REFINING IN THE '90s--1 CLEAN AIR ACT COMPLICATES REFINERY PLANNING

Richard C. Scherr, G. Allan Smalley Jr., Michael E. Norman
ENSR Consulting & Engineering
Houston

The recently signed 1990 Clean Air Act Amendments (CAAA) will have a more significant impact on refinery operations and capital expenditures than any environmental legislation since the Resource Conservation and Recovery Act (RCRA) in 1976.

This first of two articles looks at the effects of the CAAA on refinery planning, construction schedules, and market forces.

The second, which will appear in a subsequent issue, will discuss the significance and interactions of the portions of the CAAA having the greatest impact on refining: nonattainment, air toxics, and permitting.

Refining is more affected than any other industry because, in addition to complying with all other CAAA provisions, refiners will have to modify, design, permit, and construct new units to produce mandated reformulated fuels. New construction will be difficult, and in some areas impossible, to permit because 70% of U.S. refining capacity is located in areas out of compliance with federally mandated air quality standards for ozone.

Environmental laws and regulations have been viewed primarily as a production cost element. Until recently, they played a small role in the strategic planning process. With passage of the CAAA, however, environmental regulations are not only a component of cost, but they also:

Dictate the market
Define product composition and performance
Influence technology
Change consumer expectations of performance
Determine the feasibility of various production and supply options.

Historically, industry could count on rulemaking delays in the regulatory process to buy added time. However, the new law has "hammer" dates which shift rulemaking to the states if deadlines are missed. As a result, the decision of whether to produce reformulated gasoline by 1995 becomes a fundamental strategic issue which must be addressed quickly.

With only 3-1/2 years before production is required, preliminary and conceptual planning must be completed no later than the end of this year. In some cases, permitting efforts should begin as early as this June to provide reasonable assurance that new units will be producing by the end of 1994. The cost and regulatory requirements imposed by the CAAA will undoubtedly cause significant changes in the refining industry during the '90s. Refiners who cannot produce reformulated gasoline by 1995 may face a restricted market and possibly narrower margins.

Facilities which cannot meet other compliance options may face capacity reductions and possible closure. However, for those companies that understand the strategic implications, the Clean Air Act Amendments also present new opportunities to create competitive advantages.

THE CAAA

Compliance with the CAAA will cost the refining industry at least $10-12 billion. Refineries will also embark on major capital spending programs (estimated at $24 billion this decade) to produce reformulated fuels.

The total cost for refining and marketing industry compliance with these and other environmental laws and regulations in the U.S. this decade is conservatively estimated at $70-100 billion. The capital budgets of even the largest companies will be strained by this amount of required spending.

Environmental issues can no longer be viewed as only a small part of the strategic planning process for refining--they are now driving the strategic process. With billions of dollars at risk, understanding CAAA implications is vital to developing a successful strategy for maintaining or increasing market share and profitability.

Determination of the proper product strategy for any given market strategy will be a trial-and-error process. For any market strategy investigated, an ideal refining/marketing or product supply strategy needs to be created. Modifications to the existing product supply system can then be planned to move the system closer to the ideal.

With these elements in place, estimates for these changes can be made, taking into account impacts of the CAAA. The resultant cost and feasibility may or may not be attractive. If it is not, changes to either the market or product supply strategy must be made and the process repeated.

The strategy finally selected should be tested against changes in the business environment. Some possible changes to be considered are a change in the supply of crude oil, a large number of areas opting for reformulated gasoline, and formula changes resulting from the high demand and limited supply of oxygenates.

Contingency plans to handle these problems should be made. These plans should consider prespending for added product supply flexibility to avoid repermitting delays in 1994 and beyond.

For major refiners, the question is not if they will produce reformulated fuels, but how and where. Smaller refiners, with more limited capital budgets, face very difficult decisions that may ultimately determine their survival. The evaluation of product supply strategies requires an understanding of the impacts of the amendments on refining and marketing, and the ability to project probable future regulatory requirements. This article addresses several issues necessary to understanding the strategic implications of the Clean Air Act Amendments on refinery planning and construction.

They are:

What are "reformulated" fuels? When and where are they required?
What processing changes might be required to produce these fuels?
What design-permit-construct schedule is necessary?
What are the market implications posed by the CAAA and reformulated fuels?
How do provisions of the CAAA, as well as existing air regulations, affect process considerations and schedules for producing reformulated fuels?
What other environmental regulations or issues need to be considered?

