LCFS - A Refiner s View from Afar

Transcription

1 LCFS - A Refiner s View from Afar OPIS 4 th Annual LCFS Workshop December 10, 2015 San Francisco, CA Thomas Hogan, P.E. Senior Vice President

2 Turner Mason & Company International consulting practice since 1971 Downstream focus; refinery/chemical engineers Provides engineering and management consulting services to clients in the downstream segment of the oil industry Publish a variety of Outlook and multi-client subscription reports Assist clients in fuels compliance, including renewable fuels Areas of expertise relevant to this topic include: Fuels Regulations and Compliance Supply/Demand/Pricing forecast in semi-annual Crude and Refined Product Outlook 2

3 Agenda Overview of the Refining Industry The LCFS Program LCFS Compliance Compliance Challenges What Does the Future Hold? 3

4 U.S. Refining Overview U.S. refining system largest in the world Divided into five geographic regions: PADD IV 12 Refineries* 0.6 Million BPD PADD II 25 Refineries* 3.8 Million BPD U.S. Total 111 Refineries* 17.5 Million BPD PADD V 23 Refineries* 2.8 Million BPD PADD I 7 Refineries* 1.3 Million BPD California Represents the Majority of PADD V Refining Capacity (1.9 Million BPD) PADD III 44 Refineries* 9.1 Million BPD Data from EIA *Refineries 20 MBPD or greater 4

5 West Coast Refining California has three distinct refining regions San Francisco/Bay Area Central California Los Angeles Area Washington State has four major refineries in the north Total capacity 590 Thousand BPD Supply WA, OR and BC Washington: 5 Refineries 590 Thousand BPD California: 12 Refineries 1.9 Million BPD San Francisco: 5 Refineries 5 Bakersfield: 1 Refinery Los Angeles: 6 Refineries

6 Refining Complexity Refineries vary by complexity More complex refiners have additional processing units and increased processing capabilities This allows for more complete processing of crude oil, including heavy crudes, into clean products California refiners are more complex on average than typical U.S. or global refineries Total Cat Hydro- Upgrading Cracking Coking cracking U.S. 56% 31% 15% 11% PADD 5 66% 29% 18% 19% California 81% 35% 23% 23% Asia 19% 13% 3% 6% Europe 26% 14% 3% 9% World 28% 16% 5% 7% Simple Light Crude Refinery A 6 V Complex Heavy Crude Refinery A V

7 The Importance of Pipelines West Coast lacks integrated product pipeline network that is prevalent in rest of U.S. Geography and policy have isolated the region This has had important implications for the region No Connections to Outside States Major U.S. Product Pipelines 7

8 Supply and Demand Fuel Production (MBPD) California demand has remained relatively flat over last decade Gasoline/diesel ratio one of the highest in the country LCFS burden falls harder on consumers; diesel is a predominantly commercial fuel YTD Refinery Capacity CARB Gasoline CARB Diesel 8 Refinery Capacity (MBPD) Gasoline/Diesel Ratio FL CA MA U.S. Avg. TX PA LA AK ND

9 Agenda Overview of the Refining Industry The LCFS Program LCFS Compliance Compliance Challenges What Does the Future Hold? 9

10 LCFS Program A Refiner s View Objectives of program from a refiner s view Reduce petroleum product use in California transportation fuels Program designed to reduce carbon intensity in transportation fuels used in California The purpose of this regulation is to implement a low carbon fuel standard, which will reduce the full fuelcycle, carbon intensity of the transportation pool used in California Progressive reduction of the average carbon intensity of fuels relative to baseline 10

11 LCFS Program Scope LCFS regulations apply to all producers or importers of on road transportation fuels, or Downstream parties who have accepted the obligation from others up stream 11

12 LCFS Program Design Petroleum producers and importers transfer funds to alternative energy providers based on a credit/deficit system Petroleum supply generates deficits Alternative fuels generally generate credits Credits/deficits are based on the gco 2 e emissions calculated for the fuel Increasingly tighter targets will incentivize increasing volumes of lower carbon intensity fuels into the market 12

