Baker & O’Brien, Inc. All rights reserved.
Changes to America’s Gasoline Pool
Gary Devenish
September 30, 2016
2
Legal Notice
Baker & O’Brien, Inc., (Baker & O’Brien) prepared this report for the Argus Condensate and Naphtha Markets conference. The opinions and findings in this report are based upon Baker & O’Brien’s experience, expertise, skill, research, analysis, and related work to date. This report relies upon public and proprietary data available to Baker & O’Brien at the time this report was prepared. All forecasts and projections contained in this presentation represent Baker & O’Brien’s best judgment, utilizing its skill, and expertise. However, such forecasts and projections are inherently uncertain due to the potential impact of factors or future events that are unforeseeable at this time or beyond Baker & O’Brien’s control. Baker & O’Brien prepared this report for the sole benefit of this Argus Condensate and Naphtha Markets conference. Any reproduction, distribution, or disclosure of this information is strictly prohibited without Baker & O’Brien’s prior written authorization. Baker & O’Brien expressly disclaims all liability for the use, disclosure, reproduction, or distribution of this information by or to any third party.
3
Baker & O’Brien: Independent Energy Consultants
Capital Project Services
Operations Support
Commercial Analyses
Mergers and Acquisitions
Dispute Resolution
Overview – Independently owned and managed
– Technical and commercial expertise
– Active over full life cycle of assets: new project development -> business support -> commercial disputes
Consulting Staff – Chemical, Mechanical, and
Electrical Engineers
– Consultants average over 25 years industry experience
– Experienced problem solvers This material is for information only and carries no expressed or implied warranty
4
• Gasoline Pool Component Review
• Light Naphtha Surplus
• Octane Demand and Challenges
Discussion Points
5
Definitions for this Presentation
Naphtha – Generic term for light volatile petroleum liquid or low octane gasoline
Natural Gasoline – Heaviest liquid stream from a gas plant, maybe called condensate composed of C5 and heavier
Condensate – Generic term for light raw petroleum that “condensed” from gas Ranges in quality from natural gasoline to light crude oil Usually meets pipeline vapor pressure specs of 11-12 psi
Light Naphtha (Light Straight Run – LSR) Mainly C5 (pentanes) and C6 (hexanes) RVP between 12 and 20 psi
Heavy Naphtha Best suited for reformers, C6-C7-C8
Full Range Naphtha
6
• Gasoline Pool Components
•
•
Discussion Points
7
• Crude oil naphtha quality
• Existence of isomerization unit
• Reformer size and severity
• FCC size, conversion level
• FCC naphtha hydrotreating severity
• Alkylation unit size, feed quality
• Hydrocracker naphtha quality (RON, N+A)
• RVP constraints (seasonality)
Refiner Blending Capability Drivers and Considerations
• Direct blending, reformer yields
• Ability to upgrade LSR streams
• Octane needs, economics
• Base Gasoline Pool Stock
• Sulfur, octane loss
• Pool octane, C3/C4 balance
• Direct blending, reformer yields
• Light component (nC4, LSR) blending
Considerations Driver
8
Gasoline Pool Components: Large Volume Base Presents Both Challenges and Opportunities to Absorb Changes
Source: PRISM™ is a trademark of Baker & O’Brien, Inc. All rights reserved.
Reformate 33%
FCC Naphtha
28%
Alkylate 13%
Ethanol 10%
Isomerate 5%
Other 11%
Gasoline Composition 2015 - 2016 YTD
9
•
• Light Naphtha Surplus
•
Discussion Points
10
Total Crude Oil and Light Naphtha Production: Rapid Growth Followed by Modest Declines
Source: EIA and Baker & O’Brien Analysis
U.S. Crude Oil Production Growth
11
Crude Exports: Minimal Impact (so far)
Source: EIA and Baker & O’Brien Analysis
Change in Domestic Crude Oil Production since 2010
Crude Exports
Export Ban
Lifted
12
• About 600,000 B/D of distillation capacity will come on line by 2017.
• About 80,000 to 100,000 B/D is Light Naphtha.
