Changes to America s Gasoline Pool Charles Kemp May 17, 2016 Baker & O Brien, Inc. All rights reserved.
Discussion Points Light Naphtha Definitions Sources and Uses of Light Naphtha Octane Challenges Tier 3 Sulfur Specifications and Problem Solving 2
Definitions for this Presentation Naphtha Generic term for light volatile petroleum liquid or low octane gasoline Full Range Naphtha Light Naphtha (Light Straight Run LSR) Mainly C5 (pentanes) and C6 (hexanes) RVP between12 and 20 psi Heavy Naphtha Best suited for reformers, C6-C7-C8. 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 3
Thousands of Barrels per Day Total Crude Oil and Light Naphtha Production 10,000 U.S. Crude Oil Production Growth 9,000 8,000 7,000 Light Tight Oil Growth 6,000 5,000 4,000 3,000 Total U.S. Domestic Crude Oil Production 2,000 1,000 0 Light Naphtha Content Source: EIA and Baker & O Brien Analysis. 4
Liquid Volume Percent Crude / Condensate Refining Introduction Crude Oil Qualities Sample Yields from Crude Oils 100% 90% 80% 70% 60% 50% 40% Light Ends LSR Naphtha Kerosene Diesel ATB 30% 20% 10% 0% Source: PRISM TM Eagle Ford Condensate 54.7 Eagle Ford 44.6 Bakken WTI LLS Brent 5
Relative Sizes of Light Naphtha Markets - 2015 Light Naphtha Consumers Driving forces for Light Naphtha: Gasoline and Olefins Gasoline Olefins ~ 2 MMB/D Diluent Exports to Canada All Other Exports Source: PRISM and Baker & O Brien estimates. 6
U.S. Light Naphtha Balance: Sources of Supply and Disposition Channels Balance Envelope Natural Gasoline Condensate Crude Oil Waterborne Imported Crude Oil Western Canadian Dilbit U.S. Refining System Diluent Gasoline Pool Direct/Isom U.S. Domestic Gasoline Production Gasoline Exports Olefins Exports 7
Cumulative Expansions, MB/D 900 U.S. Light Tight Oil Distillation Capacity Growth 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. 800 700 Planned Firm 600 500 400 300 200 100 0 2015 2016 2017 2018 Source: Company Announcements, Baker & O Brien Analysis. 8
Relative Dollars per Barrel Quality Issues The Challenge of Light Ends Relative Economic Value of Condensate Splitter Intermediate Products Lower Relative Values Source: Baker & O Brien Analysis and Platts. 9
Billions of Vehicle Miles Travelled First Driver: U.S. Demand Influences on Light Naphtha Consumption 3,200 Record 3,100 3,000 2,900 2,800 2,700 Trailing 12-Month Total Annual Miles Driven 2,600 2,500 2,400 Source: U.S. Federal Highway Administration. 10
Thousands of Barrels Per Day Pentanes Plus Exports to Canada Influences on Light Naphtha Consumption 300 250 Monthly Exports Annual Average Exports 200 150 100 50 0 Source: EIA. 11
Cents Per Pound Alternative Value Cracker Feedstock 50 45 Cash Cost of Ethylene Production from Different Feedstocks Natural Gasoline 40 35 30 25 20 15 10 5 Normal Butane Propane Ethane High Cost Feed 0 2010 2011 2012 2013 2014 2015 Source: Dan Lippe, Petral Consulting Company. 12
Percentage of Gasoline Price Value of Light Naphtha in Gasoline 100% 90% Natural Gasoline 80% 70% 60% 50% 40% Normal Butane 30% 20% Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Source: Baker & O Brien Analysis and Platts. 13
Low Values Both butane and naphtha are at relatively low prices Normal butane has historically been the seasonal blend storage component Refiners can blend as much as 10% additional low cost butane in the winter than in the summer Light naphtha (aka natural gasoline) is now exhibiting similar seasonal pricing swings 14
Percentage of Gasoline Price Octane Value, /Octane-Gallon Value of Light Naphtha in Gasoline 100% NATURAL GASOLINE AS A PERCENTAGE OF GASOLINE (Mont Belvieu Natural Gasoline / Gulf Coast Gasoline ) 8.0 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Source: Baker & O Brien Analysis and Platts. 15
