Refiners in the U.S. once again are grappling with ways to supply gasoline with a new composition required by environmental law.
The phased removal of lead from U.S. gasoline is nearly complete after 15 years of efforts by refiners. In trendsetter California, sale of leaded gasoline was banned effective Jan. 1. Unleaded's share of the U.S. gasoline market climbed to about 96% in 1991 from 27.5% in 1977.
Lead phasedown has been accomplished with relatively minor effects in U.S. refining/marketing operations, perhaps obscured by the wild gyrations in oil prices the past 20 years.
But the next bio, changes in the composition of U.S. gasoline will make lead phasedown seem only a blip by comparison. Under the Clean Air Act (CAA) amendments of 1990, most U.S. gasoline will have to be dramatically reformulated to bring the nation's more problematic air quality regions into compliance with federal standards.
An early test of how refiners will be able to supply a new composition gasoline will be CAA rules calling for higher oxygen levels in gasoline in carbon monoxide nonattainment areas during -several months of the year beginning in November.
Some industry analysts see market dislocations occurring at this early stage.
But an even tougher test will come when refiners must supply a drastically reformulated gasoline to combat a host of air pollution concerns in the worst nonattainment areas in 1995.
The extent to which reformulated gasoline will penetrate U.S. markets is uncertain. Still emerging are factors that will determine how U.S. refiners reconfigure process units, operations, and business strategies to serve demand for oxygenated and reformulated gasoline in the 1990s.
Given expedited permitting and reasonable waivers when required, say industry officials, U.S. refiners probably will be able to meet the reformulated gasoline challenge. But it's certain that rising imports will be needed to supply the volume of oxygenates required to meet demand. And some refiners will not be able to justify the economics of providing reformulated gasoline. That spells the demise of a substantial volume of U.S. refining capacity.
Under any scenario, the widespread introduction of reformulated gasoline in the U.S. will jump gasoline costs sharply. If more states follow California's lead on developing gasoline specs even more stringent than the federal rules, the market dislocation could be severe, refiners warn.
CALIFORNIA WILD CARD
With timely permitting and adequate access to financing, U.S. refiners have the process technology and engineering/ construction companies the logistical capabilities to meet federal clean air deadlines, ARCO Products Co. said.
But an extremely strict, statewide clean fuel standard adopted last November by the California Air Resources Board (CARB), to affect the state's large refiners in 1996 and small refiners in 1998, has added more uncertainty to future reformulated fuel use. ARCO, California's top gasoline marketer, estimates the new CARB clean fuels standard will add about 160/gal to the cost of gasoline statewide. But the state standard has national repercussions.
Even before CARB approved the new fuel standard, many in the refining industry were predicting oxygenate imports would be needed to meet U.S. demand. With the new California standard, the need for imported oxygenates and the cost of reformulated gasoline are likely to increase sharply.
More uncertainty, stems from 1990 CAA amendments that allow optional use of reformulated gasoline in high ozone areas outside the nine worst ozone nonattainment areas. Governors of states with areas that may opt for reformulated gasoline must petition the Environmental Protection Agency for permission to enter the program. The District of Columbia and nine states on the East Coast have asked EPA for permission to adopt the California fuel specifications. Each state that adopts those reformulated fuel specs will send the cost of gasoline higher and further strain the supply of reformulated gasoline components, chiefly oxygenates.
ACHIEVING CARB STANDARDS
"Achieving CARB's reformulated fuel specs will require new processing units but no new technology, and there's adequate time for orderly design, procurement, and construction," said Bob Trunek, ARCO Products senior vice-president of manufacturing, engineering, and technology.
Trunek said there is enough manufacturing capacity available to meet U.S. demand for process equipment and adequate engineering and construction talent to do the job. The timing of the new regulations also is good, he said, because companies likely to be called upon to reconfigure U.S. refineries are experiencing a slowdown of activity and will be anxious to get the work.
"Fundamentally," Trunek said, "this is an environmental enhancement, and based on statements of regulators, we believe they will do their best to expedite permits. Altering processes to produce reformulated gasoline is a large cost item, but we think the market for the product is here. When you have a market and the capability of meeting it, we think financing will be available."
