A.D. Koen
Senior Editor
News
Time is short for U.S. products pipelines preparing to ship reformulated gasoline (RFG) required by 1990 amendments to the Clean Air Act (CAA).
As currently written, CAA final RFG rules, issued last Feb. 16 by the U.S. Environmental Protection Agency, appear likely to upset U. products pipeline logistics as never before. Operating strategies and business relationships throughout the country's refined products transportation, storage, and distribution industry will be changed.
How to operate in a vastly different business environment was under scrutiny during much of the American Petroleum Institute's pipeline conference in Houston (OGJ, June 6, p. 86).
Precisely, what changes are in store isn't certain because at this late date a long list of regulatory, fiscal, and technical questions remain unanswered. Possibly no two companies in the chain linking U.S. RFG and conventional gasoline supplies to retail consumers will be affected in the same way, but virtually all will be affected.
The crux of the uncertainty facing products handlers is the effect of the CAA requirement that U.S. gasoline retailers year round beginning Jan. 1, 1995, must sell only RFG in nine U.S. metropolitan areas with extreme summertime levels of atmospheric ozone. RFG sales in those cities and surrounding areas are expected to account for 25-30% of the 7.5 million b/d U.S. retail gasoline market.
RFG must be available by Dec. 1, 1994, at products terminals serving retailers in RFG areas. That's a requirement that could force some refiners to begin producing RFG as early as September.
Adding to the confusion, EPA will allow 87 other areas with serious or moderate ozone levels to opt in to the federal RFG program through state implementation plans (SIPs). How many areas will choose to use RFG remains to be seen. But if all 87 join the program, RFG by 1998 could claim as much as 45% of the U.S. gasoline market.
Effects of CAA gasoline mandates don't end there.
Other CAA rules require retail outlets in about 40 U.S. metropolitan areas with excessive levels of carbon monoxide (CO) to sell gasoline during the winter with preset amounts of oxygenates. In other areas, gasolines with lower Reid vapor pressure (Rvp) ratings are required in the summer to reduce releases of volatile organic compounds (VOCs).
To complicate matters still further, al mid-June, federal officials still were reviewing a proposal requiring at least 30% of gasoline oxygenates blended into RFG to be renewable.
Added to the mix are motorists in places not required to sell RFG or oxygenated gasoline but who must use one or the other by default because their retail outlets are supplied by products terminals serving ozone and CO nonattainment areas.
MARKET DISRUPTIONS
Even if federal regulators were changing nothing else, simply moving, storing, and distributing all the new grades of gasoline created by various federal and state environmental requirements would be a daunting task for U.S. products pipelines.
But strict product specifications ban mixing different gasoline blends. RFG must be segregated from conventional gasoline, simple model RFG from complex model RFG, one refiner's complex RFG from another's (unless they have the same baseline), and RFG from reformulated base for oxygenate blending.
Products pipeliners fear that by legislatively creating so many new gasoline grades, limiting their uses to prescribed areas, and insisting on segregation to protect the purity of the various products, RFG rules will undermine operation of the nation's integrated products transportation and distribution system, the flexibility of which is based on product fungibility.
If so, products pipeline utilization and efficiency are sure to wane.
Many believe operating challenges raised by CAA rules threaten the main mission of the nation's interstate gasoline transporters.
"Given the delays in promulgating the RFG program, the complexity of the regulations, and ongoing delays in clearly defining critical issues, we cannot be assured the program will be implemented without disruptions in supply of gasoline to the market," says W.L. Thacker, Texas Eastern Products Pipeline Co. (Teppco) president and chief executive officer.
He sounded that warning at a mid-June meeting in Houston of the Independent Liquid Terminals Association, Washington, D.C.
Expected regional U.S. RFG supply imbalances, the imprecise nature of products pipeline operations, and untried operating adjustments account for Thacker's outlook.
OPERATING CONSTRAINTS
Bonner & Moore Associates Inc. (BMA), Houston, in a study of 1995-97 U.S. gasoline markets east of the Rocky Mountains, found that increasing the number of gasoline grades pipelines and terminals are required to handle reduces their capacities.
That results from reducing the sizes of batches to be transported while increasing the need for product segregation and the number of interfaces required.
Scheduling more shipments into products terminals across the country constrains the flexibility of interstate pipelines serving them. The need to segregate more grades of gasoline also leads to less efficient use of large tanks at distribution terminals and other inventory or storage constraints.
BMA said, "Temporary supply disruptions and RFG price spikes in the first few months of the RFG era are possible, similar to what was witnessed with the introduction of low sulfur diesel."
When state and federal low sulfur diesel fuel rules became effective last October, supply imbalances caused shortages in some states. The effect: localized price spikes of as much as 50% (OGJ, Oct. 18, 1993, p. 32).
