The Reformulated Gasoline Market Affected Refiners Differently
January 1, 1996
Introduction
The United States has completed its first summer driving season using reformulated gasoline (RFG). Motorists noticed price increases at the retail level, resulting from the increased cost to produce and deliver the product, as well as from the tight supply/demand balance during the summer. This article focuses on the costs of producing RFG as experienced by different types of refiners and on how these refiners fared this past summer, given the prices for RFG at the refinery gate.
RFG Regulatory Requirements
The use of RFG is a result of the Clean Air Act Amendments of 1990 (CAAA). The CAAA cover a wide range of programs aimed at improving air quality, including a program to reduce emissions from automobiles, through the use of (a) oxygenated fuels targeting carbon monoxide emissions and (b) RFG targeting ozone and toxic pollutants. Use of RFG was required in 9 areas rated as being in severe or extreme non-attainment. Other less severe areas were allowed to choose to be in (opt into) the program. The major areas using RFG this past year were in the Northeast, the Midwest (around Chicago and Milwaukee), and Southern California.
The RFG program is being implemented in two phases, each of which contains both prescriptive and performance standards. Industry preferred performance standards, where possible, to allow some flexibility in how companies could meet the standard. The two phases target different levels of emissions reduction.
As shown in Figure FE1, Phase I targets reducing hydrocarbon emissions by 15 percent during the high ozone season (summer), and reducing toxic emissions by 15 percent, or requiring fuel performance to meet the standards of a formula fuel, whichever produces the greatest reduction. In addition, Phase I requires that nitrogen oxides (NOx) not increase. Phase II has a more aggressive goal than Phase I, targeting 20 to 25 percent volatile organic compound (VOC) and toxic emission reductions. The non-performance or prescriptive requirements under both Phase I and II are shown in Figure FE2.
Phase I began in December of 1994 at the wholesale level of distribution, and was in place by January 1995 at the retail level. Within Phase I, there are two means of compliance: the simple model and the complex model. Currently, refiners are complying under what is called the "simple model,"? which EPA established at the end of 1991 to meet the requirements of the legislation. This "simple model"? formed the guidelines for refiners from data available at that time relating fuel parameters (oxygen content, Reid vapor pressure (RVP), benzene, aromatics) to emissions.
Other parameters such as sulfur, T90,3 and olefins were capped at a refiner's 1990 baseline level to keep from having these parameters undercut achievements in emissions reduction from parameters being controlled in the simple model. The simple model can be used by refiners until January 1998, when the "complex model"? must then be used to meet Phase I standards. (EPA issued the complex model performance standard early in 1994.)
Phase II begins in the year 2000. During Phase II, refiners will certify RFG according to the Phase II standards using the complex model.
This article concentrates on the economics of complying with the simple model under Phase I. Table FE1 shows the RFG compliance strategies under the simple model. Refiners were given a choice of meeting requirements on an individual barrel basis, or on an average basis. As shown in Table FE1, to comply with the VOC control requirements of the CAAA, oxygen content and RVP are controlled. The simple model formula for toxics emissions is a function of fuel benzene, fuel aromatics, RVP, type of oxygenate, and oxygen content.
In addition, the regulations stipulate that for conventional gasoline:
- benzene content cannot exceed the refinery's 1990 baseline level;
- sulfur, T90 and olefins must be capped at 1.25 times a refinery's 1990 level.
The intention of these requirements is to prevent "dumping"? undesirable products, such as benzene and aromatics that will be removed from RFG, into conventional gasoline.
With these guidelines, refiners determined what needed to be done to their refineries and/or crude charges to meet the specifications.With these guidelines, refiners determined what needed to be done to their refineries and/or crude charges to meet the specifications.