Story by Alexis Madrigal
What happens if, all of a sudden, you need to change the entire energy infrastructure on which California’s transportation system runs?
Most Californians probably haven’t noticed, but that’s exactly what a combination of Midwestern farmers, Big Oil companies, railroad operators, and fuel terminal owners have done over the last decade.
I. How to Take Some Oil Out of An Energy System — Fast
In switching out MTBE, a former component of California gasoline, in favor of ethanol, a behind-the-scenes change of huge proportions took place. The state and its industrial infrastructure companies managed to start putting a billion gallons of ethanol into our gas tanks a year, without anyone really noticing.
“Gasoline is just one component in what is legislated to be motor fuel. You can’t sell it without the ethanol,” says John Mahon, who runs renewable fuels for Kinder Morgan, a key player in California’s liquid fuels market. “Ethanol becomes a critical path.”
In 2000, California consumed about 60 million gallons of ethanol. That grew to 100 million gallons by 2002 and 600 million gallons by 2003, according to the California Energy Commission. In 2006, California consumed about 970 million gallons of ethanol. That’s a 1,500% increase in use of the biofuel in seven years.
Some in the energy debate say that this type of transformation is impossible. Other say radically changing our energy infrastructure is necessary. Many realists seem to suggest that both statements are true.
The MTBE-to-ethanol exchange is evidence that change can happen fast, but it might come at a price. It required no new behavior on the part of consumers and doesn’t appear to have added to the run-up in gas prices at the pump. On the other hand, the changes occurred out of public view in the industrial ports and railyards of the state, and now we’re stuck importing a fuel that may not actually reflect the politics of the people who use it.
The switch to ethanol has been so effective that while the Federal mandate that required ethanol use has gone by the wayside, refiners don’t have any alternative additives for making gasoline that fits the state’s bill.
Now, with a host of new state regulations sending oil, refining, and supply chain companies scrambling to reduce their carbon output, ethanol’s lessons have never been more relevant.
This alternative fuel experiment reveals how flexible our industrial infrastructure is, but also how difficult reducing our dependence on foreign oil is going to be without leaving our energy system more vulnerable than it already appears to be.
II. The Geography of Green
In northern California, the major incoming station for ethanol is the NuStar Selby Terminal outside Crockett, in unincorporated Contra Costa County.
At places like Selby, rail cars filled with ethanol are unloaded into holding tanks, then eventually transloaded into a truck (or a pipeline) that delivers the fuel to a refinery. The Big Oil refiners splash-blend it with hydrocarbons inside tanker trucks into what the state calls gasoline.
That’s one of the things that Selby’s manager, Mike McDonald got shipped to California to do, after his last post at a refinery in the Caribbean. He’s sturdily-built with closely cropped hair. In his blue coveralls, it’s obvious he’s no suit or hipster. When I show up uninvited at Selby early one evening, after weeks of trying to get the NuStar press handlers to call me back, I catch McDonald still working.
And why wouldn’t he be? Selby never stops working. The terminal operates 24-hours a day, 365 days a year. It can store three million gallons of liquid fuels, the vast majority of it being oil.
McDonald’s office is a trailer that sits in the shadow of a farm of gleaming white tanks. A random strip of suburban-looking houses lies across the parking lot, the remains of the old company town of Tormey, which was run by the American Smelting and Refining Company, and largely razed in 1971 when the plant closed along with its 610-foot chimney, once the world’s tallest.
A local later tells me that the lead coming out of the stack was killing horses in Benicia, miles away. “That was back then, though,” he notes appreciatively.
Now the big employer in the area is the C&H Sugar Factory, a couple miles down the road from Selby in Crockett proper. The work never stops there, either. At night, it stays lit-up, almost magical, its machinery convoluted, its processes obscure.
Families play bocce in the warm evenings, the factory rising above them. Down by the port, people fish the waters a mile from where the old smokestack stood. Classic cars sit on lawns, half restored. Despite all this retro civic activity, the town isn’t frozen in time. On the random Wednesday I visited, a local bar, Toot’s, featured a DJ playing hip hop to a small, drunk, tattooed crowd.
27 miles from San Francisco, the epicenter of a green movement trying to change the world, and one mile from a fuel terminal that’s an important node of an equally global but far-less-liberal network, Crockett is just one of many exurban towns ringing our big cities that have become the new battlegrounds in the fight to change how we drive and live.
To push beyond token changes to the energy system, the green movement has to penetrate all the way out to places like this. Guys like McDonald might not have to convert, but they will have to help design the new industrial processes required for a cleaner world.
The geography of green will have to look more like a map of the nation’s rails and highways and less like the store locating app for Whole Foods. The dirty work doesn’t just occur when oil comes out of the ground or is burned in a car. The points in-between matter.
