Ethanol Fires Up

It’s a colourless, inoffensive looking liquid, but it’s as combustible as petrol. Just how combustible is ethanol, and the debate surrounding its use, was demonstrated just over four years ago when the coalition parties announced before the 2001 election a policy of introducing a target of blending 350 million litres of ethanol and other biofuels into Australia’s roughly 31 billion litre petrol and diesel market.

The policy was a sop to the National Party, which was pushing for the creation of distilleries and jobs in regional areas to produce ethanol from wheat, sorghum, corn, sugar, potatoes, or any vegetable matter. The target was a drop in the bucket of Australia’s vehicle fuel market and no one in government expected such a modest policy intention to spark the political explosion that nearly brought the emerging ethanol industry to its knees.

It came at a time, too, when independent petrol stations in southern Sydney and Wollongong were selling ethanol-blended fuel at 5–10¢ a litre cheaper than the nearby stations of the major oil companies.

Big Oil went to war and their target was Australia’s ethanol pioneer and biggest producer, Dick Honan, and his big Manildra ethanol refinery near Nowra on the NSW south coast, which supplied the independents. He also makes edible starches and food additives for the food and brewing industries. Honan’s mistake was to blend 20% ethanol with the petrol he supplied the stations. Most blended fuels internationally are 5% or 10% (E5 or E10), although in Brazil the standard is 22.5% and a growing number of stations in the US sell it in blends up to 85%.

Cars using more than 20% generally need modifications to their fuel lines and petrol containment systems to cope with the higher oxygen content of ethanol which is alcohol, a carbohydrate, as opposed to petrol, which is hydrocarbon. The only difference between ethanol and the alcohol consumed in drinks is that, typically drinking alcohol contains about 5% water. Ethanol refining removes all of the water.

Although there was no recorded damage to any car that used Manildra’s blend, the strength of the ethanol in the blend Honan sold allowed ethanol’s opponents to mount a campaign alleging ethanol damaged engines and was downright dangerous. This was not true, of course, but Honan had no time to respond before things got very political. Labor got into the act, accusing Honan of using his alleged friendship with John Howard to win special treatment for the ethanol industry. This wasn’t true either, but it made good headlines. To reinforce their argument, the oil companies put “no ethanol” stickers on their pumps, the implication being that ethanol was bad for cars.

Manildra’s output at its peak of 60–70 million litres of ethanol a year, fell over the ensuing two years as the anti-ethanol campaign got traction (and the Government was obliged in 2003 to place a 10% cap to appease the car manufacturers) to about 25 million litres (25 megalitres) a year.

This was a mighty distraction from the issue of ethanol’s cleaner burning and octane enhancing qualities as well as the fact that it is renewable. To his credit, Howard '” prompted as much by his coalition partner the Nationals than any closed door lobbying '” saw through the anti-ethanol urgings and gave the oil companies an ultimatum at a biofuels summit in September 2005: use ethanol blended petrol, or the Government will mandate its use.

They chose the voluntary route. So persuasive the Prime Minister must have been the chief executive of Caltex Australia, Dave Reeves, emerged from the meeting declaring that the key was “to encourage consumers to buy ethanol-blended fuel and biodiesel”, which “are perfectly good fuels”. This was quite a contrast to the oil majors’ attitude two years earlier, although to be fair, Reeves wasn’t in the driving seat at Caltex then.

Asked about the changing attitude of the oil groups, group manager of corporate affairs for Caltex, Richard Beattie, told Eureka Report: “The communities represented by the Government have a policy that calls for a viable biofuels industry and the oil companies have to listen to that.

“We would prefer to let the free market be allowed to determine the outcome of ethanol usage.”

The ethanol industry is crossing its fingers that the promises the four oil majors have made to Howard in their “action plans” submitted on December 22 last year to incorporate ethanol in petrol and biodiesel (essentially recycled and treated cooking oil) in diesel to reach the Government’s 350 megalitre target. In fact, the plans of the oil majors add up to a total of 430–520 megalitres by 2010, which exceeds the Government’s modest target. They’ve also put themselves in a position of offering a transparent monitoring system so their progress towards the target can be measured.

