Mexico will produce its first batch of ethanol by 2010 and plans to mix the fuel with gasoline that will be distributed in the country's three largest cities as it seeks to reduce imports of gasoline.

Ethanol output will reach 200 million liters (53 million gallons) in 2010, Agriculture Minister Alberto Cardenas said today at a conference in Guadalajara.

"We have everything we need in order to become one of the world's most important producers of biofuels,'' Cardenas said.

State-owned oil company Petroleos Mexicanos will mix the ethanol with gasoline it sells. Pemex, as the Mexico City-based company is known, is the only company allowed to explore, refine and sell hydrocarbons in Mexico.

Guadalajara, the second-largest city in Mexico, will be the first city to sell ethanol mixed with gasoline. Monterrey and Mexico City will follow. Pemex will invest as much as 320 million pesos ($30.3 million) to upgrade its infrastructure in Guadalajara to handle ethanol, said Chief Executive Officer Jesus Reyes Heroles today at the conference.

Mexico imports 40 percent of the gasoline it consumes, as the country's six refineries, which have a capacity to process about 1.3 million barrels of crude a day, are unable to meet growing demand. The country needs to build a new refinery every three to four years until 2021 to become self sufficient in gasoline, Energy Minister Georgina Kessel has said.

Replacing MTBE

Mexico will replace methyl tertiary butyl ether, or MTBE, a gasoline additive, with ethanol in its gasoline mixtures, Reyes Heroles said. Pemex spent about $409 million on MBTE imports last year. The U.S. replaced MBTE earlier this decade with ethanol. The first gasoline with ethanol produced will be a mixture that contains 10 percent ethanol.

The U.S. is the world's largest ethanol maker, with production reaching a record 518,000 barrels a day in February, the latest month data is available, according to the U.S. Energy Department. Brazil, which makes the fuel from sugar, is the second-largest producer.

The U.S. mostly uses corn to make the gasoline additive. The country subsidizes the industry by providing a 51-cent tax incentive for blending the fuel into gasoline and by levying a 54-cent tariff for ethanol produced in Brazil.

Mexico passed a law that regulates the biofuel industry this year. It restricts the use of food crops for biofuels to surplus crop. The government has rejected using corn, a staple food, for ethanol because of concern its use would lead to a shortage of the grain.

Mexico will use African palm and some sugar cane to produce its ethanol. Mexican farmers will set aside 300,000 hectares by 2012 for crops that can be used for ethanol output, Cardenas said.