Refiners Responses to Light Naphtha Surplus Operational Changes Alkylation units - maximum throughputs Naphtha reforming - increased rates and octane/severity Isomerization - site specific, octane and RVP incentives at odds Overall, higher operating costs to blend low octane naphtha More gasoline production High refinery utilization and imports allowed more light naphtha blending Record refinery input in July 2015 Gulf coast blenders have begun importing high octane MTBE again, over 1.3 million barrels in 2015, possibly more in FTZs 16
Percentage of Reformer Capacity Increased Octane Contributions by Reformers 95% Reformer Capacity Utilization 90% 85% 80% 75% 70% Source: PRISM. 17
Barrels Per Day Influences on Light Naphtha Consumption U.S. gasoline production jumped by 350,000 B/D in 2015 10,500,000 10,000,000 Net Production of Finished Motor Gasoline Annual Average 9,500,000 9,000,000 8,500,000 8,000,000 Source: EIA and Baker &O Brien Analysis. 18
Thousands of Barrels Per Day Influences on Light Naphtha Consumption 800 U.S. Gasoline Exports 600 400 Monthly Exports Annual Average Exports 200 0 (200) (400) (600) (800) (1,000) Source: EIA and Baker & O Brien Analysis. 19
EPA s Tier 3 Program* Tier 2 currently limits gasoline sulfur to no more than 30 ppm sulfur on an annual average Tier 3 is identical but with no more than 10 ppm sulfur Annual average, beginning Jan 1, 2017, per gallon cap of 80 ppm Applies to United States and territories, excluding California Refiners and importers Includes Average, Banking, and Trading (ABT) Volumes produced prior to 2017 that are below 30 ppm generate credits (five year lives) that are valid until Dec 31, 2019 Three year delay for small refiners until 2020 (<155,000 bpcd company / 75,000 bpd single refinery crude charge in 2012) *Federal Register, April 28, 2014 20
Tier 3 Potential Responses SHORT TERM CHANGES INTERNAL Increase gasoline hydrotreating FCC catalyst additives Make high octane components MARKET Buy more low sulfur, high octane components Sell high sulfur, low octane components Sell more low octane gasoline and less premium gasoline 21
Tier 3 Potential Responses LONG TERM CHANGES Install new caustic extraction capacity Install new hydrotreating capacity Build a naphtha splitter *Federal Register, April 28, 2014 22
Gasoline Blender Possible Refinery Modifications for Tier 3 Compliance C 1 to C 5 Fuel Gas Sat Gas Plant Propane to Sales Butane Mercaptan Extraction (or similar) Butane to Sales Crude Oil Naphtha Kero C5/C6 Naphtha Splitter LSR Hydrotreater and/or Isom LSR 27 ppm (Tier 2) ~7 ppm (Tier 3) Diesel AGO Naphtha Hydrotreater Reformer Reformate Atm Resid FCC Gasoline Hydrotreated Cat Gas Hydro- Treater ~30 ppm (Tier 2) ~10 ppm (Tier 3) Alkylate 23
New Processes for Non-Refiners Butanes Field or Refinery Grade Mercaptan Extraction (or similar) New Clean C4 Spheres To Blenders Storage Cavern Existing Storage C4- Natural Gasoline LSR Hydrotreater Isom IFR Tank To Blenders Storage Cavern <11 psi C5+ 24
Conclusions Production of light domestic crude with light naphtha has created large discounts for light components Refiners have responded by Raising octane/severities at higher operating costs Running at high utilization to consume low priced crude and naphtha Blending with high octane components, i.e. imported MTBE Refiners are planning Tier 3 strategies for internal blendstocks Previous blend streams, e.g. LSR, alkylate, may be too high in sulfur New octane deficits may be challenging Tier 3 sulfur specifications may limit blenders from using previously clean blendstocks such as butane and natural gasoline 25
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