Document ID: EPA-HQ-OAR-2005-0161-0270
Agency: epa
Document Type: Supporting & Related Material
Title: 
Posted Date: 2007-05-01T04:00Z

ETHANOL INDUSTRY PROFILE 

September 30, 2006

Prepared for 

 

Office of Transportation and Air Quality 

U.S. EPA 

1200 Pennsylvania Avenue, NW

Washington, DC 20460

Prepared by

ICF International 

9300 Lee Highway

Fairfax, VA  22031

	ETHANOL INDUSTRY PROFILE

This profile of the ethanol industry was prepared to provide background
and context for the ICF report, “Effects of Market Structure on the
Performance of the RIN market.”  

In the summer of 2006, the ethanol market in the United States was in a
state of almost explosive growth in production capacity, with the supply
chain downstream of the production sources in flux as the infrastructure
for ethanol blending into motor gasoline continues to evolve.

Overview

The ethanol supply chain in the United States involves a unique
collaboration of agricultural, transportation, and oil business entities
that are in the process of altering the transportation fuel supply
chain. This change is taking place in part due to government
intervention and in part due to economic fundamentals.

Ethanol production is growing rapidly as new ethanol plants are being
built and made operational throughout the Midwest and (to some extent)
in other regions.  Demand for ethanol in fuels had originally been
primarily in the Midwest, but has expanded into California (2004) and
New York and Connecticut (2004) reformulated fuel markets as use of MTBE
(Methyl Tertiary Butyl Ether) was banned in those states. In 2006, the
use of MTBE in other reformulated gasoline markets has been radically
reduced as refiners elected to use ethanol instead of MTBE to mitigate
liability issues related to MTBE. 

The ethanol supply chain originates at farms in the Midwest where corn
production is sold to ethanol producers from a region surrounding the
ethanol plant. The ethanol production is sold to blenders (usually
refiners and/or blending companies) by ethanol Marketing companies.
These companies in some cases own production facilities, and in some
cases act as “marketing arms” of the producing companies  The
marketers will often market ethanol from multiple plants to oil
companies and blenders.

Ethanol historically moved from production sites into local Midwest
markets either by truck or railcar, with purchasers/blenders taking
advantage of the 51 cpg blending credit and generally low ethanol prices
vs, gasoline. With the emerging ethanol demand in California and the
East Coast, ethanol production capability began a rapid rise, and a
method to efficiently move larger quantities of ethanol to market
developed. Railroads and ethanol marketers developed “Unit Trains,”
or dedicated “rolling” movement of ethanol from Midwest locations
into the Southern California, Albany, New York, and Sewaren, N.J.
markets. These unit trains are capable of moving 65-100 railcars at a
time, picking up ethanol at multiple Midwest locations and moving to
blending markets.

In 2006, most Refiners have opted to completely eliminate the use of
MTBE in reformulated gasoline markets due to the potential liability
issues. In order to continue to market gasoline that fully meets
reformulated gasoline specifications, refiners are replacing MTBE with
ethanol, and marketing a 10% ethanol blend in reformulated markets.
These “new” ethanol demand markets are primarily Dallas/Houston in
Texas, Mid-Atlantic (New Jersey through Virginia), and New England.  The
additional spike in ethanol demand from these new markets (almost a 50%
increase in demand) has stretched production capacity and distribution
capability. Refiners and blenders are working with marketers, railroads,
importers and terminal operators to insure a reliable supply chain into
the ultimate blending terminals. At the same time ethanol prices have
risen to very high levels for spot (non-term or one-time delivery)
product due to the constraints in the system.

Once the MTBE phase-out has been accomplished and new ethanol capacity
better aligns with demand, ethanol prices are likely to fall somewhat.
The ability of ethanol to continue to penetrate the fossil-fuel based
gasoline supply will be contingent upon the economics to blend ethanol
in more conventional gasoline markets, and the willingness of refiners
and blenders to market E10, E85 or other ethanol blends in areas not
mandated by Federal or State legislation.       

This document examines the key components of the ethanol supply chain
from Producers to Refiners to provide a perspective on each component
toward the ethanol credit proposals under consideration. The report
looks at these sectors in both a current view and also a forward view to
the extent ICF can determine this.

