U.S. gasoline plagued by economic, technical uncertainty

The first year of reformulated gasoline (RFG) production turned out to be a mixed bag for the U.S. refining industry.

Refiners successfully ramped up RFG production and stocks in time to meet the regulatory deadline. But the backlash that followed was unexpected by many in the petroleum products industry.

Fred Craft, executive director of the Oxygenated Fuels Association, believes unfavorable consumer response was a result of industry not explaining itself to the public before it rolled out the new fuels. The analyses and projections of other industry experts will shed light on the past years events and their effects on the U.S. refining industry.

RFG, oxygenate markets

The relative ease with which producers boosted MTBE (a critical component in RFG) capacity is illustrated by Table 1 (18142 bytes). The table compares global MTBE capacity for 1991 and 1995, compiled by the East-West Center in Honolulu.

World MTBE capacity increased nearly 93% over the 4-year period. In addition, U.S. producers share of that capacity increased from 50% in 1991 to 57% in 1995.

Most of the U.S. capacity is concentrated on the Gulf Coast. Producers in Texas alone account for 70% of U.S. MTBE capacity, according to the East-West Centers Ronald Ripple.

Table 1 (18142 bytes) indicates that 77,850 b/d of MTBE capacity is either under construction or in the engineering phase. Ripple says most of this capacity (60,250 b/d, or 77%) is to be built outside North America.

The 5,100 b/d of capacity listed as under construction in North America must be questioned, said Ripple. None of the 25 projects that make up the 42,750 b/d of capacity listed as under construction outside of North America exceed 5,000 b/d, and only three exceed 3,000 b/d, he added. On the other hand, the 17,500 b/d listed under the engineering category is a single project in Saudi Arabia.

The U.S. Department of Energys Energy Information Administration (EIA) keeps detailed U.S. supply and demand records for oxygenates and RFG. Fig. 1 (83906 bytes) shows production of conventional, oxygenated, and reformulated gasolines.

Refiners met the Jan. 1, 1995, deadline for RFG sales rather easily, but the supply/demand balance was close. Table 2 (16737 bytes) shows the results of an EIA survey of RFG suppliers, illustrating this close balance.

In January of last year, conventional gasoline comprised about 62% of total U.S. gasoline production. During the same month, oxygenated gasoline accounted for some 14%, and RFG for more than 23%, according to Charles Dale, an operations research analyst for the EIA.

EIA data for U.S. gasoline imports are shown in Fig. 2 (105975 bytes). The figure shows a peak in RFG imports of about 125,000 b/d in March of last year.

Conventional gasoline accounted for the majority of imports for all but 2 months in the period covered in Fig. 2 (105975 bytes). It was during January and February of 1995 that RFG imports were higher than those of conventional gasoline.

Fig. 3 (58065 bytes) shows EIAs figures for U.S. oxygenate capacity. At about 232,000 b/d, MTBE capacity is the highest of the six major oxygenates.

EIAs records of retail prices for conventional and reformulated gasolines are shown in Fig. 4 (98414 bytes). The price differential between the two grades was about 11/gal when the program started in January 1995, and had fallen to just over 4/gal by September.

In Fig. 5 (58066 bytes), EIAs retail price data for conventional, oxygenated, and reformulated gasolines are broken down into their component factors: crude oil cost, oxygenate cost, average gasoline margin, and the so-called cost of reformulation.

Fig. 5 (58066 bytes) clearly shows the minimal contribution of reformulation costs to total gasoline production cost. It should be noted that both crude and oxygenate costs were higher for the RFG and conventional gasoline sample taken in 1994, compared to the conventional and oxygenated gasoline samples taken in 1993.

Backlash

Despite these successes, there has been a downside to the RFG story.

John R. Hall, chairman and chief executive officer of Ashland Inc., points out, In the majority of the nine cities, including Houston, where RFG is mandated by law, it has met with almost no resistance. Hall adds, however, that a number of so-called hot spots have developed in the RFG picture (OGJ, Oct. 9, 1995, p. 40):

• Wisconsin governor Tommy Thompson requested that EPA waive mandated use of RFG in his state. Hall said EPA Administrator Carol Browner is reported to be leaning against granting this request.