13 Fuels Subject to Regulation Any Other Liquid or Non-liquid Transportation Fuel Electricity Battery and Partialhybrid vehicles, Electric Rail Gasoline CARB Gasoline Ethanol (and blends) LCFS Hydrogen Compressed/Liquid H 2 Fuel Blends Containing Hydrogen Diesel CARB Diesel Biodiesel (and blends) Natural Gas Fossil-based and Bio-based CNG/LNG 13 13

14 Credit Balancing Act Deficit Sources Refineries Supplying CARB Gasoline and Diesel Credit Sources Low Complexity/Low Energy Refineries (For Own Use Only) Refinery Emission Reductions (For Own Use Only) Electric Forklifts Innovative Crude Oil Production Hydrogen Imported Petroleum Gasoline and Diesel Electricity Used for Transportation Methane Gas (CNG/LNG) from Bio Sources Renewable Diesel Biodiesel Some Forms of Ethanol 14

15 Average Carbon Intensity Average intensity targets have been revised twice since the program began, once in 2012 and again in 2016 Result has been delay in reductions, with sharper reductions in later years for gasoline Targets frozen at 2013 level for 2014 & 2015 by court order Carbon Intensity (gco2e/mj) Gasoline (or substitutes) Diesel (or substitutes) Initial Revised Latest (2016) 15

16 Selected Carbon Intensities Over time, regulated parties will be required to incorporate increasing volumes of low carbon fuels, or purchase credits in order to comply with target average CI CI (gco2e/mj) *CI reported is effective CI after accounting for EER adjustment factors

17 Agenda Overview of the Refining Industry The LCFS Program LCFS Compliance Compliance Challenges What Does the Future Hold? 17

18 Deficit Calculation The deficits are based on the difference between the petroleum component of gasoline and diesel and the declining mandate The difference between petroleum gasoline and diesel and the targets in 2013, 0.99 and 0.98 respectively, grow to 9.85 and in 2020 Although the CI only declined 10%, the projected deficit in 2020 is over 6 times more than the projected deficit in

19 LCFS, Actual and Projected Deficits, CO 2 e 25,000 20,000 Fixed Petroleum Demand Thousand Metric Tons 15,000 10,000 Actual Projected 5,000 Reduced Petroleum Demand, sugarcane ethanol and biodiesel used to reduce CI

20 Additional Sugarcane Ethanol & Biodiesel In my example, the gasoline CI reductions were attained by using sugarcane ethanol and the diesel CI reductions were obtained by using biodiesel In 2020, about 349,000 barrels per day (about 5.4 billion gallons, ethanol content of about 34% in the 2020 gasoline pool) of sugarcane ethanol would be required to reduce the CI of the petroleum gasoline consumption In 2020, about 59,000 barrels per day (about 1 billion gallons, about 24% of the diesel pool) of biodiesel would be necessary to reduce the CI of the petroleum diesel consumption Current renewable fuel component of the U.S. transportation pool for ethanol and biodiesel in gasoline and diesel is about 10% and 3-5% respectively 20

21 Energy Replacement Implications The alternative energy replacement choice will have an impact on how much the petroleum portion will decrease For instance, the two choices for gasoline and diesel replacements to reduce the CI of the pool had CIs in the mid 50s while the petroleum CIs are set by the legislation at around 100 gco 2 e/mj The lower the CI of the alternative fuel, the less the reduction in the petroleum portion 21

22 Gasoline Balance (Constant Energy Basis, All Sugarcane Ethanol) Consumption, Thousand BPD % 35% 30% 25% 20% 15% 10% 5% % Renewables in Pool Petroleum Gasoline Ethanol Percentage 0% 22

23 Diesel Balance (Constant Energy Basis) % Consumption, Thousand BPD % 15% 10% 5% % Renewables in Pool Petroleum Diesel Biodiesel Percentage 0% 23

24 Use of E85 to Balance Deficits Thousand BPD Most Gasoline today blended with corn ethanol Transition to lower CI sugarcane ethanol will be required to meet targets 2016 CA requirement would require 54,000 BPD of sugarcane ethanol, currently total CA ethanol imports peaked at 8,000 BPD in 2013 (7,000 from Brazil) and averaged <1,000 BPD in 2014 and By 2020, CA would need to import >75% of Brazil s ethanol production Assumptions: - Constant Energy Basis 950,000 BPD E10 Gasoline - Existing E10 is blended with Corn Ethanol (10 vol% Ethanol) - E85 is blended with Sugarcane Ethanol (70 vol% Ethanol) E10 (Corn Ethanol) E85 (Sugarcane Ethanol) Sugarcane Ethanol Corn Ethanol

