Major overcapacity woes loom for oxygenates despite rising demand

Valero Energy Corp.'s oxygenates plant at its Corpus Christi refinery coproduces MTBE and TAME, a technique that's increasingly used worldwide to provide flexibility to meet market demand. The MTBE unit shown has capacity of 17,000 b/d; a separate heavy oil cracker MTBE/TAME unit boosts overall oxygenate capacity at the refinery to 22,500 b/d. Photo courtesy of Valero Energy Corp.

But a potentially major overcapacity problem looms in the not-too-distant future, as more new oxygenate plants are planned than can be supported by even rapidly-growing markets, analysts say.

The shape of things to come may have been foreshadowed recently in tanker movements to the U.S. West Coast, where a record number of tankers were reported unloading record volumes of methyl tertiary butyl ether (MTBE)-far and away the leader in world oxygenate market share-in ports around Los Angeles and at Bellingham, Wash.

Imports surge

Starting last year, much larger-than-usual shipments of imported MTBE began arriving on the U.S. West Coast, said Robert Coleberd of Pacific West Oil Data, Mission Hills, Calif.: "I've never seen anything like this. These are huge cargoes."

A month-to-month comparison of Coleberd's data on tanker arrivals in December 1995 and those slated for December 1996 showed a substantial increase.

MTBE also arrived from more exporting countries this past December than the same month a year before (see table, p. 26). This past January, one 597,000 bbl cargo was due to come ashore at Los Angeles from Saudi Arabia. That's 200,000 bbl more than the largest Saudi MTBE shipment in December a year ago.

Based on scheduled tanker arrivals, more big tanker shipments were headed to the U.S. West Coast early this year from more ports of origin than Coleberd's industry data-tracking firm had ever seen. And he's not alone in spotting the swell in imports.

What's happening

Analysts agree that the current surge in MTBE imports probably reflects a favorable price differential for oxygenated versus conventional gasoline, compelling West Coast refiners to stockpile the most sought-after oxygenate not only for clean-gasoline mandates but also as an octane-enhancer of choice.

Several factors may be contributing to the trend, says Kevin Lindemer, senior director of refining for Cambridge Energy Research Associates (CERA), Cambridge, Mass.

"In recent years, PADD V refining demand for crude oil has begun to outpace PADD V crude oil production. That's really changed the value of California's oil relative to the rest of the world. Before, California was long on crude, but the decline in Alaska production and lifting the export ban on Alaskan crude brought California crude oils up to world parity price, so California's oil is no longer discounted to the rest of the world's any more."

He added, "That may be one reason why different sources of MTBE may be so attractive. The economics of attracting crude and intermediate feedstocks are more attractive. Prior to all this, virtually all of California's MTBE came from the U.S. Gulf Coast and Canada."

Cal Hodge, technical director of the Oxygenated Fuels Association (OFA) and manager of market and regulatory analysis for San Antonio-based refiner Valero Energy Corp., said, "It's a good season to stock up." It's particularly good this year, he contends, as West Coast margins for premium gasoline are unusually high. Importers, seeing the opportunity, are sending large cargoes of MTBE to the West Coast, where, in addition to being used for RFG, it's probably going into premium gasoline as an octane-enhancer at higher-than-usual levels, Hodge said.

"The market will get saturated and prices will collapse, but right now, suppliers are seeking everything they can," Hodge added.

Chemical Market Analysis Inc. (CMAI), Houston, said, "Imports of MTBE in December averaged 92,300 b/d, representing only the second time that imports have averaged more than 80,000 b/d during any given month and the first time to average more than 90,000 b/d. The high volume of imports explained how stocks were able to show a considerable gain at the end of 1996 amidst strong demand and only average production."

CMAI added, "It also helps prove the case of many domestic MTBE producers, who claim that rising imports have flooded the market, causing weak prices and poor returns."

