Apr-2014

Gasoline production in the age of shale oil, renewable fuel mandates, and tier 3 regulations

The North American shale oil production surge has provided North American refiners with a seemingly bounty of high quality crudes.

Eric Ye, DuPont Sustainable Solutions
Terry Higgins, Hart Energy Consulting

Article Summary

However, this rise in the light sweet crude supply has resulted in a number challenges for refiners particularly with respect to light ends and gasoline production. Domestic gasoline consumption has declined from its peak in 2007 and due to CAFÉ standards is projected to decline. Expanded use of biofuel will further reduce demand for refinery-produced gasoline. However, this new increasing supply of opportunistic crudes and associated natural gas liquids (NGLs) favours increased gasoline production. While increasing exports and declining imports have offset the decline in demand, refiners need to revisit the components of their gasoline pool to not only adjust to changing gasoline demand volumes, but in a way that accommodates increasingly stringent domestic and export (Tier 3 gasoline and Euro V/VI) specifications.

In this new environment, individual gasoline components will take on new roles with respect to blending strategies and economics. Unit operations such as traditional high volume FCCs and Catalytic Reformer streams are becoming less attractive as marginal contributors to the gasoline pool while high margin light products such as alkylate are becoming increasingly attractive.

This paper will examine the supply, demand and economic impacts of the increasing supply of light sweet crude and natural gas liquids, biofuel mandates, and regulations will have on a North American refiner’s gasoline production. Yield, gasoline blending operations and economic analysis will be reviewed and market projections for the future of the gasoline market will be discussed.

Introduction
The unprecedented success of the hydraulic fracturing of North America’s tight oil and gas reserves has resulted in a surge in production of light sweet crude, natural gas, and natural gas liquids. While this increase in high quality crude and light hydrocarbons has boosted the fortunes of the North American refining industry, these burgeoning supplies of crude oil and natural gas liquids have escalated an increasingly challenging dilemma: how to adjust operations to accommodate a source of crude and light hydrocarbon products that favour the production of gasoline, a product market that, in North America, is on the decline.

Once the most desirable and profitable refinery product, the economic attractiveness of producing gasoline has been negatively affected by the surge in light sweet crude and heavy natural gas liquids due to their higher yields of naphtha and other light ends such as butane, products that have few domestic markets other than gasoline blending. This increase in the supply of gasoline blendstocks has coincided with a stagnating gasoline market in North America. The resulting domestic surplus of gasoline has been reflected in increasingly narrower margins for the production of gasoline.

A few years ago, the U.S. was a net importer of over 500 thousand b/d of gasoline. Today, with tepid domestic gasoline demand and increasing supply, the U.S. net imports have fallen to below 100 thousand b/d and the U.S. is projected to be a net gasoline exporter in 2014. While growing export markets, particularly those in the logistically advantaged Latin American region, have provided a ready market for this surplus of gasoline, planned refinery projects in this region, many of which are in various stages of completion, are projected to supply a greater portion of internal demand in the longer term.

While the economic recovery has resulted in a modest increase in North American gasoline demand, in the long term, gasoline demand in the U.S. is forecasted to decline due to a number of market factors including increasing vehicle efficiency and changes in U.S. population demographics. In addition, increasingly restrictive regulatory requirements such as Tier 3 regulations have increased gasoline production cost.

This market imbalance has been further aggravated due to the declining use of naphtha and butane in the production of ethylene. The surging supply of natural gas liquids has flooded the U.S. market with cheap ethane, which currently sells at near fuel value. As a result, many ethylene crackers that formally used naphtha or butane have switched to cheaper ethane as feedstock, reducing the petrochemical demand for naphtha and butanes, an action which adds additional light gasoline blendstocks to an already oversupplied market.

Barring a significant easing of the restrictions on exporting U.S. crude oil, domestically produced light sweet crude will comprise a growing share of the U.S. crude supply and will continue to sell at attractive discounts to similar quality imported crudes. Production of natural gas and natural gas liquids will likewise grow, holding the value of these streams below parity with gasoline. Even though natural gas liquids and naphtha are not subject to export restrictions, logistic and shipping costs to get these materials to viable international markets will drive down netback values and leaving these streams as potentially attractive feedstocks and blend components for U.S. refiners/blenders.

While domestic gasoline demand in U.S. is forecasted to steadily decline, it still is and will remain for the foreseeable future, the largest refined product market in North America. In this ever shifting market environment, North American refiners need to properly allocate their limited resources to accommodate this shift in crude supply and leverage their ability to maximise their return through effective utilisation of discounted feedstocks. At the same time, the refiner needs to ensure that these actions will not only allow them to complying with more restrictive regulations, but will provide the flexibility to adjust to potential changes in these regulations and market demand.

If not already in progress, refiners should examine the current and potential margin contribution of each of the blendstocks that comprise their gasoline pool. While the absolute values of these blendstocks will vary, in general, formally desired components such as FCC Naphtha and Catalytic Reformate will need to be displaced to accommodate the declining gasoline pool volume. As such strategies to minimise their production or find alternative outlets for these streams need to be considered. On the other hand, the gasoline pool offers discounted components such as Straight Run Naphtha (SRN), butanes and alkylate a higher value product disposition than chemical feedstock or fuel markets.

Fracking and the Surge in Unconventional Oil and Natural Gas Liquids Production
The success of the U.S. shale and tight rock fracking phenomenon has unleashed a literal tsunami of hydrocarbons that has reshaped the natural gas and petroleum industry in way that was unimagined only few years ago.