NEWS U.S. refiners face more challenges in wake of RFG introduction

Patrick Crow
Energy Policies Editor

Now that reformulated gasoline has been successfully introduced into the U.S. market, refiners face even more fuel reformulation challenges.

With the peak driving season approaching, the Energy Information Administration has predicted there will be no supply problems with conventional gasoline or reformulated gasoline.

But refiners also are facing other challenges:

There may be a congressional inquiry into this spring's spike in gasoline prices.
California will introduce its own RFG June 1.
There are lingering questions about the formula for the federal Phase II RFG.
Automakers are pressuring the oil industry for a greater say in fuels formulation.

EIA predicts U.S. gasoline demand will increase 2.1% to a seasonal record of more than 8 million b/d this summer (OGJ, Apr. 15, p. 32).

EIA said fuel efficiency growth, if there is any this year, is likely to average well below 1% "due to a lack of efficiency growth in new vehicles and consumer preference for minivans and light trucks."

The agency expects U.S. travel growth to average 2.8% this summer due to continuing advances in the driving age population, increased driving per capita, and some additional short term impetus from income increases.

Tight markets

EIA also pointed out that U.S. gasoline markets are again tight this year-perhaps even tighter than last year. Very low inventories, record high demand, high refinery utilization, and forecasts for high imports increase the potential for short term price volatility.

Total gasoline stocks as of Mar. 29 were 203.8 million bbl, the lowest end-March level recorded since EIA began collecting weekly stock data in 1981.

The agency said, "Crude oil markets are highly likely to weaken by the end of summer. The midcase gasoline price projection for August is $1.23/gal, but this price could be lower, particularly if Iraqi crude sales begin.

"Tight crude and gasoline markets suggest that retail gasoline prices this spring may peak higher in June, perhaps as much as 8-10 higher than today's price. Nevertheless, crude prices are expected to fall by summer, bringing gasoline prices down also."

Jay Hakes, EIA administrator, explained, "Gasoline prices are only a cent or two higher than they were last year at this time, but this year the runup came sooner."

He pegged the average U.S. price of all grades at $1.29/gal at present. That could rise to about $1.35 by June or July before falling to $1.23 in August.

Hakes said gasoline demand will continue rising for several years because the vehicle and fleet fuel efficiency, as expressed in miles per gallon, is no longer dropping. Higher speed limits in several states might raise consumption, but only as much as 0.05%.

EIA data show U.S. drivers traveled 1.042 trillion miles on personal business in 1970, but the figure doubled to 2.207 trillion in 1995.

EIA said, "Over the same period, the driving age population (16 years or older) grew by about 40% to 205 million persons. Thus, about 40% of the travel growth in the U.S. since 1970 has been due to increases in per capita driving.

"Between 1970 and 1995, the driving age population grew at an average rate of 1.36%/year. Based on Census Bureau projections, the driving age population is expected to grow by 0.9% during 1995-97.

"Driving per capita, which grew at an average rate of 1.7%/year between 1970 and 1995, can be expected to grow as well, even apart from short run shifts in gasoline market conditions."

EIA pointed out it is not clear what effect the move to higher speed limits by many states-only four states retain a maximum speed of 55 mph-has had on national average fuel efficiency, but it is far smaller than the calculated efficiency loss for a car traveling a particular distance at, say, 75 mph instead of 55 mph.

"This is because the roads on which statutory speed limits have been lifted are mostly rural arterial roads, which handle perhaps one quarter of total national highway travel.

"Furthermore, it is doubtful that the changes in statutory speed limits will be equal to effective average speed changes on affected roads if many drivers who desire higher speeds have been traveling above the posted speed limit all along."

Oxygenates

EIA said oxygenate costs should not affect gasoline prices much differently this year than they did last year.

"With the onset of the RFG program in 1995, oxygenates moved from being mainly of seasonal interest to become an important gasoline component year round.

"Oxygenates account for most of the cost increase in RFG over conventional gasoline and added about 1% to the overall gasoline pool price in 1995. The oxygenate supply is expected to be adequate this summer."

EIA said methyl tertiary butyl ether (MTBE), the major oxygenate, was trading at about 74/gal in February, about the same price seen in 1993.

"The outlook for methanol is for prices to remain low because the market traded in a 30-42/gal range early in 1996, even as several methanol plants, including Ashland's 11,500 b/d plant in Louisiana, closed for 1-2 weeks for routine maintenance. Soft methanol prices will likely hold down the cost of MTBE, which uses methanol as a feedstock."

Meantime, ethanol may experience some upward price pressure due to decreases in corn crop yield and increases in demand for corn, possibly offset by a decrease in ethanol demand in California due to its RFG program.