25 E85 Challenges At end of 2014, California had 23.8 million registered automobiles* As of 2010, about 400,000 flex fuel vehicles exist in CA (1.5%) CA Energy Commission projects 4.2 million by 2020 Assuming constant vehicle numbers, that will be <18% of all vehicles To balance credits, 452,000 BPD of sugarcane E85 must be sold >40% of gasoline pool in 2020 In 2012, CA E85 sales averaged 334 BPD; a 135,000% increase is required Major rollout of E85 across state, coupled with pricing correlated at or below energy content basis to gasoline will be required *Excludes commercial vehicles, motorcycles, etc E85 Stations in California (~10,000 total stations in 2012) 2686 E85 Stations Across U.S. (~150,000 total stations in 2012)

26 Why LCFS Deficits Grow So Quickly The LCFS targets for 2013 through 2015 were frozen at 2013 levels Based on the 2013 version of the regulation, the deficits for 2014 and 2015 would have been as shown below Original Target gco 2 e/mj Deficit Thousand MT CO 2 e Gasoline Diesel Calculated Recorded ,400 2, ,500 2, (estimated) ,600 2,580 Raw Petroleum

27 Why LCFS Deficits Grow So Quickly The deficits would already have grown significantly if the 2015 target had not been frozen at the 2013 level The new LCFS targets are essentially the continuation of the original reduction schedule with 2016 treated as if the reductions had been occurring all along These assumptions create the classic hockey stick curve in the previous graph 27

28 Current Credits and Deficits Under the current targets, there still exists a surplus of credits In part due to ability to generate credits by blending 10% Corn Ethanol into gasoline As CI targets fall in future years, this will no longer be possible and these surplus credits will be rapidly depleted Figure from 2015 Q2 LCFS Reporting Tool Quarterly Data Summary 28

29 Impact of LCFS on Clean Product Price Deficit (2016 regulations) Thousands of Metric Tons Impact in Cents per Gallon on Petroleum Portion of G+D Fixed Petroleum Reduced Petroleum $100/MT $200/MT ,365 2, ,425 2, ,580 2, ,222 5, ,350 8, ,462 10, ,680 14, ,883 17,

30 Agenda Overview of the Refining Industry The LCFS Program LCFS Compliance Compliance Challenges What Does the Future Hold? 30

31 Compliance Pathways In order to meet credit levels, substantial alternate conversions will need to take place Electric Cars Natural Gas, especially captured biogas, substitutions Fuel cell vehicles Turnover of motor vehicle fleet is slow versus this program s 2020 target for a 10% CI reduction This will ultimately drive up the cost of existing fuels, to incentivize high credit prices and investment 31

32 LCFS Impact on CA Refinery Crude Slate The LCFS program includes over 360 crude Carbon Intensity Indices They range from less than 2 to 35+ gco 2 e/mj In fact, Brass River from Nigeria has a CI of About 275 of the indices are less than the California crude CI assigned to 2015 and beyond of About 90 have been assigned indices >

33 LCFS Impact on CA Refinery Crude Slate The crude oil CIs are used to calculate deficits The average CI of all crude refined in California is calculated each year If the CI of all the crude refined exceeds the standard which ultimately becomes in 2017 forward (slightly lower in earlier years), a CO 2 e deficit is calculated All of the petroleum gasoline and diesel producers and importers receive a proportional share of the deficit which they must offset If the CI is lower than the standard, no credits are generated 33

34 Impact of Crude Oil Deficit Provision The crude oil deficit provision creates no incentive for individual refiners to reduce the CI of their crude oil slate It may create an incentive for refiners to run higher CI crudes If higher CI crudes are lower priced, refiners that have a crude slate in excess of the standard are not penalized if average CA crude runs are less than or equal to the standard Even if average CA crude runs are greater than the standard and deficits are generated, they are shared by all petroleum suppliers 34

35 Foreign Crude Oil Imports into CA, 2014 Country MBPD Percentage Crude CI, gco 2 e/mj Saudi Arabia Arab-lt 9.15 Iraq Basrah Lt Ecuador Oriente Columbia Cano Limon 9.41 Canada Bow River 9.27 Angola Cabinda Brazil Marlim 7.76 Mexico Isthmus Russia Espo Other California Average Total Based on 2014 EIA Data

