ITALIAN REFINERS' ENVIRONMENTAL SPENDING TO SOAR IN 1990s

Italian refiners' environmental spending is poised to take off in the 1990S.

Industry estimates are that Italian refiners' capital outlays will total almost 12 trillion lire ($7.2 billion), in 1990 currencies, in the 1990s. Most spending will be earmarked to develop cleaner fuels and plant-specific environmental mitigation measures related to new European Community regulations (OGJ, Jan. 25, p. 29).

Italian refiners generally have lagged some of their counterparts in Europe and North America on environmental spending. That's because they have faced a continuing margin squeeze as a result of product prices remaining under tight government controls.

Last year, the government began to implement price deregulation in line with EC directives. At the same time, the government is enforcing stiffer emissions rules to improve air quality in urban areas.

SPENDING PLANS

Unione Petrolifera (UP), the Italian refiners association, said the most pressing concerns for Italian refiners in the 1990s are ways to meet growing demand for more environmentally benign products.

Their chief concerns will be reducing benzene levels in gasoline and sulfur levels in gas oil and heating oil. At the same time, Italian refiners will have to increase the market share of high value-added products to satisfy expected growing demand for lighter products (see table above). And they must streamline distribution and marketing systems in order to reach EC's standards. UP in 1990 broke out Italian refiners' total projected investments in 1990-2000 as:

• $4 billion to switch to cleaner fuels for electrical power generating plants.

• $2 billion to improve the quality of gas oils and gasoline.

• $3.3 billion for distribution and marketing.

• $2.6 billion to replace and revamp plants and equipment.

Late last year, UP estimated Italian refiners' environmental spending will jump to 2.5 trillion lire ($1.5 billion) in 1993 from 2.1-2.3 trillion lire ($1.25-1.38 billion) in 1992 and $1.5 trillion lire ($900 million) in 1991.

Such a high level of spending is due not only to enforcement of EC directives in Italy but also to the nature of the Italian market. Until last year, cumbersome national regulations hindered refining and marketing operations, and product prices have been strictly regulated by the government.

Spurred by the open competition of other EC countries, Italy is entering full scale deregulation but continues to lag others in Europe because of its recent history of heavy regulation.

ENVIRONMENTAL CONCERN

Studies showing Italy with the highest levels of urban air pollution in Europe underscore a heightened environmental concern in the country.

Italy has one of the oldest vehicle fleets in Europe as well as densely populated cities that lack parking space and public transportation.

In addition, high levels of sulfur dioxide emissions by obsolete power plants concern local authorities as well as Italy's neighbors. Currently, Italian power plants emit 800,000 metric tons/year of sulfur into the atmosphere.

Finally, Italy is the last EC country to introduce catalytic converters and unleaded gasoline-in 1989. Government estimates last December showed unleaded gasoline sales accounted for 13% of the total market. They were about half that level a year earlier.

Early progress in marketing unleaded was hampered by a lack of price incentive. Only 54 lire (3.2cts) separated premium leaded (0.15 g/l. of lead, 98 octane) and unleaded premium (0.013 g/l. of lead, 95 octane) (table, p 21). That differential was raised in December to 75 lire with a tax exemption.

"The former differential was too tiny considering how old the Italian fleet is," said Luigi De Simone, an official with the Technical Secretariat of the Energy Department at the Ministry of Industry in Rome. "Drivers were not adequately informed of the types of cars that accepted unleaded fuels. Moreover, the 'greens' have heavily campaigned against unleaded gasoline by alleging that its higher level of benzene and aromatics is hazardous to health. Maybe (those higher levels) were the case in 1988, but not now, since both gasolines come from the same stream, and refiners simply add 0.15 g/l. of lead to reach at least 97 octane."

Meanwhile, Fiat, the main Italian car manufacturer, announced that all its cars produced since 1989 burn 95 octane gasolines, thus paving the way for more widespread acceptance of lower octane unleaded gasoline.

But Italy still has a lot of environmental ground to catch up with others in Europe, and severe air pollution in Italian cities is forcing Rome and local authorities to tighten regulations.

During the past two winters, local governments of Italy's 11 biggest cities had to ban travel by automobiles without catalytic converters for a number of days. Since an antismog decree by Minister of the Environment Ripa di Meana was issued in November 1992, all traffic without catalytic converters must halt when certain monitoring levels for SO2, nitrogen oxides, carbon monoxide, and ozone are exceeded for more than 1 day.

UP, Agip SpA, and Italy's ministries of environment, industry and health agreed to improve the quality of refined products.

One agreement calls for a limit of 0.2 wt % sulfur for all gas oils for transportation and heating distributed in cities with a population of more than 300,000. Meanwhile, an EC directive on 3 wt % sulfur applies to the rest of the country. In 1996, in line with tougher EC rules, sulfur levels in transportation gas oil will be cut further to 0.05 wt %.

