2012-09_Ethanol Accounting Practices

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TECHTALKETHANOL ACCOUNTING PRACTICES

OIL, GAS AND CHEMICALS SERVICE SEPTEMBER 2012

Introduction

Currently, there is a large amount of confusion, worldwide over the best or correct way to account for ethanol.Until relatively recently most ethanol trade was for the beverage and pharmaceutical industries and was typicallyshipped in small quantities. With the advent of ethanol becoming one of the principal biofuels, it is now beingshipped in significantly greater volumes and shipment sizes. Unfortunately, the thermodynamic tables andvalues that were acceptable for custody transfer accounting to the beverage and pharmaceutical industries areproving themselves to be less than acceptable to the fuels industry. The following is an attempt to list most (butcertainly not all) of the current prevalent practices and give them as much perspective as we can.

Definitions

There are essentially three different types of ethanol that we encounter in the fuels side of the industry and wedo see instances where people fail to differentiate between them. These are:

Hydrous Ethanol is ethanol that typically contains up to 7% by volume (5% by weight) of water. In thiscondition it is not suitable for fuel use and must go through a dehydration process to remove most of thewater.

Anhydrous Ethanol this is ethanol that has had most of the water removed and is typically 99% to 99.9%pure. This grade is suitable for fuels usage.

Denatured Fuel Ethanol - this is ethanol made unfit for beverage use by the addition of denaturants underformula(s) approved by a regulatory agency to prevent the imposition of beverage alcohol tax.

Denaturants Material added to ethanol to make it unsuitable for beverage use (human consumption)but does not impair the quality of the ethanol for fuel use. While the most common denaturants arenatural gasoline, gasoline blendstock and unleaded gasoline in the 2% to 5% range, there are manyother materials that can be used as denaturants such as; kerosene, MIBK, Heptane, ETBE, Raffinate,naphtha, toluene, etc.

Calculation Methods and Reporting Units

Before getting into a review of factors and thermodynamic values we should also discuss calculation processesand reporting units. There are two primary methods utilized in the calculation process.

One method corrects the volume at the observed temperature to the volume at a standard temperature byapplying a volume correction factor specific to the standard temperature required. Weight or mass isobtained by multiplying the standard volume with the density for that same standard temperature. If mass isrequired use the density in vacuum. If weight is required use the density in air

The other method adjusts the density at standard temperature to its density at the observed temperature ofthe ethanol at the time of measurement; typically, by use of a thermal expansion coefficient per degree.Multiplying it by the volume at observed temperature by the density at observed temperature will give themass or weight. If volume at standard temperature is required, divide the mass or weight by the appropriatedensity or weight correction factor specific to the desired standard temperature.

Both of these methods have essentially equal technical merit and both are widely used; however, we shouldalso add that variations to these methods are also in use.


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Ethanol can be traded on weight/mass or volume at standard temperature. Weight/Mass is usually reported inmetric tons, although conversion to long tons or even short tons is not problematic. Trading in volume atstandard temperature is more of a problem because there are three commonly used standard temperatures:

15C Typically Europe, Asia, Africa, Middle East, etc although the use of 20C is also common

20C Brazil

60F - USA

Therefore, when conducting any type of voyage analysis it is necessary to convert all volumes to one standardtemperature so that comparisons can be made. It is also necessary to check the various conversion factors toensure that this was done correctly. Factors that convert volumes from one temperature to a anothertemperature must have a volume correction factor component built into them and it is important to ensure thatthe conversion factor used is specific to ethanol and not another material such as crude oil or a petroleum

product.

Factors (Let Us Count the Ways)

The following is a review of some of the more commonly used factors:

a) The closest thing to a global convention is the OIML (International Organisation of legal metrology)International Alcoholometric Tables R-22 (please see http://www.oiml.org/publications/R/R022-e75.pdf ) butthese are not often used despite many governments and Customs having signed off on their use.

These tables were produced in 1973 and numerate the various relationships between density,temperature and the alcoholic strength of ethanol/water mixtures.

There are 5 International Alcoholometric Tables; however, Annex 1 also defines 17 other Practical

Alcoholometric Tables. There are no Volume Correction Factor tables, per se, in OIML R-22; however, from the various

density/temperature relationships shown, it is a relatively easy exercise to produce VCF tables and wesuspect that this where many, if not most, of the numerous local handy tables originate from. Ofcourse, the technical provenance of how such VCF factors were produced is usually not availablemaking their accuracy impossible to evaluate.