BMA expects the cost of shipping RFG from refineries along the U.S. Gulf Coast in Petroleum Administration for Defense (PAD) District III to New England and Central Atlantic markets in upper PAD I to range as high as 2.7cts/gal after turmoil stirred by the introduction of RFG subsides.
BMA included only PADs 1, II, and III in its gasoline study because there are no CAA extreme or severe ozone areas in PAD IV. PAD V markets generally are isolated from those in the rest of the country, and in a little more than I year many will have to comply with more rigorous California Air Resources Board gasoline regulations.
ADJUSTMENTS TO COME
Peter C. Fusaro, president of Global Change Associates, White Plains, N.Y., says RFG price volatility early in 1995 could lead to unexpected regulatory adjustments.
"I think we're going to see waivers from the EPA in some cases when we don't have the right product in the right areas at the right times," Fusaro said.
Transporting gasoline of any grade in the U.S. will become riskier because RFG rules will fragment product pipeline and terminal capacities, while at the same time requiring transporters to guard product purity more carefully than ever. Because pipelines will have to deal with more distinct, nonfungible gasoline grades, refiners and gasoline marketers will have less flexibility scheduling products shipments.
"I think we're going to have some real logistical headaches in the beginning," Fusaro said. "But in time, as more of the barrel is reformulated, there will be fewer gasoline grades and the problems will be resolved.
Peter J. Killen, executive vice-president of Wright Killen & Co., Houston, says the evolving role in U.S. markets of foreign gasoline suppliers could contribute to early disruptions in RFG supply.
"If there are problems on domestic pipelines delivering RFG to the Northeast, the restrictive quality requirements on RFG will make it hard for foreign refiners to fill possible supply gaps as quickly and as easily as in the past," Wright Killen said.
After a time-possibly several years-foreign suppliers' responsiveness will improve. In fact, foreign refiners not subject to U.S. baseline rules will have an edge over domestic refiners because they won't have to abide by antidumping rules covering components being purged from the U.S. RFG pool, Wright Killen said.
MARKET IMBALANCES
Industry sources expect RFG supply/demand gaps after Jan. 1 to be greatest in PAD 1. The largest inter-PAD movements of RFG will be PAD III supplies entering PAD I markets, mostly in New England and Central Atlantic states.
BMA estimates PAD I RFG demand in 1995 will reach 1.8 millon b/d, exceeding RFG production of the region's refineries by 772,000 b/d. Customers in the New England and Central Atlantic regions, where gasoline markets are expected to convert almost entirely to RFG, are expected to account for about 1.2 million b/d of total PAD I RFG demand.
To meet demand, BMA says New England and Central Atlantic states will need about 656,000 b/d of RFG and Lower Atlantic states 116,000 b/d of RFG from sources outside PAD I. About 114,000 b/d of RFG entering New England and the Central Atlantic likely will be imported from non-U.S. sources, mainly Canada, Venezuela, Saudi Arabia, and Northwest Europe.
Central Atlantic refiners are expected to convert about 72% of the region's gasoline capacity to produce RFG, leaving about 65,000 b/d of conventional gasoline available for transport to Lower Atlantic markets. A conversion rate of 80% across PAD I would eliminate excess supplies of conventional gasoline in the region.
BMA expects total gasoline movements from Texas and Louisiana on the interstate systems of Colonial Pipeline Co. and Plantation Pipe Line Co., both of Atlanta, Ga., to increase by a combined 80,000 b/d, a 7% hike. RFG requirements in PADs II and III will be met with local supplies. RFG sales in PAD III will be limited to the Dallas-Fort Worth area and Houston.
BMA said Colonial and Plantation pipelines recently have handled 15-20 products requiring segregation during the transitional months of spring and fall. RFG transportation requirements on the two systems mean more product batches will have to be segregated.
"With the increase of RFG demand added to the normal maximum segregation period, pipeline capacity (on Colonial and Plantation) could reach its limit during seasonal product specification shifts," BMA said.
GASOLINE GRADES
Paul Rolniak, vice-president of Energy Analysts International Inc. (EAI), Bloomfield, Colo., says the growing number of gasoline grades required by CAA rules likely will cause serious operating problems.
While the number of gasoline grades theoretically could increase by factors of three or four, only about twice as many gasoline grades are likely to be shipped.
Some products pipelines, terminals, or storage facilities serving both RFG and conventional gasoline areas will choose to handle as many of the new grades as possible, losing flexibility and functional capacities as a result. Others will have to decide which markets to serve and which to give up.
