Update: They now have a news release on the teleconference: Democratic Governors Discuss America’s Energy Future. You can download the audio of the 30-minute teleconference at the bottom of the news release.

Today (6-22-06) the Democratic Governors Association (DGA) hosted a conference call on energy policy. Michigan Gov. Jennifer Granholm and Oregon Gov. Ted Kulongoski hosted the call, and listeners were able to submit questions beforehand. They answered 4 questions, including the one that I submitted.

Overall, it was a mixed bag. Gov. Granholm came across like a politician, offering solutions, but also out to score political points. Gov. Kulongoski sounded sincere, really focused on conservation, and did not attempt to score political points. It felt almost like a “good cop, bad cop” routine from my perspective.

I took notes, but hopefully they will make the transcript or a recording available. Gov. Granholm went first. Her “left hook” was “oil companies are bad”. Her “right cross” was “ethanol is good”. She went for the left hook most of the time. Here was the gist of her comments:

Fuel prices are too high, and oil companies are making too much money. She wants legislation to cap profits. She claimed that oil companies are not investing in alternative energy technologies (this is not true, but maybe they aren’t investing in the ones she wants them to invest in). She made a passing remark at conservation, but didn’t sound too passionate about it. She piled on oil companies again and really vilified them. (My concern before-hand was that this would be the tenor of the call). She really pushed ethanol, and she said Michigan needs a huge number of ethanol plants. She thinks we need more E85 pumps, and complained that the oil companies have not been eager to embrace them. Near the end of her opening statement, she reiterated that oil companies are not eager to cap profits. (What sector is eager to cap profits?)

At this point, I was thinking that America really needs a new political party. But they then went to Gov. Kulongoski. He really focused on the conservation angle, and he came across as less political, and more focused on finding solutions than in scoring points. He discussed what Oregon is working on. He has established targets for government agencies, and in 4 years wants all government agencies to run off of 100% renewable electricity. He said the state is making large investments into alternative electricity – wave, geothermal, wind, solar. He also noted that Oregon has no coal or oil deposits, which is one driver in their push for sustainability. He did mention biofuels, and also seemed to think ethanol will play a big part. He said he drives an E85 vehicle.

They then went to the Q&A. We were allowed to submit questions prior to the call, and they selected four questions to answer. I don’t like this format, because it lends itself to easy political posturing. Question 1 reaffirmed my fears.

Question 1 from Pittsburgh: “Why have oil company profits gone up as gasoline has gone up?” Of course Gov. Granholm took this one, as it was another opportunity to score political points by attacking oil companies. Her answer: Because they aren’t regulated, and they can get away with it. Says we need to regulate oil companies like public utilities. She said that profits are too high, and that we need to restrict profit margins. (I hope she understands the difference between a profit, and a profit margin).

Question 2: I already had a favorable impression of Governor Kulongoski, but he chose to answer question 2 from “Robert in Billings, Montana.” That’s me. They omitted part of my question, so here is the complete question I submitted:

I am a chemical engineer in the oil industry. One of the things that I, and many others, have been bothered by is the level of political pandering that has accompanied the present energy crisis. The Republicans say a solution is to drill in ANWR. Some Democrats say the solution is ethanol (not a chance), or they merely grandstand and point fingers at oil companies. I believe the root problem is our reluctance to embrace conservation, and unless this is addressed all other solutions are doomed. Who among you has the courage to get tough on this politically sensitive issue? And how will you address it?

And here is what they read and answered:

I believe the root problem is our reluctance to embrace conservation, and unless this is addressed all other solutions are doomed. Who among you has the courage to get tough on this politically sensitive issue? And how will you address it?

Gov. Kulongoski: “Robert is absolutely correct”, and he sounded like he meant it. He went on to describe some of Oregon’s conservation measures – such as increasing standards for appliances. He said we must learn to live sustainably. He said that he believed the state, and not the federal government, would lead on this issue. He said state governments must lead by example, and concluded with “Again, Robert is correct. We must look at ourselves in the mirror and decide that we must change our behavior.” Gov. Kulongoski scored big points with me.

Question 3, from Michigan: Do you support PHEVs, solar, wind, etc? Gov. Granholm: Absolutely! She talked about giving personal property tax breaks to alternative energy providers, and said she was sitting in her hybrid as she was answering the question.

Question 4, from Oregon: How do you get the private sector to buy into alternatives? Gov. Kulongoski: He explained how Oregon moved to sustainable forestry practices, and said they must do the same for energy. He also mentioned the importance of combating global warming. Again, I thought he sounded passionate and sincere.

That’s my assessment. If you listened in and heard something different, or think I missed any important points, let me know. I was much more impressed with Gov. Kulongoski than with Gov. Granholm, even before he answered my question. I guess the one thing that struck me as ironic is that Gov. Granholm’s “cheap fuel for everyone” routine is at complete odds with Gov. Kulongoski “we must conserve” routine.

