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Impact of Clean Fuels Regulations to the Refining and LPG Industries

Products Planning and Compliance Reporting. Impact of Clean Fuels Regulations to the Refining and LPG Industries. November 03, 2005 Patrick Troyer. Fuels Regulations & Product Supply Background. Background

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Impact of Clean Fuels Regulations to the Refining and LPG Industries

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  1. Products Planning and Compliance Reporting Impact of Clean Fuels Regulationsto theRefining and LPG Industries November 03, 2005 Patrick Troyer

  2. Fuels Regulations & Product SupplyBackground • Background • Fuels regulations to reduce emissions are not new. Gasoline and diesel have been changing since lead phase-out began back in 1982. • Gasoline and diesel fuels have been getting cleaner, which combined with engine modifications, have resulted in lower emissions per mile. • However, population and miles driven per individual have been increasing. • Hence, there are still many areas of the country that to not meet the National Ambient Air Quality Standards (NAAQS). • Therefore, the EPA has already enacted new fuels regulations, and is in the process of drafting additional fuels regulations. • At the same time states may switch to lower RVP gasoline in the summer as part of their State Implementation Plans (SIP) to meet the NAAQS. • Finally, the recently passed energy bill will have both an near term and long term impact on the gasoline market.

  3. Fuels Regulations • 1990 - Congress amends Clean Air Act (CAA) giving EPA power to enact & pass regulations • 1991 - 1992: Phase I and Phase II RVP controls • 1994 - EPA passed Reformulated Gasoline & Anti-Dumping rules - all refiners, importers, blenders required to register with EPA and establish 1990 baseline of gasoline properties • 1995 – non-compliant metropolitan areas required to begin using RFG • 1998 – Complex Model RFG Phase I • 2000 – Complex Model RFG Phase II • 2002 – Mobile Source Air Toxics (MSAT) - establish new 1998 – 2000 baseline • 2004 – Tier II Gasoline

  4. RVP Controls • Enacted in 1991 and 1992 to reduce Volatile Organic Compounds (VOC) • All summertime gasoline must be 9.0 RVP or less - Some areas further restricted to 7.8 RVP

  5. Reformulated Gasoline • Initial phase enacted under simple model limits • Benzene limited to 1.0 vol% • Additional RVP reduction • Oxygen mandate, introduction of MTBE in gasoline MTBE adds 3 octane numbers at 15%, only half way from regular to premium

  6. RFG Complex Model • Phase I introduced the complex model in 1998 • Input 8 gasoline properties and calculate emissions for Volatile Organic Compounds (VOC), Nitrous Oxides (NOX), Toxics • Refiners were required to reduce emissions from a 1990 baseline • VOC is mainly a function of RVP and distillation • Further reduces RVP but prevents distillation from getting too “heavy” • NOX is mainly a function of Sulfur and Olefin • Limits Cat Gasoline in blending • TOX is mainly a function of Benzene and Aromatics • Limits reformate in blending • Phase II was implemented in 2000 using the same model but more restrictive

  7. VOC Impacts • Improved the value of components with lower RVP and higher E200 • Raffinate value into RFG increases, Reformates moved into Conventional • Refiners with high sulfur and high olefin Cat Gasoline can not meet VOC because NOX limits amount of Cat Gasoline in the blend

  8. Mobile Source Air Toxics (MSAT) • Gasoline in 1998-2000 was in over-compliance with the RFG and Conventional (anti-dumping) toxics requirements • Actual RFG averaged 26.71% reduction vs. 21.5% required minimum • Actual Conventional averaged 94.64 mg/mi vs. 104.5 required maximum • The regulation creates an anti-backsliding program in anticipation of increasing Reformate production to make up the lost octane from MTBE • Initial impact is minimal but will further limit blending of aromatics • Adds additional value to Paraffinic components such as Raffinate & Alkylate

  9. Tier II Gasoline Sulfur • Tier II regulations will lower gasoline sulfur to a 30 ppm average over a 3 year period beginning in 2004 • Corporate sulfur pool averages in effect in 2004 and 2005 • Refinery sulfur pool average of 30 ppm begins in 2005 • Can be met using credits traded between refineries • Credits appear to be plentiful, making corporate pool sulfur limiting • To meet the 300 ppm sulfur per gallon limit in 2004 and 2005, refiners can choose to reduce the Cat Gasoline endpoint and delay investment • A majority of the sulfur in Cat Gasoline is in the last 10 % • Sour crude refiners will have to hydroprocess the feed to the FCC or the FCC gasoline • FCC feed treatment produces a higher quality feedstock and preserves octane, but has high capital costs • Many refiners choose to treat the FCC gasoline. Depending on the process of choice, the FCC gasoline can lose 1 to 5 or more octane numbers

  10. Future Fuel Regulations • Regulations • The Tier II low sulfur gasoline regulations will require sulfur to decline to 30 ppm in 2006 • Lack of MTBE liability protection and removal of the oxygen minimum for RFG as of May 5, 2006, along with State MTBE bans and conversion of MTBE units will impact production beginning in the spring of 2006 • The Renewable Fuel Standard (RFS) in the energy bill will require 7.5 billion gallons per year of ethanol (489 mbpd) by 2012 • The National Ambient Air Quality Standards (NAAQS) for ozone will result in lower summertime RVP for conventional gasoline in many areas beginning in 2007- 2009 • The Mobile Source Air Toxics II (MSAT) regulations will require benzene to decline to 0.6 vol% in 2010-2012 • Market Impact • The overall impact of these regulations will require the U.S. gasoline pool to have a lower summertime RVP and lower benzene content • Production declines due to the regulations will be more than offset by increased ethanol blending • Initially the pool may be octane, RVP and volume limited until MTBE units are converted and ethanol blending is implemented

