Welcome to the Future – Part 3, With Tier 3 Costs Sky-High, U.S. Refiners Consider Investments, Alternatives
When the price of the Tier 3 sulfur credit hit a new high of $3,600 in October 2023, this tradable sulfur credit moved from the background to center stage in refining circles. That’s because the $3,600 price marked a 10-fold increase over 2 years and translated to a Tier 3 compliance cost of $3/barrel for refiners. Today’s blog is about investments refiners are considering to reduce that $3/barrel cost.
Read more blogs from this series: Welcome to the Future:
The Tier 3 sulfur credit system allows refiners to sell gasoline that exceeds the maximum sulfur specification of 10 parts-per-million (ppm) as an annual average for gasoline sold in the U.S. See Part 1 of this series for the full story on how that credit works and Part 2 for the full story on what’s behind its soaring price.
Tier 3 gasoline
Implemented in 2014 with initial phase-in beginning in 2017 and full implementation in 2020, the Tier 3 gasoline sulfur standard requires that all refiners and importers that deliver gasoline to the U.S. market must meet a 10-ppm maximum sulfur specification as an annual average, compared with 30 ppm under the previous Tier 2 specs. The tightening of that specification, from 30 ppm to 10 ppm sulfur, is the whole driving force behind the Tier 3 story.
But the story is really about two tightly coupled gasoline quality specifications: sulfur and octane. Many U.S. refineries are unable to desulfurize gasoline down to 10 ppm without also downgrading the octane of their gasoline pool. With Tier 3 now fully in place, the sulfur-octane connection has become a major new bottleneck for gasoline production in North America that is significantly reducing gasoline supply, increasing gasoline price, and affecting refining company profitability and stock prices.
Soaring octane value
Octane is the primary yardstick of gasoline quality and price. Fuel consumers who pay close attention to gasoline prices know that the retail price differential between premium gasoline (typically 93 octane) and regular gasoline (typically 87 octane) has increased from a long term historical value below $0.20/gallon to nearly $1.00/gallon today. That’s because octane demand has been steadily increasing while supply has been decreasing. For the full story on octane and the octane supply/demand picture, please see our RBN Energy series Breaking The Chains – Steady March Higher For Octane Prices Driven By Demand, Tighter Supplies
The FCC train
The Tier 3 octane/sulfur bottleneck is a crippling issue for some refineries and a non-issue for others. The difference lies in the makeup of a part of the refinery known as the “fluid catalytic cracking (FCC) train”. The best equipped refineries have a high-horsepower “cat feed hydrotreater” in front of the fluid catalytic cracker; and a low-horsepower gasoline desulfurizer behind the cracker. That 3-component train, feed hydrotreater, cracker, gasoline desulfurizer, allows a refinery to maximize Tier 3 gasoline production from a wide range of feedstocks with little or no octane loss.
The problem is that 40% of US refineries don’t have the high horsepower cat feed hydrotreater leading the train, and that is a huge competitive disadvantage compared to those that do.
Any refinery would like to feed low cost, heavy, high sulfur feeds to the FCC train and make high yields of 21st century specification fuels. The 3-component train does this. A good way to think of it is to consider the high horsepower cat feed hydrotreater as a machine that converts cheap, heavy high sulfur feed into more valuable heavy low sulfur feed for the cracker; then the cracker cracks that nicely prepared low sulfur feed to make high yields of low sulfur cracked fuel blendstocks, and the low-horsepower gasoline desulfurizer polishes the low sulfur cracked gasoline to meet the Tier 3 sulfur specification with little or no octane loss. That’s the way to make the gasoline of today. If all refineries without a cat feed hydrotreater would build one, there would be no Tier 3 bottleneck, and no $3/barrel extra cost.
Workarounds
But first we will address the question, how can a refinery without a cat feed hydrotreater compete in the Tier 3 world? There are many ways. Two obvious ways are 1) to restrict the use of low cost, heavy, high sulfur feeds to the FCC, and 2) to increase processing severity in the gasoline desulfurizer. Both options are being used today but they both reduce the production of on-spec gasoline and refinery profitability. Specifically, restricting use of low-cost feeds reduces the product-feed upgrade margin realized from cracking, which is the fundamental driver of refining profit; and more severe gasoline desulfurization destroys octane which also reduces gasoline production and profit. Those interested in more details on these Tier 3 technical challenges should see our previous Tier 3 blog posts, Breaking The Chains, Part 2 – Tier 3 Gasoline Mandate Tests Refiners, U.S. Octane Production and Breaking The Chains, Part 3 – Tier 3 Gasoline Specs Can Handcuff Production, But Refiners Have Options
A third alternative is to use sulfur credits by, for example, continuing to make 30 ppm sulfur gasoline with low octane loss and buying sulfur credits at a current price of $3/barrel.