CARB standards that go into effect for major California refiners in 1996 will reduce vehicular emissions in the state an average 1,900 tons/day, including cuts of 130 tons/day of volatile organic compounds, 180 tons/day of nitrogen oxides, 1,300 tons/day of carbon monoxide, and 30 tons/day of sulfur dioxide.
During debate on the standards, ARCO supported the more stringent of two clean fuel proposals. Others in industry favored weaker specs achievable at a cost of about 70% that of the tougher standard.
Trunek said ARCO's position differed because the company focused on decreasing ozone, while others considered all hydrocarbon emissions. Focusing on different goals leads to different conclusions, he said.
In testimony before CARB, ARCO Products Pres. George H. Babikian said the weaker fuel standard might achieve a 90% reduction of all hydrocarbon emissions, "but not for ozone, the true culprit of smog."
Babikian told CARB, "In our estimation, an investment of 70% would result in only a 70% reduction of ozone."
"A lot of companies' comments to CARB focused on reducing hydrocarbon emissions because they are criteria pollutants," Trunek said. "But it takes more than hydrocarbon emissions to make ozone."
He said ARCO believes the main thrust of clean air requirements should focus on reducing ground level ozone, not just one of its precursors. "We're concerned about controlling hydrocarbon emissions but only as a precursor to ozone formation," Trunek said. "Ozone creation is what we're most concerned about."
ARCO said it will spend about $1 billion to convert its Los Angeles refinery to produce reformulated gasoline meeting CARB standards. Estimates of statewide fuel reformulation costs range to as much as $5 billion.
Trunek said the CARB fuel formulation likely will meet what ARCO expects federal fuel standards to be at the end of the century.
MARKET SPILLOVER
Even without a significant number of areas embracing CARB fuel specs, the size and complexity of the U.S. gasoline distribution system will make it very difficult to deliver oxygenated or reformulated gasoline only into nonattainment areas where they are required by CAA, said Chem Systems Inc. (CSI), Tarrytown, N.Y.
The extent of spillover into attainment regions has been estimated at 10-100% of the minimum calculated to meet legislated demand. CSI estimates delivery logistics will result in spillover of about 30%.
To serve oxygenate demand created by reformulated gasoline requirements, supply will have to include ethanol, U.S. produced methyl tertiary butyl ether (MTBE), and tertiary amyl methyl ether (TAME), MTBE imports, and U.S. MTBE storage, CSI said. After 1995, it predicts, imports likely will be the lowest cost supply of MTBE.
OPTING FOR TROUBLE
Trunek is critical of other states' plans to follow California's clean fuel lead.
"What's true of air quality in California probably isn't true in New York City," Trunek said. "It would be a serious mistake for any other jurisdiction to blindly adopt California specs."
He contends the dynamics of air basins differ enough to raise questions about CARB requirements' effectiveness in other areas.
"Adopting California's reformulated fuel specs in the Northeast could create a situation in which refiners would be faced with all the costs of changing their processes to make California spec reformulated gasoline but get very little of the benefit," Trunek said.
ARCO also split with other California refiners on whether reducing air pollution from mobile or stationary sources would be less costly.
ARCO said more reduction could be achieved by controlling mobile pollution, while other companies said it would be cheaper to clean up pollution from stationary sources.
For example, Trunek said, 70% of the NOx emissions in California's south coast air basin come from gasoline powered mobile sources and even higher percentages in other California air basins.
"We can reduce tailpipe NOx emissions something like 26% by burning reformulated gasoline," he said. "To get the same magnitude of reduction from stationary sources, we would have to eliminate 100% of NOx emissions from stationary sources.
MTBE SUPPLIES
CSI said it will be almost impossible to meet CAA requirements later this year when CAA rules requiring oxygenated gasoline in carbon monoxide nonattainment areas take effect.
"To meet projected demand including spillover, an additional 100,000 b/d of MTBE from storage is required," said Marshall E. Frank, CSI president and managing director. "This is highly unlikely."
