Viewpoint: E15 changes may lift midcon CBOB prices

Market: Oil products
26/12/23

US midcontinent gasoline prices may tick higher than normal next summer as eight midcontinent states seek to retain year-round sales of 15pc ethanol gasoline (E15) in a proposed reformulation that could pinch regional supplies and constrain pipeline movements.

The potential shift to year-round E15 could lead to portions of the midcontinent adopting a boutique grade of gasoline particular to the region that would be used for blending to produce the E15. The boutique grade would be 7.8 Reid Vapor Pressure (RVP), a more expensive specification, as opposed to the 9.0 RVP gasoline that is typically used during the summer months.

This lack of uniformity in gasoline specifications may cause logistical problems, with pipelines unable to make the necessary changes to accommodate two separate RVPs of CBOB before the 2024 summer. The change may also result in an inability to draw product from other regions, leading to higher prices.

Gasoline prices at the pump could potentially increase by between 8¢-12¢/USG if the proposed rule were to go through, said US refiner HF Sinclair in its 15 November petition to the US Environmental Protection agency opposing the move, citing a study conducted by energy consultant Baker and O'Brien earlier this year.

Southern US midcontinent suboctane gasoline prices averaged $2.62/USG from April through December this year, while Chicago's Buckeye Complex CBOB averaged $2.49/USG in the same timeframe.

Ethanol industry groups released a study conducted by energy consultant MathPro in December 2021 that estimated the cost of a nationwide shift to E15 gasoline at approximately 2¢/USG. Petroleum industry organizations say the MathPro study is flawed.

The change to E15 may benefit the environment as well with the Renewable Fuels Association claiming that E15 gasoline produces 40-50pc less greenhouse emissions than crude-based gasoline. The association also argues that the use of more US-made ethanol can increase energy independence and reduce the effects of market shocks.

E15 has been available for sale across the US since 2019, but a federal court in 2021 found that the Clean Air Act exclusively offers a fuel volatility waiver to refiners to produce 10pc ethanol gasoline. The EPA has worked around this ruling for the last two summers by issuing temporary emergency orders allowing the sale of E15 because of the Ukraine conflict's squeeze on fuel supply. The EPA currently intends to issue a final ruling by late March next year.

The change could also result in additional costs and losses in production for refiners. Segregating 7.8 RVP gasoline from 9.0 RVP gasoline could result in a 12pc decrease in production, HF Sinclair said in its petition to delay the change, citing a 2005 report from the US Government Accountability Office. The US midcontinent produced an average of 2.53mn b/d of finished gasoline between April and September this year, according to data from the US Energy Information Administration (EIA). Ethanol blending in the midcontinent averaged 248,000 b/d during that period.

Other US and Canadian refiners also filed petitions urging the EPA to delay the change beyond summer 2024. US refiners Phillips 66 and Country Mark and Canadian refiner Cenovus each filed petitions in October of this year. Country Mark, which operates a 30,000 b/d refinery in Indiana, said it planned to supply Illinois if the proposed change were implemented but would most likely be unable to continue to supply Ohio. Cenovus said that the change would require significant capital investment and would potentially not be done in time for the 2024 driving season.

Pipeline problems

Because any change in RVP specifications would not be uniform across the midcontinent, pipelines would face logistical issues over how to deliver different specifications of gasoline to different destinations.

Magellan, operator of a major fuel distribution system in the southern midcontinent, said in its 18 August petition to the EPA that it currently did not have the resources to "bifurcate" or divide shipments between multiple RVPs. The bifurcation of two different grades of gasoline may also lead to less efficient shipping along the pipeline and may have splash-over effects on diesel transportation due to a drop in available CBOB inventories, according to Magellan.

The US midcontinent receives a significant volume of CBOB from the US Gulf coast during the summer, averaging 2.19mn bl/month from April to September this year, according to data from the EIA.

The midcontinent would become more reliant on shipments from the US Gulf coast to meet demand due to the production pinches caused by the 7.8 RVP specification, according to the Baker and O'Brien study. US midcontinent refineries were running at an average of 91pc utilization from April to September of this year, according to EIA data. High utilization levels leave little room for increases in efficiency to compensate for the loss of production that would be caused by the transition to E15.

Still, the US Gulf coast would be the only region able to meet the new demand because its refiners already operate at high run rates.

By Zach Appel

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