Section 1:  Ethanol Production

Industry

The current (July 1, 2006) ethanol production capability in the United
States is 4.8 Billion gallons per year (bgy) as reported by the
Renewable Fuels Association (RFA). The RFA tracks ethanol production
facilities that are operational, and also identifies ethanol production
facilities that are under construction. Attachment 1 shows the
facilities that RFA is reporting as operational and under construction
as of July 1, 2006.  Operating capacity is 4.8 bgy and capacity under
construction is 2.1 bgy. It is expected that by the end of 2007,
essentially all the capacity under construction will be complete and
operational, with total U.S. ethanol production capacity at about 7.0
bgy by January, 2008.

In addition to these facilities, ICF has identified an additional 8.4
bgy of ethanol production plants that have been announced or are in
planning stages, with start up advertised in the 2007-2009 timeframe
(See Attachment 2). These additional production sites are in various
stages of development, but in our judgment it is highly unlikely that
all of these plants will be built, or will be built in the timeframe
indicated. In some cases these initiatives may still need to resolve
issues such as a specific location, grain supply, or permits.  To
provide a forecast beyond 2007, ICF is assuming that the additional
capacity gained in 2008 will be 2.0 bgy, and then an additional 1.5 bgy
in each of the years from 2009 through 2012. Feedback from some industry
participants indicate that 1.5 bgy of annual new construction is about
as much as can be effectively built, and we have shown a higher number
in 2008 to reflect the specific planned projects of ADM in that
timeframe. 

RFA’s identification of ethanol capacity as including all currently
operational plants plus all plants currently under construction is a
sound approach to a “reliable” capacity outlook.  For the purposes
of this study, however, ICF believes it is reasonable to include the
projects identified in the planning stages, since the overall economics
of the ethanol market vs. corn would appear to foster a very favorable
environment for funding new projects, subject to industry growth
constraints estimated above.   

Exhibit 1-1 shows the historical and projected growth in U.S. ethanol
plant capacity based on existing, under construction, and planned
ethanol plants. We have assumed that the “planned” projects all
become operational after January 1, 2008, with capacity gains of 2.0 bgy
in 2008, and 1.5 bgy thereafter as described above. On this basis, U.S.
ethanol production capacity will exceed the 2012 Renewable Fuels
Standard (RFS) requirement of 7.5 bgy sometime in early 2008, and be at
a 15 bgy level by the start of 2012.

Exhibit 1-1: Current and Future U.S. Ethanol Production Capacity

Sources:  Renewable Fuels Association:    HYPERLINK
"http://www.ethanolrfa.org/industry/locations/" 
http://www.ethanolrfa.org/industry/locations/ 

                  Ethanol Industry News Announcements on Capacity
Increases

This ethanol production capacity is roughly one million barrels per day,
or about 12% of current U.S. gasoline demands.

The overall trend in the development of U.S. ethanol plant construction
has some striking changes. The average size of an ethanol plant in the
U.S. has steadily grown with the expansion of national ethanol plant
capacity. Exhibit 1-2 shows that the average size of an ethanol plant
has grown from 34 mgy in 1999 to 48 mgy currently. The average size of
new plants under construction is almost 60 mgy, and the average size of
new plants in the planning stage is about 60 mgy, with many sites at the
100 mgy capacity. Exhibit 1-3 shows a comparison of the number of
ethanol plants in various size ranges from 2002 to current. This exhibit
clearly shows the growth in both the number of ethanol plants and the
shift to a much higher ethanol plant size in the U.S. market. The
implications of the larger plant size on the market will primarily
emerge in market cycles where ethanol price is low. Plants with higher
volume will have lower fixed costs per gallon of production, and
therefore be better able to profitably weather market cycles than the
smaller plants.