U.S. Light Tight Oil Distillation Capacity Growth
Source: Company Announcements, Baker & O’Brien Analysis
13
Naphtha Content Range of Light Crude Oils
Sample Yields from Crude Oils
Source: PRISM
Average LSR + Nap = 24% Average LSR + Nap = 37%
14
The Challenge of Light Ends: “New” Crudes Produce More Low Value Streams
Relative Economic Value of Condensate Splitter Intermediate Products
Source: Argus and Baker & O’Brien Analysis
Lower Values
15
Light Naphtha Consumers: Gasoline Pool Dominates Accounting for Over 75% of Disposition
Driving forces for Light Naphtha: Gasoline, Exports, Olefins
~ 2 MMB/D
Source: PRISM and Baker & O’Brien estimates
16
Light Naphtha Consumers
Driving forces for Light Naphtha: Gasoline Blending
Source: PRISM and Baker & O’Brien estimates
17
Light Naphtha Consumers – Gasoline: Demand Remains Strong
• Vehicle miles travelled remains at record levels in 2016
Source: U.S. Federal Highway Administration
18
• Record gasoline production continued into 2016
Source: EIA and Baker &O’Brien Analysis
Light Naphtha Consumers – Gasoline: Record Production
19
Light Naphtha Consumers
Driving forces for Light Naphtha: Diluent Exports
~ 2 MMB/D
Source: PRISM and Baker & O’Brien estimates
20
• Pentanes Plus Exports to Canada
Source: EIA, Statistics Canada
Light Naphtha Consumers - Diluent
Condensate Exports
Canadian Production
21
Light Naphtha Consumers
Driving forces for Light Naphtha: Olefins
~ 2 MMB/D
Source: PRISM and Baker & O’Brien estimates
22
Alternative Value – Cracker Feedstock: Competing against NGLs
Source: Argus and Baker & O’Brien Analysis
23
Light Naphtha Surplus Continues to Drive Down Values
Source: Argus and Baker & O’Brien Analysis
• Declining relative value, increasing seasonal swings
24
Light Naphtha - Summary
• With the drop in shale-oil production, light naphtha volumes may have “peaked,” but remain at historically high levels
• Strong gasoline demand has provided the primary “home” for light naphtha
– Alternative markets (i.e., diluent and olefins) provide some relief but are likely to continue to have minimal impact
• Generally declining value versus gasoline, with large seasonal swings, appear likely to continue in the near future
– Should inventories continue to climb (and prices fall), exports into foreign markets may increase
25
•
•
• Octane Demand and Challenges
Discussion Points
26
Octane Demand: Increasing Sales of Premium Gasoline
• Premium sales increasing (new engine requirements, low prices)
Source: EIA and Baker & O’Brien Analysis
Octane Spread % Premium Sales
27
Octane Demand: Impact of Tier 3
• Tier 3 limits gasoline sulfur to no more than 10 ppm sulfur on an annual average
• Octane Loss is a side-effect of FCC Gasoline Sulfur-removal processes
• Refiners and blenders may have to reject higher-sulfur components from the gasoline pool
• Full impact may not be felt for several years: – Small Refiner (38 Total) Exemption until 2020 – Volumes produced prior to 2017 that are below 30 ppm generate credits (five year lives)
that are valid until December 31, 2019 – Banking and Trading (ABT) of Credits will allow refiners to delay investment
2015 Average Sulfur = 25 ppm 650 Billion credits in 2015 Small Refiners can generate <30 ppm credits until 2020
Source: EPA and Baker & O’Brien
28
Octane Properties for Blending Streams and Pure Components
Description
RON
MON
High
Aromatics?
Comments
Butane 94 89 High RVP – limited during Summer
Isomerate 90 80 Potential RVP issues
Reformate (full-range) 90-100 82-88 Large RON/MON Spread
Light Reformate 90 83 Ex. Toluene, Benzene
Heavy Reformate 95 82
Toluene - Pure 121 107 Higher value in petrochemical market
Xylenes/Ethylbenzene 111-117 98-115 Higher value in petrochemical market
FCC Naphtha (full-range) 93 80 Main Gasoline component
Light Fraction 95 82
Heartcut Fraction 91 80
Heavy Fraction 93 81
Alkylate (from butylene) 95 91
2,2,4 Trimethylpentane 100 100
Ethanol 109 90 Current practical blend wall of 10 vol%
MTBE 115 98 Banned in U.S.
29
Octane Blending Components: Reformate
Description
RON
MON
High
Aromatics?
Comments
Butane 94 89 High RVP – limited during Summer
Isomerate 90 80 Potential RVP issues
Reformate (full-range) 90-100 82-88 Large RON/MON Spread
Light Reformate 90 83 Ex. Toluene, Benzene
Heavy Reformate 95 82
Toluene - Pure 121 107 Higher value in petrochemical market
Xylenes/Ethylbenzene 111-117 98-115 Higher value in petrochemical market
FCC Naphtha (full-range) 93 80 Main Gasoline component
Light Fraction 95 82
Heartcut Fraction 91 80
Heavy Fraction 93 81
Alkylate (from butylene) 95 91
2,2,4 Trimethylpentane 100 100
Ethanol 109 90 Current practical blend wall of 10 vol%
MTBE 115 98 Banned in U.S.