However, oxygenate prices overall are not expected to increase the costs of RFG over conventional gasoline more than they did last year. The cost of meeting federal reformulation standards should remain 3.5-6.5/gal above conventional gasoline production costs.

In March, the Environmental Protection Agency issued a rule allowing RFG to contain as much as 10% in oxygenates compared with the previous limit of 7.7%.

EPA said the oxygenate increase will create more demand for renewable fuels like ethanol while providing flexibility for refiners in choosing the most economical oxygenate and will help farmers by increasing ethanol demand while protecting the environment.

RFG success

RFG has been in use for more than a year in nine metropolitan areas with the worst ozone smog: Baltimore, Chicago, Hartford, Houston, Los Angeles, Milwaukee, New York, Philadelphia, and San Diego. Other areas are allowed to opt-in to the program.

About 26-27% of the gasoline sold in the U.S. is RFG. It reduces by 15% smog forming volatile organic compound emissions and toxic emissions. It contains at least 2 wt % oxygen and no more than 1 vol % benzene. All lead and heavy metals have been removed, and detergents have been added.

The American Petroleum Institute estimates refiners are spending about $10 billion in the 1990s to produce RFG and other cleaner burning fuels.

William O'Keefe, an API vice-president, said, "This is a very complex reformulation of gasoline with very large capital expenditures. A number of logistical problems had to be resolved.

"There were some concerns raised initially in Milwaukee, although there was no evidence that the product was causing performance problems or adverse health effects."

Terrence Higgins of the National Petroleum Refiners Association agrees: "We're now upon our second summer with RFG. In general, the program was rolled out quite successfully with little impact on consumers. There were adequate supplies throughout the system. We understand from EPA that compliance has been rather good."

He pointed out that EPA has set up a computer bulletin board to answer questions about the program, "which has been a tremendous help in ironing out problems. The staff at EPA has been very open and willing to listen to us."

O'Keefe said, "We're concerned about areas that opt-in and then opt-out. So we're watching to see what EPA's final opt-in, opt-out rules will do. We think areas opting in ought to make some commitment that gives refiners the opportunity to recover their increased costs if they opt-out later."

EPA's view

Chuck Freed, director of EPA's fuels and energy division, said the RFG program is "working better and better."

"Over the last winter we didn't hear the volume of concerns that had been raised previously, and no states have approached us to leave the program. Based on those indicators, we are encouraged and believe the program is pretty solidly based.

"And from our early reports, we think the industry is in substantial compliance with the regulations."

He also said some regions in the U.S. are considering opting into the RFG program. "We're looking for avenues to expand the program, particularly to areas that are concerned that they are nearing nonattainment."

EPA expects to issue the opt-out rule within the next 2 months, detailing the process that states or counties must take to leave the program in the future and the time frames involved.

Freed said, We've had extensive discussions with states and the oil industry regarding this rule. The industry is concerned, in the case of an opt-out, about (not getting stuck with) inventories of RFG between the refinery gate and the retail outlet. That's dealt with in the rule."

Freed said refiners also are concerned they might be required to spend considerable sums for equipment needed to make Phase 2 RFG, only to have areas opt out, making their investments unprofitable. EPA plans a separate rulemaking on that issue.

Phase 2 RFG

In 2000, U.S. refiners will be required to sell a cleaner burning, more costly Phase 2 RFG. It will reduce summertime volatile organic compound emissions by at least 25% and nitrogen emissions by 5%, reducing ozone smog.

O'Keefe said refiners will face no particular problems ramping up to Phase 2. "There is no physical problem or chemical problem refiners will experience in transitioning from one to the other. There appears to be sufficient lead time."

Freed said, "We want a smoother introduction of Phase 2 than occurred with Phase 1. When California introduced its RFG, it had a fine and substantial program under which it tried to gain as much information as it could, along with a test project and public outreach and information efforts.

"We intend to follow a similar path so we can have a lot of answers ready by early 1999, and we can give the public the information it needs and quell any concerns. We're looking for a seamless transition between Phase 1 and Phase 2."

The only controversy regarding Phase 2 RFG is that API believes EPA went too far in proposing to reduce summertime nitrogen oxide emissions 5-7% from Phase 1. It has asked EPA to reconsider. It said the requirement also violates the industry-government negotiated rulemaking that led to RFG formulas.

API said, "An EPA regulation, not the 1990 Clean Air Act amendments, requires the reduction in nitrogen oxide emissions, and that regulation alone accounts for most of the higher costs of Phase 2 reformulated gasoline. As a result, Phase 2 won't be cost effective in many areas.

"Also, as EPA has recognized, decreasing nitrogen oxide could raise ozone levels in a few cities, such as Chicago, because of differences in air chemistry.

"Reducing nitrogen oxide emissions from stationary sources is a less costly way to reduce ozone and permits targeting of those reductions to areas where they would be effective."

