Changes to America’s Gasoline Pool Gary Devenish · Changes to America’s Gasoline Pool Gary...

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Changes to America’s Gasoline Pool

Gary Devenish

September 30, 2016

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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.

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• Gasoline Pool Component Review

• Light Naphtha Surplus

• Octane Demand and Challenges

Discussion Points

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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

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• Gasoline Pool Components

•

•

Discussion Points

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• 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

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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

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•

• Light Naphtha Surplus

•

Discussion Points

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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

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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

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• 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

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Naphtha Content Range of Light Crude Oils

Sample Yields from Crude Oils

Source: PRISM

Average LSR + Nap = 24% Average LSR + Nap = 37%

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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

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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

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Light Naphtha Consumers

Driving forces for Light Naphtha: Gasoline Blending

Source: PRISM and Baker & O’Brien estimates

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Light Naphtha Consumers – Gasoline: Demand Remains Strong

• Vehicle miles travelled remains at record levels in 2016

Source: U.S. Federal Highway Administration

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• Record gasoline production continued into 2016

Source: EIA and Baker &O’Brien Analysis

Light Naphtha Consumers – Gasoline: Record Production

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Light Naphtha Consumers

Driving forces for Light Naphtha: Diluent Exports

~ 2 MMB/D

Source: PRISM and Baker & O’Brien estimates

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• Pentanes Plus Exports to Canada

Source: EIA, Statistics Canada

Light Naphtha Consumers - Diluent

Condensate Exports

Canadian Production

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Light Naphtha Consumers

Driving forces for Light Naphtha: Olefins

~ 2 MMB/D

Source: PRISM and Baker & O’Brien estimates

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Alternative Value – Cracker Feedstock: Competing against NGLs

Source: Argus and Baker & O’Brien Analysis

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Light Naphtha Surplus Continues to Drive Down Values

Source: Argus and Baker & O’Brien Analysis

• Declining relative value, increasing seasonal swings

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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

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•

•

• Octane Demand and Challenges

Discussion Points

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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

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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

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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.

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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.

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Increased Octane Contributions by Reformers

Source: PRISM

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Octane Contributions by Reformers: High Reformer Margins

Source: Argus and PRISM

Reformer Margin

Naphtha/PUL, %

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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.

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Octane Contributions - Alkylation

Source: Argus and PRISM

iC4/RUL, % Alkylation Margin

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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.

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• 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

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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??

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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

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