Economics is key to policy on fuel blends

Indian refineries will have to move towards stringent product specifications to meet emission standards. And the Mashelkar Committee has drawn up a roadmap to achieve this. According to it, refineries will have two main technical options for Octane Number improvement, which has to be significantly increased. The addition of oxygenates, such as methyl tertiary butyl ether (MTBE), tertiary amyl methyl ether (TAME), ethanol, etc., to the pool of gasoline produced in the refineries is a standard option for this. The other option is to blend ethanol. Ethers such as MTBE (methyl-tertiary butyl ether) and TAME are mainly produced from intermediates ? iso-butenes and iso-amylenes, respectively ? produced during refinery operations in combination with methanol. Ethanol is mainly produced from renewable agro-base feedstocks, such as sugarcane, corn and biomass, with molasses from sugarcane being the major source in India. There are already some refineries in the country producing MTBE and TAME. MTBE is produced in the BPCL refinery in Mumbai and IOC's refinery in Baroda, while TAME is manufactured in the Reliance Petroleum refinery in Jamnagar. In terms of their impact on emissions, the two options have different relative merits. While ethanol has an advantage over the ethers because of its higher Octane Number and oxygen content, which reduce emissions, ethers have lower Reid Vapour Pressure compared to ethanol blended gasoline, which is an advantage for the ethers from the emissions and general handling viewpoint. However, a policy on blending of fuels to meet emission standards should not only factor in the relative technical merits but should balance all considerations, including the relative economics of the two options. That would include a reckoning of the economic costs and benefits all along the supply chain of the two alternatives. For instance, while the use of ethanol may contribute to increased incomes in the farm sector, particularly in sugarcane growing areas, the opportunity costs of existing refining capacity investments, which might become unremunerative, would also have to be taken into account. Therefore, a comprehensive study of the issues is required. In 2001, the Government allowed the blending of up to 5 per cent ethanol in gasoline by making the required changes in the Bureau of Indian Standards specifications for gasoline in the year 2001. Blending of 5 per cent ethanol in gasoline, which started in three places as a pilot demonstration project, is proposed to be extended to all the sugarcane-growing States, and then to the entire country. These steps will definitely give an impetus to a reduction in the use of fossil fuels but will, at the same time, impact the profitability of the refineries at a time when refining margins are already under severe pressure due to various international factors. The experience of various other markets would serve as a pointer to understand the effect that such proposals could have on the refining industry as the auto-fuel producers. For example, there has been considerable resistance by the US refining industry to a proposal before the US Senate since June 2002, which recommends introducing a minimum renewable fuel standard (RFS) in the fuel in place of the current minimum oxygen content standard. In effect, this will translate to substitution of ethers by ethanol. At the same time, some of the oil majors are making this switch voluntarily in that market. But, while the US imports about 5 per cent of its total gasoline requirements, besides such other products as diesel and jet fuel, as it is not self-sufficient in refining capacity, India has a surplus refining capacity. This has led to a situation where India has surpluses of both gasoline and diesel and refineries are exporting both these products at margins much less than the domestic margins. It is also important to note that though the country is surplus in diesel and petrol, it is not so in LPG. With such alternative fuels as CNG, LPG, etc., emerging as auto-fuels in major cities, with their cost and fiscal advantages over petrol and diesel, ethanol will further erode the demand for these products in the country. Many refineries in India cannot export gasoline, or any of their products, at economically viable prices due to their inland location and have to incur huge losses to export products and maintain their refinery throughputs. Such refineries would have to then reduce their crude throughput to maintain the right product balance, which would lead to reduction in supply of products such as LPG, whose imports will, in turn, have to increase to meet the demand. Therefore, the entire gamut of issues should be comprehensively addressed before taking any policy decision to maximise the economic benefits to the nation.