“We Can Work it Out” – Most U.S. Refiners Likely to Find Ways to Avoid “Worst Case Scenarios” in Meeting Tier III Standards

By James W. Jones

Last week’s guest blog by George Hoekstra of Hoekstra Trading highlighted the potentially serious economic penalties associated with meeting Tier III gasoline sulfur standards with certain FCC naphtha post-treating technologies or units that are not being operated at their optimum points; however, Mr. Hoekstra’s article was primarily focused on his experience with his specific client base, which may not reflect the U.S. refining industry as a whole.  We, at Turner, Mason & Co. (TM&C), are constantly reminded that our own client base may not reflect the industry on average when it comes to operation, refinery configuration, capital investment, construction costs, project management styles, etc.  Like Mr. Hoekstra, the clients that come to us for help tend to be those with greater needs (i.e., problems) and limited staffs with which to address all of the various challenges facing our industry. Thus, our clients have the potential to be “outliers” relative to the industry as a whole, as do Mr. Hoekstra’s.  Further, there are a number of competing FCC naphtha post-treating technologies that range from single-stage systems to multi-stage systems and even nonhydroprocessing, adsorption approaches, all with varying degrees of selectivity when it comes to sulfur reduction and octane loss.  In today’s blog, we hearken back to the early days of the Beatles and analyze some of the factors that might allow much of the industry to “Work It Out” and to avoid the “Worst Case Scenarios” that Mr. Hoekstra identified last week.

“Try to See it My Way” – TM&C Client Experiences With Tier II/III Projects

With respect to FCC naphtha post-treating technology, our experiences have been somewhat different than those cited by Mr. Hoekstra. In our work with one client, they ended up choosing a less selective single-stage system for Tier II sulfur compliance with the understanding that they would later modify that unit to address future Tier III requirements. That modification would focus on a separate stage of desulfurization of the lightest, most olefinic portion of the FCC naphtha, which experiences the greatest octane loss in a single-stage system when operated for maximum sulfur removal (i.e., Tier III).  We found that particular client had a clear understanding from its licensor of the potentially large octane loss from a Tier III operation, along with a conceptual plan for altering the unit.  For another client, we conducted a technology review of the available post-treating technologies and their competing costs and benefits, including octane loss.  That client installed a more-selective, multi-stage post-treater for their Tier II compliance.  Two cases were evaluated at the time: 1) a primary Tier II case with their current FCC naphtha feed (700 ppm sulfur) and an alternative case that featured a FCC naphtha feed with 2,000 ppm sulfur since there was the potential for that refiner to occasionally process higher percentages of high sulfur crude oil.  As it turned out, the high sulfur FCC naphtha scenario required the same operating severity/degree of desulfurization that the primary case feed would need in meeting future Tier III standards.  During the start-up of this post-treater, in which TM&C participated, the unit operated for a few days at the Tier III severity and the octane loss experienced was very similar to that predicted by the licensor.  As a result, this client also had a very good grasp on its projected performance well in advance of its future Tier III compliance date.

“Think of What I’m Saying” – Many Refiners Not Impacted by “Worst Case” Challenges

As we alluded to earlier, a large percentage of refiners installed post-treaters for Tier II compliance. It was our belief at the time that 50% to 70% of those units employed more selective technologies, either multi-stage hydroprocessing or adsorption. Further, some refiners opted to install FCC feed desulfurizers to meet Tier II standards and retained the option to post-treat only the heaviest portion of their FCC naphtha, at very low octane loss, to meet future Tier III standards.  Finally, there are a few hydrocracking refineries that don’t produce any FCC naphtha. These refineries are in the best position for producing 10 ppm sulfur gasoline and will have very low, if any, Tier III compliance costs. Thus, we believe only 30% to 40% of the U. S. refining industry relied upon conventional hydrotreating or single stage, selective post-treating technologies to meet Tier II standards.  We also suspect many of these refiners had solid plans, many featuring new investment, for mitigating the potential octane loss associated with future Tier III sulfur reductions.  Of this segment of the industry, the refineries facing the most difficult Tier III challenges are those processing sour crude without the benefit of FCC feed hydrotreating.  Some of these refineries which were processing light sour crude oil five years ago may well have shifted to greater volumes of low sulfur, domestic shale crude oils.  This will lessen the impact of Tier III standards to their facilities by reducing the eventual increase in operating severity and subsequent octane loss at the post-treater.

A 2009 study sponsored by API predicted that the industry would spend approximately $10 billion for new investments to comply with expected Tier III rules lowering sulfur and RVP.  Most all of that amount was earmarked for revamps to existing FCC feed hydrotreaters and FCC naphtha post-treaters.  Annual compliance costs were estimated to be about $5 billion per year, but one-third of that value was investment amortization.  Half of the annual cost was related to the rejection of butane and light naphtha from the gasoline pool, primarily due to the anticipated RVP reductions that were never mandated.  Thus, the expected annual cost related to sulfur reduction, excluding investment, was on the order of $1.0 to $1.5 billion for the refining industry.  The study also indicated that the refineries hardest hit by Tier III (i.e., those supplying the most expensive increment of supply) would experience production costs on the order of four times the average cost of those refineries supplying 90% of the total domestic gasoline production. The expected cost for this group is consistent with the cost cited by Mr. Hoekstra’s, which we would characterize as a “worst case” scenario; however, we note that the API study would not have anticipated any benefits associated with the “shale revolution” that began several years after its release.