Exhibit 1-2: Average Ethanol Plant Size

Source:  Renewable Fuels Association:    HYPERLINK
"http://www.ethanolrfa.org/industry/locations/" 
http://www.ethanolrfa.org/industry/locations/ 

Exhibit 1-3 Ethanol Plant Capacity Distribution

Source:  Renewable Fuels Association:    HYPERLINK
"http://www.ethanolrfa.org/industry/locations/" 
http://www.ethanolrfa.org/industry/locations/ 

At the same time, the ethanol producers continue to rely almost
exclusively on corn as a feedstock, with almost all the capacity under
construction coming from corn. In addition, the geography of U.S.
ethanol production is not materially changing, with production
increasingly focused on the U.S. Midwest (PADD 2) through January 1,
2008.  Exhibit 1-4 shows a map of the U.S. with existing, under
construction, and planned projects identified. Note that PADD 2 remains
the core production area, although there is a widening of the production
“belt” from Iowa/Minnesota into Nebraska, Illinois, Ohio, etc prior
to 2008. This is basically the migration of the Iowa/Minnesota ethanol
plant “model” into other corn-producing markets. 

In this exhibit, there is a clear trend in projects being planned
(yellow triangles) for development in other PADD’s. These plants under
development or planning indicate a movement away from PADD 2 sourcing
into regional sourcing closer to gasoline markets. ICF has not reviewed
these specific project proposals within the scope of this assignment,
however, we expect that the developers are planning to utilize local
corn or other economic feedstock as a raw material. The potential for
these projects to actually be implemented may depend on the developers
ability to persuade investors that reliable raw material supply is
available, and that land, permitting, and byproduct markets are also
viable.

Exhibit 1-5 shows the same information on a capacity basis with columns
for current (July 2006) and forecast (2012) assuming all planned
projects are completed and operational at that time.  While PADD 2
production continues to significantly grow beyond the base
Iowa/Minnesota core, it is clear that other PADDs are aggressively
looking at production facilities.

Exhibit 1-4: Existing, Under Construction, and Planned Ethanol
Production Facilities

Source: Renewable Fuels Association:    HYPERLINK
"http://www.ethanolrfa.org/industry/locations/" 
http://www.ethanolrfa.org/industry/locations/  

            www.impact-net.org/LinkedDocs/
Ethanol%20Production%20Package.xls

Exhibit 1-5: Ethanol Current and Future Production Capacity (mmgy)

Source: Renewable Fuels Association:    HYPERLINK
"http://www.ethanolrfa.org/industry/locations/" 
http://www.ethanolrfa.org/industry/locations/  

            www.impact-net.org/LinkedDocs/
Ethanol%20Production%20Package.xls

ICF also examined the historical ethanol production information as
published by the EIA and compared it with the ethanol capacity
information. Exhibit 1-6 shows that the ethanol production capacity
utilization has increased from the mid-80’s in 1999-2002 to the
95-100% utilization level in 2003 to current. While it is likely that
the actual capacity on an ethanol plant may exceed the “nameplate”
capacity, it is clear that the ethanol industry has been operating for
the past few years at a pace that is pushing the maximum utilization of
the current ethanol plant capacity. 

Exhibit 1-6: U.S. Ethanol Producers’ Utilization

Source: Renewable Fuels Association 

Specific Producers

The significant transitions noted above will result in a number of
changes in the makeup of the ethanol producers in the U.S. Exhibit 1-7
shows a listing of the ten largest ethanol producers as of January 1,
2006, 2008 and 2009. ICF has assumed that essentially all of the
existing capacity and capacity under construction (as reported by RFA)
will be operational by January 1, 2008. Capacity growth beyond 2008 is
based on information gleaned by ICF on announcements of planned new
capacity.

Exhibit 1-7: Top U.S. Ethanol Producers

 

Source: Renewable Fuels Association:    HYPERLINK
"http://www.ethanolrfa.org/industry/locations/" 
http://www.ethanolrfa.org/industry/locations/  

            www.impact-net.org/LinkedDocs/
Ethanol%20Production%20Package.xls

Clearly, the largest producer is ADM (Archer Daniels Midland), with over
20% of current production. After ADM, there are a number of producers
adding new plants. Based on plants under construction (operational by
2008) and those in the planning stage, it appears that several producers
will become more prominent, but still lag well behind ADM in production
capacity. These producers include U.S. BioEnergy, VeraSun, ASAlliance
BioFuels, Aventine, Beemer and others. The ten largest producers account
for about 41% of the total U.S. ethanol production by 2008. ADM’s
market share of production will decrease from current levels, but then
increase after 2008 as their new 500 mgy capacity (two locations)
becomes operational.

