DOE finds ethanol pipeline feasible, with conditions

By Kris Bevill | August 27, 2010
The U.S. DOE recently completed a study to determine the feasibility of constructing and using a pipeline to transport ethanol from the Midwest to the East Coast. The agency concluded that while a dedicated ethanol pipeline would reduce the burden of transport on railroads, enhance fuel delivery infrastructure and reduce greenhouse gas emissions, ethanol volume must be increased significantly before a pipeline could be economically viable.

According to the study, the ethanol volume expected to be pipelined from producers in the Midwest to demand centers in the East Coast is approximately 2.8 billion gallons per year. This estimate is based on current consumption projections and includes demand for E10 and E85. Using an assumed pipeline construction cost of $4.25 billion, the DOE determined that a pipeline tariff would average 28 cents per gallon. Comparatively, other modes of transport along the same corridor currently charge an average tariff of 19 cents per gallon. Therefore, in order for the ethanol pipeline to be cost competitive with truck, barge and rail options, the DOE found the pipeline would need to transport approximately 4.1 billion gallons of ethanol annually. The DOE stated that this increased volume can only be achieved through a significant increased demand for E85 or widespread use of ethanol blends greater than E10. Even if pipeline construction costs were lowered by $50 million, the agency said significant financial incentives would still be required to make the pipeline feasible if ethanol demand is not increased.

Aside from financial considerations, other risks associated with an ethanol pipeline focus mainly on policy issues. The DOE stated that if current supportive policy measures were removed, including the renewable fuels standard mandate, the Volumetric Ethanol Excise Tax Credit or the ethanol tariff, the pipeline's feasibility would face serious consequences. "Government policy is likely to play an integral role in the commercial viability of the asset throughout its operating life," the report stated.

Additionally, advanced biofuels and other non-ethanol alternative fuels could decrease the demand for ethanol if they become commercially available. However, the DOE stated that ethanol pipelines could potentially be used to transport those other biofuels as well.

The hypothetical pipeline used in the DOE's feasibility study was based on a pipeline project proposed in 2008 by Magellan Midstream Partners LP and Buckeye Partners LP. The pipeline would gather ethanol produced in the Corn Belt and transport it to demand centers in New England, the Central Atlantic and the Virginias. The DOE stated that this is the most likely path for an ethanol pipeline, but other routes would also be possible and would carry similar risks and investment requirements. The West Coast represents the least feasible end-point for a pipeline due to increased costs associated with terrain and the additional distance between supplier and demand center.

Magellan and Poet LLC are developing a project similar to the DOE's hypothetical pipeline, seeking to construct a pipeline to transport ethanol from the Midwest to a distribution center in New Jersey. The companies said their project differs somewhat from the DOE's hypothetical pipeline and has been found economically viable in their own analysis. It is based on a smaller capital cost of $3.55 billion and is estimated to have transport rates 15 percent lower than rail rates. The pipeline would have an annual capacity of 3.5 billion gallons.

The companies said they were pleased with the DOE study's overall results and said the report will be valuable to Congress as it considers energy legislation. "We believe the DOE's conclusions are directionally correct: a large-scale pipeline project is feasible under certain conditions and that a federal loan guarantee is necessary to move forward," the companies said in a statement. "In addition, the DOE confirms that transporting energy via pipelines has multiple benefits such as reducing congested highway and rail systems while reducing greenhouse gas emissions when compared to other modes of transportation."

Sen. Tom Harkin, D-Iowa, and Reps. Leonard Boswell, D-Iowa, and Lee Terry, R-Neb., have been working to expand DOE loan guarantee funding to qualify a renewable fuel pipeline as an eligible project. Terry said the DOE study proves that an ethanol pipeline cannot become a reality without the aid of legislation.