However, it should be kept in mind that in case of a claim or court action the fact that countries are membersof OIML may well be cited by either side and such a citation may hold up in court.

OIML currently has 57 member states and 64 corresponding member states.

b) In July 2011, the American Petroleum Institute issued API MPMS Chapter 11.3.3 - Miscellaneous

Hydrocarbon Product Properties Ethanol Densities and Volume Correction Factors . This document hasproduced thermodynamic values in the form of a coefficient of expansion or alpha (for use with the Special

Application or C Tables of API MPMS Chapter 11.1 / ASTM D 1250) for pure (99+%) ethanol anddenatured ethanol in the range of 2% or 5% denaturant. The alpha for pure ethanol is 0.000599/F.

The US Customs requires the use of API MPMS Chapter 11.3.3 for all ethanol that is covered by thescope of this standard and falls within their jurisdiction, which is typically all imports and Foreign TradeZone [FTZ] movements.

For any ethanol that does not fall within the scope of API MPMS Chapter 11.3.3 the US Customsrequires the Special Application tables, with an alpha of 0.0006301/F to be used, although they do


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reserve the right to require the importer of record to have a specific alpha developed for the material inquestion.

API MPMS Chapter 11.3.3 also states that if occasional table differences of 0.001% are acceptable toall parties, commodity group Refined Products (formerly known as Table 6B) with an API Gravity of50.47 may be used in lieu of the 6C table. This statement is also causing a lot of confusion becausewhat the standard does not explain is that it is only the thermodynamic values associated with an APIGravity of 50.47 in the B table that matches the thermodynamic values associated with an alpha of0.000599/ in the C tables. The API Gravity / Density relationship is different because the actual APIgravity equivalent of 99+% ethanol is around 46.5, depending upon the purity. Therefore, while you canuse the B tables with an API Gravity of 50.47 to get to standard volume at 60F, in order to get toweight you have to use a weight conversion factor for a different API gravity (typically around 46.5 but itwill vary with the amount of water or other impurities in the ethanol).

We are finding that some people are using an API Gravity of 50.47 to convert to weight and are

coming up with a significant loss if the load port used the actual density. Alternately, others usingthe B table with an API gravity around 46.5, which is incorrect and tends to overstate the volume.

Also, prior to the publication of this standard, industry practice in the US for cargoes not under USCustoms jurisdiction was to use Table 6B with a fixed reference API Gravity of 51.5 for all ethanols.We are still finding a number of instances where this practice continues.

While the OIML tables do not specify alpha values, the OIML densities for 100% ethanol were usedto develop and alpha, which when rounded to six decimal places agreed with the alpha found fromthe APIs independent study.

c) To further compound the issue in the USA the EPA uses its own formula as specified in 40 CFR Part80.1426 under the renewable fuels standard.

(8) Standardization of volumes. In determining the standardized volume of a batch of renewable fuel for

purposes of generating RINs under this paragraph (f), the batch volumes shall be adjusted to a standardtemperature of 60 F.For ethanol, the following formula shall be used:

Vs,e= Va,e*(0.0006301

*T + 1.0378)

Where:Vs,e= Standardized volume of ethanol at 60 F, in gallons.Va,e= Actual volume of ethanol, in gallons.T = Actual temperature of the batch, in F.

In the RINS formula, 1.0378 is the theoretical density of ethanol at 0F and 0.0006301/F is the same alphathat the US Customs used prior to the publication API MPMS Chapter 11.3.3. This formula lends itself better

to programming as it avoids a t with 60F; however, except for decimal point variations all the calculationsusing this alpha should yield very similar values.

It is believed that alpha value of 0.0006301/F came from the Renewable Fuels Association; however, weare not able to confirm this from what is currently available on their website.

d) There is yet another table quoted in US Federal Regulations (27 CFR 30.67), which is Gauging ManualTable 7 as used by the US Alcohol and Tobacco Tax and Trade Bureau [TTB] for drinking ethanol. Thistable dates from 1913 and only outputs 3 decimal place volume correction factors, but is never-the-less stillused from time to time.


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e) Brazil is the largest producer of ethanol and Brazilian authorities accept either the OIML AlcoholometricTables R-22 or Associao Brasileira de Normas Tcnicas Standard NBR 5992:2009 Ethanol and ItsMixtures with Water Determination of Density and Alcoholic Strength Glass Densimeter Method . Whilethis is mostly a standard on the use of glass hydrometers, the document also contains and informative

Annex A, which gives a formula for the development of Alcoholometric Tables, based upon the Bettin andSpieweck model.

