Ample U.S. stocks of low sulfur diesel likely will minimize refiner/marketers' logistical problems stemming from new federal sulfur requirements for highway diesel fuel that took effect Oct. 1.
Uncertainty about the depth and breadth of the market that low sulfur diesel could capture has prompted U.S. refiners to build more low sulfur diesel manufacturing capacity than is expected will be needed.
Estimates vary, but many industry sources believe U.S. low sulfur diesel fuel processing capacity exceeds demand by 10% or more. The American Petroleum Institute estimated August 1993 low sulfur diesel production at 1.1 million b/d, about 35% of U.S. refinery distillate output.
Patterns of low sulfur diesel demand at each products terminal will emerge in time. But whatever bottlenecks turn up will be resolved within the next 2 years with relatively low cost expansions of distribution infrastructure and storage.
Those infrastructure expansions in part relate to a U.S. government mandate to monitor diesel supplies to prevent substitution with a poorer quality product. Beginning Oct. 1, off-highway diesel will have to be marked with a blue dye-1,4-dialkylamin-oanthroquinone (OGJ, Aug. 2, p. 77). A concentrated solution of the dye must be injected into the higher sulfur diesel blend to differentiate it from on-highway diesel.
Distribution bottlenecks likely will have only minor effects because U.S. refiners and refined products traders, wholesalers, and retailers have been building low sulfur diesel inventories since last summer. By API's estimate, low sulfur diesel stocks at the end of August amounted to about 35% of total U.S. month end distillate inventories.
The upshot is that U.S. refiner-marketers are well prepared to supply the new spec federal diesel fuel required by the Environmental Protection
Agency with little disruption to markets, other than the price jolt at the pump. National Petroleum Refiners Association estimates refiners' costs to produce the new spec diesel at 3 8 cts/gal.
Because California is a captive market owing to its tougher than federal specifications for diesel that also take effect Oct. 1, there remained last minute concerns over spot shortages in that state.
SUPPLY, PRICES
Recent government statistics reflect ample supplies of low sulfur diesel despite the surge in demand.
Year to date U.S. demand for low sulfur distillates is 6.2% greater than in 1992. Energy Information Administration reports an average demand of 3.12 million b/d through Sept. 10 vs. 2.94 million b/d in the 1992 period.
Production of 0.05 wt % sulfur diesel was 1.52 million b/d for week ending Sept. 10. Low sulfur diesel production averaged 1.4 million b/d for the 4 weeks ended Sept. 17, equaling projected demand for the new fuel, according to Pace Consultants Inc.
EIA estimates U.S. low sulfur distillate stocks in the week ending Sept. 17 were 53.4 million bbl, up 23.4 million bbl from early August levels. Sept. 17 low sulfur distillate stocks accounted for about 41% of total U.S. primary distillate stocks.
U.S. distillate prices have strengthened since late August, when the No. 2 fuel oil/West Texas intermediate crude spread began climbing from 6 cts/gal to the current 8.8 cts/gal. Increased U.S. and European demand have boosted prices, says Pace.
FORECAST DEMAND
EIA predicts U.S. consumption of highway diesel fuel will increase long and short term.
U.S. transportation distillate demand by EIA's definition includes highway diesel, vessel bunkering, and military and railroad use. Highway diesel fuel consumption accounts for about 77% of U.S. transportation distillate demand.
The agency estimates 1993 transportation sector diesel demand of 1.811 million b/d, up about 2.4% from 1992 consumption of 1.768 million b/d. Transportation use of diesel in 1994 is projected to reach 1.881 million b/d, a 3.9% increase from 1993.
For the long term., EIA estimates transportation use of distillate fuel will increase about 1.7%/year during 19902010, or total demand growth of 42%. Growth of highway diesel consumption by freight trucks is expected to pace growing distillate demand with a steady increase of about 1.3%/year.
