GASOLINE REFORMULATION TO ROLL PETROCHEM MARKETS

Reformulating gasoline in the U.S. will transform world markets for oxygenates quickly and extensively.

That's the main point of a study by Probe Economics Inc., Millwood, N.Y., that assesses the effects gasoline reformulation will have on prices and supplies of methyl tertiary butyl ether, methanol, ethanol, and other oxygenates.

Probe also examined how upheaval in oxygenates markets will ripple through refined products and petrochemical markets.

The analyst sees world oxygenate demand possibly growing more than tenfold by 2001.

SHARP CHANGES

Dramatic change is under way in oxygenates markets, Probe noted.

"The combination of clean air legislation and raw material supply limitations have begun to alter oxygenate markets and could entirely transform them during the 1990s," said Probe Pres. Fred Peterson.

While oxygenates producers see potential big gains, they also face risks, Peterson said.

"If only a handful of countries pass clean air laws, the market will decide which oxygenates refiners use and what they pay for them. The industry can cope with that, although it will make some methyl tertiary butyl ether plants unprofitable."

There will be problems, however, if more countries order reformulation to cut aromatics levels to improve air quality.

"MTBE makers will not be able to find enough butane feedstock to meet demand without disrupting petrochemical markets and perhaps even running out of butanes," Peterson warned.

Probe contends prices will drop for certain commodities such as propylene, benzene, and toluene but soar for ethylene and ethanol. Ethanol prices could rise high enough for fermentation plants to show a profit without government subsidies, Probe said.

BUTANE SHORTFALL?

U.S. refiners are shifting already limited supplies of butanes to MTBE production to meet soaring demand for the most widely preferred oxygenate.

To increase supplies, MTBE will have to pull even more butane molecules away from refiners' alkylation units, Probe said.

"The U.S. thinks it's safe. But what happens when Tokyo, Mexico City, and Seoul decide to cut smog and toxic emissions? Or when countries with growing octane needs shy away from aromatics and opt for oxygenates?" asked John Johnson, Probe consultant.

"Everything will come at us in a global fashion," Johnson said. "No one is counting the butane molecules, and there is only a limited economic supply of them."

Currently, butane supplies in the market economies will permit production of only 1.3 million b/d of MTBE. That's enough to oxygenate the market economy gasoline pool to 8.3 vol % but not as much as is being required in the U. S. alone.

This limits the amount of methanol that can be sold for MTBE production to 20.4 million metric tons/year, only about a doubling of current world capacity and less than has been estimated will be built.

Companies that have not counted butanes could overbuild MTBE capacity, Probe warns.

"Since producers tap the cheapest isobutylenes first, the newest MTBE plants will have to pay higher prices for those that are left and probably will have to make them out of butanes at an even higher price.

"Companies most likely to reap MTBE profits during the 1990s are those with cheap captive isobutylene or price protection on the buy or sell side. The safest projects will sell MTBE on a cost-plus basis or have feedstock cost protection."

BUTANE CRUNCH

Probe outlined the effects of a butane supply crunch under a scenario of extensive gasoline reformulation around the world.

To ensure enough butanes to meet oxygenate demand, governments would have to order reductions in gasoline volatility. That would drive butanes from gasoline into MTBE production.

MTBE production would not be enough to meet oxygenate demand under this scenario. That in turn would force refiners to turn to ethanol and other oxygenates, which would then compete on the basis of oxygen content.

If that happened, ethanol prices would rise to a point of profitability without subsidies, and MTBE prices and returns would be "disconcertingly low."

Unless methanol producers see this coming, Probe said, they may overbuild to supply MTBE plants. If butane supplies limit MTBE production, methanol prices will collapse.

Any methanol shakeout will favor producers in developing nations that make methanol from natural gas currently being flared, Probe said.

This scenario also predicts a collapse in aromatics prices. Aromatics limits in gasoline could drive refiners out of the aromatics market, creating an enormous surplus that would drive down the price of key aromatics such as toluene and benzene, Probe said.

If butane grows too valuable to justify alkylating propylene, Probe warned, the freed refinery propylene will flood the market, thus slashing propylene prices and thereby cutting propylene's contribution to lowering ethylene costs and driving up ethylene prices dramatically.