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Insight: Ethanol lobby sees red over a yellow gas hose in Kansas

A gas pump shows different kinds of fuel at Scott Zaremba's Zarco 66 gas station in Lawrence, Kansas in this handout photo taken December 12, 2012. 
REUTERS/CathrynFarleyPhotography.com/Handout via Reuters
A gas pump shows different kinds of fuel at Scott Zaremba's Zarco 66 gas station in Lawrence, Kansas in this handout photo taken December 12, 2012. REUTERS/CathrynFarleyPhotography.com/Handout via Reuters

By Cezary Podkul

NEW YORK (Reuters) - At a handful of gas stations in eastern Kansas, the intensifying fight between major oil refiners and the ethanol industry over the future of America's fuel supply has found a new focus: the color of the gas hose.

Scott Zaremba, owner of Lawrence, Kansas-based Zarco 66, says he is being forced by his main fuel supplier, Phillips 66, to stop selling gasoline blended with 15 percent ethanol, the maximum level currently allowed for use in normal car engines but higher than the 10 percent norm.

Zaremba, the first retailer in the country to sell the so-called E15 fuel, has found himself caught in a fierce market-share battle between ethanol makers and oil companies that is also being fought in the courts and in the U.S. Congress.

On April 1, Zaremba received a notice from Phillips 66, the nation's third-largest refiner, that he could no longer sell the E15 fuel from his regular black fuel hoses, as he had been selling it since last July.

Instead, any gasoline with more than 10 percent ethanol has to be served from a separate, yellow hose, according to a copy of the Phillips 66 guidelines seen by Reuters. The aim is to distinguish E15 from other Phillips 66-branded gasolines with 10 percent or less ethanol.

He has other options, but they aren't cheap - or very feasible. For example, it would cost $100,000 to $250,000 to install new stand-alone gas pumps for E15, Zaremba said. Or he can always pay a $412,000 fee to Phillips 66 to break his marketing contract - expensive options that have so far kept him in compliance with the Phillips 66 guidelines, the only way he said he could.

In April, Zaremba began phasing out E15 sales, leaving only some two dozen stations in the country that sold the blend as of the end of May, when the last of his eight stations gave up the fuel.

"They're just holding you to your 10 percent max," he said.

Asked about its new guidelines, Phillips 66 Spokesman Dennis Nuss said in a statement that they were simply part of an occasional update to its brand standards meant "to ensure a positive and consistent customer experience at the pump."

The Environmental Protection Agency, which administers fuel standards, declined to comment on Zaremba's situation.

The market-share fight is the result of the 2007 Renewable Fuel Standards law, which mandated the blending of gasoline with renewable fuels like ethanol.

Congress's goal was to make the U.S. less dependent on foreign oil by putting more home-made renewables into gasoline - from 9 billion gallons in 2008 to 36 billion by 2022.

The increasing annual targets were based on expected growth in fuel demand that would allow more gallons of ethanol to be blended without increasing its share of supply.

Instead, thanks to the 2007-2009 recession and rising fuel efficiency, consumers are buying less gasoline than expected.

That has left oil companies actively trying to repeal those blending requirements, while ethanol producers are fighting to keep them in place.

'ALL-OUT WAR'

In the country's heartland, ethanol proponents say refiners are resorting to technical rule changes and brute market force to keep E15 out of gas stations.

In nearby Iowa, eight retailers who want to sell E15 say they can't even make it because oil companies won't sell them the ingredients necessary to make the appropriate summer blend of the fuel, according to a petition viewed by Reuters.

"They've essentially declared an all-out war (on E15)," said Monte Shaw, Executive Director of the Iowa Renewable Fuels Association, which represents ethanol producers.

Phillips 66's Nuss said the company has 945 marketing customers like Zaremba covering more than 7,000 gas stations and has received no other complaints about the guidelines.

"We strenuously deny any suggestion that our actions are part of a larger effort to frustrate the adoption of the Renewable Fuel Standard," Nuss said.

Oil producers say they are just doing the responsible thing - holding firm to a 10 percent maximum blend of ethanol in gasoline, or E10 - because anything more than that can cause engine damage in many vehicles on the road today.

"We are not about to put something out there that we don't think is safe or reliable for the consumer," said Charles Drevna, president of American Fuel and Petrochemical Manufacturers, which represents refiners like Phillips 66.

The EPA has approved E15 for cars made after the 2000 model year. But automakers have not extended their warranties to cover E15 use on pre-2013 models. That leaves only about 12 million of 240 million cars on the road, or about 5 percent, with warranties to use E15, according to a November survey conducted by the American Automobile Association.

"Every automaker with the exception of Porsche said that E15 could void your warranty unless it was a very new car," said AAA spokesman Michael Green.

HEAVY LOBBYING

So far most gas stations have been either unable or unwilling to carry E15.

The Renewable Fuels Association, which represents ethanol producers nationally, estimates that with Zaremba's exit, only about 25 gas stations nationwide sell the fuel - out of about 140,000. Sales of E15 over the last year have amounted to less than one percent of one day's worth of daily U.S. gasoline use, according to Reuters calculations.

The battle is being waged on multiple fronts. American Fuel and Petrochemical Manufacturers recently filed a Supreme Court challenge to E15 gasoline.

The refiners argue the EPA over-stepped its authority when it approved the sale of E15 for only some cars, instead of looking at the market as a whole. "The EPA can certify fuels for engines - not for this engine or that engine," Drevna argues.

A who's-who of the refining industry - including oil majors Exxon Mobil Corp, Chevron Corp, BP Plc, Valero Energy Corp, Tesoro Corp and Phillips 66 - are represented by the group.

In case their legal challenge fails, Drevna says, the oil companies are actively pursuing "legislative" solutions to the issue in Congress.

"It is very, very heavy lobbying right now from all sides and it's going to be at least for another year," said Dave Juday, a commodity market analyst in the Washington area.

MARKET SHARE

The ethanol lobby says oil companies are bluffing.

"What it comes down to is we're coming into their market share," said Michael Frohlich, spokesman for Growth Energy, the ethanol group that made E15 possible by petitioning the EPA to approve its sale.

Profits - more than vehicle safety or performance - are the main reason why refiners are "fighting tooth and nail" to get rid of E15, Frohlich said. If they wanted to, they could easily blend more ethanol into the gasoline supply, he said.

The lobby has one high-profile ally: NASCAR, which uses E15 fuel for "every driver, every lap, every series," said Michael Lynch, managing director of green innovation at NASCAR in Daytona Beach, Florida.

Growth Energy has a marketing arrangement with the car racing group, though NASCAR denies money from the deal influenced its decision to use the fuel.

NASCAR racers have traveled 4 million miles on E15 since the group started using it in February 2011, Lynch said.

He says there's only one reason why the rest of America isn't running on the same fuel.

"The fundamental difference is availability."

(Reporting By Cezary Podkul; Editing by Tim Dobbyn)

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