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Biofuel Companies Fight EPA's Proposed RFS Downgrade

Biofuel Companies Fight EPA's Proposed RFS Downgrade

Companies that make biofuels from corn husks, soy and other materials are mounting a last-ditch lobbying campaign to prevent a weakening of the U.S. renewable-fuel mandate, saying a lower requirement would set back an industry that is ready to blossom.

The Environmental Protection Agency, responding to complaints from refiners and fossil-fuel oil producers, has proposed a reduction in the amount of renewable fuels that refiners must blend into gasoline and diesel next year, according to a draft obtained by Bloomberg on Oct. 10.

The proposal, which may be released this week, has been sent to the Office of Management and Budget for review. The agency has held 22 separate meetings with outside groups about the 2014 mandates since Sept. 23, according to its records. Seventeen have been since the draft emerged -- 11 with renewable fuel makers such as DuPont Co. and Abengoa SA trying to fend off the reductions.

"The worst thing that the Obama administration would be doing is creating uncertainty for the industry," Javier Garoz, chief executive of Abengoa Bioenergy, said in an interview. "You would be killing the industry for no reason."

The mandates affect a wide range of industries. Refiners, fast-food restaurants, ethanol producers and motorboat makers all say the EPA's decision is crucial to their industries. The catch is that what each wants is very different.

Leaked Draft

The leaked EPA draft would cut the renewable fuel mandate to 15.21 billion gallons for 2014 instead of the 18.15 billion gallons established by a 2007 law. News that the agency was exploring that cut sent stocks for producers such as Archer- Daniels-Midland Co. falling, while boosting refiners such as Valero Energy Corp. and Tesoro Corp. The draft called for the use of 13 billion gallons of conventional corn-based ethanol and 2.21 billion gallons of advanced biofuels such as biodiesel, down from 13.8 billion gallons and 2.75 billion gallons respectively this year.

Makers of corn-based ethanol and advanced renewable fuels say the cutbacks would curb investments in their fuels and undercut the industry just as it is set to take off. In the meetings at the White House, company executives and lobbyists are urging the administration to change course before the plan is officially released.

Market Certainty

Producers argue that cutting back on the advanced biofuels doesn't make sense, because, after long delays, companies such as Abengoa and a joint venture of Royal DSM NV and Poet LLC will begin making commercial quantities of biofuels from corn stalks or other farm wastes in 2014.

They argue they need the government mandate to stay at its current level so they have a certain market. Without that, operating corn-ethanol plants would be idled and investments in plants using non-food crops constrained, Garoz said. Abengoa has six ethanol plants in the U.S., and is building a new plant in Kansas that will make cellulosic ethanol from corn and wheat waste. It is set to begin producing next year, he said.

Outside analysts say these producers have reason to worry.

If the EPA's draft is adopted "they would be sending a pretty strong signal to anyone investing in cellulosic biofuel that you may not have the guaranteed market you think," said Scott Irwin, a professor in the department of agricultural economics at the University of Illinois. If this policy holds, "EPA is adopting a policy of not forcing a stretch in the market."

Refiners' Complaints

At the same time refiners such as Marathon Petroleum Corp. say falling demand for motor fuels mean they are unable to blend an increasing amount of ethanol without putting engines at risk. In their meeting with OMB, Marathon officials said the escalating requirements of ethanol to be added would force them to sell fuel blends exceeding 10 percent or export gasoline, a phenomenon known as "hitting the blend wall."

Blending in ethanol at greater than 10 percent can cause problems with engine materials breaking down and the operation of emission-control systems, according to the American Petroleum Institute. Older vehicles can't handle blends of 15 percent ethanol, the Washington-based trade group said.

Based on the Energy Information Administration's estimated 132.9 billion gallons of gasoline demand in 2014, an ethanol requirement of 13 billion gallons would fall below that 10 percent share.

API's Push

The EPA proposal of that amount is "directionally positive, but I think EPA needs to go a little further to provide the certainty consumers want," Bob Greco, downstream director at the API, the fossil-fuel trade group based in Washington, said Oct. 24.

Critics say that the 10 percent "blend wall" is a fiction created by refiners trying to preserve a market for gasoline. If the mandate for renewable fuels grows, gasoline retailers will have an incentive to sell more E85, an 85 percent ethanol blend, to flex-fuel vehicle owners, ethanol makers say. Irwin said that a higher overall mandate could also be filled by surging biodiesel production, which is primarily made from soybean oil.

"The blend wall has been used as an excuse, but it's not a real problem," Paul Beckwith, the chief executive of Butamax, a joint venture of DuPont and BP Plc making biobutanol for fuel use, said in an interview. "It can be overcome if the industry sets its mind to overcoming it."

Copyright 2013 Bloomberg

Lead image: Corn cob and wheel via Shutterstock

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