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Issues Concerning the Use of MTBE in Reformulated Gasoline: An Update.
Subcommittee on Oversight and Investigations
Mr. Robert S. Kripowicz
Mr. Chairman and Members of the Subcommittee, you have asked that the Department of Energy provide an update on issues concerning the use of methyl tertiary butyl ether (MTBE) in gasoline. I will address the Committee's concerns, but would like to start with the broader National Energy Policy context, and recent energy markets experience, as a framework for these issues. The early focus of this Administration on the development of a comprehensive National Energy Policy was motivated to a significant degree by the rising concerns over the adequacy and cost of energy supplies, not the least of which are gasoline and other petroleum products on which much of our economic activity depends. We have observed over the past few years a tightening of the supply/demand balance in the petroleum product market in general and gasoline in particular. Events in the world oil markets have contributed to the high and volatile prices we have experienced this summer and last year. The Department's Energy Information Administration addressed these near-term issues in testimony earlier this year and I will not repeat that here. I will only note that we experienced tight supplies and volatile prices again this summer in the Midwest. These problems were most evident in the Chicago/Milwaukee ethanol-blended reformulated gasoline (RFG) market, and supplies of other products including conventional gasoline and diesel fuel also experienced severe tightness largely because of ongoing infrastructure limitations in that area. The longer term issues affecting infrastructure and petroleum product supplies include:
Having experienced a decade of poor returns, facing legal challenges related to permitting on previous refinery expansion, and having to comply with significant new requirements for cleaner fuels that will demand large stay-in-business investments, it is not surprising that the financial decision-making in the refining industry has responded very cautiously to the growth in gasoline (and other transportation fuels) demand. Other parts of the petroleum product supply system, including pipelines and terminals, have faced similar financial situations that have discouraged investment and have left us with constrained capacity. Assuring adequate capacity to meet future demand in an environmentally responsible manner in the longer term is not an easy matter but we must take on this challenge. Our program activities include support for alternative fuels, research on advanced cellulosic ethanol production and development of new refining technologies. In the short term, our choices are even fewer and any changes that have been proposed must carefully consider impacts on price and supply. Under this framework, I will address the issues related to MTBE in gasoline, as requested by the Subcommittee. MTBE Issues The Department has been involved for some time with the EPA, other Federal agencies and State organizations like the Northeast States for Coordinated Air Use Management (NESCAUM) in addressing the issue of MTBE, an oxygenate used in clean gasoline formulation affecting water supplies. This problem arises primarily from leaking underground gasoline storage tanks, and there is an ongoing, federally-mandated effort to fix and upgrade most of these tanks. Individual States have made additional efforts to address these leaking gasoline tanks and their potential impacts on water supplies. However, some States have made the choice to resolve the problem by banning the use of MTBE in gasoline. This clearly is one option for addressing the problem and we can appreciate that some States, like California and New York, believe that it is the best option. However, we believe addressing these water quality concerns with near-term bans of gasoline additives represents would threaten the adequacy of gasoline supplies in those States. As refiners face additional requirements to meet even tighter clean fuel standards for their gasoline, like the recently promulgated standards for Tier II low-sulfur gasoline and anti-backsliding toxic emission control requirements for conventional and reformulated gasolines, and address commercial considerations like the Unocal patent, they will find oxygenates such as MTBE even more necessary and valuable to increase volume, make up for lost octane, and address other property changes such as distillation characteristics. The availability of oxygenates also provides valuable immediate gasoline blending flexibility to refiners trying to meet tight product specifications; the oxygenates are aromatic-free, high octane, virtually sulfur-free blendstocks that can be put in almost any shipment of gasoline to offset performance shortfalls in other parts of the refinery. This is particularly true for MTBE which can be blended at the refinery and shipped in pipelines and which has little negative impact on vapor pressure. The effect of being able to readily blend MTBE into gasoline is to help assure product deliverability, reliable supplies, and affordable gasoline prices to consumers. Recent information indicates that MTBE, if banned, could be replaced with other blendstocks. We have not seen any conclusive analysis that validates this contention, but acknowledge this issue needs to be studied very carefully. If a sufficient number of States were to restrict use of MTBE, refiners and distributors might choose to remove MTBE from all gasoline in that region to protect the fungibility of the gasoline distribution system and avoid even more "boutique" fuels. Although MTBE consumption is currently about 300,000 barrels per day nationally, in replacement terms MTBE's contribution to gasoline supplies nationally is greater because of its high quality. Additionally, a loss of ability to use MTBE may also affect the ability of the U.S. gasoline market to draw gasoline supplies from Europe, the major source of our price-sensitive gasoline imports, since those refiners widely use MTBE, albeit typically at lower concentrations than in the U.S. Alternatively, gasolines with and without MTBE could be produced but with less flexibility and fewer exchange opportunities in the distribution system. In addition to the ongoing supply problems one could expect from trying to produce both reformulated and conventional gasolines without MTBE, regional refinery or distribution supply problems could lead to additional short-term difficulties under near-term State-by-State bans. One could expect these situations to contribute to regional gasoline shortfalls and longer periods of price volatility as markets struggle to re-balance on a State-by-State basis. In addition, for Northeast States, which depend heavily on imported reformulated gasoline, MTBE bans and the subsequent need for special gasoline blendstocks for ethanol blending could be even more problematic. Additionally, with the Mobile Source Air Toxics (MSAT) rule implemented by EPA, refiners are required, starting in January 2002, to maintain the toxic performance of their gasoline at or above the 1998 to 2000 baseline. Some refiners have produced gasoline with toxics performance much better than was required to meet the RFG performance guidelines because of market opportunities in the petrochemical markets. The MSAT rule requires these refiners to continue to produce gasoline that over-complies relative to toxic performance into the future. The near-term elimination of MTBE as a gasoline blending component would severely hinder these refiners' ability to produce clean gasoline because the availability of substitute gasoline blending components with similar quality is very limited. The Department of Energy remains concerned about our current and longer-term energy supply situation. We will continue to work with EPA and others to better understand the energy supply implications of all our actions and look for additional ways to improve the current capacity situation. While we fully support the various clean fuel requirements that are necessary to achieve our air quality goals and we share a strong desire to protect the nation's water quality, we believe that it is important that these initiatives be implemented in a way that has the least negative impact on fuel supplies. As we move forward, the National Energy Policy provides important guidance and Executive Order 13211, "Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use," will appropriately focus our attention on these impacts in future rule makings. Assuring adequate supplies of energy, gasoline in this case, in an environmentally responsible way and at reasonable prices to support a strong economy is a key goal of this Administration. Mr. Chairman, that ends my testimony and I would be happy to answer any questions the Subcommittee may have. Thank you.
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