Exports averaged 6,700 b/d in December, resulting in total net imports by the U.S.-the world's largest MTBE market-of 85,600 b/d, or 100,600 b/d including MTBE imports contained in RFG refined outside the U.S., CMAI reported. The trend continued steady gains of recent years. The U.S. imported 42,000 b/d of MTBE in 1995, up from 20,000 b/d 2 years before.

By contrast, CMAI said, "Ethanol trade remained rather uneventful, with imports averaging only 3,700 b/d and exports falling to 600 b/d during December."

What's to come

Market dynamics for oxygenates are repositioning for the long term in a way that will give refiners more choice of suppliers than ever before, contends consultant Douglas-Westwood Ltd., Canterbury, U.K.

By 2000, a large surplus of oxygenate production capacity is likely, if all new plants now planned or being built around the world come on stream, the firm concluded in a recent study.

Despite currently unfavorable economics, the report also projects that oxygenates derived from ethanol and other feedstocks could gain in popularity with refiners, particularly in France, in years to come.

Meanwhile, in the U.S., the perennial MTBE vs. ethanol debate continues to rage on (see related story, p. 22). Ethanol producers seem at risk of losing tax credits, which could ensure that MTBE holds its large command of the U.S. oxygenate market.

Oxygenate preferences

MTBE has long been the favored oxygenate among refiners, due in large part to the favorable economics of a relatively low-cost feedstock, methanol. Another key advantage is that MTBE is fungible, or easy to transport, in the nation's pipeline system.

Spurred primarily by demand for cleaner-burning gasoline in the U.S., MTBE is one of the world's fastest-growing chemicals, with demand expected to increase 16% the next 4 years, following 25% demand growth during 1990-95, Douglas-Westwood notes. Viewed another way, the world produced no oxygenates in 1973 vs. output of 473,000 b/d in 1995.

The company forecasts U.S. oxygenate demand growth, led by MTBE, of 2-2.5%/year through 2000.

Gaining in popularity is tertiary amyl methyl ether (TAME), often co-produced at the same site as MTBE, so output can be switched. There are currently 20 TAME plants worldwide with total capacity of 46,000 b/d vs. 172 MTBE plants worldwide having 502,000 b/d capacity. TAME has similar advantages to MTBE, but lower Reid vapor pressure (Rvp). One benefit of co-producing TAME with MTBE is that feedstocks apart from the C4 stream can be used for etherification, Douglas-Westwood notes.

A major competing oxygenate is ethyl teritary butyl ether, or ETBE. Because ETBE can be made from ethanol derived from corn, it has long been the favorite of the corn lobby. Longstanding political rivalries have existed between proponents of ethanol and MTBE (OGJ, Mar. 22, 1993, p. 21), and the current session of Congress promises to hold much of the same, as ethanol producers continue to press for tax credits.

ETBE has some advantages over MTBE, including a higher octane value. Also, because more ETBE is needed to meet the overall 2 wt % oxygen specification in federal RFG, it also dilutes more of the other components targeted for reduction in the gasoline stream, including aromatics, sulfur, olefins, and benzene, providing an option for refiners to avoid installation of more costly refinery upgrades.

Despite these pluses, ETBE has a number of limitations. It tends to be more volatile, which can toss gasoline containing ethanol or ETBE out of compliance with U.S. Rvp specifications in the peak summer driving months. In addition, ETBE commingles with water molecules in pipelines, and generally must be splash-blended by refiners close enough to the point of sale for the finished product to be carried in tank trucks. Moreover, the economics of ETBE hinges on the supply and price of corn, which can be quite volatile. Last year, for instance, corn prices soared, leading to a slump in U.S. demand for fuel-grade ethanol to an estimated 65,000 b/d in 1996 from 82,000 b/d in 1995, according to Douglas-Westwood.

Still other oxygenates include di-isopropyl ether (DIPE,) and tertiary amyl ethyl ether, or TAEE. Neither are currently in widespread commercial production (see map, this page).