Looking at the top 4 firms in each time frame, the production share
declines from 34% to 29% on January 1 2008 to 28% in 2009.  Based on
this outlook, ICF believes that the ethanol production industry has a
relatively low exposure to domination by one or small number of
producers.  Conclusions in the FTC report issued in December, 2005 were
similar. 

That being said, many other industries, including the oil industry, have
undergone periods of acquisition and mergers. The same overall drivers
behind those mergers apply also to ethanol producers. Mergers would
achieve lower overheads, centralized plant support, aggregated raw
material procurement processes, etc. We believe it is likely that this
will be seen in the ethanol production market over the next few years.

Ethanol Imports

In 2005, the United States imported roughly 110 million gallons of
ethanol, or 302 thousand gallons per day.  This volume was roughly 2-3%
of the total ethanol demand in the U.S. in 2005. The sources of the
majority of these imports were South and Central American countries as
shown in the table below.  The lone exception was Canada, which
accounted for 2% of imports.

Exhibit 1-8: 2005 Ethanol Imports by Source Country

			     Source: EIA Company Level Imports Data

The Caribbean Basin Initiative (CBI), which falls under the umbrella of
the Central American Free Trade Agreement (CAFTA), allows duty-free
imports of ethanol to the United States.  Therefore, in 2005, Jamaica,
El Salvador, Costa Rica, and Trinidad & Tobago sent imports to the
United States on a duty-free basis.  As part of the CBI, these countries
are required to meet certain requirements in terms of percent ethanol
produced from local feedstock and adhere to caps on imports from
specific countries.  Alternatively, these countries can reprocess
hydrous ethanol from Brazil in a dehydration plant and import duty free
up to 7% of U.S. ethanol demands. Imports directly from Brazil on the
other hand are administered a 54 cpg tariff which in effect offsets the
51 cpg gallon tax credit received for blending ethanol into gasoline. 
CBI countries and Brazil accounted for 98% of the U.S. ethanol imports
in 2005.

Twelve companies imported ethanol in 2005, with the four largest
accounting for approximately 70% of the total volume imported as shown
in the table below.  It should be noted that companies importing ethanol
do not necessarily blend the ethanol themselves.  According to 2005 EIA
data, only BP, Chevron, Shell and Conoco import and also blend ethanol.

Exhibit 1-9: 2005 Ethanol Imports by Importing Country

		   Source: EIA Company Level Imports Data

The table below shows a PADD-level breakdown of the imports by importing
company.  The majority of imports are going into PADD 5, with Hogan and
Cargill constituting a major portion of those PADD 5 imports.  BP,
Vitol, and Northville account for the majority of imports into PADDs
1-4.

Exhibit 1-10:  2005 Ethanol Imports by Importing Company PADD
Distribution

	     Source: EIA Company Level Imports Data

Importers of ethanol, similar to producers, will be owners of renewable
credits under the proposed program.

Section 2:  Ethanol Marketing

The demand for ethanol in the U.S. is met by the sales of domestically
produced ethanol, and the sales of ethanol imported from other
countries. For 2005, domestically produced ethanol totaled 4.0 bgy and
imported ethanol was 0.3 bgy. The domestic ethanol is marketed by a core
group of large ethanol marketers. Some of the marketers have their own
production facilities, and others either buy ethanol from producers and
market the ethanol, or they have marketing agreements with producers to
market ethanol for a fee. Some ethanol plants are co-operatives, in
which several farmers may supply corn, and a marketer will provide a
common price for the ethanol to the co-operative members.

The large number of new ethanol plants being constructed in many cases
have an ethanol marketing agreement either in place or being negotiated
with a marketer. In some cases large producers appear to be moving to
market their own product (for example, VeraSun will market on their own
in 2007 rather than through Aventine), however we believe that most new
production locations will move their product through the large marketing
companies.

