REFORMULATED GASOLINE MORE PROFITABLE IN VENEZUELA THAN IN U.S.

Carol Dahl
Colorado School of Mines
Golden, Colo.

Wolfgang J. Garcia
Barre Intevep S.A.
Caracas

Refiners in the U. S. feel under siege as they are squeezed between domestic environmental regulations and foreign competition.

At the same time, non-U.S. refiners are constantly on the lookout for competitive opportunities in the U.S. market.

Information on the competitiveness of new refining capacity at any location may mean the difference between boom and bust for both groups of refiners. Such information has been determined by investigating the competitiveness of recent investment plans by Petroleos de Venezuela S.,k. (Pdvsa), which include new export refining capacity for the U.S. market.

COMPETITIVENESS

According to the authors' economic analysis, Pdvsa's planned export capacity will be profitable in the highly competitive U.S. refining market. The economic analysis suggests that conventional refineries in Venezuela are more profitable than equivalent new capacity on the U.S. Gulf Coast.

More importantly, in light of recent U.S. environmental policy, Venezuelan capacity to produce reformulated gasoline shows an even greater cost advantage.

The dynamics in the U.S. market look promising for Venezuelan products. This market has historically been the most important market for Venezuelan crude and products. In recent years, more than 50% of Venezuelan exports have been to the U. S.

U.S. product demand is expected to increase while U.S. refining capacity remains relatively stable. Additionally, new environmental regulations are increasing the pressure on U.S. refining capacity.

The 1990 U.S. Clean Air Act Amendments require a minimum of 2.0 wt % oxygen (2.7 wt % in CO nonattainment areas during the winter months). Other requirements include a maximum of 1 vol % benzene, no heavy metals, and no increase in exhaust emissions.

Emissions are to be reduced 15% from 1990 levels by 1995, and a further 25% by the year 2000. These reductions must be met for ozone-forming volatile organic compounds (VOCs), exhaust NOx emissions, and toxic emissions, which include benzene, butadiene, formaldehyde, acetaldehyde, and polycyclic organic matter.

These standards will be met primarily through the use of reformulated gasoline. This new gasoline will provide immediate benefits using the existing vehicle stock, including the oldest 10% of vehicles, which are thought to account for over half of automobile emissions.

Reformulated gasoline will be readily available through existing distribution and marketing systems. Furthermore, voluntary reformulated gasoline programs, better-known as "opt-ins," continue to flourish.

There is not yet a definitive formula for reformulated gasolines, but the quality parameters thought to be affected are vapor pressure, aromatics, benzene, olefins, heavy components, sulfur, and oxygen content. Probable quality parameters are shown in Table 1.

ECONOMIC ANALYSIS

The economic analysis utilized a hypothetical Venezuelan export refinery. This refinery runs Venezuelan Barinas crude with an API gravity of 23.5, 1.38 wt % sulfur, and other characteristics, as shown in Table 2.

Barinas was chosen because its API gravity is a bit less than a recently determined Venezuelan average of about 25.7 and proven Venezuelan reserves are thought to be heavier than the current average.

The refinery's capacity is 200,000 b/d. Based on U.S. product forecasts from 1989 to 2005, it has a product distribution of 58% gasoline 12.5% jet fuel, 25% middle distillates, and 5% residual. Table 3 contains the base-case quality requirements for these products.

The conventional refinery, shown in Fig. 1 and Table 4, operates under the following assumptions:

• All light virgin naphtha, also called light straight-run naphtha (LSRN), is sent to isomerization.

• All heavy straight-run naphtha (HSRN), heavy hydrocracked naphtha (HHCN), and delayed coker naphtha (DCN) are sent to the catalytic reformer.

• Light hydrocracked naphtha (LHCN) is sent directly to the gasoline pool without further processing.

• Maximum light and heavy vacuum gas oils (LVGO and HVGO) are fed to the fluid catalytic cracking unit (FCCU).

• All delayed coker gas oil (DCGO) is fed to the hydrocracker.

• Maximum light cracked gas oil (LCGO) from the FCCU is sent to the hydrocracker, within the lower API gravity limits of jet fuel.

• Minimum LCGO is sent to the hydrotreater (HDT), within the sulfur content limits of heating oil.

• All unprocessed LCGO is sent to the heating oil pool.

• All heavy cracked gas oil (HCGO) from the FCCU is sent to the high-sulfur residual fuel oil (HSFO) pool.

REFINERY MODIFICATION

For purposes of the study, the refinery is modified to meet reformulated gasoline requirements by adding new process units using existing technology, changing conventional process units, and changing the input chemicals enough to meet the new specifications. The alternatives with the highest consensus among studies were chosen as the modification methods.