Changing dynamics

In a major difference from years when oxygenates first came into vogue as a means to help control emissions from gasoline, MTBE no longer commands an "environmental premium," analysts agreed.

This means it no longer has a special price differential for its value as a pollution-control measure but is priced on its octane value and competes roughly on par with other octane-enhancing additives.

Ultimately, this may put relatively high-cost producers at an even greater disadvantage with lower-cost producers in the Middle East, Asia, and Latin America, where new MTBE capacity is rapidly coming on stream.

Non-U.S. MTBE producers often can bring plants on stream faster than those in the U.S., as a result of less-onerous environmental and permitting restrictions.

According to Douglas-Westwood, another 76 oxygenate plants either are planned or now under construction. If all these plants are completed, they would add 337,000 b/d to world MTBE capacity by 2000, far above projected total demand of about 582,000 b/d as the new century unfolds.

Of the plants now planned or under construction, a total of 62 would produce MTBE. Most would be split roughly between Asia (18) and Latin America (17), with eastern Europe running close behind with 11 plants planned or under way. The Middle East could bring on as many as seven MTBE plants, while North America and Africa have the least MTBE capacity planned or under way, at two plants each.

Among the other oxygenates, as many as eight TAME, five ETBE, and one DIPE units also are on the drawing boards worldwide.

Also at play is the competition among oxygenates-particularly MTBE and ETBE-for market share, notes Douglas-Westwood analyst Barney Parsons.

Because ETBE can be made from renewable sources, "This is politically important in those areas where raw material for fermentation into the feedstock ethanol is readily available. The U.S. Midwest corn lobbies and the French farming lobbies have interests in promoting ethanol and ETBE, Parsons noted.

In fact, Europe and the rest of the world will see faster oxygenate demand growth in the next few years than the U.S.

The European equation

One of the biggest question marks facing demand for oxygenates through the turn of the century is the extent to which Europe may become a major new consumer of clean-burning fuels.

The European Union (EU) has yet to mandate reduced-emissions gasolines or the use of oxygenates, but individual governments may yet do so, Parsons forecasts.

The continued phase-out of lead may lead to an increase in oxygenates use ranging from 1.75%/year-or keeping pace with the predicted rate of growth in gasoline use in EU nations-to as much as 3%/year. Douglas-Westwood expects that most EU nations choosing to advance cleaner-burning gasolines will follow the U.S. lead and make MTBE the oxygenate of choice.

Pressure to do something to clean up automobile emissions is high, the company notes, with some cities, such as Rome, having banned the use of vehicles without catalytic converters large parts of the day.

Meanwhile, increasing prosperity in eastern Europe will boost demand for MTBE as an octane-enhancer and lead replacement.

Growth of as much as 6%/year in MTBE use in eastern Europe through 2000 is likely, the analyst projected.

Demand elsewhere

But Europe won't be alone in seeking supplies of MTBE. The strongest annual growth in MTBE demand in the forecast period, or 7.5%, will occur in the Asia-Pacific region, Douglas-Westwood predicts, as phase-out of lead in gasoline continues.

MTBE will be sought after as an octane-enhancer as unleaded gasoline's market share climbs to 82% at the turn of the century from 76% this year and 64% in 1994, the report said.

The probability of a ban on octane enhancer methylcyclopentadienyl manganese tricarbonyl (MMT) will boost demand for MTBE in Canada by 4-5%/year. This will increase slightly after 2000 as new TAME capacity comes into play. Latin America's MTBE demand also should grow by 4-5%/year as some cities crack down on air pollution and unleaded gasoline grows in market share.

The Middle East and South Africa will see similar 4-5%/year oxygenate demand growth through 2000, as well, as new MTBE, TAME, and ETBE output proves "easy to feed into domestic markets," Douglas-Westwood said.

Still, if all planned new capacity comes on stream, oxygenates producers will have a run for their money, with supply capability well in excess of demand. And politics will continue to play in deciding the market shares enjoyed by methanol and ethanol-based oxygenates.

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