Since many of the ethanol marketing companies are not public, ICF has
used existing information developed by EPA, as well as follow-up
conversations with key ethanol marketers and the RFA website to develop
a view of the ethanol marketers’ current sales levels and forward
outlook. Exhibit 2-1 shows the results of this analysis, in terms of
U.S. ethanol marketers based on total volume sold (including any own
production) currently, and then by year end 2007.

Exhibit 2-1: Current Ethanol Marketing Volume by Marketing Company 

Source:  www.impact-net.org/LinkedDocs/
Ethanol%20Production%20Package.xls

Exhibit 2-2: Estimated January 2008 Marketing Volume by Marketing
Company

In developing changes in marketing volumes from July 2006 to the end of
2007, ICF included known changes (e.g. VeraSun) along with identified
new marketing alliances from projects currently under construction. The
new marketing alliances included in the  total are shown in Exhibit 2-3.
Though not all new plants have announced marketing partners at this
point, it seems clear that many are utilizing some of the current major
marketing companies.

Exhibit 2-3: Ethanol Plants Currently Under Construction

Source: Renewable Fuels Association:    HYPERLINK
"http://www.ethanolrfa.org/industry/locations/" 
http://www.ethanolrfa.org/industry/locations/  

            www.impact-net.org/LinkedDocs/
Ethanol%20Production%20Package.xls

The customers who are buying ethanol in the market tend to be major
refiners. They are buying ethanol for their own needs to blend gasoline
for sales to consumers. In some cases at their own terminals, and in
some cases at terminals where they have leased tankage, they are also
buying ethanol to re-sell to other marketers who load product at that
location. This is an efficient means of managing ethanol supply without
requiring every gasoline marketer to maintain their own ethanol
inventory. Several marketers contacted indicated that 80-85% of their
ethanol sales were to major refiners.

The contracts for ethanol sales to refiners tend to be primarily on a
term basis, with some spot sales to balance refiner system needs. From
discussions with several marketers, the term sales appear to be of
relatively short duration (3-6 months) and can be based on several
pricing mechanisms. Typically, fixed price transactions, prices tied to
a Platt’s ethanol posting, or prices tied to a Platt’s unleaded
gasoline posting are the benchmark, with differentials (basis) to the
benchmark determined by market conditions, locations, etc.

The balance of ethanol sales from marketers are to large distributor
companies (Quik Trip, Sheetz, and others) and major pipeline and
terminal operators. The pipeline and terminal operators are buying
ethanol to resell to shippers and customers who use their terminals as
an added service.

Ethanol Logistics and Demand:

The logistics and geography of ethanol in the U.S. is important to the
effective growth and development of the ethanol marketplace. The ethanol
industry supply chain begins with a gathering process of feedstock
(primarily corn) into a local plant for processing. The size and
location of ethanol plants is influenced by the economics of gathering
corn and bringing it to the site. In general, it would be grossly
non-optimal to build a grain-based ethanol plant in a location removed
from feedstock.

Once ethanol is produced, it is gathered by marketers and moved to
customers through several distribution channels. Exhibit 2-4 shows the
primary ethanol flow from PADD 2 production sources into the
marketplace. The grey lines convey the primary flow in 2005, and the
green lines indicate the additional demand markets added in 2006 based
on the MTBE elimination and Hawaii’s ethanol mandate (beginning April,
2006).

Exhibit 2-4:  U.S. Ethanol Flows and Supply

Ethanol demands in the Midwest region are typically supplied from the
plants to marketing terminals by either truck or railcar movements. The
railcar movements are typically single railcars of ethanol.      

Ethanol is supplied to California primarily via a rail car unit train
operated by Burlington Northern railroad. The unit train picks up
ethanol at multiple Midwest locations and travels to the Lomita Rail
Terminal near Los Angeles. The unit train carries about 2.8 million
gallons of ethanol in up to 100 rail cars. Product is pipelined from the
terminal into Shell-owned tankage for movement by truck into the Los
Angeles and California gasoline terminal system for blending into
gasoline.

Ethanol has been supplied into the New York and Connecticut markets to
replace MTBE in reformulated gasoline since those states banned MTBE in
2004. Most of this ethanol moves on unit trains from the Midwest into
Albany, New York and Sewaren, New Jersey terminal storage through a
process similar to the California movements. The railroads used are CSX
into Albany and Norfolk Southern into Sewaren. Product can be moved by
either truck or barge into other New York and Connecticut terminals.

