The clock is ticking on Tier 3 gasoline

Gasoline sulphur is being reduced in the US to meet the EPA’s Tier 3 standard which requires an annual average of 10 ppm sulphur by 2020. The Tier 3 rule was enacted in 2014, and EPA gave the industry six years to achieve full implementation by 2020. (Note: The standard actually took effect in 2017, but banked Tier II credits generated prior to 2017 are allowed for use toward meeting Tier III specifications through the end of 2019.)

Progress toward the 10 ppm goal has been slow. The US average sulphur in gasoline has been creeping down by 2 ppm per year from 30 ppm which has been required since 2012.

The average gasoline sulphur number for 2018 will be released in June. We think it will show there is still a lot of work ahead to meet the 2020 deadline.

In coming months, as refiners move to meet the 10 ppm standard nationwide, octane will be destroyed for reasons explained below. While gasoline sulphur has been creeping down, octane demand and price have been rising. The US average retail price of octane, measured by the difference in pump price of premium and regular gasoline, has risen to all-time highs above 50 cents per gallon.
The octane market has clearly changed from the old days when the differential was always under 20 cents per/gallon.
Today, octane demand is up, octane price is up, and octane supply is about to go down. This is the recipe for an octane squeeze.
What is the linkage between sulphur and octane, and why does Tier 3 gasoline imply octane destruction?

Gasoline Sulfur and Octane
In most US refineries, the fluid catalytic cracker (nicknamed the cat) is the main refining unit for converting heavy feeds into gasoline and diesel. The gasoline it produces (called cat gasoline), is the largest component of the US gasoline pool.

Cat gasoline contains up to 2500 ppm sulphur and must be desulphurised before blending into finished gasoline. This desulphurisation job is done by cat gasoline desulphurisers which are small refining units compared to the cat. Twenty years ago, hundreds of these desulphurisers were built around the world to take sulphur out of gasoline, and they have been doing that ever since.

The solution for Tier 3 seems simple – just turn up the heat on these gasoline desulphurisers and desulphurise harder to meet the 10 ppm spec on finished gasoline.

It is almost that simple – except, when you turn up the heat to remove more sulphur, you  also accelerate a side reaction which is the saturation of olefins to form alkanes. Olefins are great for octane, and alkanes are horrible for octane. Since much of the US octane supply comes from olefins in cat gasoline, the olefin saturation that comes along with harder desulphurisation has the potential to destroy much of North America’s octane supply.

How much octane might be destroyed? This was a pivotal question ten years ago when the Tier 3 standard was being developed. After exhaustive paper studies and surveys of licensors and refiners, the number 0.2-0.5 octane was established as the expected incremental octane loss associated with the Tier 3 standard. This number sank into industry consciousness and has stayed there, firmly entrenched, ever since.
But the number, 0.2-0.5 octane loss was not supported by any good data. In fact, it was known to be highly uncertain. There were many good technical reasons to believe it was low, but no hard data was available.

In 2015, we led a group of refiners to do pilot plant studies and commercial field tests to measure octane loss when desulphurising cat gasoline to 10 ppm sulphur. The results show that many US refineries will experience much higher octane loss than the paper studies said. Our data says the 0.2-0.5 number is highly optimistic. Many refiners will lose five times that much octane, and some will lose ten times that much. That is enough to make a big dent in the US octane supply.

The Blood Test
When estimating octane loss for Tier 3 sulphur, the big uncertainty is how many olefins will get converted to alkanes when the heat is turned up in North American desulphurisers by enough to remove the last few ppm of sulphur consistently and reliably. The next ppm keeps getting harder to remove than the one before, especially as you approach zero. In our program, we use a 21st-century lab analysis to measure every compound in cat gasolines (there are 750 of them), including all the olefins, the alkanes, and sulphur compounds before and after desulphurisation. We call this analysis the blood test. It shows all the reactions that affect octane in full detail.

This chart shows the distribution of olefins by carbon number in a cat gasoline feed going into a commercial desulphuriser (black curve) and the desulphurised product coming out (tan curve).

The gap between the two curves shows a loss of olefins in the C5-C7 range. The total olefin content of this gasoline went down from 18.2% in the feed to 16.2% in the desulphurised product. The octane loss was 0.7.

Three months later, the difference between the feed and product curves had increased showing more olefin saturation, and the octane loss increased to 1.2.

The increased olefin saturation and octane loss were caused by changes in desulphurisation severity.

The feed to the unit described above is already low in sulphur, around 300 ppm. Here is the chart for a desulphuriser with high-sulphur feed.
Over half the olefins in this cat’s gasoline have been converted to alkanes in the desulphuriser, causing octane loss of 4. The blood test shows that for purposes of making Tier 3 gasoline, this is a sick cat.

Our client group has done blood tests on many North American cats over the last four years. We looked at the cat process trains for all US refineries, classified them into groups, and, using hard data like that shown above, estimated the octane loss for full implementation of Tier 3 gasoline. That is how we concluded the paper estimates of octane loss are way low.

Other parts of the world make 10 ppm sulphur gasoline, why can’t we? The answer is we can, but not without destroying more octane than is expected. European and Californian cats are fed higher-quality, less variable feed, most of which has been pretreated upstream of the cat cracker in high pressure cat feed hydrotreaters and/or hydrocrackers, which greatly eases the load on cat gasoline desulphurisers; and their gasoline desulphurisers are better equipped to achieve deep desulphurisation with less octane loss compared to ours.
Underinvestment in Hydrotreating Capacity
When the Tier 3 standard was developed, it was estimated that 80 capital investment projects would be needed in the US at a cost of $3 billion for new high-pressure cat feed hydrotreaters, new desulphurisers, and/or upgrades of existing units to meet the Tier 3 requirements in the US Very little of that investment occurred, leaving our infrastructure in poor position compared to our European and Californian counterparts.

Without capital investment, octane lost in gasoline desulphurisers can be made up in other ways, but at a cost and to a limit. There are also ways to mitigate the octane loss with changes in the gasoline desulphurisers. Our work has proven out some mitigation and optimization steps that can be implemented quickly. The question is not whether the Tier 3 spec can be met, but rather with what impact on refining profitability.

What and when might be the impact on refining profitability? There will be winners and losers. Though it has not been a headline item, octane is a very profitable product for refiners today. Refiners who get blindsided by an unexpected octane sink could find themselves explaining the issue to shareholders next year.

EPA’s sulphur credit program allows refiners who underachieve to buy Tier 3 sulphur credits from others who over-achieve. But over-achieving on Tier 3 means booking an annual corporate average gasoline sulphur below 10 ppm, which is a feat that cannot be done by most US refiners today and cannot be done quickly by any. Tier 3 sulphur credits will be in tight supply. Buying them is likely to be a costly compliance strategy – their price has already quintupled since they started trading.

Time to move low sulfur gasoline to the front burner
Tier 3 low sulphur gasoline has been a back-burner issue for most refiners, having been overshadowed by other important issues, including the 2020 IMO LS bunker fuel regulations, Renewable Fuel Standards, changes in crude quality and availability; and, of course, worries about product demand and impacts on margins; however, with the Tier 3 deadline now approaching, it is certainly incumbent on refiners to make sure they are well positioned to meet those standards. Hoekstra Trading has done a significant amount of work in this arena, which is available in a series of three annual reports. These reports include hard data and analysis on gasoline desulphurisation technology, catalysts, regulations, octane supply/demand/price, sulphur credit supply/demand/price, an octane model, a desulphurisation model, and other data and tools needed to assist refiners in their ability to assess their readiness to make Tier 3 gasoline.


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