EIA said diesel fueled truces will capture more short haul markets, accounting by 2010 for 63% of freight truck fuel consumption. In 1989, diesel fuel consumption made up about 54% of all energy used in the U.S. by freight trucks. Consumption by trucks of diesel fuel likely will increase more slowly than real gross domestic product because of fuel efficiency, improvements, EIA said.
EXCESS LOW SULFUR CAPACITY
Purvin & Gertz Inc. (P&G), Houston, estimates U.S. refiners could manufacture enough low sulfur diesel fuel to serve 60-65% of U.S. distillate markets. However, consumption of highway diesel accounts for only about 45-50% of U.S. distillate use.
As a reflection of the large volume of new low sulfur diesel production capacity, low sulfur/high sulfur price differentials are quite narrow. By most estimates, the differential is too narrow to allow low sulfur distillate manufacturers to recover their investments in low sulfur units.
P&G Principal Blake Eskew said excess capacity has been built because most refiners that made the investment to produce low sulfur diesel tried to reconfigure to produce 100% low sulfur diesel. Also, P&G principal Ken Miller said, economies of scale meant refiners could build larger units for less investment per barrel of capacity and thus were willing to pay a little bit more to get a lot more capacity.
As a result, Eskew said, "Most companies that have elected to supply low sulfur diesel typically will be able to produce a higher volume than their markets require. They'll be able to produce plenty of low sulfur diesel for on-highway market requirements, plus quite a bit."
Logistical factors resulting from excessive low sulfur diesel supplies could cause some high sulfur distillate markets to begin using low sulfur product, especially construction and agricultural markets, where users don't have flexible storage.
P&G said the buildup of low sulfur inventories indicates U.S. refiners and distributors are well prepared to meet expected demand.
"There obviously will be a few disruptions here and there," Miller said. "But I think we'll get through this first season without much difficulty."
PROBLEMATIC IMPLEMENTATION
Wright Killen & Co., Houston, said some refiners likely will experience problems stemming from the new low sulfur diesel regulations because of regional differences in capital investments, supplies, and readiness of distributors.
"The implementation of low sulfur diesel requirements for on-highway applications this fall promises to be problematic, at best," Wright Killen Executive Vice President Peter J. Killen said.
Killen said it is not vet clear whether adequate provisions have been made to allow efficient segregation of on-highway and off-highway distillates in product blending, storage, and transportation facilities. Several earlier Wright Killen studies of effects of low sulfur diesel requirements on the U.S. refining industry found that capital requirements, high operating costs, and logistical bottlenecks could cause a 3-5 cts/gal price differential between on-highway and off-highway diesel east of the Rocky Mountains.
"Process capabilities to produce low sulfur diesel east of the Rockies-based on process facilities in place today or soon to be completed-exceed expected demand by at least 10%," Killen said. "Price differentials on Gulf Coast spot markets will be unaffected by logistical bottlenecks and will reflect recovery of all cash operating costs and perhaps a small premium to cover capital related costs."
PRICE DIFFERENTIALS
Horace O. Hobbs, Wright Killen's manager of refining strategy and business analysis, said U.S. diesel markets have evolved to three tiered pricing, with splits occurring among prices for 0.5 wt % sulfur product, 0.2 wt % sulfur product, and 0.05% sulfur product.
Products with medium sulfur content are selling at about a 1 ct/gal premium and low sulfur diesel at about a 2.5-3 cts/gal premium to high sulfur distillate. Distillate spot differentials mostly are based on cash costs of hydrodesulfurization severity, he said.
Wright Killen estimates that a 3 cts/gal premium for 0.05 wt % sulfur diesel will offer refiners an adequate return on investment needed to produce the lower sulfur distillate, especially in the Gulf Coast region where cash and investment costs have been the lowest.
Hobbs said refiners will manufacture on-highway diesel only as long as price allows recovery of some low sulfur product increased processing costs. Wholesale prices for distillate products are set by activity on the New York Mercantile Exchange, while retail pump prices reflect marketing margins, distribution costs, and state and federal taxes.