RR

This will be my last ever story on Xethanol. I have written a number of stories on them in the past. I wrote that their claims that they would be the first to produce commercial cellulosic ethanol were ludicrous. That was the gist of the interview I gave to Sharesleuth when they were writing their Xethanol exposé. I predicted that Xethanol would “offer up a litany of excuses and delaying tactics for why their cellulosic ethanol plant is not up and running.” I explained to several reporters that the technology agreements they touted to investors could be had for next to nothing, and in February of 2007 I predicted that Xethanol would eventually go bankrupt. I was sounding these warnings when the share price was $12. It eventually fell to well under $1.

You know where this is going, don’t you? I had failed to check in on Xethanol for a while, but today I did a search for the stock symbol, and got this: “No quote found for that symbol.” Hmm. So I searched Google News, and found this:

Xethanol changes name, energy focus

The self-proclaimed discredited cellulosic ethanol company Xethanol Corp. relaunched itself on Aug. 28 on the New York Stock Exchange as Global Energy Holdings Group Inc. and is ushering in what company executives hope will be new life for the company.

“We’re moving on from ethanol and the reason is – the business model doesn’t work,” Ames said. “With the price of corn and energy…we’ve lost a lot of money doing that. We’ve spent a lot of money in cellulosic research and nothing out there is really fruitful and will make a major economic impact on producing ethanol.”

And in another article, former Xethanol CEO David Ames made a very profound statement:

Ames is skeptical that cellulosic will change the U.S. energy system. He said difficulties associated with making the fuel will not be eased by making it in bigger batches.

“You can scale widgets, but you can’t scale chemistry,” he said.

This is exactly what I keep trying to tell people who insist that cellulosic ethanol is going to proceed along a Moore’s Law path and scale up to displace significant quantities of gasoline. It’s not going to happen. The chemistry and physics are working against you.

I truly feel bad for Xethanol investors, but this is what can happen with overhyped technology. The investor who is out of their field of expertise can’t easily distinguish an overhyped company from a company with true potential. But that’s one reason I write this blog: To sniff out and expose the hypesters, while promoting the diamonds in the rough.

On a more positive note, their new direction (into methane) is a much more promising field. Biomass can be fermented to methane at a fraction of the expense and complexity that it takes to make cellulosic ethanol. This doesn’t mean they will be a commercial success, but their odds have gone from one in a million to one in a hundred.

I should have Part 2 of the series of answering readers’ questions posted by tomorrow, but until then I was just sent the following link, which was of great personal interest to me:

A Green Refinery?

The gist is that last year the American Petroleum Institute flew a group of bloggers up to the ConocoPhillips refinery in Billings, Montana where I used to work to give them a perspective of life in a refinery. A video diary of the trip was recently posted to the link above. An excerpt from the link:

The refinery has twice been awarded EnergyStar designation by the EPA for its comparatively efficient production processes. It also established a Citizen’s Advisory Council to maintain an open dialogue between the community and ConocoPhillips. This council has been instrumental in tracking the plant’s social, economic, and environmental performance.

It was kind of funny to see my old managers there lecturing on how a refinery works, and what makes the Billings Refinery unique. (Yes, Tim Seidel looks unusually young to be a manager in a refinery, but he is very talented).

Here were some of the essays that bloggers wrote following the trip:

How Much at What Pressure and Temperature?

Semi-coherent and random thoughts about the Billings trip

Refined Refinery? ConocoPhillips in Billings, MT

I do have one comment on some of the write-ups I have seen. There seems to be some misinformation that the refinery was either built for, or relies upon the Alberta tar sands for feedstock. First, that certainly wasn’t why the refinery was built, as it was there long before tar sands became an industry. Second, unless things have changed in the 2.5 years since I left, the refinery actually utilizes little or no syncrude from tar sands. It is a refinery designed for heavy, sour oil, and as such is not ideal for the syncrude coming out of the tar sands.

Anyway, just thought this might be of some interest. More answers to readers’ questions tomorrow.

Energy security. Homegrown fuels. Better markets for our farmers. And by gosh, it’s good for the environment. Sounds good, doesn’t it? Where do I sign up?

However, the truth behind grain-derived ethanol is masked behind half-truths and myths promoted by a very powerful lobby on behalf of agricultural and ethanol interests. This is one of the biggest scams in operation today, enabled by politicians who fear the political power of that powerful lobby. I will dissect some of the claims in this essay, and show why grain-based ethanol is a huge misallocation of resources.

