Big changes in the US octane market
Strategies for enabling higher margin capture in today’s highly volatile crude and product markets.
Hoekstra Trading LLC
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Three big changes in the US octane market are traceable to the Tier 3 10 ppm gasoline sulphur specification, including the first change: octane destruction in gasoline desulphurisers is five times higher; second change: The US retail octane value is five times higher; third change: The sulphur credit price is seven times higher.
Octane destruction in gasoline desulphurisers is measured by the change in RON octane vs product sulphur measured in field tests on commercial gasoline desulphurisers, as shown in Figure 1 ‘performance curves’. The lower solid curve shows a loss of 9 RON octane at 10 ppm product sulphur, which was measured in a field test on a commercial unit.1 The upper dashed curve shows a loss of 1.5 RON octane at 10 ppm product sulphur, which was the industry consensus expectation for octane loss when making 10 ppm product sulphur.2 The difference in the slopes of the two curves between 70 and 10 ppm sulphur is a measure of the higher-than-expected cost of compliance being realised by that refinery, compared to the industry consensus expectation, for reducing gasoline sulphur for Tier 3.
The retail value of octane is measured by the US average retail pump price differential between premium and regular gasoline in cents per gallon. Figure 2 shows it has increased from the historic value below 20 cents per gallon to the current level of 85 cents per gallon.³ The uptrend has persisted since 2012. Though often blamed on other factors, Tier 3 is unquestionably a primary cause of the increased market price of octane.
The price of Tier 3 sulphur credits is measured by the price of actual trades among gasoline suppliers. Figure 3 shows this price increased seven-fold since the first quarter of 2022, from $360 to $2,800/million ppm-gallons. This credit price is a direct measure of the true cost of meeting the Tier 3 gasoline sulphur specification.
These three metrics combine to show the high cost being borne by US refiners to reduce gasoline sulphur from the previous (Tier 2) 30 ppm level to the current (Tier 3) 10 ppm level.
Cost of Tier 3 compliance
The current cost of Tier 3 compliance can be estimated directly from the sulphur credit price, as can be demonstrated for the cost of a single refinery and the cost for the US.
Cost for a single refinery
Consider a single refinery producing 100,000 barrels per day of gasoline. Instead of making 10 ppm sulphur, that refinery has the option to continue making 30 ppm sulphur and offset it by buying $86 million/year worth of credits as follows:
Single refinery cost = (30-10) ppm x 100,000 barrels/day x 42 gallons/barrel x $2,800/10⁶ ppm-gallons x 365 days/year = $86 million/year.
The credit price is a good measure of the actual cost of compliance because it is known that refineries are paying that credit price today to avoid the actual cost of reducing sulphur to 10 ppm, which means their actual cost must exceed the cost of credits.
Cost for the US
In 2017, Hoekstra Trading predicted the cost of octane destruction in US refineries would be $10 billion/year when Tier 3 fully kicked in.² That was based on pilot plant and commercial field test data showing that high octane loss (like the lower solid curve in Figure 1) would occur in many US gasoline desulphurisers.
That $10 billion/year estimate compares with the Environmental Protection Agency (EPA)’s estimate of $1.3 billion per year.2,4 But the EPA’s estimate included a capital charge for $3 billion of capital investment, mostly in FCC feed hydrotreaters, that was anticipated but did not occur.2,5 Those FCC feed hydrotreaters were expected to reduce octane loss from levels indicated by the lower solid curve in Figure 1 to levels indicated by the upper dashed curve. That would have greatly reduced octane destruction and the cost of compliance compared to what is being realised.
Why is the cost so high?
The reason for the high cost of Tier 3 compliance is the high-octane destruction occurring in refineries not well-equipped for Tier 3 duty. Forty per cent of US refineries rely exclusively on low-pressure selective FCC gasoline desulphurisers to reduce the sulphur in FCC naphtha to levels compatible with a 10 ppm sulphur gasoline pool. They suffer high octane loss.
Another 40% of refineries have high-pressure FCC feed hydrotreaters and/or hydrocrackers in addition to gasoline desulphurisers. Their octane loss is low. The remaining 20% of refineries have a high-pressure FCC feed hydrotreater and/or hydrocracker but no gasoline desulphuriser.
High-pressure FCC feed hydrotreaters get the sulphur out of heavy and high sulphur intermediates before cracking in the FCC, resulting in the production of low sulphur FCC gasoline that meets or is easily desulphurised to Tier 3 specifications with low octane loss (like the upper dashed curve in Figure 1).
Improving Tier 3 economics
Refiners have succeeded in greatly improving Tier 3 economic performance through seven strategies:
• Feed opportunities
• Revamp opportunities
• New process opportunities
• Catalyst opportunities
• Credit opportunities
• Lab opportunities
• Capital investment opportunities.
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