  11. Future Fuel RegulationsTier II • Tier II Low Sulfur Gasoline • Requirements • 30 ppm average sulfur U.S. non CARB gasoline pool • Implementation • Refiners treating FCC gasoline and some LSR streams • Impact on pool (direct and secondary impacts to bring pool into balance on RVP and octane) • Less octane (octane loss due to olefin saturation of FCC gasoline) • Less volume (high sulfur components removed from pool) • Refiners more susceptible to gasoline supply disruption (issues with hydroprocessing equipment, sulfur plants, or hydrogen supply leads directly to lost production) • Lower Toxics (reduction in sulfur from 260 ppm in 2003 to 30 ppm in 2006, lowers toxics emissions by about 10%)

  12. Future Fuel RegulationsEnergy Bill • State MTBE Bans / Energy Bill Elimination of Oxygen Minimum in RFG • MTBE usage will decline • Ethanol will likely replace MTBE in RFG areas that currently have MTBE, even with elimination of the oxygen minimum • Loss of MTBE will leave RFG pool short octane and volume • Implementation • Timing varies by state for state bans • Energy bill calls for elimination of oxygen minimum immediately in CA and in 270 days (May 5, 2006) in the rest of the U.S. • Refiners will shutter or convert FCC MTBE units and Merchant MTBE plants to iso-octene/ iso-octane or alkylate production. • Impact on pool (direct and secondary impacts to handle iso-butylenes) • Lower RVP (RFG blend 1 psi lower prior to addition of ethanol) • All butane out of blending, have to remove C5s but lowers E200 which will make VOC limiting • Most likely refiners will add low RVP, full boiling range components • Less octane (low RVP components typically low octane) • Iso-octene and iso-octane will add octane and swell pool • Higher Toxics (iso-octene is an olefin and removing oxygen increases toxics emissions)

  13. Future Fuel RegulationsEnergy Bill

  14. Future Fuel RegulationsEnergy Bill • Renewable Fuel Standard (RFS) • Requirements • 7.5 billion gallon per year ethanol by 2012 • 307 mbpd increase by 2012 from current 2005 usage • Implementation • Refiners replace MTBE in RFG with ethanol • Blenders blend additional ethanol in 9.0 RVP conventional gasoline areas • Impact on pool (direct and secondary impacts to bring pool into balance on RVP and octane) • Higher RVP (1 psi RVP ethanol waiver applies in attainment areas, in non-attainment areas or RFG areas refiners will have to lower RVP of base gasoline to keep RVP constant) • More octane (octane increase due to ethanol ) • More volume (10% ethanol volume plus additional blendstocks to meet VOC limitations)

  15. Observations: Current – Ethanol in conventional, RFG, CARB and AZ makes up 27.8% of the pool 2006 (MTBE phaseout) – Ethanol replaces most MTBE in RFG now 41.7% of the pool contains ethanol 2012 – Ethanol is in 63.2% of the pool, all grades except some 7.8 and 7.0 RPV conventional Regulatory Impacts – U.S. Gasoline MarketEthanol Disposition – U.S. Gasoline Pool

  16. Future Fuel RegulationsRFS • U.S. Gasoline Pool • Current ethanol usage is 191 mbpd • 2006 requirement is 261 mbpd • Assuming ethanol replaces MTBE in RFG and other current usages remain constant, total ethanol usage will meet the RFS requirements in 2006 and 2007 • In 2008 – 2010 the RFS requirement can be met by blending ethanol in to the 9.0 RVP conventional pool and utilizing the 1 psi waiver • In 2011 and 2012+ some ethanol will need to be blended into the 7.8 or 7.0 conventional pool

  17. Future Fuel RegulationsNAAQS • Future Gasoline Regulations • National Ambient Air Quality Standards (NAAQS) • Requirements • States will have to develop State Implementation Plans (SIP’s) to meet new 8 hr ozone standard of 0.08 ppm • Anticipate states will shift from 9.0 RVP Conventional to 7.8 or 7.0 RVP Conventional • Up to 15% of U.S. gasoline pool could be impacted • Implementation • Timing varies by non-attainment region based on its classification • Most new areas have 5 years (2009) to comply, some must be in compliance by 2007 • Anticipate new fuel specifications in 2007 • Impact on pool (direct and indirect impacts on pool) • Lower RVP (lower RVP standard) • Less octane (octane decreases with C4’s leaving pool ) • Less volume (C4’s pushed out of gasoline pool in new non-attainment areas)

  18. Future Fuel RegulationsNAAQS • New non-attainment areas represent 15% of total U.S. gasoline consumption • (Areas marked in RED)

  19. Future Fuel RegulationsMSAT II • Mobile Source Air Toxics - MSAT II • Requirements • 0.60 vol % system wide benzene average with credit trading • Implementation • Notice of Proposed Rule Making scheduled for November, 2005 with Final Rule scheduled for July, 2006 with 2010 to 2012 implementation date • Refiners will have to pre-fractionate reformer feed to remove benzene precursors and also remove benzene from reformate by aromatics recovery and benzene saturation of reformate heart cut • Impact on pool • Higher RVP (benzene removal and pre-fractionation will raise gasoline pool RVP) • Lower octane (benzene removal lowers pool octane) • Less volume (loss of benzene volume and C5’s pushed out of gasoline pool to get RVP back down and octane up) • Lower Toxics (benzene is the primary toxic in gasoline) • Estimate 48 mbpd decrease in U.S. gasoline production For 2010 implementation, need to develop strategy in 2006 and start engineering in 2007, for proper project implementation.

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