The price difference between U.S. conventional and reformulated gasolines is expected to be 3.1cts/gal higher, less than the 4cts/gal difference indicated in May by the New York Mercantile Exchange, says Bonner & Moore Market Consultants, Houston.
The difference will be set by the central Atlantic and New England areas, which Bonner & Moore projects to be significantly short on reformulated gasoline and long on conventional gasoline. Bonner & Moore consultants Kevin Waguespack and Louis Karvelas, in an unpublished report, say refiners in the central Atlantic will not be able to economically convert much more than 70% of their gasoline output to reformulated gasoline.
As a result, gasoline movements through the pipeline system supplying Petroleum Administration for Defense District (PADD) 1-the U.S. East Coast-will have to increase to deliver reformulated gasoline produced on the Gulf Coast to New England and the Central Atlantic region.
PRODUCTION COSTS
Demand for reformulated gasoline will be about 2 million b/d in PADDs 1, 2, and 3, says Waguespack (Table 1). And PADD 1's New England and Central Atlantic regions, where entire states have opted into the reformulated gasoline program, will require 1.3 million b/d, or 65% of total reformulated gasoline demand in PADDs 1, 2, and 3.
PADDs 2 and 3, the U.S. Midwest and Gulf Coast, and the lower Atlantic portion of PADD 1, will have much lower reformulated gasoline requirements.
The cost of producing reformulated gasoline, relative to conventional, has two components: oxygenate and processing costs. The oxygenate (MTBE) cost premium can vary from zero-when MTBE sells at near its gasoline blending value, based on octane and Rvp volatility credits only-to as much as 2.5cts/gal, if MTBE sells for 23cts/gal more than its blending value.
Bonner & Moore estimates world MTBE supplies will adequately cover oxygenate demand for reformulated and oxygenated gasolines going into 1995, and MTBE will sell for about 12cts/gal above its blending value. This price forecast yields an oxygen component cost for reformulated gasoline of 1.3cts/gal.
PROCESSING OPTIONS
Refiners that extract benzene and other aromatics from catalytic reformates for sale to the chemical industry will produce reformulated gasoline at lower cost. These refiners can produce 80-90% reformulated gasoline output at incremental processing costs of less than 2cts/gal, says Waguespack.
The next most competitive group of refiners are those that can modify their naphtha splatters upstream of the catalytic reformer by taking the light naphtha cut to an isomerization unit. The isomerization unit can convert the benzene and benzene precursors into relatively high octane, benzene-free gasoline components, thus lowering the benzene content of the gasoline pool.
Reformulated gasoline production capabilities for these refiners depend on individual operations, but are expected, on average, to be 65% reformulated gasoline production at a 2cts/gal incremental processing cost.
Refiners that have neither aromatics extraction capabilities nor C6 isomerization units will have to reduce reformer severity to decrease production of benzene and other aromatics. These refiners will tend to produce less than 50% reformulated gasoline, if any, with production capability being a function of baseline gasoline benzene and aromatics content.
PRICE DIFFERENTIAL
Bonner & Moore's analysis indicates that the price differential between the two gasoline grades will be 3.1cts/gal, comprising a 1.3cts/gal oxygenate cost and a 1.8cts/gal processing cost. This differential is based on average production capability and gasoline demand, and is expected to increase during the summer and decline during the winter.
The 3.1cts/gal differential is an equilibrium price, says Waguespack. Temporary supply disruptions and reformulated gasoline price spikes are quite possible in the first few months of the program, as was seen with the introduction of low-sulfur diesel.
On May 18, Nymex projected slightly less than a 4cts/gal increase in gasoline price for December delivery vs. November delivery, reflecting the current market perception of the cost of making reformulated gasoline deliveries.
COMPLIANCE
Because of the lack of fungibility of complex-model gasoline, almost all refiners are expected to use the simple model for reformulated gasoline for the first three years of the program (1995-1997) (OGJ, Jan. 17, p. 17). Refiners also can choose whether to use annual average or per-gallon specifications for reformulated gasoline certification.
Average specifications allow refiners more flexibility to use seasonality and grade quality differences to reduce production costs. But this flexibility has a price, says Waguespack, in two ways: tighter annual specifications and increased administrative costs for averaged properties.
More frequent reporting and market surveys of gasoline retail outlets are required with average specifications. And exposure to even tighter specifications is possible if a market survey determines gasoline does not meet specifications.
The American Petroleum Institute is developing a consortium to manage the administrative aspects of the survey requirements, says Waguespack. Participants will pay some share of the total costs, which has been estimated to be as much as $20 million/year.
The cost to an individual refiner will depend on the number of participants in the consortium. The costs are not, however, insignificant, even if participation is great.
AVERAGING
Benefits from averaging both oxygen and benzene parameters are evident at fairly high reformulated gasoline production, no matter what type of processing configuration is used. Increased benzene and oxygen use in the summer can "stretch" a refinery's gasoline-producing capability during high-demand months.
Among the regular and premium grade distribution, the benzene content of regular gasoline is higher than that of premium, with the opposite trend noted for oxygen. When both benzene and oxygen are averaged, says Waguespack, the total benefit is greater than the sum of the contributions from averaging oxygen and benzene independently.
Little or no benefit was noted from averaging toxic emission reductions and Rvp. Toxic emission reductions usually exceed the minimum specification, while flexibility, in Rvp averaging is not great enough to overcome the slightly lower Rvp specification when averaging.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