III. How to Move A Billion Gallons of Fuel from Iowa to California
Back in the 1980s, with smog choking American cities, the government decided to tinker with the gasoline hydrocarbon formula to create cleaner burning fuels. The easiest way to do that is to add a little oxygen to the gas. Adding O2 is a little like blowing on a flame: the controlled fire inside your car’s engine burns a little more efficiently and thus a little cleaner, reducing toxic air pollutants, carbon monoxide, and ozone.
Spurred by state and Federal regulations but committed to selling the most petroleum they could, oil companies found the cheapest oxygenate they could, a crude-derived chemical called MTBE. Subsequent environmental impact studies determined that MTBE was a groundwater pollutant, and in 1999, then-Governor Gray Davis ruled that all MTBE had to be removed from California’s gasoline by the end of 2002 (though the phase out was extended).
That left the state casting around for an alternative way to get extra oxygen into its gasoline blend while maintaining the smog-control benefits of the previous blend, and quick. They settled on ethanol, the only scaleable oxygenate available.
“This actually was a major shift in a lot of different things. The phase out was something extremely rapid. It required [the oil industry] to use the only other oxygenate alternative, which was ethanol,” says Rahul Iyer, a founder of the biofuels infrastructure startup Primafuel.
With fascinating symmetry for those familiar with petrochemical farming methods, gas isn’t gas without corn. Though the exact formulations are Byzantine, for most intents and purposes, gasoline in California contains at least 5.7 percent ethanol. That has pushed the state’s ethanol consumption to our current one billion gallons a year.
So, through the last half-decade, ethanol, by default, has become a necessary part of transportation fuel in the state. In so doing, the state and its oil industry created a perfect test case for the rapid adoption of an alternative fuel in a gasoline market about the size of China’s.
But California had and has very little in-state ethanol production. Companies stretching all the way to Illinois had to figure out how to get corn grown and refined in the Midwest to the west coast. Given the speed of the ramp-up, an ad hoc system developed to keep up with the demand. Remember: keeping up with the demand isn’t merely academic; you can’t sell gasoline if you don’t have enough ethanol.
The real action in a shift like this doesn’t occur at what oil companies call the upstream, where a fuel is produced; or downstream, where consumers pay for petrol at energy distribution outlets we call gas stations. What had to change was the midstream, the set of interlocking logistics, transport, and storage facilities that push energy in liquid form around the world.
In petroleum logistics, pipelines do much of the transport work and do it cheaply. The same isn’t true of ethanol. It can’t travel through oil pipelines and building ethanol-only pipelines, at $1-2 million a mile, is too expensive.
Trucks can and do carry fuel into the state, but the majority of ethanol comes to California on trains loaded with ethanol fuel cars. That’s because rail cars are simply cheaper. Cybus Capital Markets found that tank trucks can cost upwards of 20 cents per gallon transported. Rail rates cut that in half.
For the rail companies, ethanol is not a major marginal strain. As John Risovato of Burlington Northern Santa Fe noted, out of the 10 million total cars his company transports, only 41,000 carloads were filled with ethanol.
The downside to the rail system is that it’s logistically more complicated. As laid-out by The Center for Supply Chain Research at Penn State, there are six major transportation steps in between an ethanol refinery and a gas station’s storage tanks. Ethanol has to be shipped in rail cars to a rail terminal. The fuel is then transloaded to distribution terminals that store the ethanol. Eventually, these facilities blend the ethanol into gasoline while it’s being loaded into trucks. Finally, tank trucks schlep the fuel to your local Mobil or Texaco.
Each rail car holds about 30,000 gallons, so to meet our annual billion-gallon demand, over 90 rail cars worth of biofuel have to enter the state each and every day.
In California, the midstream is dominated by two companies: Kinder Morgan and NuStar. They own most of the terminal facilities, pipelines, and storage locations in the state. That’s placed them at the middle of the scramble to ramp up the amount of ethanol flowing into the state.
Burlington Northern Santa Fe Railroad services Kinder Morgan’s Lomita Rail Terminal, which provides ethanol for a large percentage of southern California. Lomita is a special ethanol-only terminal. It’s the only place in the state that can accommodate so-called unit trains, which are 96-car trains filled exclusively with one product, in this case, ethanol.
Lomita is designed to offload an entire unit train in 24 hours, which reduces the turnaround time for Midwestern producers.
“It might take you thirty-some days to ship a single car,” said BNSF’s Risovato. “On a unit train, depending on where you’re coming from, it’s ten to twelve days.”
The railroad also gives unit trains a 3 to 4 cent discount per gallon to encourage their use and because the system makes the railroad more efficient overall.