First, what do I know about ethanol? I grew up on a farm, and my family still farms. I wanted to help farmers and the environment, so I went to a graduate school where I could be a part of a research project that was doing just that. My research group in graduate school was working on the conversion of biomass (aka cellulose) into ethanol. Biomass conversion via microorganisms was the topic of my thesis. After graduation, I worked several years for a chemical company in various roles (R&D, process, production) supporting propanol and butanol production. I currently work for a major oil company, and I try to stay current on developments in the alternative energy fields. In 2005, my company sent me to the state legislature to provide expert testimony regarding a proposed ethanol mandate for my state. My testimony generated a lot of discussion, and I was called back to the stand ten times to answer questions. Despite some very contentious questioning, nobody rebutted the arguments that I made, which is the gist of this essay.

There is a pretty good consensus that oil production will peak in the next 10-20 years. Some are suggesting that it has already happened. I share the view that an oil peak is on the horizon, and I believe that it is critical for our very way of life to prepare for the imminent changes ahead. It is clear that sooner or later we will need to develop sustainable alternative fuel sources for transportation. However, grain-based ethanol production is not sustainable in the long-term.

A lot has been written about the energy balance of grain ethanol. Clearly, to be renewable, the Energy Return on Energy Invested (EROI) must be greater than 1.0. Pimentel at Cornell and Patzek at Berkley have argued that there is actually a net loss of energy when producing ethanol (as well as some other biofuels) (1). I do not share this view, although there is enough uncertainty in the data that there is a possibility that the EROI for grain ethanol is less than 1.0. However, in order to make my point, I am going to use the data from a 2002 USDA study by Shapouri et al. entitled “The Energy Balance of Corn Ethanol: An Update”(2). To be certain, Shapouri is an advocate of grain ethanol. In his report, Shapouri argues that when a BTU credit is taken for co-products like animal feed, the EROI is 1.34. In other words, for 1 BTU of energy invested, the total BTU value out was 1.34 BTUs if co-products were included.

At this point, it is important to point out a bit of accounting sleight of hand utilized by Shapouri, as well as a number of others when calculating EROI for ethanol. Note that the actual energy inputs into the process according to him are 77,228 BTU per gallon of ethanol produced (using the higher heating value, or HHV). The BTU value given for a gallon of ethanol (HHV) was 83,961. Therefore, excluding co-product credits, the EROI would appear to be 83,961/77,228, or 1.09. He includes a co-product credit of 14,372 BTU, which should raise the overall value of the BTU products to (83,961 + 14,372), or 98,333 BTUs. This would imply an EROI of 98,333/77,228, or 1.27. However, Shapouri, like many ethanol advocates, performs a completely illegitimate accounting trick to exaggerate the EROI of ethanol. He uses the 14,372 co-product credit to reduce the energy input of 77,228 and assumes an energy input of just 62,856 BTUs/gallon. Since the co-products are not actually used as inputs in the process, this is invalid. But that is not the most serious issue. When he uses the co-product credit to offset the energy input, it should be removed from the product side. Shapouri includes it on both sides of the equation – reduce the inputs with the co-product credit, and increase the BTU output with the co-product credit.

Consider this analogy. I invest $100, and I get a return of $20 and another $40 worth of goods (co-product). What is my return on investment (ROI)? Most people would say that I got a total return of $60 on an investment of $100, for an ROI of 60%. If we utilize Shapouri-style accounting, we would use the $40 co-credit to offset our initial investment. We would then argue that we only invested $60 to get a return of $60, for an ROI of 100%. So, the answer to the question – “When does a $60 return on a $100 investment amount to a 100% return on investment?” – is “Whenever the USDA is doing the accounting.”

To give another example of why this accounting practice is invalid, consider a case in which we invested 100 BTUs of energy, and got in return 100 BTUs of animal feed and 1 BTU of usable energy. What is the EROI? Using Shapouri-style accounting, the EROI is infinite, since the 100 BTUs of co-product completely offset our initial investment. We invested nothing, and got 1 BTU in return! Clearly this is not a valid way of accounting for our energy balance, but this practice is common in ethanol accounting.

So, we have an exaggerated EROI in the case of ethanol, but what’s the bottom line? Energy is being created, right? Isn’t that what we are after?

Yes, we are after energy creation (indirectly via capture of solar energy). However, the EROI must be very good, or the price we pay for this energy creation will be much too high. At present there is a federal subsidy on ethanol that amounts to $0.51/gallon. Let’s consider what we are getting for the subsidy. A gallon of gasoline contains 125,000 BTUs (same HHV basis as ethanol). In the Shapouri paper, the net gain reported in producing a gallon of ethanol was 21,000 BTUs. This means that we have to produce 125,000/21,000, or 5.95 gallons of ethanol before we have generated the energy contained in 1 gallon of gasoline. Given a federal subsidy of $0.51 a gallon, we have spent 5.95*$0.51, or $3.03 subsidizing replacement of 1 gallon of gasoline! This amounts to $24.29 of federal subsidy for every million BTUs (MMBTU) of energy created. Contrast this with a natural gas price of $7.00 per MMBTU. That doesn’t even factor in various state subsidies which push the overall subsidy up to over $4.00 per gallon of gasoline displaced. So, taxpayers pay this, but then they still have to buy the ethanol. Any way you slice it, this looks like a bad deal to me.

