Ethanol is in Major Trouble Thanks to this Biofuel

Halloween may be a week away, but the ethanol industry is hearing footsteps already. The American Society for Testing and Materials, or ASTM, recently established ASTM D7862, which defines performance requirements and testing methods for a variety of characteristics of butanol-blended fuel. It's a giant step towards the creation of a national butanol industry that will help producers such as BP (NYSE: BP  ) and DuPont (NYSE: DD  ) , gasoline blenders such as Valero (NYSE: VLO  ) , pipeline managers such as Kinder Morgan (NYSE: KMI  ) , and drivers like you and me in a number of ways.

What it means for drivers
There are actually three different forms of butanol covered under the new standard that share similar physical properties. I'm going to focus on the commercialization of isobutanol, which I believe has the best potential to make an immediate impact on the nation's fuel supply. Here's how the fuel compares to ethanol:

 

Ethanol

Isobutanol

Blend Reid Vapor Pressure (RVP)

18-22 psi

4.5-5.5 psi

Blend octane

112

102

Energy content (% gasoline)

65%

82%

Water solubility

Fully miscible

Limited miscibility (8.5%)

Oxygen content

35%

22%

Source: Gevo White Paper, May 2011

I'll discuss the table in more detail below, but consider that a fuel blend of 10% isobutanol, 90% gasoline would fetch an extra 1,700 miles per 100,000 miles driven compared to a blend of 10% ethanol, or E10. Better yet, isobutanol has established standards compatible with all cars for blends up to 12.5% at the moment -- good enough for 2,200 miles more than E10. Given its limited miscibility with water (low potential to rust engines, pipelines, and storage tanks), there should be potential for even higher blends (16% standards are on the table), assuming the fuel's oxygen content could be improved.

And although ethanol is pretty cheap, isobutanol-blended gasoline could one day be even cheaper for consumers thanks to a number of important advantages. In the meantime, the fuel can actually be added to E10 to increase its performance.

What it means for isobutanol producers
The two biggest names in bio-isobutanol are Gevo and Butamax, a joint venture between BP and DuPont. Each has developed a novel platform capable of producing isobutanol from a variety of sugars using yeast.

Butamax and Gevo are racing to commercialize platforms similar to the one pictured above. Image source: Gevo White Paper

Yeast, sugars, corn -- that should sound familiar. Rather than spend hundreds of millions of dollars building new commercial facilities, each platform can be implemented at existing corn ethanol facilities. Theoretically, the nation's excess ethanol capacity -- about 1 billion gallons per year -- could be converted into 820 million gallons of isobutanol in less than one year of retrofitting. That would represent one heck of a growth spurt and an annual revenue stream worth billions of dollars for BP, DuPont, and Gevo. While end products would likely be focused on high value chemicals rather than fuels at first, ASTM D7862 is an important first step toward the gas tank.

What it means for ethanol producers
Approval of a competing fuel blendstock might sound like bad news for ethanol producers, but it's actually a major blessing. The industry has fallen victim to extreme volatility; posting large profits one year and crushing losses the next. Last year's drought has kept corn prices high this year, but it also created a feedstock shortage that forced several companies to mothball facilities. Ethanol producers will be scrambling once again if and when the EPA decides to scale back its mighty ambitions for ethanol blending requirements.

Enter isobutanol. Not only can the chemical be used in a number of high value products to diversify product portfolios and insulate producers from market volatility, but it also qualifies for higher value subsidies and credits when used as a blendstock compared to ethanol. Better yet, producers can enlist Butamax or Gevo to retrofit their current facilities with virtually no modifications to other parts of their business or supply chains.

What it means for refiners
Valero, the world's largest independent refiner, also stands to benefit from the commercialization of isobutanol. As shown in the table above, isobutanol has a lower RVP than ethanol, which makes it easier and cheaper to blend. Refiners would no longer have to create special base blends of gasoline to achieve an acceptable vapor pressure in the end fuel, leading to savings and reduced emissions of volatile organic compounds. That could be great news for Valero shareholders, especially with ethanol blending costs expected to soar to over $750 million this year for the company.

There's also the possibility that refiners would be able to export butanol-containing gasoline. Currently, many countries place high tariffs on or reject altogether American E10 in an effort to spur their own domestic biofuels programs. Given how quickly the United States could create a butanol industry, European countries, which have already approved butanol blends of up to 15%, would certainly be tempted. Simply put, there would be no shortage of potential customers.

Valero could also ship isobutanol-blended gasoline directly from its refineries through existing pipeline infrastructure -- resulting in additional savings compared to truck or rail delivery. The drop-in fuel would save Kinder Morgan, the first company to transport commercial quantities of ethanol via pipeline, from spending millions building ethanol-specific pipelines and terminals. That would lead to more volume for higher value products in the company's pipeline network, which has historically been the lowest margin segment.