After the Lomita terminal receives the ethanol, it pipes it to a Shell refinery nearby in Carson, California. As Agriculture Online explains, “Shell has refurbished five 65,000-barrel storage tanks to hold ethanol. Those and other improvements made to switch from MTBE to ethanol cost the company $35 million. From there, 100 fuel trucks a day haul ethanol to blenders that supply gasoline to most of the major oil companies in the southern California market.”
In northern California, there is no fast-offloading, unit-train capable, ethanol-only terminal. There are just Selby and a smaller facility in Stockton.
Not that Selby is a bad spot. In fact, it’s uniquely situated to be an infrastructure hub. It’s right on the Bay, on the ocean end of the Carquinez straight, so it’s got marine access. I-80 rumbles through Crockett a mile east and a Union Pacific rail line comes right through the area. You couldn’t ask for better access to the nation’s transportation systems. That’s why NuStar sited its three million gallon tankage facility smack dab where old Tormey used to be.
But Selby wasn’t designed to bring in large amounts of biofuel. It was designed to bring in crude. Selby can only accommodate about 30 cars of ethanol at a time and it still takes them a day to unload them. Even with imports from Brazil or shipped from down south, the ethanol distribution infrastructure in northern California is not stable.
“In the northern California area, your largest tank farm is Selby and I know they have problems serving it,” Risovato said. “It’s been embargoed several times. It got congested and they had to meter the loads in until it got decongested.”
McDonald acknowledged that his site sometimes had difficulties bringing ethanol into the terminal.
“It can get backed up, but it’s mostly railroad problems, mechanical problems,” McDonald said.
“Metering the loads” causes delays. And with the ethanol infrastructure in its still-nascent state, there isn’t a lot of room for error.
The system that’s developed, according to Kinder Morgan’s Mahon, has little slack. Ethanol is used as quickly as it comes into the state.
“The petroleum world has several backup systems,” Mahon explains. “Ethanol doesn’t have multiple backup systems. If anything breaks down in that supply chain, all of a sudden you’re trucking from Arizona.”
The value that would accrue to the company that stabilized (and thereby dominated) the northern part of the state’s market has pushed Kinder Morgan, Pacific Ethanol, and Primafuel to look at building an ethanol unit train terminal in the Bay Area.
“In general, the market is serviced by what would be characteristic of any startup or new business. It really is a hand-to-mouth system,” Mahon said. “It is an emergency fire drill going on every day. All you need is a couple of [rail] cars to get lost or a couple of trucks to not get a driver and you’re not moving product.”
When “product” means gasoline in the world’s third-largest gasoline market, that’s a major energy security risk.
IV. In Which Our Hero Is Called Upon One Too Many Times
The California Energy Commission expects ethanol to continue to become more integrated into the state’s energy system. In response to Federal legislation, ethanol blends are expected to increase from about 6 percent now to 10 percent by 2012. That will drive demand from 1 billion gallons of ethanol this year to 1.7 billion gallons by 2012. Put in perspective, if the expected changes occur, ethanol use will have grown 1.6 billion gallons in a decade. The total ethanol market will be larger than the Netherlands’ entire gasoline market, and only a little smaller than Thailand’s. As rapid changes in industrial infrastructure go, it’s spectacular.
But now a host of new regulations are forcing even more changes to liquid fuel in the state.
Our dependence on oil, rightly called an addiction, has given rise to a strong movement to kick the habit. The coalition pushing for an end to crude oil derivative use for transportation fuel comes from an odd variety of corners with distinct interests.
Responding to those concerns, the California legislature and governor have promulgated a cluster of laws and regulations designed to change the fuels you put in your car. The following table summarizes these overlapping desires made law.
“Don’t change horses in midstream.”
What you might note about the list of regulations is that they all focus on different pieces of the problem with oil. AB 32 directly addresses the problem of carbon dioxide emissions, which scientists have identified as the primary driver of what they call “radiative forcing” and what the rest of us call global warming. AB 1007 directly addresses alternative fuel use and AB 1493 calls for a reduction in petroleum dependence.
The problem is that different types of infrastructure at the refining and logistical levels are going to be needed to meet different types of requirements. For example, the best solution to Executive Order S-01-07, which requires that fuel carbon emission intensity decrease 1 percent a year for a decade, might not be the best solution for AB1007’s requirement to decrease dependence on petroleum.
“What is the priority that we’re trying to meet?” asked Mahon of Kinder Morgan. “Let’s pick our poison and stick to it.”
As pressure ratchets up to change the mix of components that go into gasoline, Mahon worries that lawmakers won’t take into account the difficulty of rejiggering the already stressed energy infrastructure of the state.
