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In 2001, China initiated an ethanol fuel program to consume aged
grains no longer suitable for use as food. The program was confined
to six provinces and select cities in four additional provinces to
avoid jeopardizing the food supply to China's population of 1.3
billion people. IHS Markit estimates that China produced about
52,000 barrels per day (b/d) of E10, a 10% concentration of
ethanol-based gasoline blend, in 2017. This blend was largely
derived from grain, as non-grain-based ethanol technology remains
commercially unproven, even with the support of government
subsidies.
Given China's concern for food security, ethanol (which comes
mainly from grain) has never been considered a strategic fuel
target for the government. That changed in September 2017, when the
Chinese government announced legislation proposing the use of
ethanol in fuel for all of China by 2020. This move is perceived as
the government's reassurance it will abide by the Paris Accord to
reduce fossil fuel consumption and alleviate global warming. But it
also enhances energy security by reining in the country's
dependence on oil imports. On a more practical level, the
initiative promises to reduce the huge corn inventory that has been
building up for years, resulting from government farming
subsidies.
The ethanol push faces tricky supply options:
bioethanol, fossil-fuel-based ethanol, or
USimports? With a minimum of 10% ethanol blend in the
gasoline pool, which is expected to reach 3.4 million barrels per
day (MMb/d) in 2020, China would need to source 15 million tons of
ethanol per year. That total is almost seven times the volume
consumed today. This volume will increase year-over-year to the
mid-2030s, when gasoline demand is expected to peak. Currently
China imposes significant tariffs of 30% on ethanol imports, both
denatured (mostly for fuel) and natured ethanol, to inhibit
imports. This policy is likely to remain. This year's US-China
trade friction, which is commanding a 25% higher tariff on imported
ethanol from the US into China, further pressures import
economics.
That leaves domestic sources as the most likely solution to the
huge supply gap. Yet China is not likely to encourage the
development of fossil-fuel-based ethanol capacity, such as syngas,
coke oven gas, or coal-based ethanol, or even natural-gas-based
ethanol, due to its significant carbon and environmental
footprint.
The current corn inventory is enough to sustain ethanol
production for nationwide E10 use (which requires more than 15
million tons per year) for about five years. Fuel-ethanol
production capacity stands at around three million tons per year.
It will be years before ethanol capacity grows to the level
required. Therefore, ethanol supply is unlikely to catch up with
demand in the medium term.
Ultimately E10 could materialize in China, but it will
take longer than the government expects
Despite the immense supply challenge, E10 may support China's
fuel and food initiatives eventually, as the government
increasingly commits to decarbonize energy consumption, improve
energy security, and alleviate poverty. Three steps will help China
reach is goals:
China's crude oil imports dependency reached about 68% in 2017.
Bio-ethanol for gasoline can curb the growth of crude oil imports
dependency.
China promises to reach peak carbon emissions by around 2030.
To meet this goal, the country will need to shift energy
consumption patterns from coal to gas and renewables. A move to
bio-ethanol to displace petroleum-derived gasoline will help honor
this commitment.
A need to create demand for base agricultural production will
protect farmers' interests at home. This demand could help narrow
the ever-increasing disparity between rich and poor, as well as
urban and rural populations.
IHS Markit acknowledges the challenges of transporting ethanol
from plants to blending facilities and gas stations. This
difficulty results from the potential for water contamination
during transport, which adds complexity to compliance mandates
across the supply chain. With these caveats, we expect the E10
policy to be adopted after some delay, although it will not be
realized uniformly or simultaneously across the country.
What are the implications for refining and petrochemical
operations?
The use of ethanol will impact oxygenate blends in gasoline such
as methyl tert-butyl ether (MTBE), tert-amyl methyl ether (TAME),
and even methanol. These liquids are to be excluded from
ethanol-blended gasoline due to the restriction of oxygen content
in the gasoline specification, which is required to minimize
nitrogen oxide emissions from gasoline engines.
However, the phase-out of oxygenate blends from the gasoline
pool is not the end of the story. Refiners and traders will need to
redesign the gasoline pool in a cost-efficient manner while meeting
the country's fast-evolving gasoline specifications. In addition,
refiners and chemical companies must adjust their operations to
deal with issues related to fluidized catalytic cracker (FCC)
operation, C4 olefins, and methanol used as the feedstock for
producing gasoline oxygenates.
TAME technology is widely adopted in Chinese refining systems.
It addresses refiners' challenges, including lower olefins in the
new gasoline specifications and increasingly higher demand for
octane. If TAME is out of the gasoline pool, refiners will have to
desulphurize FCC light naphtha, which is used as TAME feedstock, to
meet the 10 parts-per-million sulphur requirement at the cost of a
lower octane rating. To make up for the octane loss, refiners may
need to invest in alkylation and isomerization units.
MTBE is primarily used as a blendstock in the gasoline pool,
which accounted for 95% of total MTBE demand in 2017. In addition
to its use as an octane improver, a small portion of MTBE is
consumed in the production of high-purity isobutylene (HPIB). This
end-use segment is expected to grow at 7.6% annually during
2020-2028, but the relative proportion of MTBE for HPIB will
steadily rise to 24.5% in 2028, assuming the total MTBE demand in
China decreases. MTBE exports are expected to slightly increase,
which will release, to some extent, the pressure from domestic
oversupply. However, it is unlikely that China will become a major
MTBE exporter in the future. Some of the volumes will be exported
as a blending component along with gasoline exports, which are
expected to rise in the long run. It will be interesting to see which
MTBE producer will shut down first because of this ethanol push.
State-owned enterprises are much more competitive than private
players because of better integration along the value chain, from
feedstock supply to gasoline disposal. Hence, private and small
players will be under immense pressure. Also squeezed will be some
of the butylene isomerization-based MTBE units with feedstocks of
raffinate-2. The alternative way to weather this ethanol storm is
to repurpose MTBE units into production of ethyl tert-butyl ether
(ETBE), which uses the same C4 feedstock but in reaction with
ethanol instead of methanol. However, no policy support is yet in
place. In fact, ETBE is considered a better way for ethanol to make
inroads into gasoline, due to better stability and vapor pressure
performance.
Posted 03 January 2019 by Harry Liu, Executive Director, Consulting, Oil Markets, Midstream & Downstream, IHS Markit and