With the elimination of MTBE in gasoline by the major oil companies in
2006, mid-Atlantic and New England states which had areas mandated for
reformulated gasoline are converting to ethanol-blended gasoline In most
cases, ethanol into these terminals is being delivered from Albany and
Sewaren terminals via either barges or trucks as required. 

The Dallas and Houston markets are also undergoing a similar “MTBE”
phase-out transition. There have been logistics issues with railcar
congestion in this market, inhibiting ethanol blending. Additional
ethanol receiving tankage is being constructed by CSX railroad, but the
state of the supply reliability is still developing.

Exhibit 2-5 shows an ethanol supply/demand balance for 2005, and an
estimated supply/demand balance for a 2006 end-of-the-year scenario in
which the MTBE phase out has been completed, and new ethanol production
capacity has been made operational. 

Exhibit 2-5: 2005 and 2006 Estimated U.S. Ethanol Supply and Demand, bgy

                                

This analysis shows that the total ethanol demand by the end of 2006
will be almost 45% above 2005 average demand. Imports have increased to
enable the higher demand levels, and ICF has identified about a 1.5 bgy
increase in ethanol production capacity will be onstream by year end
2006.

Industry contacts (refiners, blenders and marketers) seem to agree that
the logistics and supply situation is suffering some birthing pains as
these new markets are added. In general though there is optimism that
the process will mature, tankage will be re-deployed into ethanol
service as needed, and a routine pattern of supply will evolve.

ICF notes that the existing marketplace will likely improve logistically
to accommodate today’s demand for ethanol and “get over” the MTBE
phase-out. Longer term, the new ethanol production being developed will
need to move into the market. It will be important to the goal of
meeting the Renewable Fuel Standard that the incremental ethanol
production gets into the marketplace efficiently. The phase-out of MTBE
is driving the current rapid additional use of ethanol in gasoline in
new market areas. The future ability of marketers to penetrate other new
markets (e.g., Atlanta) will depend more on economics, and logistics
costs may be an important decision factor for refiners and blenders
looking to decide whether or not to sell gasoline in markets currently
selling conventional (i.e., non-reformulated markets).

At current ethanol prices (about $4.00/gallon in the spot market), it is
unlikely that refiners or blenders will further expand gasoline sales
containing ethanol. However, as new production begins to exceed demand
levels, ethanol prices are likely to fall and make ethanol more viable
on an economic basis. The independent marketers and blenders are likely
to take a leading role in pushing new markets for ethanol penetration.
If sales significantly lag demand, it is possible that state legislators
will consider actions to mandate ethanol usage. 

Section 3:  Refiners & Blenders

Refiners

As noted earlier, major refiners directly purchase over 80% of the
ethanol from ethanol marketers. Under the proposed terms of the RFS,
refiners who produce gasoline, and parties who import gasoline are
considered obligated parties required to own a determined percentage of
gasoline produced or imported as renewable credits. Hence these parties
determine the “demand” for renewable credits.

Gasoline Production

U.S. gasoline production in 2004 and 2005 averaged about 8.25 million
barrels per day, and gasoline imports (net finished and blendstocks)
averaged 1.0 million barrels per day. In gallons, production is 126 bgy,
and imports 15 bgy (versus 2005 U.S. ethanol production of 4.1 bgy
according to RFA). The U.S. gasoline production in 2004 and 2005
included about 0.3 million barrels per day of MTBE, which is essentially
being completely phased out in 2006.

The major gasoline producers in the U.S. can be identified from studying
published refinery capacity data, 10-K reports, and other trade
publications. In most cases 10-K reports do not identify actual U.S.
gasoline production for the company. ICF’s approach to estimate the
largest gasoline producers was to identify the refiner’s published
crude capacity, and average industry utilization (both as reported to
EIA), and estimate actual gasoline yield on crude (i.e., the fraction of
the crude oil that is transformed into gasoline). The gasoline yield on
crude for the U.S. in total is published by the EIA as part of the
Petroleum Supply Annual, and this yield has averaged about 53% of crude
capacity over the past two years. 

