Stillwater Associates appreciates the opportunity to comment on the University of California scientists’ assessment of MTBE. Stillwater Associates is a consulting firm that specializes in the downstream oil industry, focusing on cleaner burning fuels like CaRFG2. Stillwater Associates has considerable experience with the blending, distribution, and marketing of reformulated gasolines and diesel fuels in California. The focus of our comments is on the report “An Integral Cost-Benefit Analysis of Gasoline Formulations Meeting California Phase II Reformulated Gasoline Requirements” and on the report’s policy recommendations.

The Cost Benefit Analysis has several serious flaws in its analysis of the gasoline formulation options. These flaws lead the authors to incorrectly conclude that blending CaRFG2 with toluene or ethanol is more economical than blending with MTBE. In addition, the CBA concluded that CaRFG2 with MTBE had a net cost to the public. We find that a surprising conclusion, given the dramatic improvement in air quality since CaRFG2 was introduced.

The CBA also evaluated a number of policy options available to reduce the costs of the continued use of MTBE. A policy of reducing the amount of MTBE blended into gasoline is certainly economically attractive.

Flaws in the Cost Benefit Analysis

The CBA looked at three CaRFG2 formulations, one with MTBE, one with ethanol, and one without oxygenates. The report weighed the economic benefits or costs of each of the formulations compared with conventional gasoline and (incorrectly) concluded that non-oxygenated CaRFG2 would be the best option for achieving air quality objective from an integral economic perspective. This analysis has the following flaws:

CaRFG2 Blending with Toluene is Infeasible

The study assumed that a refiner could remove MTBE from the gasoline blending pool, replace the volume (or octane benefit) with toluene, and produce CaRFG2. CaRFG2 has very restrictive aromatics content specifications. Removing MTBE with zero aromatics content, and replacing it with toluene, which is essentially 100% aromatics, would cause a refiner to have to invest in processes that reduce aromatics in gasoline across the board. For example, CaRFG2 in the summer averages 22-23% aromatics, against a flat limit specification of 25% aromatics. Removing MTBE (Zero % aromatics) would raise the aromatics level of the base gasoline to about 24-25%. Adding toluene would add another 10% aromatics (100% aromatics X 10% volume) to the final blend. The resulting gasoline would not pass the Predictive Model. Blending with toluene is an infeasible solution because of air quality issues.

Toluene Costs are Incorrect

The UC study incorrectly determined that toluene is less expensive than gasoline. Toluene is not commercially produced in California. All volume would have to be imported, probably from the Gulf Coast at costs that include 8-10 cents per gallon for tankering to California. Toluene is produced by distillation from gasoline streams and is used as a high-octane gasoline-blending component or in high margin chemical processes. Because of its greater value, toluene is always more expensive than motor gasoline. Even if refiners could blend toluene to CaRFG2, the costs would be higher than for conventional gasoline. Hart’s Octane Week for November 30, 1998 quotes Gulf Coast toluene at 63 cents per gallon in Texas or Louisiana. Octane Week quotes CaRFG2 at 50.05 cents per gallon in Los Angeles. With freight, toluene is about 21-23 cpg more expensive than CaRFG2.

Ethanol blending costs are understated

The UC study estimated ethanol blending costs at $510 to $1190 million versus conventional gasoline due to price increases and fuel efficiency decreases. At about the same time the California Energy Commission estimated that ethanol blending would cost $902 to $911 million per year more gasoline blended with MTBE. This CEC estimated cost is the net of:

1. imports of blendstocks and finished products to meet volume requirements

2. exports of gasoline components that cannot be blended to CaRFG2 because of ethanol’s higher volatility

3. additional transportation costs due to the difficulty in handling ethanol

4. a fuel economy penalty because of the lower energy content

The wide difference between the two estimates is occurs because the UC study did not recognize many of these cost elements.

The Non Oxygenates Formulation is feasible, but expensive

Instead of toluene, refiners would import alkylate or other low aromatics stocks and export non-conforming gasoline steams to meet CaRFG2 specifications. The Energy Commission calculated that the cost of this option would be $636 million to $1.3 billion versus using MTBE in the intermediate term.

Water treatment costs are dramatically overstated

The CBA details cost of water treatment. The aggregate annualized cost of this treatment is shown in Table 9 of the report, which estimates water treatment costs for using MTBE to be $340-1480 million. The bulk of these costs, at older UST sites are $320-1030 million. Stillwater Associates is not in a position to comment on these estimates, but we do point out that the costs associated with older contaminated sites will be incurred whether or not MTBE remains in gasoline. Using the remaining assumptions then, aggregate annualized cost of water treatment with MTBE in gasoline would be $20 - $450 million.

Recreational costs need to be managed

MTBE pollution of drinking water reservoirs by motor craft is a potentially serious problem. However, Stillwater Associates has estimated that the requirement for gasoline for this application is about 0.5% of total gasoline demand. We believe that industry and government can solve this problem without making wholesale changes to the entire gasoline supply or unduly restricting access to recreational facilities.

Summary Comparison

Stillwater Associates suggests the following changes to Table 2 of the CBA to reflect the above comments.

$ Million CaRFG2- MTBE CaRFG2 – Ethanol Non-oxy CaRFG2

Health Costs

Air Quality damages 0 – 27 3 – 200

Water treatment 20 – 450 1 – 10

Alternate water supplies 1 – 30

Direct costs Base 901 – 920 636 – 1300

Other Costs

Water monitoring 2 – 4

Recreational costs ???

Ecosystem damages

Costs subtotal 23 – 511 904 – 1120 637 – 1310

We have not proposed changes for Air Quality Benefits, Air Quality Damages, Alternate Water Supplies, Water Monitoring Costs or Ecosystem Damages because these topics are outside our area of expertise.

With the above estimates, Stillwater Associates concludes that CaRFG2 with MTBE is a more economically attractive formulation than CaRFG2 with ethanol or non-oxygenated CaRFG2.

Policy Recommendations

The most important recommendation from a refiner’s point of view is to implement HR 630. This bill will eliminate the minimum oxygenate requirement in Federal RFG.

Refiners would only use as much MTBE as their economics dictate, primarily to provide octane, as well as take advantage of MTBE’s ability to dilute sulfur, aromatics, and olefins in gasoline.

The CEC study calculated that MTBE usage would decrease by 30% if the Federal minimum oxy level were eliminated and costs would be reduced. A recent Department of Energy study (Octane Week 11/23/98) calculated a 28% reduction in MTBE if RFG were produced without a minimum oxy requirement.

Conclusion

The UC study incorrectly determined that non-oxygenated CaRFG2 is the best alternative to meet air quality objectives. The UC study incorrectly determined that CaRFG2 with MTBE has the highest costs. Despite these and other errors, the study correctly recommends support of HR630, which will reduce the amount of oxygenate mandated by Federal regulations.