EPA responded that the nitrogen oxide reduction is an important factor in its estimates of reduction in ozone levels to be derived from the RFG program.

Freed said API failed to submit substantial new data with its request. But EPA is reviewing the issue and plans to respond by the end of the year. It also has asked others to provide information.

Freed said by the end of 1996 or early next year refiners will have to lay plans to install the equipment needed to produce Phase 2 RFG. "That's why they want an answer from us in that time frame in regard to the nitrogen oxide issue."

O'Keefe said, "It will be very costly in terms of capital investments to make a 6% reduction. We believe analysis that has been done and is under way at the Department of Energy confirms our analysis that it would be very costly, relative to the benefits.

"We believe the direction of DOE's economic analysis confirms our cost estimate of more than $10,000/ton of nitrogen oxide reduction compared with EPA's analysis of less than $5,000/ton.

"We hope that by the end of the year DOE's analysis will be done and by the end of the year EPA will take steps to reverse its position."

API noted that since EPA issued the RFG rule in 1994 it has granted several states waivers from certain stationary source nitrogen oxide reduction requirements because in some areas nitrogen oxide cuts do not help-and may hinder-progress toward complying with federal ozone standards.

California RFG

EIA said California is expected to see larger seasonal gasoline price increases in 1996 than the rest of the U.S. as the state introduces Phase 2 of its RFG program (CaRFG2). EIA pointed out that the new fuel is more expensive to produce, so prices in late March were 5-7/gal higher than conventional gasoline.

California will require CaRFG2 throughout the state, while federal RFG was required only in southern California. Refiners were required to deliver CaRFG2 beginning Mar. 1 and retail stations were required to provide it by June 1.

EIA said demand for CaRFG2 is expected to be about 896,000 b/d for its first year (Mar. 1, 1996-Feb. 28, 1997), taking into consideration a 1-2% energy efficiency loss compared with federal RFG.

Production is predicted to average 906,000 b/d, providing a 10,000 b/d cushion which, while not large, is expected to be average. California refiners can produce 946,000 b/d, and several Gulf Coast refiners may be able to produce the fuel, too.

EIA said, "Similar to the outset of the federal RFG program, the supply/demand balance is expected to be tight for the start of the California program, but no problems are anticipated as long as no major supply disruptions occur.

"California refiners will use 85-90% of their gasoline capacity to produce CaRFG2. The product is more expensive to produce-initial estimates are 5-15/gal more than conventional-and thus the price will be higher than that of conventional gasoline or federal RFG."

EIA also said although the fuel will cost more, consumers will benefit from significant smog reduction, compared with conventional gasoline and even to federal RFG.

"After the problems experienced during introduction of low sulfur diesel fuel, California has taken many precautions to assure that the new fuel will be ready and that no serious performance problems will arise.

"The fuel has been tested for 6 months on over 800 fleet vehicles, and communications with the petroleum industry are ongoing to assure a smooth transition."

NPRA's Higgins said, "Things seem to be going relatively smooth with the California RFG push. They've had a fairly good public outreach program, so people are ready for it."

California independent marketers have asked the state to be ready to suspend the CaRFG2 requirement when supplies are tight (OGJ, Apr. 15, p. 35).

CARB optimistic

The California Air Re- sources Board estimated that reduced pollution will be equal to removing 3.56 million vehicles virtually over- night from California's roads and highways.

It said, "Cleaner burning gasoline will reduce emissions of smog forming compounds from motor vehicles about 15%. It also will reduce human cancer risk from exposure to toxics in gasoline by 30-40%."

It said the fuel will cost 5-15/gal more and result in 1-3% lower gas mileage.

CARB said it worked for 5 years with refiners and automakers in developing the specifications.

"Individual oil companies can still determine the specific formulation of their products as long as they meet the requirements. There is no mandated formula."

CARB said its gasoline has about twice the clean air benefits of RFG used elsewhere.

"Statewide use of cleaner burning gasoline will reduce smog forming emissions by 300 tons/day, carbon monoxide by 1300 tons/day, and sulfur dioxide by 30 tons/day."

CARB's James Boyd said, "We were careful not to call this gasoline `new.' People don't want to make changes (in gasoline). So you don't see the word `new' in our information."

He added, "The oil industry deserves a lot of credit for bringing this program to fruition."

Dennis Lamb of Unocal Corp. said California refiners must comply with CARB and EPA gasoline requirements because EPA has refused to deem the California RFG program as equal to the EPA program, although it has allowed some limited exemptions.

Automakers anxious

While refiners are trying to meet EPA's specifications for fuels, trouble is brewing from another quarter.

The American Automobile Manufacturers Association (AAMA) wants less variability in gasolines so engine performance can be predictable. API and refiners say there is no, and should be no "one size fits all" auto fuel.