36 Refinery Specific Provisions Low Complexity/Low Energy Use Refiners Can generate credits for own use Refinery Investment Credit Pilot Program Approved projects that reduce CO2 emissions Unlikely to create many credits, refiners are already energy efficient Renewable Hydrogen Refinery Credit Pilot Program Hydrogen made from renewable energy source rather than natural gas. 36

37 Reduce Obligation by Producing Biofuels Refining companies may try to minimize the impact of the regulation by owning biofuel production facilities or by partnering with a domestic or foreign supplier for a low CI renewable fuel There is no cost associated with the generation of credits; ethanol with or without credits cost the same to make Assuming there is economic incentive to produce biofuel without any program incentives, the refiner might even make a margin on the biofuel produced 37

38 Buying Credits The program includes a free market between credit owners and the obligated parties; credit price is unlimited Once a year the state will conduct a market clearing sale with an upper limit on the value of the credits at $200 per metric ton plus inflation It is possible, not enough credits will come available at $200/MT There is no provision for the state to sell credits outright If the market foresees a shortage of credits in the future, it will be very difficult to fine tune the program to keep the credit value under $200/MT 38

39 Recordkeeping and Reporting Companies in 23 states are registered in the LCFS program Everyone that takes ownership of product, even in the transportation system, must keep records and file reports This is an added cost to refiners and regulated parties 39

40 Agenda Overview of the Refining Industry The LCFS Program LCFS Compliance Compliance Challenges What Does the Future Hold? 40

41 Conclusions Compliance with the LCFS program could cause unusual, uneconomic supply situations. For example, ethanol from corn and sugarcane is identical except in the eyes of the LCFS program. Demand for sugarcane ethanol could result in sugarcane ethanol imported from Brazil passing US Corn ethanol exported to Brazil. The deficits are set to increase over six-fold from 2015 to The success of the program will depend on how quickly the credit pool can be expanded. Excess credits generated in the past three years are not likely to be repeated unless the credit pool is significantly expanded. 41

42 Conclusions (con t) Depending on the alternative fuel which replaces the petroleum portion of the California transportation fuel, petroleum in the pool could be reduced by as much as 20% or more. In that case, over 350,000 B/D of refining capacity would no longer be required to meet California demand That capacity might either be shutdown or used to supply exported product Refiners and petroleum fuel importers may invest in renewable fuel production to avoid paying alternative fuel suppliers for credits 42

43 Speaker Presenter: Thomas R. Hogan Senior Vice President Turner, Mason & Company Suite 2920, LB Ross Avenue Dallas, Texas 214/ (voice) 214/ (fax) 43

44 Backup Slides 44

45 West Coast Refinery Movements in CA 45

46 Selected Refinery Configurations, B/D Chevron P66 ExxonMobil Shell Valero Refinery El Segundo LA Torrance Martinez Benicia Crude Capacity 269, , , , ,000 Vacuum Distillation 161,000 78,000 98,000 91,100 78,500 Delayed and Fluid Coking 67,500 48,150 50,500 25,000 28,000 Catalytic Cracking 65,000 45,000 83,500 68,870 69,000 Catalytic Reforming 44,000 34,000 17,000 29,400 36,000 Catalytic Hydrocracking 46,000 24,750 21,000 37,900 36,000 Catalytic Hydrorefining/ Hydrotreating 201, , , , ,000 Alkylation 30,000 14,400 24,500 11,000 17,100 Polymerization 2,470 2,900 Isomerization 27,000 20,750 15,000 Hydrogen (mmscf/d) Sulfur Extraction (t/d)

47 Other LCFS Programs In addition to California, other states have begun to evaluate LCFS options: Oregon passed LCFS in January, faces opposition Washington opposed LCFS regulation in July Regional Greenhouse Gas Initiative (RGGI) by several East Coast states and Eastern Canadian Provinces established, currently covers only power plants (proposed expansion to vehicles) 47