The most important changes in the refinery configuration producing reformulated gasoline are an added 17,900 b/d MTBE complex including 18,000 b/d of butane isomerization capacity and 13,800 b/d of dehydrogenation capacity (Fig. 2).

The MTBE complex uses methanol and n-butane to produce MTBE for meeting the new oxygen requirement. The severity of the catalytic reformer is reduced by 12 RON (87 vs. 99) to reduce aromatics and benzene production, with hydrogen production also reduced by 88%.

A larger hydrogen plant is required to convert natural gas to H2 (71 vs. 6 MMscfd) to meet higher demand and the loss of reformer H2 production. The FCCU is put in overcracking mode to increase the yield Of C3/C4 olefins. FCCU conversion is increased from 70 to 86% and feedstock reduced by 23% to reduce the contribution of FCC gasoline to olefins in the reformulated gasoline pool.

Alkylation capacity is increased by 58% to process previously polymerized C3 olefins and to process additional C3/C4 olefins from FCC overcracking. No polymerization capacity is provided to help reduce olefins in gasoline; instead, feed is deviated to alkylation.

Hydrocracker capacity is increased by 40% to accommodate the feedstock deviated from the FCCU. Coker capacity is reduced by 12% because of higher conversion in the FCCU.

These differences are reflected in Table 4, which compares the size of the process units in the conventional refinery with those in the reconfigured refinery. The yield of refined products in the conventional and reconfigured refineries is given in Table 5.

Because this is an export refinery, all prices, except for natural gas used in Venezuela, are measured U.S. Gulf Coast (USGC). The price of crude in the U.S. is assumed to be $19.05/bbl, which is the average 1991 U.S. refinery acquisition price. (This analysis was performed using 1991 data, because 1992 data were not available at the time of the analysis.) Product prices are based on their historical relationship to U.S. refinery crude oil acquisition price. The price of Venezuelan crude landed in the U.S. is set at $15.58/bbl. This is based on the historical relationship between U.S. and Venezuelan crudes, with a discount for quality.

Diesel prices have been increased by $0.04/gal to account for new regulations reducing the sulfur level from 0.24 to 0.05 wt %. The price of reformulated gasoline in the U.S. is assumed to be 8cts/gal higher than conventional gasolines. This differential was arrived at by considering several studies on price increases for reformulated gasolines (Table 6).

Sulfur, methanol, and natural gas prices are actual 1991 prices. All prices used are shown in Lines 1-4 and Lines 6-16 of Table 7.

CAPITAL/OPERATING COSTS

An economic comparison requires the examination of investment and operating costs for the conventional and reconfigured refineries. The capital costs represent all capital necessary for installing process plants and equipment, and for all auxiliary installations needed for full operation of the refinery. These auxiliaries include cooling water systems, steam systems, storage facilities, electric power distribution, water supply, and disposal.

All estimates contained in Table 7 are made for grassroots refineries at a new site. Although it is unlikely that a grassroots refinery will be built on the USGC, this location is used for the reference refinery, for comparison purposes. All capital costs are taken from estimates for the U.S. Gulf Coast. They are converted to Venezuelan costs using the locational adjustment factors shown in Table 7. These factors, collected from literature, show operating costs and natural gas to be cheaper in Venezuela, but capital costs to be higher.

Table 7 combines all of this information to compare the before-tax economics of the two refineries, USGC vs. Venezuela.

The refinery economics are somewhat better for both types of refinery in Venezuela.

Line 41 shows that in Venezuela, refinery margins are $2.09/bbl for the conventional refinery and $2.85/bbl for the reconfigured refinery.

Under the assumptions used, refinery margins for Venezuela are $0.46/bbl better for the conventional refinery and $0.60/bbl better for the reconfigured refinery.

The comparative, pretax, internal rate of return (ROR) also shows Venezuela's advantage. Hence, Venezuela's lower fuel costs are enough to offset its higher capital costs.

In both instances, the reconfigured refinery is more profitable, with an ROR of 1.3-1.4% better. These refineries do not reflect the investments needed on the USGC to meet the latest U.S. environmental regulations for refinery emissions. The emissions regulations, which might increase costs by as much as 30% put USGC refineries at a further economic disadvantage.

SENSITIVITY TESTS

From these assumptions, the obvious conclusion is that Venezuela has an economic refining advantage, which is larger for a refinery reconfigured to produce reformulated gasoline. All calculations were based on information in the open literature. Sensitivity testing was therefore done to determine the robustness of the conclusions across changes in the basic parameter assumptions (PAs):

• PA1 = Changing the price differential between reformulated and conventional gasoline between $0.00/gal and $0.16/gal.

