As ethanol companies have become more efficient at producing fuel, they have become equally efficient in its delivery.
From rail to truck to even pipeline, ethanol producers are turning the transport of their products from a necessary evil into a cost-cutting opportunity.
Moving from Point A to Point B sounds simple enough. But factor in fuel surcharges, fluctuating costs, on-time delivery and shipping order diversions, and you’ve got one very complicated process.
That’s the reality of transporting ethanol, and other co-products of the ethanol process such as distillers dried grains and carbon dioxide (CO2), from plants to blenders and end-users. “There can be destinations with too much product and destinations that are in need of more gallons than anticipated. There can be changing rate structures or a tariff change or some other cost change in getting a product there,” says Steve Seabrook, Director of Business Development for POET Ethanol Products, a Wichita, Kan.-based company that markets and distributes more than 1 billion gallons of ethanol per year. “We have to consider that in every origination and destination, and then we have to go back to what gives us the most efficient delivery.”
Weighing the Options
POET Ethanol Products, which operates 2,500 rail cars, is at the cutting edge of ethanol transportation. “Since we started the company, we realized this industry would require an efficient operation to remain competitive,” says Ben Sweat, Vice President of Logistics at POET Ethanol Products. “We have always invested time and development into systems that help us achieve that efficiency as the needs of our customers change.”
The company’s ethanol distribution system, serving 33 plants, utilizes a linear program to determine the most optimal solution at the lowest possible cost. The proprietary computer-aided program constantly compares options for the most optimal rail and truck shipments. The program considers multiple factors in its calculations, including fuel surcharges, backhauling and volume variables. Timing and logistics play a big role, as well. The goal is not only to ship the product efficiently, but also to get the right amount of product to the destination on time.
Often, the optimization system must find the most economic solution to address shipping changes that occur on a regular basis. For example, a plant might be transporting ethanol to three different destinations simultaneously, and one of those destinations may suddenly need to increase its order. The system is able to check the feasibility of diverting some gallons from the other destinations in order to more efficiently fulfill the request. Moreover, the system can see if any ethanol being transported from other plants could be shifted. These types of issues occur daily, except on a much larger scale—think in terms of 33 plants and hundreds of destinations.
The linear optimization system was developed to meet the needs of constantly changing shipping plans as a result of changes in supply, demand and transportation. “Right now, we are the only company I know of that has the ability to do this,” says Bob Casper, President of Ethanol Products. The company has used the linear optimization program for rail freight for more than four years; it developed the same for truck freight last year.
“We try to give our plants as much flexibility as possible to be able to ship their products to diverse markets in diverse fashions,” Seabrook says. “We look at what is the most efficient way to make it happen. We use that approach every single day to decide how a product gets to a market.”
All Together Now
Another advance in transportation is the use of highly efficient 70- to 100-car unit train shipments. A unit train shipment can save roughly 5 to 10 percent of freight costs, depending on origin and destination, versus splitting into smaller groups of single cars. Savings occur because it costs less for the railroad to organize unit trains.
However, there are currently a limited number of metro markets with demand great enough to justify the expense of installing a unit train receiving facility, which can cost tens of millions of dollars. “Unless a market has enough demand, we would not be able to ship enough unit trains to receive a return to pay off the investment,” Casper says.
For example, the Dallas/Fort Worth area has enough demand for a unit train every two to three days. Therefore, it can receive 10 to 15 unit trains per month, sufficient to justify the expense of a receiving facility. Only markets that demand this type of volume can economically justify a capital expenditure like that.
“The reason unit trains are not shipped everywhere is that we don’t have the demand to justify it,” Casper says. But he also points out that factors such as the ethanol blend limit could impact the number of destinations with enough volume to justify a unit train facility. “If the current ethanol blend increases, that in turn would increase the number of unit trainfeasible destinations.”
Moving DDGs
Unit trains also play a key role in transporting POET’s Dakota Gold® Distillers Dried Grains with Solubles (DDGS). POET transports about 70 percent of its Dakota Gold by rail. Unit trains have been very effective, particularly in the Western Corn Belt, where groups of plants can combine tonnage to efficiently build unit trains and ship to key markets in places like central Mexico, southern Idaho or California.
But as with ethanol, it isn’t always feasible to use unit trains for DDGS. Unit trains for DDGS products are less prevalent, for example, in the Eastern United States, where livestock populations are less concentrated and customers are more likely to receive feed ingredients a few cars at a time. Although Eastern transport distances are much shorter than in the West, the key markets for DDGS are rather limited within a typical truck-haul distance from POET plants.
