Bob Williams
Senior Staff Writer
Sun Refining & Marketing Inc. expects a relatively stable gasoline market this year but sees refiners on a collision course with market forces and new air quality rules in years to come.
Brian Davis, Sun's manager of future fuel development, sees the spike in gasoline prices in 1989 as a harbinger of things to come on reduced volatility rules and the reformulated fuels push.
Sun is among major refiner/marketers that have introduced reformulated fuels in the U.S. (OGJ, June 18, p. 43). It also was at the forefront of industry's efforts to accommodate earlier than expected reduced volatility limits in the U.S. Northeast (OGJ, Nov. 28, 1988, p. 24).
The 1989 collision of market and environmental forces came when the government was implementing new volatility standards, pinching gasoline supplies at the same time as the Exxon Valdez oil spill, North Sea outages, and a Gulf Coast refinery explosion put the perception of a potential supply shortfall in consumers' minds, Davis pointed out.
"Overseas suppliers absolutely spiked the price of available fuel...up 20-30cts/gal for what you would pay in New York Harbor, compared with what you would have expected.
"I think you're going to see that happen again and again because we're reaching the point where people are close to flat out on production. That means anytime there's a whimper or a quiver, all of a sudden supply and demand will come up against a spike."
Because of weaker than expected demand this year, Davis does not foresee an overall gasoline supply problem in the U.S.
"But from here on things begin to get a bit dicier."
MEETING THE CHALLENGE
The changes in gasoline volatility beginning in 1992 will slice about 2-3% of supplies from the gasoline pool, Davis estimates. Beyond that, it becomes a question of how volatility rules are applied.
"Obviously refiners will be adding oxygenates. That's an addition to supply. But in all probability, a variety of things will have to be removed: some aromatics, some heavier materials such as olefins. Where the balance will come from is what's interesting."
Depending on a refiner's approach, the supply reduction could be significant or negligible, Davis said.
"For instance, if you could get by with not running material through the reformer and using low octane naphtha along with higher octane MTBE and that blend couple worked, that would give you more volume rather than less.
"I think...somewhere down the road you're going to have to trim some off the end of gasoline. You're going to have to trim some aromatics. You're going to have to take some benzene out of the middle. And you may well see pressure to lower Rvp again.
"At that point, the amount of MTBE or ethanol, or whatever you've added, will not be enough to make up the shortfall, and you're going to be more dependent on imports to make up the difference."
PROCESS CHANGES NEEDED
Further, as U.S. refiners are forced to remove some of the more volatile components from gasoline and bring in more oxygenates, they could be faced with having to cut crude runs, Davis said.
The alternative, he contends, is to run a refinery in a wintertime operations mode by making extra fuel oil and jet fuel to keep the crude run up but facing the prospect of having to dispose of those products in an oversold market.
Overall, Davis expects refiners to meet the public's demand for octane, especially if they install enough oxygenates capacity, but the octane will shift among gasoline grades.
"If you have a mandate to put 2 wt % oxygen or more in unleaded regular, then you've got octane coming out your ears. People may answer with a higher octane regular.
"On the other hand, the number of things that will get squeezed out of premium may make it such that it won't be so easy to build a very high octane premium."
Generally, Davis expects a rebalancing of U.S. refining slates as a result of volatility cuts and the reformulated fuels push.
"People will be making more or less of things they weren't making before in some product streams. Things that weren't maybe so valuable before, leftover streams that have low octane and were used for petrochemical feedstocks now suddenly will become more valuable, and they won't want to give away any octane. Things like alklyates will become extremely important because they're paraffinic and nonreactive but still have very good octane."
COSTLY CHANGES AHEAD
Davis thinks refiners face costly changes, including big capital outlays for equipment to produce reformulated fuels.
Refiners will press efforts at extensive debottlenecking and process reconfiguration, splitting product streams in new ways, all of which calls for things such as new splitters, new storage, and new blenders, Davis said. Some refiners will install new isomerization or alkylation capacity or a captive MTBE plant.
