Ethanol blending runs on empty as supplies dry up

A shortfall in production has thrown out of gear the government’s plans to blend ethanol with petrol. The government made it mandatory to blend petrol with 5 per cent ethanol 16 months ago but the plan never stabilised and the October-2008 deadline to raise it to 10 per cent has been missed.

In October 2007, when the blending policy was announced, oil marketing companies estimated that 1,800 million litres of ethanol would be required to meet the 5 per cent norm. The companies, however, only managed to contract for around 1,320 million litres and actually procured just 120 million litres, according to data until January, the latest available.

The lack of success of the blending programme is linked to a crisis of sorts in the sugar industry, as a result of which the sugar mills that produce ethanol as a by-product have been operating at a fraction of their capacity.

A worldwide sugar glut has seen prices crash, as a result of which farmers have shifted to other crops that fetch better prices. Sugarcane acreage in major producer states has declined 20 to 25 per cent. In fact, sugar mills, particularly in Uttar Pradesh, where India’s top-three sugar producers are located, have recorded the shortest sugarcane crushing period in a decade and most were forced to operate at 40 to 50 per cent of their capacity.

This has impacted the production of molasses, the raw material for ethanol. Industry estimates suggest the molasses output could decline over 30 per cent this crushing season, which will end in February, though mills traditionally close only in April . Sugarcane output is expected to remain low in the next season, which will start in October 2009, as well.

“Even the 5 per cent programme has not yet stabilised. If blending is to be raised to 10 per cent across the country, the availability of sufficient ethanol has to be ensured,” Dinsha Patel, minister of state for petroleum and natural gas, told Parliament a few days ago.

Alternative fuels like ethanol assumed significance across the world when crude prices had rallied to unprecedented highs. However, the attention seems to be waning now that crude oil prices have fallen. The Indian basket of crude has crashed from a high of $142 a barrel in July 2008 to around $40 now, a decline of over 71 per cent. This defies the logic to import ethanol even though cheaper imports are possible from countries like Brazil.

The state-owned oil marketing companies procure ethanol at Rs 21.50 a litre from sugar mills through a tendering process. Some oil marketing companies also had plans to enter ethanol production on their own. Hindustan Petroleum Corporation, for instance, bought two sick sugar mills in Bihar last year, but no further progress has been reported. In January, the company deferred plans to buy four sugar mills in Andhra Pradesh.

Sugar industry sources indicated that blending has been largely successful in the northern states but less so in states like Maharashtra, Andhra Pradesh, Tamil Nadu, West Bengal and Orissa. “What the sugar industry needs is a consistent buying pattern, so that more investment is made in ethanol,” said Narendra Murkumbi, managing director, Renuka Sugars, a large ethanol producer.