I questioned Shapouri about this in an e-mail. I wrote that the subsidies appeared to be way out of line, considering that the subsidy on wind power was about $5/MMBTU. In his response, he made no attempt at all to rationalize or defend these subsidies. He wrote If we want to produce fuel ethanol from biomass and crop residues, then ethanol should compete with gasoline on the BTU bases. We do not have the technology yet. But in the future it is a possibility. His conclusion is the same one I came to in graduate school in the 90’s: Someday the technology may be economical for biomass, but grain-based ethanol is not even in the ballpark.

Also note that Shapouri’s paper examined the energy balances for the 9 highest corn producing states. He used a weighted average for the states (Table 4 in his report) and concluded that on average it takes 57,476 BTU to produce a bushel of corn. It is this average on which his EROI is based. However in states like Nebraska, where corn must be irrigated, they concluded that it takes 68,120 BTUs to produce a bushel of corn. In other words, the energy balance for some states is far less favorable than others, and may be negative in some cases (even using Shapouri’s methodology).

What of the claims from the pro-ethanol literature such as: Ethanol production is extremely energy efficient, with a positive energy balance of 125%, compared to 85% for gasoline (3). If these claims were true, then would they actually need ethanol subsidies? Ethanol could put oil companies out of business if this claim had merit.

In fact, however, such claims are false. These claims are based on the use of two different accounting methods designed to show ethanol in a positive light. The energy balance for ethanol is calculated for the entire life cycle, and that for gasoline is calculated on the basis of a barrel of crude oil ready to be refined. We can calculate gasoline based on an entire life cycle to obtain a true apples to apples comparison. It takes only about 1 barrel of oil energy input to net 10-30 barrels of oil from the ground, depending on the source. So, this step has an efficiency of at least 1000%. Once the 85% energy efficiency is factored in for refining gasoline from the oil, the positive energy balance for gasoline ranges from 850% to well over 1,000%. That’s why gasoline costs significantly less than ethanol on a BTU basis. The claim that gasoline is less efficient is just another piece of propaganda used to make the public believe ethanol is better than it is. It would be interesting to see a closed-loop ethanol plant, in which the ethanol they produce provides the energy for the plant. It would not take long for the charade to fall apart, as it would become apparent just how dependent they are on fossil fuels.

I have not even addressed the environmental impacts of growing corn to produce fuel. This is usually given a “free pass” when considering the economics of corn ethanol. Consider a recent report by Lester Lave and Michael Griffin, from Carnegie Mellon University. They write:

Corn farming is rough on the environment. Soil erosion due to wind and water is rampant. Fertilizer and pesticide runoffs produce algae blooms that result in “dead zones,” including one in the Gulf of Mexico that is so polluted it cannot support aquatic life. Furthermore, building the ethanol processing plants will take 3–4 years, and gas stations would have to commit to providing ethanol. And, because ethanol uses only the starch in corn, not the oil, protein, or other components, converting corn into ethanol is attractive only if there is a market for the byproducts. Opinions differ, but some estimate that byproduct markets could saturate well short of 11 billion gallons of production.

So, we have a marginal energy balance, subsidies that are far out of line with what we are getting for the money, and we are damaging the environment in the process. This idea sounds like something hatched by politicians and kept alive by lobbyists with deep pockets. Which is, in fact, the truth of the matter.

This was the gist of my testimony at the state legislature in 2005. I made an offer to the representatives, as well as to the ethanol proponents and general members of the audience. I told them that I would hang around and answer every single question or criticism they had about my testimony. That was quite interesting. I was cursed by one of the sponsors of the bill. I was accused of protecting the interests of “Big Oil”. I was blamed for the war in Iraq (despite the fact that my state gets all of our imports from Canada). Lots of people told me that I had my facts wrong, but every one of them backed down when I asked for specifics. Nobody rebutted my argument.

References

1. Pimentel, David. The Limits of Biomass Energy. Encyclopedia of Physical Sciences and Technology, September 2001.

2. Shapouri, H., J.A. Duffield, and M. Wang. 2002. “The Energy Balance of Corn Ethanol: An Update”. AER-814. Washington, D.C.: USDA Office of the Chief Economist.

3. This claim seems to have originated with the American Coalition for Ethanol, but can be found on a number of the ethanol advocates’ information sheets. It is also promoted by Argonne National Laboratory through their misleading GREET model.

4. The Green Bullet