DDGS products are more likely to be shipped to more distant dairy markets in Pennsylvania and Florida; poultry markets in Delaware, Maryland and Virginia; and poultry and swine markets in the Southeast. That means a higher percentage of rail shipping, despite the lack of unit train-oriented receivers, says David Bertram, Vice President of Transportation for POET Nutrition, the arm of POET responsible for developing its DDGS products.
“Our current challenge as a company is to rethink the logistics chain because the product marketing and distribution model developed for our Western plants doesn’t directly transfer to our Eastern plants and markets,” Bertram says. “For the past 18 months, we have been working on that. We have worked very closely with our merchandising colleagues to decide what kind of logistics chain to build in the East.”
Meanwhile, there are constant efforts to gain efficiencies. “We recently worked with one of our rail car suppliers to redesign some key features of railcars used to transport DDGS. … The new cars will have a larger hatch opening, a larger outlet gate and 190 additional cubic feet of capacity,” Bertram says. “We will have 325 of these new cars delivered and in service during the first quarter of 2009.” The updates will not only improve the efficiency of loading and unloading cars, they will boost the cars’ cubic capacity to allow for loading an additional 2.5 tons per car.
While unit trains are important in transporting DDGS, Bertram says there are times when trucks or single-car rail shipments are the best way to go. He compares the shipping system to a three-legged stool.
“You have the local market truck influence—that’s one leg of the stool,” he says. “Then you have the single-car rail market. That comes in where you are not quite into the volume situation of a unit train, but you are past the transport distance you’d have for trucking. And finally, you have the 80- to 100-car unit trains.”
Long term, Bertram envisions a fourth leg added to the stool: increased international shipping. “In the future, the ethanol industry will produce more DDGS than the North American market is willing and able to consume,” he says. “We will need to increase our focus on international trade. Shipping to international markets is a challenge we will have. We need to build expertise in those markets.”
Down the Pipeline
It may be a while before pipelines are an integral piece of the nation’s ethanol delivery system, but the first steps have already been taken toward this goal.
In December, Houston-based Kinder Morgan Energy Partners began transporting commercial batches of ethanol, along with gasoline shipments, via America’s first significant ethanol pipeline. The 16-inch-wide Central Florida Pipeline runs between Tampa and Orlando. Rather than build a new pipeline, Kinder Morgan retrofitted an existing gasoline pipeline. The Central Florida line was an ideal fit for this type of project because it is a relatively short line (less than 200 miles) that sits on flat land, says Emily Thompson, Kinder Morgan Corporate Spokeswoman. The cost to upgrade the line was estimated at $10 million.
Extensive testing played a big role in the 18-month-long project. It involved identifying and removing incompatible parts, and determining the best brushes and chemicals to clean the line. Through the testing, Kinder Morgan developed a proprietary additive package that prevents the ethanol from damaging the steel of the pipeline. And in early October, the company transported 5,000 barrels of ethanol via the pipeline. “It was a success,” Thompson says. “It marked the first time an ethanol batch has been shipped by pipeline from one market to another.”
“At this point, we are focusing on our Central Florida line,” Thompson says. “Once we begin moving ethanol, if all goes well, we will look to other parts of the system that might be a good fit for ethanol.”
At the same time, others are exploring the feasibility of building ethanol pipelines from scratch. In February 2008, pipeline builders Magellan Midstream Partners and Buckeye Partners announced they are considering a 1,700-mile, $3 billion project that would bring ethanol from the Midwest to the Eastern coast.
However, ethanol pipelines face challenges, such the costs and risks associated with government policies. Investors will want to see how certain political factors play out before deciding to pay for new pipelines.
“Given the cost of constructing an ethanol pipeline and the long payback period, project sponsors will want to understand the impact of any potential changes to the Clean Air Act, the ethanol blending requirements of the Renewable Fuel Standard, and the tax credit and ethanol tariff provisions,” Sweat says.
Still, Casper and others are optimistic. “As the industry continues to develop, there may be the opportunity for this method to develop,” he says.
As the ethanol industry prepares for increased volume, it will continue to make strides in productivity and competitiveness in every area, including all types of transportation. “The biggest keys [for the transport of ethanol] will be flexibility and efficiency,” Sweat says. “In order to compete with other fuel alternatives, we will need to ensure we can provide fuel at a competitive price where and when our customers and end-users need it. With the current market volatility and changing regional demands, we will continue to adapt and improve our system and methods of transportation to maintain consistent supply.”