48 Energy Economy Ratio Another factor in determining credits is the Energy Economy Ratio Based on substitute fuel and use, factored two ways: Reduces CI reported: CCCC rrrrrrrrrrrrrrrr CCCC ii EEEEEE Acts as multiplier for energy displaced: EE dddddddddddddddddd = EE ii x EEEEEE Light/Medium Duty Gasoline Replacement Fuel/Vehicle Gasoline (up to E85) EER Relative to Gasoline CNG/ICEV 1 Electricity, BEV or PHEV Heavy Duty/Off Road Diesel Replacement Fuel/Vehicle EER Relative to Diesel 1 Diesel/Biodiesel H2/FCV 2.5 CNG/LNG (spark-ignition) 0.9 CNG/LNG (compressionigntion) 1 Electricity, Truck 2.7 Electricity, Bus 4.2 Electricity, Heavy Rail 4.6 Electricity, Light Rail 3.3 Electricity, Trolley, Cable 3.1 Car, Street Car Electricity, Forklifts 3.8 H2/FCV 1.9 H2, Fuel Cell Forklifts

49 Low Complexity/Low Energy Refinery Provision The LCFS program includes a provision that if a refinery has a complexity less than 5 and annual energy use of less than 5 million MMBTU, it can qualify for an energy use credit This credit is only available to specialty refiners like asphalt refiners because all of the fuels refineries in California have a complexity of much greater than 5 49

50 Nelson Index Company Refinery Index Alon (shutdown) Chevron P66 Paramount 2.8 El Segundo 10.3 Richmond 12.5 Los Angeles 12.6 Rodeo/Santa Maria 12.0 ExxonMobil Torrance 13.1 Shell Martinez 11.9 Tesoro Valero Carson 10.5 Wilmington 14.8 Golden Eagle 12.3 Benicia 10.7 Wilmington

51 Credit Sales Program established a credit Clearance Market where regulated parties with surplus credits can be sold This market has a cap of $200/credit in 2016, adjusted to the CPI for subsequent years Credits are also sold on open market, and nobody is bound to pledge credits for sale in Clearance Market Private credit sales are not subject to a price cap 51

52 Credit Generation Regulated parties must calculate their credits or deficits for each fuel: CCCCCCCCCCCCCC oooo DDDDDDDDDDDDDDDD(MMMMMMMMMMMM TTTTTTTT) = CCCC ssssssssssssssss CCCC rrrrrrrrrrrrrrrr x EE dddddddddddddddddd x CC Example: Refiner produces 100 bbl of E10 (blended with corn ethanol) in 2016: CCCCCCCCCCCC = xx10 6 = 1.48MMMM CCCCCCCC EEEEEEEE = xx10 6 = 1.03MMMM Total Deficit is: = MT per 100bbl If sugarcane ethanol is used instead (CI of vs for corn), total surplus is: = 0.52 MT per 100bbl This pushes the more rapid adoption of advanced biofuels into the California fuel market. 52

53 What Does This Mean For Refiners? By 2020, when target CI drops from to 88.82, E10 will generate a deficit of = MT per 100bbl with corn ethanol, or = MT per 100bbl with sugarcane ethanol If credits cost $100/MT, that represents a compliance cost of $0.10/gal for E10 with corn ethanol, or $0.08/gal for E10 with sugarcane ethanol Ultimately, the petroleum component of road fuels must decrease, to allow for increased blending beyond E10, or substitution by alternative fuels (Electric Cars, CNG, H2 Fuel Cells, etc.) 53

54 Selected Foreign Crude Oil Imports into CA Company Location Saudi Arabia Iraq Ecuador Columbia Canada Chevron El Segundo Richmond Philips 66 Los Angeles San Francisco Tesoro Golden Eagle Wilmington Carson Shell Martinez 29 5 Valero Benecia Wilmington Based on 2014 EIA Data

55 Similar Programs Crude oil price controls from the 1970s Old Oil vs. New Oil Small refiner s bias vs. low complexity/low energy refinery provision Setting the price ceilings on oil vs. setting the price for the LCFS credits Many crude oil traders in the supply chain created difficulty in documenting transactions vs. reporting requirements for anyone in the supply chain Federal renewable fuel program Setting the price of RINs vs. setting the price for LCFS credits Making the RIN and LCFS credit pool big enough to make the program viable RIN can only be used for the year of generation and the following year vs. unlimited lifetime for LCFS credits 55