Just When You Thought It Was Safe to Go Back in the Fuel Pool

As of mid-2019, the Chinese government has only six months to make good on its 2017 pledge to roll out mandatory ten percent ethanol content in gasoline (E10) on a nationwide basis by 2020.  While China’s unique economic and political structure may theoretically allow it to achieve this ambitious target within a relatively short time period, such a move would present significant challenges.  China’s use of fuel ethanol is currently confined to a relatively small number of provinces and cities, accounting for only 3 percent of national gasoline consumption.  The implementation of the government’s new target in 2020 would entail a very steep rise in demand, equivalent to around 11 million tons above 2018’s level. 

China’s ethanol plan raises a number of questions.  Firstly, in the context of today’s global ethanol market, it is unclear from where, and in what form, the country intends to source the ethanol volumes required to meet its goals.

Secondly, implementation of a national E10 mandate would most likely come at the expense of MTBE, of which China is the world’s largest consumer.  The elimination of almost half of global MTBE demand by a successful E10 roll-out would mean significant uncertainty for local and international producers, as well as for the market for MTBE feedstocks methanol and isobutylene.

Promises of E10: Where do they get the Ethanol?

China’s options if it is to meet its E10 goal are as follows:

• Amp up domestic first generation ethanol production – Although China maintains very large stocks of grain – the result of longstanding agricultural support policies – this option raises concerns over potential competition with food and farmland for food in China.  This is also an unlikely option to reach the E10 level of blending in the short term, as it would take a few years even if China began building the plants now.
• Import first generation ethanol, with one of the following trade partners:
• United States – The largest producer and exporter of ethanol globally.  Currently the low cost ethanol producer, but also engaged in a trade war that makes them an unlikely trade partner.  However, ethanol from the US could potentially be imported to another location and converted to ETBE to be imported to China avoiding the tariff.
• Brazil – The second largest producer of ethanol globally.  Currently benefiting from the trade war by supplying soybeans to China.  Sells ethanol at prices near US export prices.
• India – Large sugarcane production and domestic ethanol producer.  Prices are government controlled and significantly higher than ethanol from the Americas.
• Import or produce ethanol that uses next generation technologies as available – While these technologies are not yet widely commercialized, they are under development, including several key developers with commercial plants in development in China.  Possible domestic sources of non-food ethanol in China could include:
• LanzaTech’s steel mill off-gas fermentation technology
• Cellulosic ethanol (e.g., hydrolysis and fermentation)
• Biomass Gasification based ethanol (e.g., Enerkem)
• Coal based ethanol, such as utilizing Celanese’s TCX technology is theoretically possible, but would be counterproductive to China’s stated goal of carbon footprint reduction
• Methanol to ethanol is also theoretically possible, however since much of the methanol is produced from coal, this would likely also be counterproductive to China’s stated goal of carbon footprint reduction
• Other bio-ethanol production technologies are also possible that would not compete with food, however remain mostly undeveloped:
• Biogas (or other methane, such as natural gas) to ethanol via methanotrophic fermentation
• Oxidative coupling of methane (OCM), (e.g., from biogas) to ethylene and hydration to ethanol
• Power to ethanol, via electrofuels routes

Will ETBE play a role?

ETBE, produced with ethanol instead of methanol, has been used in Europe and Japan as a way to get ethanol into gasoline, while not upsetting the existing value chain, and minimizing the need for investment in new ethanol blending infrastructure.  ETBE could conceivably play a role in the Chinese drive for E10; if domestic producers of MTBE no longer have a market for their product, they may consider switching production to the ethyl ether.  Additionally, with tariffs on US products, there is a question of whether US ethanol could be converted to ETBE in another country and shipped to China without receiving the US tariff.  Currently, there are no stated plans to switch to ETBE to achieve E10, as the experience in the US and Brazil with splash blending to achieve E10 (and in Brazil considerably higher blends, up to pure ethanol), means that the ETBE solution is not necessarily required.

Ultimately the decision whether to use ETBE as a solution for E10 will come down to a number of factors:

• Regulations
• The structure of the gasoline distribution value chain
• Global geopolitics and the trade war
• Domestic MTBE producers’ position on the global cost curve
• Domestic ethanol production

Currently, the prices of ethanol have come down sufficiently to put ETBE costs at parity with MTBE on a raw materials basis. 

Every Action Has a Reaction: What are the Ramifications?

Should China increase the blending of ethanol into gasoline to anywhere near the level required to meet its E10 goal, the ramifications for global MTBE markets could be huge.  Depending upon where they fall in the global cost curve, domestic producers may be able to remain in business as exporters, and force other MTBE producers to shut down.  Many potential strategies are available to China, the domestic MTBE producers, and potential impacts from them will make available.

In order to answer these questions and others, Nexant is examining the possible outcomes of several implementation scenarios in a three-volume report, “Biofuels in China: An existential threat for MTBE?”  The report is due out this fall, and will focus on the impacts to Markets (Volume 1), Pricing (Volume 2), and Cost Curves (Volume 3) under different scenarios.  Please contact us for more details.

Authors:

Steven Slome, Program Manager I Energy & Chemicals Advisory

Ron Cascone, Principal I Energy & Chemicals Advisory

Matthew Morton, Senior Consultant I Energy & Chemicals Advisory

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