In addition, the national electricity company ENEL is striving to increase its use of low sulfur fuel oil (LSFO) to comply with EC rules. With those measures, De Simone said, sulfur dioxide emissions in Italy will be reduced from 1980 levels by 30% in 1994, 45% in 1997, and 60% by 2002.

EDGE ON SULFUR LIMITS

Some refiners are benefiting from the tighter limits on sulfur levels in gas oil and fuel oil. Tamoil, a 100% Libyan owned company in Italy that refines low sulfur Libyan crude, is now the top supplier of fuel oil to ENEL power plants. Currently, Libyan crude is the best selling crude in Italy with a 27% share of total crude imports.

"We are in a better situation than other refiners," a Tamoil official said. "We are already selling 0.2 wt % sulfur gas oil in the cities, and we could even satisfy a future demand of 0.1 wt % sulfur by desulfurizing a bit more."

At its 88,000 b/d Cremona refinery in northern Italy, Tamoil has two distillation units, two reforming units, a visbreaker, and a dewaxing unit that also serves as a mild cracker. Tamoil is considering a plant for direct desulfurization of fuel oil.

"Our fuel oil has less than 0.1 wt % sulfur," a Tamoil official said. "We are lucky because our competitors have to refine a sour crude with 0.8 wt % sulfur and have to reduce it to the compulsory 0.3 wt % for the Italian market for gas oils and to 0.2 wt % in the cities. The EC regulation has given us a competitive advantage, but it should be kept in mind that sweet crudes are more expensive than sour crudes."

The recently merged Isab SpA/Erg holds an edge because of desulfurization investments begun 20 years ago in order to sell products in North American and North European markets. Aldo Garozzo, general manager of refining and trading at Isab, said, "In 1975, we built a refinery at Priolo to make cleaner products. Now we are able to meet all the European and Italian specs without having to make new investments. We are almost oversized in desulfurization capacity, so we are not worried by more stringent European specs in 1996. We'll have to do some small revamping of furnaces and change the catalysts but not the refinery."

Isab is installing its second thermal cracking unit in 3 years at Priolo.

"It allows us to produce low sulfur fuel oil from high sulfur crudes and low sulfur gas oil from high sulfur gas oil." Garozzo said. "As early as 1972 we owned a hydrorefining unit that later was modified to a mild hydrocracking plant. After 15 years, we are beginning to use our equipment to full capacity."

The company exports 35-40% of its production to markets with tighter specs than Italy.

"It's true that a 0.05 wt % sulfur level doesn't scare us," Garozzo said. "But if 0.02 wt % were introduced in the EC, as some are asking the EC commission for, it would be a very different matter. You can make 0.05 wt % with plants working at low or average pressures, but 0.02 wt % absolutely requires high pressure equipment."

Esso Italia, which has also a sizable export capacity, owns refineries at Trecate, northern Italy, and Augusta, Sicily. It started up a deep conversion hydrorefining unit last year at Augusta to reduce the sulfur content of its gas oils and fuel oils. The 160,000 b/d Augusta refinery exports 20% of its production. The 20,000 b/d hydrorefiner also enables Esso to recover 70,000 metric tons/year of sulfur pellets. At the Sarprom refinery at Trecate, Esso in 1991 started up isomerization and alkylation units at a combined cost of 27 billion lire ($16.2 million), enabling it to produce isopentenes and isohexanes and boost its octane pool while lowering benzene.

BENZENE

The November 1992 agreement between the Ministry of Environment and Italian refiners also calls for a new limit, 3 vol %, on benzene levels in all fuels.

Limiting benzene does not create severe problems for industry, De Simone contends.

"Benzene can be easily extracted from gasoline because it is the lightest element and is on the top of the column. When a refinery has a neighboring petrochemical complex, such as the Q8 refinery in Naples, benzene is used as a feedstock for the petrochemical plant. To attain lower limits on benzene is not a big problem, but it costs."

Garozzo concurred, saying, "In our refinery we have a reforming/isomerization plant that converts low octane paraffins to high octane isoparaffins. These are excellent diluents for benzene and aromatics produced by the reformer. The isomerization plant can destroy the benzene, but we prefer to extract the benzene and make a stream rich in benzene that we can sell, thus boosting profits.

"If tougher specs on aromatics are introduced on the domestic or European market, we'll have to use additives such as methyl tertiary butyl ether (MTBE). There are no investments that enable you to lower aromatics. Either you lower them by dilution or produce less severe gasolines and blend them with additives."

Guido De Cristofaro, vice-general manager at Saras, owner of Italy's biggest refinery, the 300,000 b/d Sarroch, Sardinia, plant, said, "To meet specs on benzene, aromatics, and olefins, we utilize a big cat cracker and alkylation.