By 1995, when clean fuel requirements expand from CO nonattainment areas to include nine ozone nonattainment areas, CSI said, significant new U.S. supplies of MTBE and TAME will be available.
"However, use of ethanol may be severely restricted because of Reid vapor pressure and oxygen specifications for reformulated gasoline," Frank said. "There would still be a major requirement from storage to meet the minimum and spillover demand. This could pose difficulties in 1995 and beyond due to year round requirements in ozone nonattainment regions."
CSI expects wide variations in:
- Minimum mandated U.S. demand for clean fuel oxygenates.
- Theoretical ceiling demand with excessive spillover or many states choosing California standards.
- Most likely demand scenarios.
In all cases, U.S. supply of MTBE falls far short of demand.
MTBE plants in the Middle East, Latin America, and western Canada will be competitive with U.S. supplies as lower production costs more than offset import duties and transportation costs. As a result, most new supply after 1995 is likely to come from imports rather than continuing investment in additions to U.S. capacity, CSI said.
If lead phasedown is delayed in other countries or ethanol, TAME, or ethyl tertiary butyl ether are used more than expected in the U.S., excess supplies of MTBE after 1995 could force MTBE prices down.
However, CSI said, the price of MTBE since 1983 never has been less than 90% of its calculated gasoline blending value. By 1995, MTBE's gasoline blend value could be enhanced further by its value as an oxygenate.
OXYGENATE SUPPLY
The major near term concern for U.S. refiners is whether there will be enough oxygenate supply to meet what may be the most pressing requirement: that all gasoline sold in 41 CO nonattainment areas in the U.S. contain at least 2.7 wt % oxygen beginning Nov. 1.
However, if EPA determines there is inadequate U.S. supply or distribution capacity for oxygenated gasoline or oxygenates, implementation of the program can be delayed for two 1 year periods.
The California Energy Commission's 1991 Fuels Report noted oxygenate shortfalls in that state likely will lead to inadequate gasoline supply and price hikes.
The report said California could experience an oxygenate shortage of 97,000-136,000 b/d of the total 107,000-146,000 b/d required.
Part of the supply problem stems from lack of storage. California refiners will require 15-21 million bbl of oxygenate storage to meet demand during the 5 month high ozone season. Yet there is little excess capacity in California's total 27 million bbl of gasoline storage capacity.
The report noted although projected cost increases to produce oxygenated gasoline are only 3-8/gal, shortages would drive up prices.
The report pegs 1992-93 MTBE production in the U.S. at 160,000-230,000 b/d and demand at 490,000-530,000 b/d. California MTBE production could be as little as 10,000 b/d with demand anticipated at 107,000-146,000 b/d. The report said the cost to increase MTBE production capacity in California to 136,000 b/d could range from $600 million to $2.4 billion.
REFINERY OPERATING CHANGES
Wright Killen & Co., Houston, said U.S. gasoline demand will be essentially flat through 2000, as a growing consumer base and a decline in gasoline energy content are offset by higher gasoline prices and improved vehicle fuel economy.
Steady demand coupled with increased use of alcohol and ether gasoline components will result in a surplus of refinery gasoline capacity, Wright Killen said, As a result, inefficient plants with high capital exposure will be shut down and refinery operations will be consolidated.
To analyze the effect of clean fuel requirements, Wright Killen studied the operational changes required by medium and high conversion refineries.
The company said the need for capital additions will vary widely depending on such things as refinery configuration, geography, and marketing strategy. But all refiners will have to make some investments to participate in reformulated fuel markets.
Refinery crude runs will decrease by about 4%, but Wright Killen expects refiners to resist lowering operating rates.
Rationalizing refining capabilities and capacities to serve reformulated fuel markets will force refiners to divest assets, closing some plants and consolidating operations into fewer, larger plants, or abandon refining as a strategic business.
In addition to outlays for process reconfiguration, Wright Killen said, U.S. refiners will have to pay:
- The cost of segregating reformulated fuels within marketing and distribution systems.
- Increased costs for remediating water and soil and reducing fugitive emissions.
For a 100,000 b/sd refinery, an investment of $20-100 million could be needed. Industry-wide investment in refining processes will be $12-20 billion, Wright Killen estimates.
