Ethanol and the Economics of Octane The Superior Solution Geoff Cooper Renewable Fuels Association October 20, 2017
Today s Presentation What is octane and why is it important? Options for boosting octane in gasoline Ethanol s octane advantage The economics of octane 2
What is Octane? Spark-ignition gasoline engines work by compressing an air-fuel mixture and then igniting the mixture (with a spark plug) at a specific instant during the cylinder s compression stroke. A fuel s octane number is the standard measure of its ability to resist pre-ignition (or knocking ) in the cylinder of a gasoline engine. Chevrolet LT4 3
Higher Octane = More Knock Resistance Pre-ignition occurs when there is too much pressure in the combustion chamber and the air/fuel mixture is incorrect. This causes uneven combustion and knocking, which can lead to poor performance and engine damage. Normal combustion Premature combustion The higher the octane number, the more compression the fuel can tolerate without pre-igniting. Engines with high compression ratios require high octane gasoline. 4
Measuring Octane RON MON AKI Research Octane Number Knock resistance at low-load operations (e.g., highway driving) Posted on pump in most of the world (e.g., Europe and Asia) Motor Octane Number Knock resistance at high-load (e.g., acceleration, hauling) MON is always less than RON Anti Knock Index also called (R+M)/2 Equal to (RON + MON)/2 Posted on the pump in North America 5
Pure Component Octane Versus Blending Octane Pure component octane: Anti-knock performance (RON or MON) of an individual, pure compound by itself Blending octane: Anti-knock performance (RON or MON) of a blending compound when it is a component of a gasoline blend 6
U.S. Octane Standards for Finished Gasoline Octane standards in the U.S. are set by individual states. Gasoline Grade AKI Premium 91-93 Mid-grade 89 Regular 87 Note: Octane standards are about 2 AKI points lower in some states in the High Plains and Rocky Mountain region. 7
International Octane Standards Regular Grade 87 AKI (91 RON) 87 AKI (91 RON) 87 AKI (91 RON) 95 RON 95 RON 95 RON 92 RON 92 RON 92 RON 91 RON 92 RON 90 RON 91 RON 87 AKI (91 RON) 88 RON 93 RON 93 RON 95 RON 91 RON 8 Source: ICCT
9 Octane and Gasoline Blending The naturally occurring octane in the crude oil fractions that become gasoline is far less than what engines need. Refiners create the additional required octane by: Carrying out chemical processes that upgrade low-octane hydrocarbon molecules into high-octane molecules; and/or Purchasing and blending high-octane blendstocks. Making octane in the refinery is costly and energy intensive. Refiners must balance octane needs with other specifications and properties. e.g., volatility, sulfur content, benzene content
Key Hydrocarbon Refining Octane Sources Alkylate Blending octane = 93-95 AKI Low volatility, no sulfur, no benzene Reformate Blending octane = 87-100 AKI Low volatility, some sulfur, contains benzene Aromatics (Benzene, Toluene, Xylene) Blending octane = 94-107 AKI Upgraded from reformate Butane Blending octane 92-94 AKI Very high volatility 10 Source: MathPro, Inc.
Ethanol s Octane Advantage Ethanol's Blending Octane (AKI) 120 118 116 114 112 110 108 Ethanol's Blending Octane Number Regular Average Premium 86 87 88 89 90 91 92 93 94 Finished Gasoline Octane (AKI) Ethanol s pure component octane number is 100 AKI. But it s blending octane number is 109-119 AKI, depending on the octane of the finished fuel. Ethanol s blending octane number is highest when used with lower-octane hydrocarbon blendstock. 11 Source: MathPro, Inc.
Ethanol s Octane Advantage Octane Number (AKI) 120 115 110 105 100 95 90 85 80 75 Blending Octane Number (AKI) of Various Gasoline Octane Sources 84 Extremely high volatility 93 94 95 Known human carcinogen 101 High toxicity 104 107 Banned in 26 states 110 114 Not approved by automakers 117 Regular grade gasoline (87 AKI) 12 70 Gasoline Blendstock Source: RFA; DOE; MathPro, Inc. n-butane Alkylate Reformate Benzene Toluene Xylene MTBE Ethanol Methanol BTX Aromatics
Ethanol Blending in the Past Prior to circa 2002, ethanol was used mainly as a volume extender not as an octane enhancer. Refiners did not assume gasoline would be blended with ethanol downstream. Gasoline (E0) leaving the refinery already met state octane specifications. Ethanol was splash-blended far downstream of refinery in some locations (mostly Midwest). Result of splash-blending was gasoline with more octane than required to meet specifications for regular grade. 13
Ethanol Blending Today Regulations and policies significantly expanded the use of ethanol in 2002-2010 timeframe. Winter oxygenated gasoline; Reformulated gasoline; State MTBE bans; RFS By 2010, most gasoline in the U.S. blended with 10% ethanol. Thus, refiners reconfigured operations to capture ethanol s octane benefit and avoid octane give-away. Began widespread production of sub-octane gasoline Blendstocks for Oxygenate Blending (BOBs) designed for blending with 10% ethanol BOB + Oxygenate = Finished Fuel 14 Blending Octane (AKI) Share of Blend Octane (AKI) Regular grade BOB 84 90% 75.5 Ethanol 117 10% 11.7 Finished E10 87.2
Ethanol has rapidly emerged as a significant source of octane in U.S. gasoline 89 88 Octane Contribution from Ethanol, MTBE, and Refinery Hydrocarbons in U.S. Gasoline MTBE Pool Octane Octane (AKI) 87 86 85 Refinery Hydrocarbons Ethanol 15 84 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: MathPro, Inc.