A fourth alternative is to invest capital in the FCC process trains. Some refineries have proven the ability to reduce the Tier 3 penalty by as much as $25 million/year with small capital investments ranging from $25 million to $100 million by revamping, expanding, or building new gasoline desulfurizers using modernized technology, or by building extraction units that reduce octane destruction when desulfurizing cracked gasoline.
Build a cat feed hydrotreater?
Which brings us back to the cat feed hydrotreater. What would it cost to build a cat feed hydrotreater, and what would be the benefits? Hoekstra Trading has estimated a $300 million cat feed hydrotreater would give a benefit of $55 million per year for a refinery with a 55,000 barrel/day FCC unit. That benefit stems from exactly the capability described above, that is, the capability to make modern U.S. fuels from a variety of cheaper feedstock with little octane loss.
Another benefit of a full, three component train is the flexibility it provides to adjust production rates of different products in response to volatile market margins and crude price differentials. Figure 1 shows the annual average and standard deviation of U.S. gasoline margin as measured by the difference between the price of reformulated blendstock for oxygenate blending (RBOB) gasoline and West Texas Intermediate (WIT) crude oil over the last 10 years.
Figure 1 Annual average U.S. gasoline margin and standard deviation when making RBOB gasoline from WTI crude. Source: Barchart.com and Hoekstra Trading.com
The gasoline margin (blue) has doubled from $15/barrel to $30/barrel in the last 2 years and its volatility (orange) has doubled from a standard deviation of $5/barrel to $10/barrel. Refiners with flexible FCC trains can adjust operations to optimize cracked product yields and qualities to capture margin opportunities as margins vary, a capability not available to refineries handcuffed by the sulfur-octane bottleneck. Hoekstra Trading’s estimates show that this advantage can triple the payback from investments that provide flexibility in volatile markets like those of the last 2 years.
Turning the refinery on its head
Some refiners are evaluating a new gasoline formulation technology called Hydrogen Rich Content (HRC) gasoline which turns gasoline manufacture on its head by using only hydrogen-rich refinery blend stocks in gasoline formulation.
Initial steps in commercializing this technology were mentioned in Part 2 of this series. If current commercial trials are successful, the next step would be phased capital investments leading to a radical transformation in the gasoline production pathway that would completely eliminate use of expensive gasoline blendstocks like reformate and low sulfur FCC naphtha, which are today the primary sources of octane in gasoline, replacing them with cheap, hydrogen rich blendstocks with octane boosted by ethanol. A full transition would involve capital investment in a new C7-isomerization unit, an expanded gasoline desulfurizer, shutdown of catalytic reformers, and provision of an alternative source of hydrogen. In addition to meeting all 21st Century gasoline specifications at lower cost, the approach brings new environmental benefits at the refinery and in tailpipe emissions.
Making the clean fuels of the future
The idea of investing capital in more efficient production of petroleum gasoline is unpopular in an environment where strong forces are aligned against petroleum fuels, to the extent of legislating them out of existence. But there is also growing concern about the impact of shrinking refining capacity on the supply and price of gasoline, and talk about possibly building more refining capacity in the U.S. The term “refining capacity” is usually interpreted to mean new refineries, and/or capacity to process more barrels per day of crude. The investments covered here use a different, faster, lower-cost approach, which is to increase production of 21st Century fuels by modernizing existing refineries equipped to produce the fuels of the past.
Recommendation
Every refining executive should have a comprehensive understanding of the technical, regulatory, and economic aspects of Tier 3 gasoline, the sulfur credit program and how they affect your business. Those wanting a quick education on the Tier 3 issue should get the short book, Gasoline Desulfurization for Tier 3 Compliance, which will make you an industry expert in a day. Once you have become expertly informed of the problem, you can save your team years of redundant work by buying Hoekstra Research Report 8. We are the ones who saw this situation coming, did the research and field tests, ran the simulations and analyzed the results so you and your team can take immediate steps to increase gasoline margin capture in the Tier 3 world. The report includes detailed pilot plant and commercial field test data, full detail of sulfur credit pricing, spreadsheet models to help improve gasoline optimization, sulfur credit strategy and refining margin capture in the Tier 3 world.
Don’t get caught panic buying after the credits spike.
George Hoekstra
+1 630 330-8159