• The governors of New Jersey, New York, and Connecticut have either proposed or are considering shortening the oxygenated fuel seasons in those states to 4 months from 7 months. In addition, New Jersey Governor Christine Todd Whitman is reported to be considering switching to a 2% oxygen requirement year-round, rather than just in winter, as required to reduce atmospheric CO levels under EPAs oxygenated fuels program. The legal authority for such a move under the federal Clean Air Act is unclear, said Hall.

• A move in Maine to opt out of the RFG program has apparently collapsed since Governor Angus King publicly expressed his support for RFG.

• The state of Kentucky has asked EPA to designate three of its counties as in attainment of federal standards for atmospheric ozone. The counties, now considered to have moderate ozone levels, are directly across the Ohio River from Cincinnati. Because one monitor in this area registered four exceedances last summer, Hall expects the petition for redesignation to be denied.

• Residents of the Louisville, Ky., area are debating the merits of RFG vs. a low-Rvp (7.8 psi) alternative. Recent exceedances in this region point to RFG as the best method of reducing pollution there. Hall says, if RFG is abandoned, a 7.0-psi alternative may be needed there to meet air quality goals.

• Maryland, Virginia, and Washington, D.C., are on the verge of being redesignated as in attainment of CO standards. Because redesignation is a lengthy process, these areas are seeking to expedite redesignation, says Hall. He adds that, Officials from EPA Region 3, which is responsible for federal clean air issues in Pennsylvania, Maryland, Delaware, and Virginia, say they dont expect state environmental officials to enforce oxyfuel in those areas, and that it is unlikely EPA would levy any penalty for non-enforcement.

In contrast to these events, Minnesota passed a law requiring oxygenated fuels year-round in the Minneapolis/St. Paul area. The law requires a 2.7% minimum oxygen requirement and took effect Oct. 1, 1995.

Widely viewed as an endorsement of ethanol, the new law has been a contentious issue between corn growers, the American Lung Association, and several refiners, said Hall.

These incidents clearly leave refiners with a great deal of uncertainty regarding the size of oxygenate markets. Rick Wolfe, Texaco Chemical Inc.s manager of oxygenate sales, says, to date, opt outs have caused a decrease in demand of about 28,000 b/d of MTBEan amount equal to the annual production from two world-scale MTBE plants.

California regulations

The scenario for gasoline production in California is complicated by state rules that will supersede federal RFG standards beginning in March.

California had only 12,500 b/d of MTBE capacity, or 5% of the U.S. total, at the beginning of 1995. For this reason, refiners in the state depend heavily on importsprincipally from Canada, but Saudi Arabian supply is growing, said Ronald Ripple.

Californias import requirements (demand in excess of in-state capacity) equal the output of two world-scale plants, according to Ripple. Table 3 (19434 bytes) shows estimates of these requirements for the years 1995 through 2000. (The estimates in the table were calculated by three different organizations, and show a range of projections.)

Ripple says no new MTBE plants are scheduled to be built in California during the remainder of the decade. Chevron Corp., however, is scheduled to bring two tertiary amyl methyl ether (TAME) plants on line, with a total capacity of 6,500 b/d. Ripple believes TAMEs lower Rvp makes it a desirable blending component because of California Air Resources Boards (CARB) 7.0 psi Rvp gasoline specification.

CARB gasoline

CARBs new Phase 2 gasoline, soon to be required throughout California, will introduce additional uncertainty into already dubious gasoline markets. CARB is easing the transition slightly by phasing in implementation.

The schedule is as follows:

• Refiners serving California markets will have to begin producing the new gasoline by Mar. 1, 1996.

• Gasoline at distribution terminals must comply by Apr. 15, 1996.

• Gasoline sold to end users has to meet CARB specs by June 1.