BACKGROUND

Although the clean fuels mandated by the CAAA are often referred to as reformulated fuels, there are actually two different, but overlapping, primary programs: oxygenated gasoline and reformulated gasoline. Final rules for these programs are due in November 1991.

OXYGENATED GASOLINE

The oxygenated fuel program requires that, beginning Nov. 1, 1992, gasoline with a minimum oxygen content of 2.7% be sold, generally during winter months, in approximately 40 cities not in compliance with carbon monoxide (CO) standards (Table 1; Fig. 1).

The Environmental Protection Agency (EPA) may grant extensions of up to 2 years for reasons of inadequate supply or distribution capability. Required oxygen content may be increased to 3.1 % for those areas not in compliance with CO standards by December 2000. The U.S. gasoline pool currently contains an average oxygen content of 1.7%.

MTBE will probably be the primary oxygenate used. If MTBE were the sole source of oxygen, the amount necessary to provide required oxygen levels would be 15% by weight. Other potential oxygenates include ethanol, methanol, tertiary amyl methyl ester (TAME), and ethyl tertiary butyl ether (ETBE).

REFORMULATED GASOLINE

Reformulated fuels are required by Jan. 1, 1995, in nine cities with extreme or severe ozone pollution problems (Table 2; Fig. 2). Approximately 100 other cities with marginal, moderate, or serious ozone problems may "opt in" to the program (Table 3).

For these ozone nonattainment areas, the law specifies a gasoline "formula" and also an emission performance standard. The more restrictive of these requirements will apply during the "high ozone season" (usually summer months).

The gasoline formula includes the following requirements:

Minimum oxygen content of 2% year round--2.7% during winter months, for those areas also subject to oxygenated fuel requirements (CO nonattainment areas).
Benzene content shall not exceed 1.0 vol %. (The current pool average is 1.53 Vol %.)
Aromatic content shall not exceed 25 vol %. (The current pool average is 32 vol %.
Lead additives are prohibited. Other heavy metals are also prohibited unless a waiver is granted by EPA.
No increase in vehicular NOx emissions is allowed, compared to emissions from present (1990) gasoline. EPA can change or eliminate other requirements, if necessary, to prevent any increase in NOx emissions.

The emission performance standard includes the following:

Ozone-forming volatile organic compound (VOC) emissions shall be reduced to at least 15% below 1990 levels, during the "high ozone season."
During the entire year, aggregate emissions of toxic air pollutants shall be reduced to at least 15% below 1990 levels. For this purpose, toxic air pollutants are defined as benzene; 1,3-butadiene; acetaldehyde; formaldehyde; and polycyclic organic matter (POM).
Beginning in 2000, VOC and toxic emissions shall be at least 25% below 1990 levels. EPA can increase or decrease the percentage reduction, but in no case can the reduction be less than 20%.

Studies have shown that additional air quality benefits might be obtained by reducing olefins and high-boiling components. However, this is not specifically addressed in the legislation. Refiners may find it necessary to incorporate these changes to achieve mandated reductions in VOCs and toxics.

EPA could also decide to add these changes under provisions directing them to further reduce ozone-forming constituents to a greater degree than provided by the formula or performance standard, if additional changes are found to be feasible.

OTHER CHANGES

In addition to the requirements addressed in the preceding for fuels sold in specific areas, the CAAA also contains the following general provisions for fuels sold in all areas:

By summer 1992, maximum vapor pressure shall not exceed 9.0 psi. Ethanol fuels (10% ethanol in gasoline) receive a 1.0 psi waiver.
By October 1993, maximum sulfur content allowed in diesel fuel shall not exceed 0.05 wt %. Minimum cetane number must be at least 40.
By January 1995, detergents are required in all gasoline.
By January 1996, lead additives will be banned nationwide.
"Anti-dumping" provisions will prohibit degrading the gasoline pool outside of program areas below 1990 average fuel standards. This will prevent the addition of benzene and aromatics (taken out of reformulated fuel) to the regular gasoline pool.

PROCESS CHANGES

Several key decisions will be driving the refining sector's selection of process changes to meet mandated gasoline pool reformulation. As recent articles in the trade press suggest, there is no universally accepted approach to manufacturing reformulated gasoline.