The first review of their progress is set for June, but Renewable Fuels Australia, the ethanol producers’ Canberra-based lobby group, is sceptical the oil companies can meet their own targets unless they’ve already entered uptake contracts with existing producers, and is pushing for the first review in March.

“The support of the oil companies is essential to the future of ethanol,” says Matthew Kelly, who has put together a consortium to build ethanol plants at Gunnedah in northern NSW and Perth, Western Australia. The two plants will produce about 80 megalitres a year and cost about $100 million each. He expects to announce soon an agreement with one or more oil companies to take a proportion of production from the plants due to be completed in 2007. With no guaranteed market, no backer would finance these projects.

Ethanol is expected to have a production cost of $US40–42 a barrel, compared with the recent price of unrefined oil of about $US67. In Australia, ethanol, like all alternative fuels such as LPG, qualify for an excise rebate, which expires in 2010, by which time the industry is hoped to be commercially viable.

At present four ethanol refineries and two biodiesel plants are under construction to add to the Manildra refinery, CSR’s small refineries in Queensland and Melbourne, and biodiesel plants south of Brisbane and at Maitland on the NSW central coast.

Kelly’s group has a number of “strategic” investors, believed to be feedstock providers and at least one oil major, plus a debt and equity financing facility from Canadian Imperial Bank of Commerce. (John Keniry, the chariman of feedstock company, Ridley Corp '” an ASX Top 200 listing '” is one of the four members of the Prime Minister's ethanol taskforce).

Separately, ASX-listed Caltex has struck a deal with Dalby BioRefineries, the refinery project controlled by Dalby businessman Chris Harrison, to buy an estimated half of the ethanol output of the plant. The first stage of the plant, producing 40 megalitres and costing $54 million, is due for completion this year, and the second stage producing a similar quantity in 2007. All up the plant will cost more than $100 million. The oil company has also purchased Harrison’s chain of 11 petrol outlets in the region to sell E10 petrol.

The commitments made by the major oil companies ethanol and biodiesel not only underwrites the construction of more refineries and biodiesel treatment plants, but opens up opportunities for investors to tap into this growing fuel sector. At this early stage most of the investors, such as in Matthew Kelly’s Primary Energy group, appear to be “strategic”, with skin in the game but in the near future ethanol producers are set to list on the ASX.

Kelly reckons that once the program to introduce ethanol cranks up and more and more refineries turn from being good ideas on paper to bankable commercial projects, Australia’s superannuation funds will be attracted to the growth of the industry '” not just in Australia, but globally.

In the US, in his State of the Nation speech this week, George Bush, challenged Congress and his country to aim to replace 75 per cent of oil imports with ethanol and, in future years hydrogen power, over the next 20 years. That’s on top of his program to lift ethanol production from the 18 billion gallons (68 billion litres) expected to be produced in 2006 to 34 billion in 2012, designed mainly to reduce US dependence on fossil fuels from the Middle East but also because it has become clear over the two decades or more that ethanol has been in use in the US it has led to measurably less pollution in the cities. About 30% of all fuel sold in the US contains ethanol.

As further evidence of the gathering use of ethanol in the US, this month grain trader Cargill and other financial investors put together a $US275 million line of credit through West German financier West LB in the largest financing in the ethanol industry, as part of a deal to construct three ethanol plants capable of producing 455 megalitres a year. The US has more than 60 ethanol plants.

In Europe and the US, there has been a measure of force in the introduction of biofuels, mostly for environmental reasons, but the corn lobby in the US was largely behind the US move into ethanol.

So the Australian agreement between government and Big Oil (albeit with a disguised threat in the background) is a first. The oil companies have further incentive to offer ethanol and biodiesel blends since the Commonwealth and the NSW and Queensland state governments all require their vehicles to be run on biofuel.

For Australian investors the story is about to start. Among the listed companies, the current agreements may affect include Caltex, CSR and Ridley Corp.

But the bulk of the action will occur when the road ahead is cleared of its last political and regulatory obsctacles by the Howard Government. Then the super funds, which have been watching this sector closely, will be ready to invest and an inevitable consolidation among the local ethanol mills will trigger the first stockmarket floats in a new sector of the resource industry.

Mark Westfield is a Sydney-based communications consultant and former journalist. He has no association past or present with the ethanol industry.