"A retail spread of 4-6 cts/gal reflects the wholesale 2.5-3 cts/gal price differential required to process regular diesel into a low sulfur, on-highway grade, plus additional logistical costs and margin," Hobbs said.
He said differences in retail prices between high sulfur and low sulfur diesels should be lower in large metropolitan areas well supplied by local refineries, pipelines, and terminals and higher in relatively more remote areas with scarce pipelines and terminals.
"The initial low sulfur diesel pump prices will begin to erode marginally once logistical constraints driving up the price are overcome in some regions," Hobbs said.
LOGISTICAL PREPARATIONS
P&G's Miller said U.S. refiners have been working for several months to be ready to supply tankage at all locations to which low sulfur distillate fuels must be delivered. Despite the lack of adequate tankage to assure segregation at all locations, Miller said most distributors are reasonably prepared.
"In places where they don't have enough tankage, distributors are exchanging products," he said.
Also, lack of storage in some areas will cause supplies of some competing distillate products to overlap. In locales where high sulfur distillates would be available only at significant additional distribution and storage costs, low sulfur material will take over former high sulfur markets altogether.
"Those types of things are happening all up and down the system," Miller said, "but most problems already have been anticipated and worked out."
The decision by Colonial Pipeline Co., Atlanta, to eliminate transportation of an intermediate kerosine grade is an example of the logistical adjustments petroleum products distributors are making to handle low sulfur diesel volumes. Colonial is the world's largest volume petroleum products pipeline transporter.
Jet-A kerosine has an average sulfur content close to 0.05 wt % and in winter typically is blended into diesel fuel to lower the cloud point and prevent plugging of fuel lines. Before the decision, Colonial transported two grades of kerosine. With 0.05 wt % sulfur diesel coming into play, to continue supplying jet kerosine as a blending feed, Colonial would have had to add a fuel. However, it didn't have enough tankage to carry all three types of fuel.
"Elimination of the intermediate grade means kerosine or kerosine cut for blending now only will be available in two grades: high sulfur jet fuel material and 0.04 wt % sulfur distillate that can be used for kerosine, blending feed, and other uses," P&G's Eskew said.
VOLATILITY TO PERSIST
Although not vet confirmed by available statistics, most refiners and many distributors are entering the 1993-94 winter heating season with only minimal levels of high sulfur fuels on hand, Eskew said. that is occurring because refiners with leftover high sulfur material at winter's end will have a tough time getting rid of it.
"Refiners will tend to maintain minimal levels of high sulfur material because they know they always can pull the low sulfur material into the heating pool if it's needed for heating purposes," he said. "More than likely, the higher cost of that probably can be passed through. That also means a continuation of narrow price differentials."
If low sulfur/high sulfur price differentials remain fairly narrow, high sulfur fuels will have a tough time competing against the low sulfur blends.
"If refiners end up with any extra high sulfur fuel at all, there could be a very brief period of time in which they'll try to dump all the high sulfur they can," Eskew said.
He said U.S. Midcontinent refiners last summer were caught with excessive supplies of off-highway distillates when flooding curbed distillate demand for farming uses and severely depressed markets.
"Refiners recognized they had to get rid of many of the higher sulfur fuels they normally have in tankage before the turnover in the pool to low sulfur requirements," Eskew said. "They tried to dump that surplus and the market ended up with 8 cts/gal discounts on the high sulfur fuel."
Volatility on U.S. distillate markets likely will remain as the boundaries between specialty markets blur and seasonal supply/demand factors more heavily influence prices. Future volatility of high sulfur distillate prices likely will be less severe on Gulf, East, and West coasts because of the flexibility allowed by waterborne transportation.
"It's more serious in inland markets where refiners can't do anything with the high sulfur product," Eskew said.
CATALYST SUPPLIES
Refiners similarly have been building hydrotreater catalyst inventories for more than a year to assure adequate supply for the new diesel.