"Our benzene averages are much lower than the EC specs of 5 vol %. In Italy, we have to provide 3 vol %, but we are able to reach 2-2.5 vol % because we have the most complex refinery in the Mediterranean area. Our cracking and alkylation units are the biggest in Italy.

"If EC specs become tougher we'll have to consider benzene extraction, but this is not yet the case. We have no problems for aromatics, either. Our levels are lower than the average in Europe and Italy."

Saras has also a 70,000 hydrodesulfurization complex, a 20,006 b/d kerosine sweetening unit, and a mild 50,000 b/d hydrocracker.

AROMATICS

A bigger concern for Italian refiners is whether EC will require a lower content of aromatics other than benzene.

"To maintain aromatics content at a certain level is very, very difficult," De Simone said. "It all depends on the crude you start with, if it has a big aromatics cut or not. Processing requires heavy investment, and it is very tricky to reach a stable level. If the feedstock has a widely variable aromatics content, there is no processing that can guarantee, let's say, a product with less than 25 vol % total aromatics."

He noted Germany's unsuccessful effort to push for a reduction in benzene to 1 vol % from 5 vol %. Environmental scientists in Italy disagree on the health hazards of aromatics. One official at the environment ministry said, "Even if not all aromatics are dangerous, some, such as xylene and toluene, are. What's more, some aromatics combine during combustion and produce polyaliphatic hydrocarbons that are harmful to inhale and might produce cancer. In November 1991, we asked to keep them below 33 vol %, but the EC didn't back us."

The lack of a limit on aromatics levels could be offset by EC directives on evaporative emissions.

"At the moment we are discussing a proposed EC directive on evaporative emissions," said an environment ministry official. EC legislation is being drafted to control evaporative emissions at all stages in storage, distribution, and use of gasoline.

OLEFINS

There are no rules on olefins in Italy, but refiners have to adhere to European Standards Organization technical specs to guarantee good engine combustion, the industry ministry said.

A reduction in levels of the most reactive olefins, such as pentenes and butenes, through etherification of tertiary amyl methyl ether would weigh heavily on Italian refiners.

Saras' De Cristofaro said, "If the gasoline has to have less aromatics it will need more olefins. You can't make a gasoline without benzene, aromatics, and olefins because they are the elements that allow a high octane number-at least you can't make it in a refinery, only in a chemical plant, and in small quantities. But you'll never meet the European demand for gasoline that way.

"In the U.S., EPA regulations have from the beginning headed toward reformulated gasoline. Only afterwards, the authorities checked with car makers to see what was happening in the engines and what the emission levels were. Then officials discovered that olefins have no influence whatsoever on emissions and that to fix limits on olefins is senseless.

"In the U.S., the administration is changing its mind, but it's difficult to change the legislation once it has been approved. The EC commission is now taking stock of the American experience and is not pressing for reformulated gasoline but is heading toward vapor recovery systems."

PARTICULATES

An EC directive on diesel vehicles enforced in Italy requires particulate emissions not exceed 0.14 g/km.

"To respect this limit," De Simone said, "either the engines must be the 'clean diesel' type or they must be fitted with catalytic converters. The Italian car industry is heading toward diesel engines that have an intrinsically low exhaust, thanks to an accurate design of the geometry of the combustion chamber."

Under EC Directive 452, the "clean lorry" directive, in October 1993 particulate emissions limits of 0.63 g/km for diesel truck engines of 85 kw or less will take effect and 0.36 g/km for engines of 85 kw or more. Those limits will be further tightened in 1996 by the EC commission to 0.3 g/km and 0.15 g/km, respectively. De Simone doesn't expect a big compliance problem for Italian refiners.

"Particulates will decrease anyway, because all gas oil on the Italian market will be less than 0.2 wt % sulfur in 1994 and 0.05 wt % in 1996," he said. "Particulates depend very much on sulfur content."

OXYGENATES

Environmental concerns also are driving demand for oxygenates in Italy's refining/marketing sector.

An EC directive Italy adopted in February sets limits of 5 vol % for ethanol, 3 vol % for methanol, and 10 vol % each for MTBE and ethyl tertiary butyl ether (ETBE).

But the Ministry of the Environment has mixed feelings toward oxygenates, noting, "They create aldehydes and formaldehyde, which are carcinogenic. However, aldehydes are also produced by conventional gasoline. It should also be considered that a thinner fuel mixture results in less carbon monoxide emissions. Thus oxygenates could be encouraged in cities, even if they result in higher NOx levels, in theory."

De Simone said, "Among oxygenates, Italian refiners definitely prefer MTBE because they produce it, as Agip Petroli does in Ravenna and Esso in Trecate. As a second best they'd rather have ETBE."

He said Italian refiners don't like pure ethanol because of its affinity for water or pure methanol because of flammability,.