• PA2 = Changing feedstock costs between - $4/bbl and + $4/bbl.

• PA3 = Changing product revenues between - $4/bbl and + $4/bbl.

• PA4 = Changing the average U.S. refinery acquisition price of oil between - $4.00/bbl and + $4.00/bbl.

• PA5 = Changing the opportunity cost of capital between 11% and 19%.

• PA6 = Changing capacity utilization between 60% and 100%.

• PA7 = Changing the cost of building the refinery between 60% of base case and 140% of base case.

• PAS = Changing operating costs between 60% of base case and 140% of base case.

• PA9 = Changing refinery capacity, between 50,000 b/d and 400,000 b/d.

Table 8 shows the results of the sensitivity tests. Included in Table 8 are all before-tax changes in refinery margins and the changes in internal ROR for both the conventional and reconfigured refineries, in Venezuela.

Fig. 3 shows the changes in relative refinery economics that occur with changes in the price difference between conventional and reformulated gasoline.

Every $0.02/gal increase in reformulated gasoline price yields roughly a $0.49/bbl increase in re finery margins and a 2% increase in the internal ROR. At a price differential of about $0.05/gal, reformulated gasoline has a better refinery margin, but it does not have a better ROR until the price differential is about $0.07/gal.

Most of the other parameter changes do not change the relative economics of the various refinery options.

Changes in feedstock costs, product revenues, or U.S refinery crude oil acquisition prices have a linear effect on refinery margins. Each dollar increase in feedstock costs or dollar reduction in product revenues reduces refinery margins by $1/bbl. Likewise, each dollar increase in U.S. refinery acquisitions costs lowers refinery margins in the conventional refinery by roughly $0.50/bbl, and-in the reconfigured refinery by about $0.55/bbl.

Changing the 15% opportunity cost of capital has a linear effect on RORs, with each percentage point increase lowering ROR by 0.18% and lowering margins between $0.20/bbl and $0.26/bbl, in both refineries.

Operating at lower utilization rates has a sharp effect on profitability, as can be seen in Fig. 4. When the utilization rate falls to 72% in the conventional refinery and 74% in the reconfigured refinery, the ROR on capital falls below 15% (the opportunity cost of capital used in the analysis). Hence, refinery margins become negative.

Below about 63% of capacity, the less capital-intensive conventional refinery actually has a slightly better refinery margin than the reconfigured refinery, although its ROR is still slightly worse.

Raising capital or operating costs, in percentage terms, also has a linear effect on refinery margins. Each 1% increase in capital costs lowers refinery margins by approximately $0.43/bbl in the conventional refinery and $0.51/bbl in the reconfigured refinery. Each 1% increase in operating costs lowers refinery margins about $0.25/bbl in the conventional and $0.32/bbl in the reconfigured refinery.

An 18% increase in operating costs or an 11% increase in capital costs would render the Venezuelan refinery less economic than equivalent refineries on the U.S. Gulf Coast.

The 200,000 b/d base-case refinery was chosen because it is equal to an announced new high-conversion export refinery for Venezuela. Fig. 5 shows the changes in Venezuelan profit margins that would occur if a different-sized refinery were built.

Given economies of scale in refining, if both the conventional and reconfigured refineries were to operate at full capacity, profit margins and internal RORs would increase with refinery size up to 400,000 b/d-the largest refinery examined. The economies of scale are steepest up to 100,000 b/d and are always steeper for the reconfigured refinery, increasing its advantage over the conventional refinery as refinery size increases.

CONCLUSIONS

A number of important conclusions can be drawn from the analysis.

1. Under the assumptions used, reformulated gasoline can be obtained with a more complex refinery, but with conventional processing techniques.

2. This more complex refinery has investment and operating costs 20-23% higher in the base case.

3. Under the price structure assumed here, both a conventional and reconfigured refinery would be profitable in Venezuela and both would be more profitable than similar refineries on the USGC.

4. For Venezuela, the reconfigured refinery producing reformulated gasoline would be the more economically attractive of the two options, in terms of internal ROR, as long as reformulated gasoline sells for at least $0.07/gal more.

5. A wide range of other sensitivity tests across parameters changed the attractiveness of both refineries in Venezuela, but did not change the basic conclusion that the refinery reconfigured to produce reformulated gasoline had the better internal ROR.

BIBLIOGRAPHY

Garcia Barre, Wolfgang J., "Comparative Economics of Petroleum Refineries Designed for the Production of Conventional and Reformulated Gasolines: The Case of New Venezuelan Export Refining Capacity," Masters Thesis, Colorado School of Mines, Golden, March 1992.

Copyright 1993 Oil & Gas Journal. All Rights Reserved.