Another important factor in determining the impact of Tier III standards for individual refineries, and the industry as a whole, is the amount of FCC naphtha going into the overall gasoline pool.  On average, that volume typically equals 30% to 40% of the pool for summer grades, with the percentage in winter grades being somewhat lower.  Still, some refineries may have FCC naphtha in excess of 50% of their gasoline pool (i.e., heavy sour crude processors with no hydrocracking), whereas hydrocracking-only refineries would have none.  While the remainder of the gasoline pool may not be sulfur free, much of it is; for example, reformate is sulfur-free, as is alkylate from HF units.  While sulfuric acid alkylate will contain trace amounts of sulfur, it is typically under 5 ppm.  Ethanol may also have up to 5 ppm of sulfur, depending upon the volume and quality of the denaturant. Although light straight run naphtha contains sulfur, there is little octane penalty associated with hydrotreating this stream to zero sulfur, and we expect most all of it is being hydrotreated these days; therefore, in order to achieve a 7 ppm gasoline pool (the level typically needed for compliance and/or pipeline acceptance), the FCC post treater sulfur target will typically range from 15 to 25 ppm.  As Mr. Hoekstra’s octane loss curve clearly shows, the greatest octane loss occurs when a refinery needs to operate below 15 ppm at the post-treater.  Under the Tier II sulfur standard of 30 ppm, most post-treaters operated to achieve FCC naphtha sulfur anywhere from 50 to 75 ppm.  Mr. Hoekstra’s curve suggests the FCC naphtha RON would be between 89.0 and 89.5 for that operation.  To achieve 15 to 25 ppm, his curve indicates a further reduction in RON on the order of 1.0 to 1.5 numbers.  Given that FCC naphtha MON is not significantly lowered by post-treating, this suggests the R+M/2 octane penalty associated with Tier III, on average, will be no more than 1.0 numbers compared with Tier II.

“Only Time Will Tell if I am Right or I am Wrong” – It’s Complex and Many Factors Will Impact the Cost of Tier III Compliance

Finally, ascertaining the “cost” associated with a loss of octane can be quite complex and vary greatly by refinery.  This is especially true since the “value” of octane is something that moves with the market prices for gasoline and gasoline components. If one were to assume the octane loss at the FCC naphtha post-treater will lead to a reduction in premium gasoline sales at the retail level, the resulting financial “hit” could be quite large; however, if the loss in FCC naphtha octane could be offset by an increase in catalytic reformer severity, the resulting “cost” would be much lower.  There is even the possibility that a modest reduction to the R+M/2 of the FCC naphtha may not have a significant cost at all.  Given 80+% of the U.S. gasoline pool is 87 R+M/2 E10 fuel, refineries generally to produce a very low RVP summer grade BOB with an octane of 84 R+M/2 for subsequent ethanol addition.  Since the lowest octane gasoline component available in most refineries, light straight run naphtha, also has a relatively high RVP, its use in summer grade BOBs is limited.  Most other available gasoline blending components with low RVPs tend to have octanes well above 84 R+M/2.  As a result, many summer BOBs either give away octane or the refiner choses to directly blend some low octane, heavy naphtha into the 84 BOB pool; however, this stream has a significant alternative value as catalytic reformer feed. At these refineries, the reduced octane FCC naphtha will either lead to a reduction in this octane giveaway or free up reformer feed for greater production of high octane, premium gasoline components.

In conclusion, we believe the average “cost” of compliance of Tier III sulfur reductions will be reasonable and that the vast majority of refineries have implemented plans to mitigate their FCC naphtha RON loss; however, we note that in the future the “cost” of octane loss associated with Tier III standards and/or sub-optimum post-treater performance will rise as CAFE standards drive the industry toward higher octane fuels and a possible RON specification.  Either of these outcomes will increase the “value” of gasoline RON and thereby increase the “cost” of any RON reduction across the FCC naphtha post-treater.

TM&C constantly monitors changes and proposed changes in regulations which can impact all segments of the petroleum industry.   Many of these are associated with transportation fuels, affecting not only demand, but also production costs, compliance challenges, and other aspects of petroleum refining.  We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook (the 2018 Edition is scheduled to be released next week) and our various other studies. TM&C also assists clients involved in all aspects of transportation fuel production, blending activities, planning and compliance-monitoring. More information on these publications and our other work involving oil industry developments and dynamics can be obtained by visiting our website at turnermason.com or calling Cindy Parker at 214-754-0898.