“California has to say, ‘How do we make sure this system doesn’t break?’” Mahon said.
But in the search for a quick solution, dry-mill grain ethanol produced from ears of corn from Iowa could find itself being called upon to deliver results that stretch the limits of the possible, plausible, and wise.
“The market has carried corn ethanol so far that people are looking to it to do things that it was never designed to do, like answer the climate crisis or replace oil,” said Iyer, a founder of Primafuel.
The best that ethanol can probably provide is a temporary and necessary fix to some of the problems that cheap oil created. Beyond that, ethanol will create more problems than it solves.
V: Where the Khakis Meet the Carhartts
Dozens of companies up and down Silicon Valley are hard at work rethinking the gasoline that’s powered internal combustion engines since Henry Ford oversaw assembly lines. They’re designing and growing fatty algae whose bodies are filled with oil that just so happens to mimic diesel fuel. They’re using genetically-modified bacteria to munch tires and sugar cane into petrol. Anything that contains carbon, they reason, can be turned into a liquid hydrocarbon with the right combination of chemical process and engineered microbes. They call these experiments advanced biofuels, and they, we’re assured, will be better for the environment than ethanol.
And yet, for all the press, all the beautiful minds at work on the best science, the ultimate success of the enterprise might rest in the crusty industrial checklist of the logistics situation. Trains, trucks, and the people who connect one to the other could have as much of an impact on the market as the particular molecular manipulations that produce the right fuel.
Some advanced biofuels claim to fit neatly into certain pieces of the current liquid fuel distribution system, but until they’re actually produced at scale, it won’t be possible to know how many devils will need to be exorcised from the details.
“Everybody is excited about cleantech and having some wiz bang widget, but it doesn’t matter if you’re talking about algae or jatropha biodiesel or switchgrass cellulosic ethanol,” says Iyer of Primafuel. “None of it matters unless you can get it to market.”
To get to market, the fuel will have to go through the Crocketts of the world. The companies producing the fuel will have to interact with the Kinder Morgans, the farmers, and the Mike McDonalds. Do green venture capitalists, recently converted from the IT ranks, have contacts in these areas? Do Berkley molecular biologists want to spend their time getting dirty in the industrial parks of the exurbs?
In the solar industry, the schism between purists and those like VC-backed Ausra, which put a former fossil fuel power plant executive at the helm, continues to grow. Who better to get a power plant built, the Ausra officials told me, than someone who’d built a few, no matter how fossilized its fuel?
It’s a split that Iyer’s company is keenly aware of. When I first met Iyer in a San Francisco bar last winter, he spoke passionately about the difficulties of connecting the current and future fuel distribution networks. The challenge is not, however, just the nozzles and tanks, but the people who control them, too.
Iyer, who is of Indian descent, noted that he’s not the guy they send to sell their services to biofuel producers in the largely white, rural regions of the Midwest. Take a look at the company’s website: you won’t see the words “green” or “environment” anywhere.
The highly pragmatic approach extends beyond their branding. Though their prospective Sacramento biodiesel plant will produce some of the cleanest fuel in the nation, it will also provide a terminal for unit-trains filled with old-school ethanol and tanks to store all types of biofuel.
The facility is the type of infrastructure that could allow California to satisfy its current demands while allowing it the flexibility to incorporate better fuels as they come along. It would increase the energy security of the Bay Area and San Joaquin Valley without locking the region into ethanol use forever.
This flexible execution and ideology is the only way that Iyer thinks his company can build a big enough tent to convince a host of skeptical groups — investors, regulatory agencies, refiners, environmentalists — to support the same plan for the future of fuel.
“At the very highest level, it’s our vision that this facility enables a wide range of low carbon fuels making it into the marketplace,” Iyer said. “The challenge is that in order to justify investing more than $100 million in steel and concrete, you need to ensure this facility can start up on time.”
Primafuel is doing what it can to make sure that happens. They’ve picked up a California Air Resources Board grant and a Davos Technology Pioneer award. They’ve made it most of the way through the environmental permitting process and are in the final stages of negotiating a complex financing package. If all goes well, they’ll break ground in the last quarter of this year and be operational by the end of 2009.
“It is a market changing investment,” Iyer maintains, but it isn’t one that many companies are eager to make. Squeezed on one end by Big Oil companies and on the other by consumers unhappy with high gas prices, companies in the fuel distribution business don’t get to innovate through iterations. There’s no beta for a rail terminal, and a fail whale for the gasoline system wouldn’t be cute.
In other words, if we want alternative fuels and electric vehicles to transform the century-old car and society with it, we can’t take Lincoln’s proverbial advice: we have to change fuels in midstream.
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