Although different from the formula used to develop the OIML Alcoholometric Tables R-22, from thesmall amount of comparison that we have done between the two, the differences noted so far have allbeen in the fifth decimal place.

There appears to be a trend in Brazil to move toward ABNT NBR 5992:2009 but there is still a lot oflocal variation and tables of unknown origin.

f) Various trade bodies and national customs bodies have developed handy or abridged or short formtables for use under certain conditions. These are likely based on the OIML tables but as many of them arequite old they were probably originally intended for beverage or pharmaceutical use, but have found theirway into fuel accounting by default.

Differences

The table below is an attempt to quantify the impact of some of these different tables and factors. In generalterms the differences will be greater the farther away the observed temperature is from standard temperature.

Also, the larger the shipment size the greater the impact of these variations. The data from Brazil is to beconsidered typical as there is no single way in which ethanol is calculated there. We have chosen GOVquantities of 30,000 bbls, 60,000 bbls and 90,000 bbls and determined GSV values for observed temperatures

of 70F, 80F and 90F.

Note: The above table is only for comparison and general guidance purposes only. Actual quantities may differdepending upon location and measurement practices.

Conclusion

To state that this is a mess would be an understatement. There is no single CORRECTway of accounting forany grade of ethanol. It is absolutely a matter of legislative compliance and/or contractual agreement at the timeand date of custody transfer. If the inspector is not clearly notified of any contractually binding agreement as to

Ethanol >99% Bbls

API

11.3.3

GSV @

60F

TTB

Tables

GSV @

60F

RINS

(EPA) -

GSV @

60F

VCF

Brazil

GSV @

20C

GSV @

60F

GOV bbls @ 70F 30,000 0.99400 29,820 0.994 29,820 0.99369 29,811 0.9988 29,964 29,827

GOV bbls @ 70F 60,000 0.99400 59,640 0.994 59,640 0.99369 59,621 0.9988 59,928 59,654

GOV bbls @ 70F 90,000 0.99400 89,460 0.994 89,460 0.99369 89,432 0.9988 89,892 89,480

GOV bbls @ 80F 30,000 0.98797 29,639 0.988 29,640 0.98735 29,621 0.9930 29,790 29,654

GOV bbls @ 80F 60,000 0.98797 59,278 0.988 59,280 0.98735 59,241 0.9930 59,580 59,307

GOV bbls @ 80F 90,000 0.98797 88,917 0.988 88,920 0.98735 88,862 0.9930 89,370 88,961

GOV bbls @ 90F 30,000 0.98193 29,458 0.982 29,460 0.98099 29,430 0.9871 29,613 29,477

GOV bbls @ 90F 60,000 0.98193 58,916 0.982 58,920 0.98099 58,859 0.9871 59,226 58,955

GOV bbls @ 90F 90,000 0.98193 88,374 0.982 88,380 0.98099 88,289 0.9871 88,839 88,432


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the accounting methodology to prevail for custody transfer, it is legitimate and quite reasonable to use the localaccounting methodology as the default standard, although these may produce significant differences betweenload and discharge ports.

It is not our intent with this document to suggest or recommend one method or procedure over another as thereis no clear or obviously technically superior method, although some of the ones in use are technicallyquestionable. Ethanol, even in its supposed pure form has measurable differences. For fuel purposes pureethanol is any purity of 99% or better, yet the density of 100% ethanol at 20C is 0.78924 kg/m

3whereas the

density of 99% ethanol at 20C is 0.79235 kg/m3. Additionally, hydrous ethanol and denatured ethanol appear to

have different thermodynamic reactions. With hydrous ethanol the alpha value decreases with increasing watercontent; whereas, from the limited data available for ethanol/gasoline mixtures the alpha appears to increasewith increasing gasoline content.

There is clearly still a lot of work that needs to be done, especially with denatured ethanol, before we can statewith any level of confidence that one method or one set of factors are superior to the others. In time we will,hopefully, resolve many of these issues; however, in the mean time, we need to make sure that we are aware ofthe different ways in which ethanol is accounted for and that we make our clients aware of these differences asthey may be able to resolve some of them by contractual agreement with their trading partners.


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Minutes of Tech Talk Meeting:

Branch:_______________________________ Divis ion: ______________________________

Person Conducting Meeting:__________________________________________________

At tendees:

Addi tional Items Discussed:

Problem Areas o r Concerns:

Comments:

The original is to be maintained at the Branch forreference and audit purposes. Data from this form isrequired as part of your monthly Global QHS&E reporting

2012-09_Ethanol Accounting Practices

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