The specifications for this fuel are even tighter than those for federal RFG. In addition to requiring oxygenates, the CARB specifications limit sulfur, benzene, olefins, 90% and 50% distillation points, and Rvp.

Refiners can make this gasoline by complying with either flat or average limits, says California consultant Michael J. Hileman. Because the average limits are more stringent, Hileman says most refiners are planning to begin by using the flat limits. He adds, however, that average limits will be adopted as refiners become comfortable with new gasoline-blending schemes.

Compliance

CARB has developed a predictive model to give refiners added flexibility in meeting the regulations, said Hileman. The model allows refiners to make up for a shortfall in one parameter by over-controlling another.

For example, says Hileman, a refiner may be able to economically reduce sulfur levels of gasoline below the flat limit of 40 ppm, and use this to allow an aromatic level above the 25% limit.

To determine whether a given gasoline meets the requirements, the model uses the properties of the fuel being tested to predict emissions of hydrocarbons, NOx, and toxics, and compares the outcome to predicted emissions from a reference fuel. Refiners can use either flat or average limits in the model.

Hileman says, Some refiners appear to be using the model to take advantage of consistently low sulfur and T90 levels, and exploring the possibility of blending higher oxygen levels. In addition, the model will be used widely to correct off-spec gasoline blends.

CARB also has given small refiners (Table 4 (14288 bytes) shows how this exemption compares to flat limits for the fuel.

Hilemans calculations show an advantage for blending ethyl tertiary butyl ether (ETBE) into CARB gasoline. Table 5 (12153 bytes) compares key specifications of CARB gasolines blended with ETBE, MTBE, and ethanol.

Supply

The California Energy Commission forecasts demand for CARB gasoline to be 927,000 b/d in 1996. Hileman estimates California refiners will produce the same volume, 927,000 b/d, making for a very tight supply picture.

It should be noted that this estimate assumes that all refinery projects start up on time, that all equipment operates as planned, and that hydrocrackers will supply some additional gasoline taken from the distillate pool, says Hileman.

Hileman predicts a slight supply imbalance between Northern and Southern California. Refiners in the northern part of the state will be about 10,000 b/d long on the gasoline, while refiners in Southern California will be about 10,000 b/d short.

Hileman draws the following conclusions about Californias gasoline market following implementation of the CARB requirements:

• ETBE will be drawn to the CARB gasoline market.

• Supplies of non-CARB gasoline produced by California refiners will increase.

• The gasoline balance between Northern and Southern California will tighten.

• Butane supplies will become increasingly long.

• The movement of gasolines and blending components in and out of California will increase.

Future

The predominant effect of the federal RFG regulations, according to Calvin Cobb, president of Wright Killen & Co., has been a loss of operating flexibility for refiners.

The complex new rules added constraints on gasoline production, blending, and shipping that have forced refiners to make fundamental changes in the way they have historically made gasoline. As refiners are learning to cope with this loss of flexibility, they will soon be facing additional constraints and even less flexibility.

Cobb is referring to the transition to the complex model for federal RFGa change that will come about in 1998. In addition, emissions targets will tighten again in 2000.

Regulatory models are being developed to mirror the CARB LEV [low-emission vehicle] program, commonly referred to as the 49-state car, that may supersede existing progressively onerous CARB implementation plans, said Cobb. These actions will result in suboptimum operations and a corresponding loss in profitability.

To combat this reduced profitability, Cobb thinks refiners will have to search for ways to restore flexibility without making additional large capital expenditures.

About this report...

Even after a year of reformulated gasoline production, refiners still are perplexed by a number of issues, particularly the size of the market, composition of the gasoline, and the patenting of certain gasoline formulations anticipated to be needed for California.

This special report, written and edited by Journal Refining/Petrochemical Editor Anne Rhodes, is based on papers presented at the Oil & Gas Journals International Oxygenates Conference, Oct. 2-3, 1995, in Houston. At this meeting, refiners and policy makers examined objectively the controversial issues surrounding RFG.

Copyright 1996 Oil & Gas Journal. All Rights Reserved.