30
Increased Octane Contributions by Reformers
Source: PRISM
31
Octane Contributions by Reformers: High Reformer Margins
Source: Argus and PRISM
Reformer Margin
Naphtha/PUL, %
32
Octane Hierarchy for Blending Streams and Pure Components
Description
RON
MON
High
Aromatics?
Comments
Butane 94 89 High RVP – limited during Summer
Isomerate 90 80 Potential RVP issues
Reformate (full-range) 90-100 82-88 Large RON/MON Spread
Light Reformate 90 83 Ex. Toluene, Benzene
Heavy Reformate 95 82
Toluene - Pure 121 107 Higher value in petrochemical market
Xylenes/Ethylbenzene 111-117 98-115 Higher value in petrochemical market
FCC Naphtha (full-range) 93 80 Main Gasoline component
Light Fraction 95 82
Heartcut Fraction 91 80
Heavy Fraction 93 81
Alkylate (from butylene) 95 91
2,2,4 Trimethylpentane 100 100
Ethanol 109 90 Current practical blend wall of 10 vol%
MTBE 115 98 Banned in U.S.
33
Octane Contributions - Alkylation
Source: Argus and PRISM
iC4/RUL, % Alkylation Margin
34
Octane Hierarchy for Blending Streams and Pure Components
Description
RON
MON
High
Aromatics?
Comments
Butane 94 89 High RVP – limited during Summer
Isomerate 90 80 Potential RVP issues
Reformate (full-range) 90-100 82-88 Large RON/MON Spread
Light Reformate 90 83 Ex. Toluene, Benzene
Heavy Reformate 95 82
Toluene - Pure 121 107 Higher value in petrochemical market
Xylenes/Ethylbenzene 111-117 98-115 Higher value in petrochemical market
FCC Naphtha (full-range) 93 80 Main Gasoline component
Light Fraction 95 82
Heartcut Fraction 91 80
Heavy Fraction 93 81
Alkylate (from butylene) 95 91
2,2,4 Trimethylpentane 100 100
Ethanol 109 90 Current practical blend wall of 10 vol%
MTBE 115 98 Banned in U.S.
35
• Some petrochemical feedstocks/components may have more value in the gasoline pool due to high Octane, low RVP.
Source: Argus and Baker &O’Brien Analysis
Octane Sources - Aromatics
36
Refiners’ Responses to Increasing Octane Demand
• Naphtha Reforming – increasing utilization, severity – Significant tailwinds for Reformer margins
Presence of low-octane light naphtha
Increasing Premium gasoline demand
Low crude prices = low volume loss impact.
• Alkylation units - maximum throughput, capacity addition
• Future changes Full impact of Tier 3 Regulations may not be felt for several years
Rejection of low octane and/or high sulfur components Naphtha, LSR sales
Further optimization of Reformer Feeds
Add more aromatics to gasoline vs. petrochemical market
Increased Ethanol blending??
37
Conclusions
• Production of domestic crude with high LSR content has created large discounts for light components
– Even though production has declined, market will likely remain “long” LSR
• Demand for premium, high-octane gasoline has been increasing and may continue to do so given changes to CAFE standards and the response of automakers
– Oil price is a wildcard – higher prices may temper premium demand, decrease Reformer incentives
– Alkylation remains attractive due to steep nC4/gasoline discounts
• Tier 3 (Low Sulfur) Regulations in effect starting January 1,2017 – Availability of generated credits and small refinery status may ease compliance
requirements and delay full impact for several years
– Ultimately will have pay to more attention to light naphtha and natural gasoline streams
– Directionally, more sulfur removal in a refinery equals octane loss
38
Baker & O’Brien – Independent Energy Consultants
www.bakerobrien.com
Dallas
12001 N. Central Expressway Suite 1200
Dallas, TX 75243 Phone: 1-214-368-7626
Fax: 1-214-368-0190
Houston
1333 West Loop South Suite 1350
Houston, TX 77027 Phone: 1-832-358-1453
Fax: 1-832-358-1498
London
146 Fleet Street Suite 2
London EC4A 2BU Phone: 44-20-7373-0925