But catalyst demand began building rapidly during 1993 and continued through mid-September, and supplies of high severity catalyst have been tight for the past 5-6 months. Still, enough catalyst is available to meet demand of all process units producing low sulfur diesel.
Jim Enters, marketing manager of hydroprocessing catalysts for Akzo Chemicals Inc., Houston, estimated that demand for additional hydrotreating catalyst increased by 16-18 million lb earlier this year. U.S. demand for refining catalyst before the low sulfur diesel regulation was about 70 million lb/year.
Demand has grown most for cobalt-molybdenum (co-moly) catalyst. In the past, refiners used mostly nickel-molybdenum catalyst to desulfurize distillate streams and remove nitrogen and aromatics. Many refiners with older hydrotreating units producing higher sulfur diesel turned this year to co-moly catalysts to make the new spec diesel.
The flow of catalyst on U.S. markets is not expected to change significantly because several suppliers-foreign and domestic-are serving the market. Indeed, most of the time, U.S. suppliers are exporting catalyst into international markets. Also, the routes to end users from suppliers are similar for all types of catalyst, so distribution is not expected to be a problem.
TIGHT CATALYST MARKETS
Robert Dallhoff, president of Acreon Catalyst, Houston, a 50-50 joint venture of Engelhard Corp., Iselin, N.J., and Procatalyse, Rueil Malmaison, France, said co-moly catalyst supplies have been tight for the past 3-6 months. Much of the market tightness likely has resulted because several refiners were getting ready for the Oct. 1 low sulfur deadline by going through early catalyst changeouts.
"We had a lot of changeout activity from mid to late summer and even into the fall," Dallhoff said.
Bill Novak, Acreon commercial and technical manager, said more companies were expected to either bring new desulfurization units on stream sooner or change catalysts in older hydrotreating units sooner.
"But many companies apparently have waited until just before the regulation went into effect, and we're still getting inquiries," Novak said.
Novak said the company garnered some large co-moly orders since its formation because traditional suppliers couldn't keep up with demand. "And we basically sold out."
Dallhoff said co-moly catalyst supplies likely will remain short through fourth quarter 1993, with market tightness beginning to ease next year.
"By now, most companies planning to buy catalyst probably have done so, so the next wave of catalyst buying will occur about the end of 1994, when current catalysts are up for changeout," Dallhoff said.
The effect of higher demand for co-moly catalyst fell heavier on some companies because not all catalyst suppliers carry the types of high metal catalysts needed to manufacture low sulfur diesel. Enters said the supply situation for cobalt became uncertain because of political upheaval in key U.S. supplier Zaire, spiking prices.
"That was not good news when a lot of co-moly catalyst was being required to meet the new diesel specification," he said. "There was a danger that the price would keep climbing. Obviously, if the cobalt price kept rising, the price of catalyst would keep increasing, too."
DIESEL DESULFURIZATION CAPACITY
U.S. refiners are adding diesel desulfurization capacity almost as fast as engineering and construction companies can build it (Table).
It's mostly the smaller refineries are adding the distillate desulfurization units, implying that majors already have the ability to produce the new fuel. Many refiners plan to blend diesel at sulfur levels even lower than the 0.05 wt % maximum to build in a margin for error. Typical target levels will be 0.040-0.045 wt %.
In addition to meeting the Oct. 1 sulfur limit, refiners must also achieve a minimum cetane index of 40, equivalent to a maximum 35 vol % aromatics.
To meet these requirements, mandated by the 1990 Clean Air Act Amendments, refiners must add hydrogen to remove sulfur and reduce or saturate aromatics. The processes that accomplish this are hydrotreating, which does not change the molecular size of the feed, and hydrorefining, which reduces the size of less than 10% of feed molecules.
These processes take place in pressurized reactors, to which a stream of hydrogen is added. The sulfur compounds in the feed--usually gas oil or straight run distillate--are converted to H,S. Other feedstocks used in diesel production include cycle oils and coker gas oils.