The final solution, however, must contain at least these elements:

An oxygenate supply
Lower aromatics content in the gasoline pool
Less butane in the gasoline pool.

This article will not discuss process change details.

However, the process approaches used will probably consist of both changes in the operation of existing units and the addition of new units.

They can best be grouped as follows:

Process operational changes
Process additions
Process steam and power balance.

PROCESS CHANGES

Hydrotreating severity for nitrogen and sulfur removal will probably increase for both finished distillates and gas oil intermediates. Also, FCCU severity and choice of catalysts will have to be resolved, in regard to both light olefins production for alkylation and gasoline vs. light distillate volume.

Reformer severity and rates may be reduced to minimize the undesirable production of benzene and other aromatics.

PROCESS ADDITIONS

Process unit additions will depend on the crude oil charge stock, the flexibility of existing refinery systems, and the availability of oxygenates. These additions may include:

Isomerization capacity for aliphatics and MTBE feedstocks
Etherification units for production of MTBE, ETBE, or TAME
Extractive distillation of aromatics
Alkylation capacity to lower olefins and aromatics content, reduce vapor pressure, and improve octane.

These process additions are not meant to be totally inclusive; but rather to illustrate the complexity of the range of choices.

UTILITY BALANCE

Utility issues must also be included when looking at possible changes required to produce reformulated fuels. Waste heat steam production from process units might change. Direct-fired steam boilers will have to accommodate new supplemental fuel regulations as well as possible restrictions on the plant's permitted NOx and SOx emission rates.

The final utility consideration is the balance of produced vs. purchased power, and its potential impact on percentage of significant deterioration (PSD) increment availability.

CONSTRUCTION SCHEDULES

In an effort to identify significant planning dates and near-term deadlines for deciding strategic issues, a timeline has been developed for compliance with the gasoline pool regulations of the CAAA.

Overlaid on this schedule are typical time requirements for conceptual design, permitting, detail design, procurement, construction, and start-up of new units.

This schedule was developed by backing up from Jan. 1, 1995 (the current date for complying with new gasoline pool requirements). As shown in Fig. 3, the following troubling issues can be identified:

Strategy and conceptual choices should already be well developed.
A new emissions inventory for permit preparation will be needed by fall 1991.
If air monitoring is required, add at least 6 months to the permitting schedule. If your addition is not classified as a major source, you may be able to reduce the schedule by 6 months.
Design and construction schedules are probably optimistic because of the industry-wide scope of required changes and the "Kuwait factor."
A 3-month schedule for debugging, start-up, and delivery to the retail level may also be optimistic.

The implications of this schedule seem clear--those who make their strategic choices soon will have competitive advantages. They will be first in the permit review process, and may be "grandfathered" in the PSD increment management program. Those who delay will face a more stringent and lengthy permit process, and may encounter personnel shortages at consulting, design, and construction firms.

MARKET IMPLICATIONS

Oxygenated fuels are required to be sold by 1992 in approximately 40 cities that have nonattainment status for CO (Table 1; Fig. 1).

These cities (including Denver and Phoenix which already require oxygenates) account for 40% of the current U.S. gasoline market. (All market figures in this article refer only to the U.S.)

REFORMULATED GASOLINE BASE

By 1995, only reformulated gasoline is to be offered for sale in the nine most severe ozone nonattainment areas (Table 2; Fig. 2). These areas currently comprise about 25% of the market. However, because of the distribution system, surrounding suburban and rural areas will probably receive reformulated gasoline as well.

Taking these areas into consideration, the minimum market for reformulated gasoline in 1995 is expected to be 30% of the current market.

Unknown at this time is what effect higher prices for reformulated gasoline might have on demand. Some sources estimate that CAAA requirements may add 10-15 cents/gal to the price of gasoline. Gasoline demand in the '90s is expected to be flat, and higher prices will surely reduce demand. However, the targeted cities are among the fastest-growing in the nation and population increases are likely to offset any per capita decline in demand in those areas.

"OPT IN" PROVISIONS

The law requires that other areas be allowed to opt in to the oxygenated and reformulated fuels programs upon petition to the EPA by the governor of the appropriate state. The most likely areas to request reformulated fuels are the other less severe ozone and CO nonattainment areas. These areas account for an additional 20-25% of current gasoline demand (Table 3; Fig. 2).

