CALIFORNIA PETROLEUM CONFERENCE
HILTON, SAN DIEGO, CA., JUNE 27, 2006

The MTBE problem had arisen and the phaseout was inevitable.

20 years ago we were internally producing fuel in California. That has changed.

The public only focuses on certain issues at certain times. The price of fuel brought this issue to the forefront.

The Governor talks about the hydrogen highway. I am in favor of it but I'm not sure I'll be alive long enough to drive on it. In politics, the public wants the vision — but they also know what you're going to do about it tomorrow. So the Governor is also very supportive of alternative fuels.

The Governor put out an executive order the other day to the Air Board that said let's maximize to the greatest extent possible the new predictive model for alternative fuels. This is a shift of policy.

Renewables are going to be a part of what we have in the fuel matrix over the next 10-15 years. Without MTBE liability protection, the major oils said when the government told us to use it, we used it and when they told us not to use it, we didn't use it. They didn't phase out in places where it was not illegal to use, like Texas. They just quit MTBE and substituted ethanol.

Our plant in Madera will be finished in Sept.-Oct. When that is finished, it will be the largest fuel plant built in California in a generation. That doesn't say as much about the size of our plant as it does about refinery construction in California. When that is finished, we're going to built one in Oregon.

$4.00 a gallon is okay in Europe but I don't think that'll sell here. I think over the next few years the price of ethanol will come down and here, like everywhere else, the most competitive will survive.

In Sweden, they have 300 E-85 stations. they're going to have 500 E-85 stations at the end of next year. Here in California we have a couple of pilot stations. You're going to see much more. There's a pilot effort with GM, us, and Chevron with the State of California so the state can add more E-85 vehicles. GM and Ford have chosen E-85 as a path back to profitability and distinguish themselves from others. You've seen the ads. Toyota says everything they send to this country starting in 2007 will be a hybrid or can run on E-85. The car companies now are starting to see this as inevitable and use it as a marketing vehicle to sell their cars.

The oil companies, who have been taking a beating lately, are looking for a way to be perceived as greener and more friendly. Their commercials are changing. You can see it changing.

To that extent, we are seeking to change the legislative arena as well. We know an opportunity to have alternative fuels in the mix is important to you and your business model.

We view it [ethanol] as a model for flexibility for oil companies to use in the mix when they need to.

California is at a crossroads. In my opinion, this situation looks very similar to the electricity situation where we couldn't decide what we were going to do: build the plants, not built the plants. It led to a crisis. Here we sit in a very similar situation with an industry who can put put billions of dollars into building facilities in the state and they need regulatory assurance so they can decide to build their facility here instead of another state.

We need the ability to have that access here in this market.

The Midwest is where we've drawn the ethanol. You build the plant, you grow the corn.

We are destination ethanol. The train comes out here, 110 car units. It never stops. It goes in a circle and comes back. It never stops. We take the corn, take the sugar out, and then take the wet distillers grain and send it to the cows. That, coupled with the market here, make economic sense.

California uses 25% of the ethanol in the country.

The number of plants looking to be built is large enough to sustain the growth in demand of ethanol. I'm not saying they'll all be built, but there is great interest.

Sugar beets is a crop that you're competing on the world market for sugar. Sugar beet and sugar cane has value for producing ethanol. But the problem, I think, is the ability to grow and compete on the sugar market. Corn for us, logistically, is scalable, profitable.

People fail to appreciate the American farmer's willingness — if he can get 25 cents more a bushel — to plant corn in his field, his yard, down the road. It'll push soybeans right out of the country into South America — that's what'll happen.

I don't think you're going to see one technology replace another. I think it's going to be additive to the whole volume for the country and the world.

The Midwest has a larger number of E-85 stations. This is brand new for us out here. It's better, I suppose, to have the cars out there that can run on E-85 so when the station comes in the consumer can choose. But it is a problem in the short run. The number of E-85 cars in California will increase dramatically.

I drive an E-85 car. I haven't put any E-85 in it yet.

We also know if you have a pump there and a tank of E-85 and no one's buying it, that's no good. If you can't sell it, it won't last long. So, over time, it's better to have the vehicles out there and have the question being asked [when will you get it?]. But I think it's a decision that business people should make, not have the government tell them. It has to be a business decision on your part for this to work.

You really can't hypothesize on a profit margin when you have two pumps in an entire state. I think it's going to take a few more of these to determine who goes first and if they make sense in your particular business situation.

No one is seeking to make it sound simple.

If you put it out there and then the price of E-85 is more expensive, they're going to buy traditional gasoline. We know people fill their tank based on price. If E-85 is too expensive, no one is going to use it, anyway.

Ethanol is the only product that can be distributed in the current distribution system while, at the same time reducing greenhouse gases. It's a transition fuel while we're bridging to hydrogen — or whatever we're bridging to.

I don't expect to see stations on every corner for a long time. I don't expect to see E-85 replacing gasoline, especially with the price differential the way it is. I don't think it means every gas station is going to have E-85. I don't think it's going to be anyone at a competitive disadvantage.

At $3.25 a bushel, they will grow corn here. For $2.75 you can get a bushel of corn delivered here, including the transportation. You won't get much lower than $3.25 from a California farmer because they have other crops they can grow. Plus, the corn was going to head this way, anyway, for corn feed.

We're in the infancy of an industry.

It takes 12-15 months to build an ethanol plant, depending on the permits and regulations.

I know of 15 plants currently planned for one railroad line.