HYDROGEN
Catalytic hydrotreating consumes 50-600 scf hydrogen/bbl feed (OGJ, Mar. 22, p. 45).
Catalytic hydrorefining consumes 100-1,060 scf/bbl. Although hydrogen is produced in the catalytic reforming unit, additional supplies will be needed to meet the demand of the new hydroprocessing capacity.
To meet soaring hydrogen demand, refiners are adding hydrogen production or recovery capacity,
Producing reformulated diesel and gasoline will require an additional 1.5 bscfd of hydrogen (OGJ, Mar. 22, p. 45).
NEW TECHNOLOGIES
As a result of the new fuel specs, new hydroprocessing technologies have been introduced.
Criterion Catalyst Co. L.P. and ABB Lummus Crest Inc. are licensing their new SynSat process (OGJ, July 1, 1991, P. 55). The low pressure process maximizes use of existing refinery equipment to desulfurize and dearomatize diesel streams.
Haldor Topsoe's new lower pressure process for producing low sulfur diesel combines deep desulfurization and dearomatization. The process can be added as either a new unit or an upgrade.
The Chinese petroleum company Sinopec is operating a medium pressure hydro-upgrading process, which utilizes a high performance nickel-tungsten zeolite catalyst. This process uses two catalysts in series to reduce sulfur and aromatics.
CALIFORNIA UPDATE
Opinions were still divided last week about how California's tougher than federal new diesel specifications would affect the market.
California's new diesel specs also came into play Oct. 1.
Most sources contacted by OGJ seemed confident there will be no shortages as feared earlier, namely because of special action taken by the California Air Resources Board in August (OGJ, Aug. 30, p. 21). CARB granted variances to Chevron Corp., Unocal Corp., and Ultramar Inc. allowing them to supply the state diesel market partially with noncomplying fuel until next year, when needed refinery upgrades are complete. In recent weeks, CARB granted additional short term variances in response to refinery problems.
"I don't think there's going to be a diesel shortage. (CARB) pretty well guaranteed that by granting extra time to meet requirements," said a market analyst with a major refiner.
Another refiner agreed, adding, "CARB definitely did what they could. I don't foresee any diesel shortages."
However, he expects interstate truckers will increasingly fill up outside the state's border because the California specs will boost prices by as much as 6 cts/gal. Even refiners holding variances must pay the state a 6 cts/gal surcharge on noncomplying fuel.
CALIFORNIA MARKETERS CONCERNED
The state's independent marketers nevertheless remain concerned about the potential for shortages.
When there are refinery problems, there won't be a large enough buffer to keep the market supplied, maintains Jim Gigoux, executive director of the California Independent Marketers Association (Cioma). That's because California's diesel will be so different from what's produced elsewhere, it can no longer be transported in from other regions to make up for shortfalls, he said.
In support of his contention that the state's transitional market already is tight, Gigoux said terminals at Stockton, Chico, Sacramento, and Bakersfield were running out of diesel well before the rule was to take effect. In addition, diesel prices had spiked almost 29 cts/gal during September in some parts of northern California.
CARB's Jerry Martin, claims diesel price increases have been only 5-10 cts/gal and are seasonal in nature. He acknowledged a run at the racks between mid-August and mid-September but insisted that was not unusual for this time of year, when small truckers and produce growers often stockpile diesel.
In addition, there were recent problems at Chevron's Richmond refinery and Texaco Inc.'s Bakersfield refinery that prompted CARB to grant further variances. Chevron's problem stemmed from a scheduled revamp of its diesel hydrocracker that took 2 days longer than anticipated. CARB had granted a brief variance for Chevron that was to expire Aug. 27. At Texaco's Bakersfield refinery, a newly installed diesel hydrocracker failed. CARB granted Texaco a variance for 12,000 b/d of noncomplying fuel for 30 days.
Just days before the Oct. 1 deadline, Martin asserted, "It will be business as usual. There is no indication of a diesel shortage."
Copyright 1993 Oil & Gas Journal. All Rights Reserved.