"Everyone of those is millions of dollars and anywhere from 18 months to 5 years of time, and it may take you 2 years to get a permit for one. There will be some cash flow questions and some very strange timing questions.
"If you have 10 refineries close together like you do in the Delaware Valley, there's a very real question of whether there will be enough physical facilities to do the building in the time frame required if everybody goes to the contractor and says I need this and I need that."
The push to reformulate fuels will increase gasoline costs, and refiners face a dilemma in how much of that added cost they will be able to pass on.
"The degree to which you are able to recover costs will depend on a whole variety of issues, some of which are governmental," Davis said.
"If the initial mandates are in very narrow areas, the price will still be set by those folks right outside those areas. In those circumstances, you would be very hard pressed to recover your costs.
"If those areas are pretty broad-and that's not unlikely in an election year there will be a lot of folks who will find it politically useful to opt into programs like this."
That in turn will spread the demand for reformulated fuels across the country and thus make it easier for refiners to recover costs in gasoline prices, Davis said. However, it will mean raising the average cost of gasoline to the consumer in a market where demand growth seldom is projected to be much more than 0.5-1%/year, Davis said.
"It doesn't take much dampening to make that zero growth."
COOPERATION, FLEXIBILITY NEEDED
Davis contends the most critical need for the U.S. refining industry is to secure cooperation from federal and local governments in obtaining more flexibility on standards and timing for reformulated fuels.
A hint of problems to come shows up in efforts to reduce gasoline volatility.
Davis noted that for the northeastern states imposing stiffer volatility rules, while doing "a fine job in trying to harmonize regulations, there are a certain number of things that aren't quite identical."
For example, Maryland is looking at a cap on volatility levels, and the rest of the Northeast has a margin of error band that allows some flexibility.
"But you're sort of restricted to the most restrictive regulation in order to deliver to a whole area. Those are the kinds of things that are going to occur, because you're going to different parts of the country."
Refiners will have to contend with new fuel standardization measurement techniques and new test codes that states will have to put into law.
"There will be individual states or regions that for whatever political reason will opt for a certain kind of standard and not follow the distribution system lines. They will follow airshed lines or state lines or county lines."
Davis contends adequate timing and flexibility are critical for refiners in manufacturing reformulated fuels needed to meet air quality goals.
"If, in uncharacteristic fashion on this issue, industry and government work together to fashion a solution, there's a variety of precedents that could be used to ease the problem."
He cited refiners' lead phasedown plans, wherein if a refiner could not make interim deadlines but devised a plan that enabled him to make the final deadline, he could use that plan if he reached its interim milestones.
As an example of the flexibility required, Davis cited the waiver Sun has in New York to market a higher Rvp product.
The waiver was needed because there was not enough time to retool to provide the lower Rvp fuel because of the company's purchase of Atlantic Petroleum Corp.'s Philadelphia refinery.
The result otherwise could have been a supply shortfall.
Sun pays the state an equalization fee to offset an economic advantage from the waiver.
SPECIFIC FORMULA THREAT
Setting a specific formula for reformulated fuels also poses a threat to supply security, Davis contends.
"If you have gasoline that is a very tight formula, you eventually start having difficulties and shortfalls as you keep rejecting more and more streams. If you have overall performance standards...you can use your own crudes and tailor your formula to get to where you have to get.
"With all the refiners tailoring their own gasoline specs, I realize that is going to cause a great deal of added heartburn for the folks who are going to have to regulate it. On the other hand, if it means less reliance on supplies from overseas, that might be a small price to pay."
Other useful approaches include bartering and pooling of credits on performance standards that might allow niche marketers to thrive.
"There is going to be more and more of that sort of thing. And Rvp is just a Band-aid compared to the brain surgery that's coming."
"It doesn't mean that these things can't be done. It means the lead time for all this is a lot longer than most people think."
Copyright 1990 Oil & Gas Journal. All Rights Reserved.