Both groups say they are protecting the interests of U.S. drivers.

Automakers have fought the issue, and lost, in the American Society of Testing & Materials (OGJ, Mar. 25, p. 37). Now they have abandoned that forum, and AAMA has issued its own gasoline standards.

ASTM standards preceded EPA's, and they coexist. In some cases, the law requires fuels to meet ASTM standards.

At a recent meeting of the Society of Automotive Engineers, automakers said they no longer are satisfied with the ASTM process, which uses peer reviews to ensure that changes in specifications are needed.

James Spearot of General Motors' research and development division, said gasoline quality is set by a patchwork of federal and state agencies and technical societies.

GM sees no reason to work with ASTM, which Spearot said is dominated by oil and pipeline companies that use the gasoline standard to define fungible products.

The current gasoline standard places an "inadequate limit" on sulfur and other contaminants and does not offer a standard definition of octane grades.

Spearot said there have been 44 revisions to the gasoline standard, D-4814, but all those proposed by automakers have been rejected.

Last year ASTM rejected automakers' requests for changes in the drivability index, which deals with the rate gasoline evaporates at different temperatures. ASTM cited a lack of technical data.

James Kranztor of Chevron USA Products Co. said, "API is very concerned that the AAMA continues to unilaterally issue its own gasoline specifications. The ASTM process works reasonably well. Technically supported changes have been implemented. The ASTM process is not broken."

Pros and cons

GM's Spearot declared, "Modern engine control technology demands well defined fuels."

Kent Hoekman of Chevron Research. & Technology Co. countered, "You cannot apply a blanket approach for all locations at all times. You must use appropriate fuels for specific locations and time periods."

Last February, AAMA issued recommendations for "high quality commercial unleaded gasoline based on automotive requirements for optimum performance maximum durability."

Automakers want to limit manganese to 2 mg/l. so it won't interfere with onboard diagnostic systems and lead to 2.6 mg/l., compared with the ASTM limit of 13, to protect catalytic converters.

AAMA called for evaporation standards and said industry should set a constant minimum of 87 octane for regular, 89 for midgrade, and 91 for premium.

NPRA's Higgins noted that the refining industry is in the midst of a 10 year program to establish RFG, and refiners are trying to reformulate fuels in the most cost effective way. "RFG is not giving them everything they want in their specs, but it does move in that direction."

API's O'Keefe said, "We have had discussions with auto manufacturers for some time over their wanting to change the specifications on gasoline. This goes back at least 18 months.

"Their contention is that there are some performance problems with some current gasolines. They noticed some of these in the first tank of gasoline they put in cars coming off the assembly line, and they say they have received some customer complaints.

"Our member companies have not been receiving those complaints. We're not sure exactly what the problem is. We don't have data that suggest customers are dissatisfied with our products.

"This might be the process of the sophisticated fuel management systems going through the learning process on the first tank of gasoline."

API has begun a 3 year project with auto firms to review the drivability index and now plans to step up the pace of the program.

Other issues

The refining industry also is concerned that the RFG program might be expanded.

The Ozone Transport Assessment Group is looking at ways to help 38 states in the eastern half of the nation voluntarily attain EPA air quality standards while considering the effects of interstate airborne ozone.

Higgins said, "They're looking at various control options and have included some additional gasoline options such as expansion of the RFG program, lower volatility fuels, and lower sulfur fuels."

The EPA advisory group is running computer models and hopes to develop recommendations this year.

API and NPRA say if more urban areas are encouraged to opt-in to the RFG program, it would force refiners to make even more investments to provide a fuel that might not be necessary.

O'Keefe said, "Our view is that RFG was created for nonattainment areas where you had air quality problems. The choice of fuel for any other geographic areas ought to be driven by their air quality problems and the choice that is most cost effective. In some areas, a low RVP conventional fuel will be more cost effective than RFG."

Industry also is watching talks aimed at developing a low polluting automobile for use in all states outside California-the 49 state car-fearing that a standard fuel might be proposed for the standard auto.

The Ozone Transport Commission, which represents 12 northeastern states, has urged EPA to push for a 49 state car but opposes requiring a new fuel to be developed for the vehicle.

EPA agrees. Freed said, "We have never believed a single nationwide fuel was necessary to make that program successful."

O'Keefe said such a vehicle should be able to operate on conventional fuels or RFG. "There's no reason there should be special fuel requirements."

Higgins said, "We have a good RFG program, and it should not be expanded. But the issue of a fuel for the 49 state car appears to have been left very open ended.

"We think there should be specific language to the effect that a 49 state car does not mean a national fuel. A 49 state car should be able to operate on either the existing conventional or RFG gasolines available in the area."