A request to enter the program can be filed at any time. Under the act, a petitioning area has to be brought into the program within 1 year of the request.

A significant motivation to enter the program will come in November 1993, when State Implementation Plans (SIPS) are required. In their SiPs, states will have to demonstrate their strategies for achieving compliance with clean air standards by specific dates. Substituting reformulated fuels to reduce vehicular emissions will probably be more attractive than other alternatives.

The total market for reformulated fuels is uncertain but could easily reach over 50% by 1996-97. A factor that could increase this figure is the potential difficulty of segregating two or more radically different gasolines in existing distribution systems.

COMPETITOR ACTIONS

Many refiners may choose not to produce reformulated fuels, either because of the capital cost, or because their current market is not one of the mandated areas. Several potential consequences of this decision should be examined.

First, if the market area served decides to opt in to the program, refiners may be given only a 1-year notice. For oxygenated fuels, supplies of oxygenate can perhaps be purchased. For reformulated fuels, however, construction of additional units would take several years. This delay would provide an opportunity for other refiners to capture market share.

In addition, the permitting process will undoubtedly be more difficult and lengthy by the mid-1990s, as states add new permit requirements mandated by the CAAA.

Second, many refiners currently serving mandated areas will choose not to produce reformulated fuels, redirecting their output to nonmandated areas. The relative supply of gasoline in nonmandated areas will increase, putting added pressure on refining margins in those areas. Conversely, relative supplies to mandated areas may decrease, allowing greater margins.

Third, not producing reformulated fuel limits a refiner's markets and options. The producer of nonreformulated gasoline will find the market for his product continually shrinking as areas opt in. Limited flexibility in the transportation and distribution system may also reduce the market for "regular gasoline."

If excess supplies of reformulated fuels exist within a mandated area, a refiner producing reformulated fuel is always permitted to sell in a nonmandated area, putting pressure on margins there.

Once a refiner has made the investment to produce reformulated fuels, the marginal cost of production is probably not significantly higher than a refiner making regular gasoline.

OXYGENATE AVAILABILITY

Another uncertainty to be considered is the potential for EPA to grant extensions if adequate supplies of oxygenate are unavailable to meet the schedule. Provisions in the act allow EPA to delay required use of oxygenated fuels for up to 3 years, although there are no details yet on how this will be decided. However, the act does not specifically mention that such extensions are available for the required use of reformulated gasoline.

Based on current and planned MTBE and ethanol capacity, only 20% of the gasoline pool can be oxygenated by 1992. It is estimated that oxygenate supplies will be sufficient for only 8 cities in 1992, 20-25 cities in 1993, and the remainder in 1994.

While it would seem reasonable that the most severe CO nonattainment areas would be least likely to receive an extension, supplies may not be distributed to make attainment possible. In fact, supplies of oxygenate could be distributed around the country in such a fashion that no area would have adequate supplies to oxygenate all gasoline consumed in that area.

What will be the effect on a refiner that has added MTBE capacity to oxygenate fuels for the market area served by that refinery, only to have EPA grant a 1-year or greater extension?

If the fuel is not mandated, will consumers in that area be willing to pay more for that producers' gasoline because it is better for the environment? Will the distribution system serving that refinery enable the oxygenate to be economically transported to another area in the program?

It seems feasible that without proper consideration of these issues, an adequate return on investment for oxygenate facilities could be delayed several years.

CREDIT TRADING SYSTEM

The CAAA contains provisions for a system allowing the trade or sale of oxygenate, benzene, and aromatics credits. Under such a system, refiners that exceed the standards could sell or trade credits to another refiner. Credits can only be used within the same area they are generated.

This may represent an opportunity for refiners that invest in reformulated fuels to receive additional margin on their investment. It may also provide a method by which other refiners can delay investment in reformulated fuels, but at a potentially higher price.

IMPACT ON FEEDSTOCKS

The move to reformulated fuel may impact the market for other feedstocks used by the refine or for chemicals produced by the refinery. For example, removing benzene and other aromatics from the gasoline pool may increase supplies in the commodity market, causing decreased prices and margins for these products.

Increased MTBE production will absorb isobutylene and light olefins stocks, with many plants choosing to dehydrogenate isobutane to produce isobutylene feedstocks.

By 1996, most of the n-butane surplus created by volatility reduction will probably be absorbed by oxygenate production. If additional areas opt in, shortages of butane and methanol may develop.