Last year, ENI spent 4 billion lire ($2.4 million) at its Ravenna refinery on a pilot program to produce 70,000 bbl of unleaded gasoline blended with ETBE. Isab/Erg does not produce oxygenates but is preparing facilities to import MTBE by tanker. At Milazzo, Sicily, Agip Petroli is building an MTBE plant. In Sardinia, Saras plans a 100,000 metric ton/year MTBE plant designed by Snamprogetti.

Saras' De Cristofaro said, "MTBE is a tested product, while ETBE isn't.

"We also are against tax exemption. If methanol and ethanol are to be tax exempt, 20% of gasoline could be substituted with them, and the state would earn 20% less. Since in Italy the tax on a liter of gasoline is 1,150 lire for every 1,550 lire spent, tax exemption would mean a 1,150 lire subsidy to ethanol producers. They would never make it otherwise because refiners are getting only 350 lire for a liter of gasoline, and ethanol costs three times as much. Any new competition boosted by tax exemption would disrupt the market."

POWER PLANT EMISSIONS

Italian refiners also are rising to the challenge of providing LSFO for the country's power plants, which are the biggest consumers of high sulfur fuel oil (HSFO) in Europe.

That's because, unlike its EC neighbors, Italy does not have a nuclear power program or substantial domestic coal or natural gas resources to burn in power plants.

SO2 emissions from Italian power plants have triggered complaints in neighboring Austria and the former Yugoslavia, which claim them to be the cause of acid rain in those two countries. A 1986 state decree and later guidelines issued in July 1991 require Italian power plants to either use LSFO that has less than 1 wt % sulfur or install desulfurization facilities. Ministry of Industry figures for 1992 show ENEL consumed 340,000 b/d of LSFO and 160,000 b/d of HSFO.

The government also is considering a decree that would limit power stations under 50,000 kw to use fuels with less than 1 wt % sulfur and over 50,000 kw fuels with less than 3 wt % provided the plant is equipped with a desulfurizer. ENEL, however, is not particularly anxious to install stack gas desulfurization units.

Isab's Garozzo explained, "The calcium sulfate resulting from the desulfurizing processing is toxic and difficult to dispose of. ENEL produces enormous quantities of it and is abandoning the technology because its power stations need quarries to produce the calcium carbonate (for stack gas scrubbing) and sites to bury the calcium sulfate. From 1997 on, this problem will involve all ENEL's power stations."

ENEL and the refining sector joined to devise a solution to the problem: resid gasification in a cogeneration scheme. The new technology, developed by Texaco Inc., will be implemented in at least four Italian refineries (OGJ, July 6, 1992, p. 38).

PRICE REGULATION

"The big problem for Italian refiners," said a Tamoil official, "is that they are being asked to invest for environmental purposes an enormous 6 trillion lire in 10 years. And this happens precisely when all European companies have very poor budgets."

In Italy, lack of price elasticity and one of Europe's highest levels of taxes on gasoline make matters worse. Prices previously imposed by government have been deregulated since spring 1992, but government still has a say.

"Because of recession and inflation, there is still a measure of control on prices by the government," De Simone said. "Prices can't exceed the inflation rate programmed by the government. Thus, it's difficult to ask refiners for better products when their cost increases cannot be reflected in prices."

The Tamoil official said, "These partially deregulated prices can vary only by 5-10 lire/l., and that's not going to pay for the fantastic increase in costs the new environmental regulations are causing."

Isab's Garozzo noted, however, "The price situation in 1992 was less rigid than in previous years. Companies such as ours, which have integrated refining and marketing operations, can offset lower margins in refining with slightly higher prices for products.

Saras' De Cristofaro acknowledges some progress on the deregulation front, saying, "The previous situation of administered prices was very dangerous and resulted in losses for the big multinational companies operating in Italy. International products prices and crude prices would go up while Italian prices would be kept as is in order not to fuel inflation. This resulted in the oil companies having to pay for inflation. That is why so many international companies such as BP and Shell had to leave Italy. There has been a loss of wealth and know-how for the country as a result."

This year, Italian refiners say, Mediterranean market prices fared a bit worse than the Rotterdam market. However, Mediterranean countries are closer to crude producing areas and cheaper transportation evened out the differences.

As with their U.S. counterparts, soaring environmental costs aren't making things easy for Italian refiners. But there has been some improvement elsewhere. In distribution networks, service stations are being streamlined according to European standards and are now allowed to sell nonoil products to improve revenues. In addition, customs regulations, among the most intricate in Europe, are being simplified, thus shortening time for preparation of products and tanker calls in line with other EC countries.

"One multinational company is now beginning to regret leaving the Italian market," said a domestic refiner.

Copyright 1993 Oil & Gas Journal. All Rights Reserved.