ICF used this information, and made some adjustments based on ICF’s
knowledge of specific refiners operational configurations (include
production of petrochemicals, processing of non-crude feedstocks, etc)
and estimated the largest gasoline producers in 2005 (See Exhibit 3-1).
In addition, U.S. refiners have announced a number of refinery expansion
projects in the past year. Most of these will become operational in the
2009-2010 timeframe. Based on these announcements, ICF estimated changes
in refinery gasoline production over the 2005 to 2012 period, and
forecast refiner gasoline production for 2012. These forecasts are also
reflected on Exhibit 3-2. Note that the 2012 forecasts assume the
complete elimination of MTBE from the gasoline pool by the end of 2006.

Exhibit 3-1: 2005 Gasoline Refinery Production (Includes MTBE)

		     Source:  Company SEC 10-K filings, Annual Reports, and ICF
assumptions.

Exhibit 3-2:  Estimated 2012 Gasoline Refinery Production

		       Source:  Company SEC 10-K filings, Annual Reports, and ICF
assumptions.

Based on this information, ICF anticipates that the gasoline production
from the top ten refiners will increase from 8.2 to 8.7 million barrels
per day over the period. Barring mergers or divestments, the composition
of the top ten is not likely to change, with Valero and ConocoPhillips
having the largest gasoline production.

Based on this outlook, it appears that the obligation for purchasing
ethanol credits will remain spread across a number of large refiners,
with no significant change in concentration of production occurring. It
is worth noting, however, that the four largest gasoline producers hold
about 48% of the U.S. refinery gasoline production capacity (a much
higher percentage than the four largest ethanol producers).

          

Imports

Exhibit 3-3 shows the top ten companies who imported gasoline in 2004
and 2005.

Exhibit 3-3: Top Gasoline Importing Companies

	   Source: EIA Company Level Imports Data

The import list includes some major refiners and trading companies. The
list is fairly stable in both 2004 and 2005 in terms of both importers
and the relative volumes. Many of the trading companies sell the
gasoline being imported either directly on discharge or (for components)
after blending to finished gasoline. Regardless, the trading company as
importer of record will be the entity obligated to purchase RINs to meet
the RFS. 

The list of importers in Exhibit 3-3 is combined with the top ten
gasoline producers in 2005 (Exhibit 3-1) to identify the top ten
“obligated parties” as defined in the ethanol credit program being
proposed. This list is shown in Exhibit 3-4 below.

Exhibit 3-4: Top Gasoline Producers/Importers

	               Source:  Company SEC 10-K filings, Annual Reports, ICF
assumptions, and EIA                     		Company Level Imports Data

Based on this assessment, the major purchasers of RINs will be Valero,
ConocoPhillips, ExxonMobil, and BP. The total volume percentage of
gasoline supply (production plus imports) for these four companies in
2005 was 48% of the total gasoline supply. Each company, however, may
have very different system operations which would affect their strategy
for dealing with ethanol and RIN management.

For example, both Valero and ConocoPhillips have a low level of actual
retail and wholesale marketing sales compared to actual gasoline
production. They sell a percentage of their gasoline production into the
spot market on a bulk basis (meaning into pipelines or barges to other
companies). Hence their need for physical supply of ethanol may be less
than for some others. Other companies may not market heavily in the
regions where reformulated gasoline predominates, and they may have less
need for physical ethanol supply than others. A specific analysis of
each companies’ current ethanol blending requirements is outside the
study scope, but it is clear that there will be a number of companies
that are “short” RINs due to high production volumes and low system
ethanol demand, and there will be other companies with the reverse
position, i.e., companies that are long “RINs” due to high ethanol
purchase needs and relatively lower gasoline production. (Note that this
assumes that the purchaser of ethanol for blending obtains the RIN as
proposed).

As noted, importers of gasoline or gasoline blendstocks will also be
obligated parties, even if they are simply bringing the gasoline into
the U.S. to be blended into finished gasoline by other parties. These
importers (such as Vitol, Glencore, etc) will be required to purchase
RINs to meet the annual RFS requirement for the imported gasoline. These
parties, as well as the U.S. refining parties who are producing gasoline
will establish the total “demand” for RINs. 