The company said reformulation is likely to increase activity on secondary markets for gasoline blending components, possibly broadening demand for aromatic blendstocks and benzene concentrates. Reformate splitting to remove benzene concentrate could be one of the most cost effective ways to achieve reductions of toxic emissions, Wright Killen said.
REFINING CAPACITY TO FALL
Adam Sieminski, County NatWest energy analyst, notes there are 190 operating refineries in the U.S. with total capacity of 15.7 million b/d. Fifty of those refineries have capacity of less than 25,000 b/d and may not be able to comply with CAA rules because of the poor economics of upgrading small units. Capacity of those smaller refineries totals 500,000 b/d.
Meantime, U.S demand is expected to grow about 1.5%/year. To keep up, overall supplies must increase by about 250,000 b/d/year. Sieminski said combining the CAA incurred loss of capacity with demand growth yields a crossover point that will require a significant increase in construction and upgrading of non-U.S. as well as U.S. refining capacity because it is uncertain whether added increments in U.S. capacity alone will meet increased U.S. demand.
He noted many refining officials believe economics work against keeping open refineries with capacity less than 50,000 b/d, threatening another 1.5 million b/d of capacity.
"In my judgment, there's at least 500,000 b/d of refining capacity that will be put out of business during the next 3 years by these rules. The net result will be a squeeze on refining capacity that will cause margins to expand," he said.
SUN'S VIEW
The question of how many refiners will make needed alterations to meet CAA rules is more one of refinery location and market rather than size, says Brian Davis, Sun Refining & Marketing Co. manager of legislative, regulatory, and technical support.
A refinery that furnishes most of its product to an area required to have reformulated gasoline probably will be able to recover costs of that effort, as will others supplying that area, Davis said.
On the other hand, a refinery that furnishes reformulated gasoline to some of its market and supplies conventional gasoline to a larger market probably will not be able to recover the cost of refinery alterations.
"Some folks are going to spread the cost of reformulation over a larger portion of the field they market and minimize the per gallon cost," Davis said. "That's pretty tough to compete with if you have to be very specific."
A large built-in price for reformulated gasoline may drive consumers outside the nonattainment metropolitan areas to stations that sell less expensive fuel, Davis noted, leaving some refiners with a shrinking market and no way to recover costs.
Davis said refiners in the Northeast, where most states have opted into the federal reformulated gasoline program or plan to do so, are more likely to meet CAA requirements because such a large percentage of that area will require it and everyone will be furnishing reformulated gasoline, resulting in less financial risk.
CRUDE VOLUMES
The effect CAA amendments will have on crude volume is not clear.
Davis noted producing reformulated gasoline requires adding at least 2 wt % oxygen by adding 11 vol % MTBE or 7-10 vol % ethanol, which increases the overall barrel volume.
"So you are adding that much to the volume of the pool," he said. "If your particular formulation doesn't demand you do much else, that's quite an increase in the amount of gasoline you have to sell."
However, most U.S. regions will require a significant reduction in Reid vapor pressure, calling for removal of several percentage points of butane. If reducing aromatics also is part of the reformulation, further volume reductions are required, Davis said.
PLANNING CHALLENGES
The effects CAA rules will have on the refining industry are hard to predict, Davis said, because so much depends on individual areas and decisions at the state level.
"What the states do to implement the federal regulations now becomes fairly critical in deciding what happens," he said.
"For instance, states can decide whether to grant flexibility or not in certain cases: whether you can average oxygen content in the first phase of the program or whether they will require a per gallon standard. Applying a per gallon standard without flexibility opens questions like: What do you do if a boat doesn't make harbor and you run out? What if you're supplying an ether, and the only thing available to fill a supply gap is an alcohol, and you can't clean your system out in time?"
Davis said planning refining and marketing operations for the Northeast is fairly straightforward at this point. That part of the country has made its intentions known. Most of the Midwest has not opted in to the federal program but could at any time.
"Now, how do you plan your refining investment to be ready? They have to allow a year of lead time, but a year is not a whole lot of time for capital," he said.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