Segment

ROI, 2001

ROI, 2004

ROI 2008

ROI, 2012

Natural gas

15.5%

14%

16.9%

11.9%

Products pipelines

11.8%

12.4%

12.5%

12.1%

Terminals

18.2%

17.8%

15.5%

13.5%

CO2

24.6%

23.8%

25.9%

28.7%

Source: Kinder Morgan, Barclays CEO Energy-Power Conference Presentaion

I don't see low ROI for Kinder Morgan's products pipelines segment as a problem, but there is room for improvement. Isobutanol could offer one possible solution that would benefit investors in terms of savings and improved margins.

Foolish bottom line
Butanol is now clear for takeoff, which firmly establishes a massive market opportunity for isobutanol companies such as DuPont, BP, and Gevo. The fuel can benefit from the same laws and credits that supported ethanol's rise to the top of the blending ladder -- and even qualifies for higher next-generation subsidies in many cases. Further, drop-in capabilities in existing infrastructure throughout the production chain should facilitate a nearly seamless transition into the nation's fuel supply.

There are still hurdles to overcome, however. Neither Butamax nor Gevo has proven that their respective processes are economical or capable of operating at steady-state operations on a commercial scale. I'm confident a company will eventually figure it out. If production can be sustained in large quantities the market should have no problem utilizing the product, especially given its superiority to ethanol. It is unlikely to completely replace ethanol as a blendstock, but having two fuels to choose from will extend many benefits to the industry and consumers.

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Read/Post Comments (8) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 27, 2013, at 9:00 AM, funfundvierzig wrote:

    DuPont Management has been struggling to develop and commercialise corn cob "gasoline" for nearly a decade (bad-mileage ethanol refined from corn stover). While promising much, they have delivered little for sale to date, either in corn cob "gasoline" or alternatively biobutanol. ...funfun..

  • Report this Comment On October 27, 2013, at 10:58 AM, RobP1965 wrote:

    Butanol can be produced from hydrocarbons as well. Ethanol is horrible, of that there is no doubt. It ruins engines and reeks to high heaven when you work it. It also burns food for fuel and that is at best unwise. But replacing one bio with another bio made from potential food or hay or wood seems like a very bad idea. Deforestation, higher food prices, subsidies out the ying yang, higher hay prices for farmers already struggling . . . none of these things will make life better. As a temporary solution perhaps while hydrogen fuel cells are developed to replace most fuels including at electric generators.

  • Report this Comment On October 27, 2013, at 11:58 AM, TMFBlacknGold wrote:

    @RobP1965,

    Biobutanol would not circumnavigate the problem with using food sources as feedstock, especially not with the way Gevo and Butamax are advocating with their retrofit business model. However, it would allow us to use corn more efficiently and get much better energy returns.

    --Maxxwell

  • Report this Comment On October 27, 2013, at 12:41 PM, DAG1996MF wrote:

    Thanks for the great article, Maxx. Considering your background, I hope you'll consider writing an article on FutureFuel at some point.

  • Report this Comment On October 27, 2013, at 10:44 PM, hemi2go wrote:

    I'm all for anything that REMOVES ethanol from the gasoline supply. Horrible mileage and the ability to attract water, has destroyed many a small engine, and ruined many a boat. Just go to any marina in the northeast and ask how the addition of ethanol has altered winterizing practices. I just love rebuilding 2 carburetors every single spring. Rrrr....

  • Report this Comment On October 28, 2013, at 6:50 AM, fuelguru wrote:

    Bio-isobutanol historically has not been considered a serious contender as a gasoline blending component not only because it doesn't exist on a commercial scale, but because it is normally considered octane neutral with regular gasoline. As with lead, and MTBE, and ethanol, the real issue for gasoline in the U.S. at the end of the day is-what octane enhancer of choice will economically provide this essential component for SI (spark ignition-gasoline) engines.

  • Report this Comment On October 28, 2013, at 10:33 AM, JimmyDoors wrote:

    Folks, the article misses the point. The reasons ethanol is the chemical of choice are two: (1), it is a superior oxygenate, and (2) it is much less polluting than MTBE, when released into the environment..... The oxygen is needed to promote gasoline combustion, and to reduce CO production. A pound of isobutanol contains 0.215 pounds of oxygen. A pound of ethanol contains 0.347 pounds of O2. And if the solubility data presented hear are correct, then you can't add enough butanol to make it work, environmentally -- but you can add whatever ethanol is required to optimize pollution control. I like duPont, but I LOVE BREATHING, BETTER !

  • Report this Comment On October 28, 2013, at 6:54 PM, TMFBlacknGold wrote:

    @JimmyDoors,

    From the article:

    "Given its [butanol] limited miscibility with water (low potential to rust engines, pipelines, and storage tanks), there should be potential for even higher blends (16% standards are on the table), assuming the fuel's oxygen content could be improved."

    The oxygenate question is currently the largest downside surrounding butanol, but certainly not one that cannot be solved. It is better than ethanol in many other -- more important -- facets from an economics standpoint. There are options on the table, such as adding an oxygenate -- even ethanol.

    Thanks for bringing that up.

    --Maxxwell

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