Non-Refining Blenders

The non-refiner blenders tend to be smaller entities in the ethanol
supply chain. These companies can be marketer/blenders such as Sheetz,
Quiktrip, etc, or they can be pipeline companies that purchase and store
ethanol at their loading terminals for parties who ship and load RBOB
product through those terminals.

Access to information on the amount of ethanol used by these parties is
very limited, and particularly so now as the Mid Atlantic, New England
and Texas markets are in flux. However, these parties play some very key
roles. Marketer/Blenders, for example, often are the first participants
to see a market change evolving and can launch ethanol based sales in
new markets somewhat easier than refiners. 

There do not appear to be any large concentrations of marketer/blenders
who could influence the RIN values. Pipeline companies who purchase
ethanol for re-sale at terminals may need to consider the implications
of RIN ownership on their rate structure and legal exposure.

Section 4: Outlook

The analysis of the ethanol supply chain should be considered in the
context of the overall U.S. gasoline supply and demand. The prevailing
outlook from the above information indicates the following trends will
emerge:

Ethanol production will grow markedly over the next several years as
plants currently under construction are completed, and new projects in
planning begin construction. Incremental ethanol production capacity by
January 2012 may be as much as 13.5 bgy, or 9 bgy above January, 2006
capacity (this is a supply increase of almost 600 MB/D ethanol).

Refinery capacity increases currently being planned and in engineering
are expected to add about an additional 500 MB/D gasoline supply by
January 1, 2012, even recognizing the elimination of MTBE from the
refinery production volumes in 2006. 

The addition of more gasoline supply from refiners and ethanol
facilities will provide more U.S. sourced supply. The added volume will
potentially decrease imports depending on the ultimate growth in U.S.
gasoline demand over the period. 

The timing of the production increases, ethanol infrastructure
development and expected continued market price volatility will likely
mean that spread between ethanol price and gasoline will continue to
exhibit wide variation.

Periods of weak markets for ethanol versus gasoline may stimulate
legislators to mandate ethanol usage in non-reformulated markets to
assure U.S. ethanol producers remain viable economically and that
home-based energy supply continues to grow.

If demand growth is kept in check due to conservation efforts, and
Europe continues to move surplus gasoline into the U.S. market, U.S.
refining margins are likely to come under periods of significant
pressure.   

The net result is that the gasoline transportation marketplace is likely
to be in a state of significant flux over the next 5 to 6 years.

Attachment 2

  The RFS target of 7.5 bgy is specified in the 2005 Energy Policy Act

 A terminal is a facility with multiple storage tanks for fuels products
owned and maintained by oil companies or pipeline operators. In most
cases terminals also have facilities to load product onto trucks for
delivery to service stations. The terminals must receive ethanol from
barge, railcar, or truck to be able to blend into gasoline blendstocks
to provide quality gasoline to service stations.

 A “term” basis refers to an agreement over a period of time, as in
50,000 gallons of ethanol per month for 6 months at a market agreed
price, or a price indexed to a marker such as Platt’s NY ethanol cargo
price.

 Blendstocks are gasoline blending components which do not meet finished
gasoline specifications, but when blended with other components of
different chemical composition, can meet U.S. gasoline specifications.
Examples are reformate, alkylate, and isomerate.

 Retail sales are sales through company owned and operated stations;
wholesale sales are sales to dealers (delivered by the oil company), and
sales to independent distributors from a terminal loading rack.

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 PAGE   28 

.4 bgy

Legend:

Grey Arrows:  Pre-2006 demand flows.

Green Arrows: New 2006 demand flows.

Red Arrows: Supply imports.

Grey Circles: Supply centers.

   PADD 1

    Supply:

    .1 bgy

2.8 bgy (PADD 2 demand)

   PADD 2

    Supply:

    5.4 bgy

1.1 bgy

.5 bgy

.4 bgy

.2 bgy

.1 bgy

.9 bgy

.4 bgy

PADD 4

PADD 5

PADD 1

PADD 3

PADD 2