The Economics of Octane What is the economic value of octane? A common measure used in the U.S. is the Premium- Regular Bulk Spread Difference between bulk spot prices for premium (90 AKI) and regular grade (84 AKI) gasoline BOBs (PRM REG)/6 pts AKI = value per AKI point of octane Considered by refiners to represent the market value of octane Good indicator of refining cost to produce incremental octane 16
$/Gallon $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $- Premium-Regular Price Spread Premium-Regular BOB Bulk Spread Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Annual Averages (Bulk) Spread ($/Gal.) PRM % Increase over REG 2005 0.11 7% 2006 0.17 9% 2007 0.16 8% 2008 0.15 6% 2009 0.14 9% 2010 0.11 5% 2011 0.14 5% 2012 0.24 9% 2013 0.25 9% 2014 0.26 10% 2015 0.26 16% 2016 0.18 13% 2017 0.21 14% 17 Source: EIA
$/Gallon $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $- Premium-Regular Price Spread Premium-Regular BOB Bulk Spread Premium-Regular Retail Spread Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Annual Averages (Retail) Spread ($/Gal.) PRM % Increase over REG 2005 0.21 12% 2006 0.24 12% 2007 0.25 11% 2008 0.26 11% 2009 0.27 15% 2010 0.27 12% 2011 0.27 9% 2012 0.28 9% 2013 0.29 10% 2014 0.33 12% 2015 0.45 24% 2016 0.47 29% 2017 0.52 28% 18 Source: EIA
Value of Incremental Octane 19 $/Gallon $0.050 $0.045 $0.040 $0.035 $0.030 $0.025 $0.020 $0.015 $0.010 $0.005 $- Value per Point of Octane (AKI) based on Bulk Prices Based on current Premium Regular BOB bulk spread, each point of incremental octane (AKI) is worth 3.5 cents per gallon to the refiner Ethanol s current theoretical octane value is $1.05/gallon over 84 AKI BOB price! (114 84) x 3.5 cpg
Why is the Value of Octane Increasing? Constrained Supply Increased Demand 20% Premium Share of Total U.S. Gasoline Sales 20 Increased volume of light tight oil (LTO) and condensate Produces lower quality gasoline blendstock (more low-octane naptha) Octane loss from tighter sulfur standards Refining industry slow to add octane-producing capacity Source: EIA, MathPro, Inc. Higher domestic demand for all gas grades Demand for premium is rising (as share of total) Higher compression and turbo charging Increased export demand for gasoline and high-octane blendstocks 16% 12% 8% 4% 0% Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
Ethanol Consistently Priced Below RBOB Gasoline $3.50 $3.00 $2.50 $2.00 Ethanol and RBOB Nearby Futures Prices, 2010- Ethanol-RBOB Spread RBOB Ethanol $1.50 $1.00 $0.50 $- $(0.50) $(1.00) $(1.50) Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 $/Gallon 21 Source: CME
Ethanol Priced Far Below Other Octane Sources Ethanol, Reformate, Alkylate, MTBE Spot Prices Reformate (Houston) MTBE (USGC) Alkylate (Houston) Ethanol (Chicago) Cents/Gallon 400 350 300 250 200 150 100 Cents/Gallon Cents/Blending Octane Point (AKI) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 Jan 2012 Apr 2012 Jul 2012 Oct 2012 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Jan 2014 Apr 2014 Jul 2014 Oct 2014 Jan 2015 Apr 2015 Jul 2015 Oct 2015 Jan 2016 Apr 2016 Jul 2016 Oct 2016 Jan 2017 Apr 2017 Jul 2017 Oct 2017 Cents/Octane Point (AKI) Jan 2012 Apr 2012 Jul 2012 Oct 2012 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Jan 2014 Apr 2014 Jul 2014 Oct 2014 Jan 2015 Apr 2015 Jul 2015 Oct 2015 Jan 2016 Apr 2016 Jul 2016 Oct 2016 Jan 2017 Apr 2017 Jul 2017 Oct 2017 22 Source: Argus
Ethanol Priced Far Below Other Octane Sources University of Illinois analysis compares ethanol prices to an average price for the BTX aromatics from 2007-2017. Over the entire period, the price premium of the aromatics relative to ethanol averaged $1.06 per gallon. 23 Source: Irwin, S., and D. Good. "On the Value of Ethanol in the Gasoline Blend." farmdoc daily (7):48, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, March 15, 2017.
Ethanol Priced Far Below Other Octane Sources Argus reports weekly market prices and a calculated octane blending value for various octane sources. In addition to octane number, the octane blending value formula takes into account energy density, RVP, and other important blending factors. 253.7 152.3 24
Proof of the Ethanol Advantage QuikTrip station in Kansas on April 7, 2017 87 AKI ethanol-free gasoline priced 20% above 87 AKI E10 and just 1.5% below 91 AKI premium E10! Buc-ee s station in Texas on June 27, 2017 87 AKI ethanol-free gasoline priced 53% above 87 AKI E10 and 22% above 93 AKI premium E10! 25
Summary Octane is a critical consideration for efficient operation of spark-ignition engines Refiners can meet octane standards by creating octane at the refinery or purchasing octane boosters from other sources Producing octane at the refinery is costly and energy intensive Demand for octane is increasing globally; supply is tightening Ethanol is a superior octane booster due to its: Extremely high RON and blending octane numbers; Economic competitiveness; and Benign effects on the environment and human health 26