NEW YORK (Dow Jones)--Ethanol use in U.S. gasoline is about to take a big step forward into a prized market - Florida.
The biomass-derived alcohol is already a key component of reformulated gasoline, a relatively clean-burning formula that constitutes about one-third of daily demand. But as ethanol plants have proliferated and supply has grown, the fuel has failed to make much headway into the rest of the more than 9 million barrels of gasoline a day that the U.S. consumes.
That may be about to change. Fuel marketers in Florida, the third-largest gasoline-consuming state in the U.S. and almost virgin territory for ethanol, are getting ready to blend more of the fuel additive into their gasoline as state officials lean toward changes in regulations that will facilitate its use and ethanol continues to price well below gasoline.
The change in rules, already passed in Tennessee and also under consideration in Georgia, along with newly compelling blending economics should mean more supply of ethanol-blended gasoline in the state from traditional marketers like Hess Corp. (HES) and Murphy Oil (MUR) as well as smaller players just entering the business. Florida motorists paying some of the highest pump prices in the country could see relief, at least in the short term.
Ethanol watchers see the move as significant though unlikely to improve the short-term outlook for a fledgling industry.
"Florida is one of the five largest U.S. markets, so there's lots of room for growth," said Ron Oster, an analyst with Broadpoint Capital, Inc. in St. Louis.
Unlike the two largest markets - California and Texas - Florida is using little or no ethanol in gasoline. According to the latest data from the federal Department of Energy, all of the 23.6 million gallons a day sold in Florida in August was what's known as conventional gasoline. In California, all 43.7 million gallons of gasoline a day sold in August included ethanol and in Texas 38% of the 36.9 million gallons a day sold contained the additive.
Florida Poised To Change Fuel Rules
In response to industry requests that Florida change fuel quality standards to better accommodate ethanol blending, the Department of Agriculture and Consumer Services is considering a change in regulations.
Key among those changes is allowing marketers to exceed part-year evaporation limits with gasoline that they blend with ethanol. Because the addition of ethanol increases gasoline's Reid Vapor Pressure - a measure of its volatility - by one pound per square inch beyond current standards, revising the limit upward would give marketers the latitude they need to blend ethanol into gasoline year-round.
Other changes would require that the quality of ethanol, biodiesel and other biofuels meet the standards issued by the American Society for Testing and Materials, the consensus organization that develops nationally recognized standards for petroleum products.
While he wasn't able to say what the decision will be or when it will be made, the state's top fuel specification official spoke favorably about the greater use of ethanol in Florida.
"Some companies are already blending gasoline with ethanol and more blending is possible," said Matthew Curran, petroleum inspection bureau chief.
Gasoline sellers in Florida expect the state to approve the rule changes soon, said Jim Smith, chief executive of the Florida Petroleum Marketers Association.
New York-based Hess Corp. plans to offer ethanol-blended gasoline at all of its 366 stations in Florida by the first quarter of 2008, "faster if possible," said Rick Lawlor, vice president of retail marketing.
The current spread between wholesale ethanol and gasoline prices - about $1 a gallon when the 51-cent ethanol tax credit is included - provides a strong incentive for terminal operators like Hess to invest in blending equipment. Supplanting as much as 10% of gasoline volume with cheaper ethanol lowers blenders' per-unit costs and boosts profits.
"There's an early-mover advantage," Lawlor said, but conditions are changing quickly. "Many competitors are moving in the same direction," he said.
Hess has added storage tanks for ethanol at its distribution terminal in Tampa and is contracting for long-term ethanol supply.
While ethanol lacks gasoline's ease of movement by pipeline and competes with other goods traveling on rail, ship and truck, Florida marketers say they aren't encountering transport bottlenecks. Ethanol's relatively low price leaves blenders more money to spend on shipping and Florida fuel terminals' coastal locations offer easy access to Caribbean and South American supply.
Murphy Oil is also equipping its two Florida distribution terminals to blend ethanol into gasoline and expects to provide that capability to all 12 U.S. terminals by the end of 2008.
"There's an economic opportunity now given the blending credit and the price of ethanol," said Harvey Doerr, executive vice president of downstream and planning at Murphy, headquartered in El Dorado, Ark.
That opportunity may lessen if many move to take advantage of it but Doerr is taking the long view on ethanol, expecting the federal mandate for the fuel to widen, he said.
Murphy sells gasoline at 970 stations located in Wal-Mart (WMT) parking areas in the Southeast and Midwest, as well as Murphy USA stations in the Midwest.
Motorists Seen Winners Before Ethanol Industry
While the amount of ethanol entering the gasoline pool in Florida is seen rising, the volume change may not be significant enough to help an industry struggling with high feedstock costs and supply bottlenecks. Corn prices are still very high and ethanol transportation in the Southeast will take time to build out, said Broadpoint's Oster.
Likely changes in Florida's fuel regulations and marketers' preparations for more ethanol blending are "a step in the right direction, but they're not going to alleviate the near-term supply concerns," that have slowed investment in ethanol production, Oster said.
The biggest winner in the short term is likely the Florida motorist. With Florida gasoline's average $3.16 registering among the 15 highest state-wide prices in the U.S., the 5- to 7-cent-a-gallon break a seller gets for ethanol-blended gasoline will spur greater competition among retailers.
"Anytime you can get a price to the customer that's better than the guy across the street, you're going to keep that customer," said Smith of the Florida Petroleum Marketers' Association.
Source: Beth Heinsohn; Dow Jones Newswires; 201-938-4435; beth.heinsohn@dowjones.com