletes the topsoil, putting future generations at risk:

Peak Soil: Why cellulosic ethanol, biofuels are unsustainable and a threat to America

Row crops such as corn and soy cause 50 times more soil erosion than sod crops [e.g., hay] or more, because the soil between the rows can wash or blow away. If corn is planted with last year’s corn stalks left on the ground (no-till), erosion is less of a problem, but only about 20% of corn is grown no-till. Soy is usually grown no-till, but insignificant residues to harvest for fuel.

2). Corn farming and subsequent conversion to ethanol consume enormous amounts of fresh water:

Experts Differ About Ethanol-Water Usage

In this article, David Pimentel is the pessimistic expert who claims that when you add in the water required to grow the corn, it takes 1,700 gallons of water per gallon of ethanol produced. The “optimist” in the article, Derrel Martin, an irrigation and water resources engineer, said:

Martin said the question of whether increased corn production and the irrigation it requires will overburden the state’s water supply is an important one that does not yet have a clear answer.

Additional research has been reported by two Colorado researchers:

Biofuels: The Water Problem

In late June, two Colorado scientists, Jan F. Kreider, an engineering professor at the University of Colorado, and Peter S. Curtiss, a Boulder-based engineering consultant, presented their peer-reviewed report, “Comprehensive Evaluation of Impacts from Potential, Future Automotive Fuel Replacements” at a conference sponsored by the American Society of Mechanical Engineers. The two found that producing one gallon of corn ethanol requires the consumption of 170 gallons of water. That figure includes the amount needed for all irrigation and distillation. For comparison, the two scientists estimated that each gallon of gasoline requires just 5 gallons of water. If Kreider and Curtiss are right, the 5 billion gallons of corn ethanol produced in America in 2006 required more water than production of the 140 billion gallons of gasoline the U.S. consumed that year.

Ethanol proponents have largely downplayed the negative environmental impacts of increased ethanol production, while emphasizing the positive impacts. But by ignoring the negatives, all of us, and future generations, are being put at risk.

Isn’t ethanol useful as an oxygenate replacement for MTBE?

August 18, 2007 Posted by | cellulosic ethanol, ethanol, ethanol production, ethanol subsidies, oil companies | Comments Off on Ethanol/Alternative Fuel FAQ