Oil companies talk biodiesel

By Ron Kotrba | January 19, 2010
Posted February 9, 2010

A panel of oil and pipeline company representatives discussing biodiesel took center stage during the general session on day two of the National Biodiesel Conference & Expo in Grapevine, Texas.

The topic of discussion was how oil and distribution companies will carry out RFS2's biomass-based diesel mandate, and what physical challenges exist in doing so.

A question that arose was whether investments should be made for terminal blending of biodiesel now, or if waiting for pipeline readiness was a safer bet. Jim Lelio with Kinder Morgan Pipeline Group said his company, which has been on the forefront of efforts to move biodiesel through the pipeline infrastructure, can already handle 100,000 barrels (4.2 million gallons) of B5 per day-a volume greater than three of the state mandates in place today. Kinder Morgan's total daily fuel throughput is 1.1 million barrels (46.2 million gallons).

The consensus from the panel was that state mandates are much less preferred than a federal standard such as RFS2. Dave Blatnik with Marathon Petroleum Co. LLC said state-by-state mandates hurt because companies have to invest millions of dollars in infrastructure for a relatively small volume of boutique fuel whose only market is that particular state. Also, fuel distribution systems are not set up to respect state lines.

Bruce Heine with Magellan Midstream Partners said companies that have to make big investments to satisfy state mandates expect those states to uphold whatever mandates they pass. He said it can be a financial hit when millions of dollars are spent to prepare for a blend requirement and then, due to unforeseen circumstances, the laws are changed or waivers are granted. Heine cited the recent Minnesota waiver for No. 1 B5 as an example.

With a standard such as RFS2 that requires obligated parties to blend certain amounts of fuel and does not dictate where or how, there is flexibility to strategically invest in their infrastructure as they see fit.

Heine said it doesn't make sense to make the infrastructure investments in terminals that have little diesel throughput, but rather companies should target investments where the demand is.

"By 2011, we have to have the infrastructure in place," Blatnik said, adding that five of Marathon's 67 terminals already have biodiesel blending capabilities. Magellan has 12 terminals set up for biodiesel.

It takes a minimum of nine to 12 months to prepare a terminal for biodiesel blending, said Heine, and that's if the effort begins at the right time of year. Lelio said he hopes it does not take that long to prepare a terminal for biodiesel. The investment cost to prepare a terminal for biodiesel is about $2.5 million to $3 million, Heine said, which includes biodiesel storage capacity of 5,000 to 10,000 barrels (210,000 to 420,000 gallons).

The question was asked to the panel whether obligated parties would be more interested in purchasing renewable identification number (RIN) credits rather than buying "wet gallons" of biodiesel. Mike Reed with Northville Product Services said, "It's better to break even or make a few cents with wet barrels" as opposed to purchasing RINs alone. Lelio made the point that the physical product will have to be used somewhere, and obligated parties shouldn't solely bank on buying RINs. Blatnik said Marathon will meet its obligations with wet gallons.
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