"In fact, most products pipelines will establish fungible specifications that will effectively limit the number of different grades to a manageable level," said Tom Hawthorne, Wright Killen's manager of refining strategy and business analysis.
"That will reduce the flexibility available to refiners and blenders shipping products across those pipelines. But it will make the systems work within the constraints of available hardware."
Explorer Pipeline Co., Tulsa, which operates a 1,400 mile products pipeline transporting mainly gasoline, fuel oil, and jet fuel from the U.S. Gulf Coast into the U.S. Midwest, serves as an example of the types of problems and decisions gasoline transportation pipelines will face.
Major metropolitan gasoline markets served by Explorer include Houston, Dallas-Fort Worth, Tulsa, St. Louis, and Chicago.
If Explorer intends to serve all those areas when RFG rules go into effect Jan. 1, it will have to carry 7.2 Rvp RFG for Dallas-Fort Worth, 7.8 lower Rvp gasoline for Tulsa, 7.2 lower Rvp gasoline for St. Louis, and 8.1 Rvp RFG for the Chicago area. In addition, Chicago distributors supply 9 Rvp conventional gasoline to many surrounding areas, as well as 7.8 lower Rvp gasoline to the Muskegon-Grand Rapids, Mich., area.
"When regulators make so many grades of gasoline nonfungible, they start building market islands that are more costly to supply," Rolniak said. "We see very specific regionality developing on pipeline distribution systems."
EAI after the first of 1995 expects to see more movement of blending stocks under simple model RFG rules as specialized blending opportunities arise for terminals serving conventional gasoline markets and adjacent RFG areas. With complex model RFG beginning in 1998, more record keeping will be required and more questions will resurface about whether U.S. pipelines can move all the products customers want.
Wright Killen says pipelines likely will drift away from transporting mid-grade gasolines in order to move more RFG and oxygenated blends. Mid-grades more likely will be blended at downstream distribution terminals.
Decisions by some urban areas to use gasolines with special oxygen requirements or Rvps will greatly complicate distribution and leave suppliers grappling with ways to serve those markets. With the many areas still deciding whether to Opt in to RFG programs through SIPS, Killen said, "At this point, we don't know what the requirements for gasoline products will be after Jan. 1 in many parts of the U.S."
PREPARATION TIME SHORT
Part of the difficulty products pipelines expect to encounter while implementing the federal RFG program stems from the relatively short time left to prepare.
In the past, Congress generally left the timing of fuel regulation development and release more to EPA's judgment of what the petroleum industry was capable of accomplishing. But some industry sources say the timing allowed to prepare to introduce RFG has hamstrung federal regulators as well as U.S. refiners and product pipelines.
When it amended the CAA in 1990, Congress intended to allow 3 years to identify RFG operating issues and solutions, from promulgation of proposed rules in November 1991 until RFG Phase I implementation Jan. 1, 1995.
But the complexity of solutions proposed and the ensuing regulatory negotiations delayed EPA's issuance of the RFG final rule until Feb. 16. That left less than 9 months for pipeliners to assess the effects of its provisions on gasoline transportation and distribution.
As RFG was being defined in the regulatory negotiation process, some say inadequate consideration was given to implementing distribution and storage plans.
Tom Hawthorne, Wright Killen's manager of refining strategy and business analysis, says that until EPA released the final RFG rules, refiners and pipeliners prudently were reluctant to make capital investments.
"They are just now beginning to understand what the real requirements are for each particular situation," Hawthorne said.
Even with the flexibility allowed by current product fungibility, Teppco's Thacker says at least 1-5 months is needed after a refiner acquires raw materials for gasoline to reach the retail customer and assure a continuous flow of products. About 30-90 days are required to process feedstocks into finished refined products, plus 2 weeks to more than 2 months to deliver a shipment of gasoline to a retail outlet after it leaves the refinery gate.
To assure that seasonal gasoline grades are available for sale at retail outlets on the dates required, marketers begin the changeover 3-4 months in advance. Refined product fungibility is a key element in gasoline suppliers' ability to quickly fill minor supply gaps by adjusting the primary distribution system, regional terminal network, and secondary transportation facilities.
"Any disruption in this process-even for a few days-strains our ability to maintain supply to the market," Thacker said.
OPERATING ISSUES
To serve U.S. gasoline markets with a continuous, timely supply of products, pipeliners currently must integrate demand forecasts with complex shipment schedules, efficient receipt, delivery, and quality assurance procedures, and documentation of product movements.
The conflict between legislated products segregation and a pipeline system designed to transport fungible products will show up in the nation's products pipeline systems as a host of operating problems.
Until the number of serious or moderate ozone areas planning to opt in to the RFG program SIPs is better known, it will not be clear whether the U.S. gasoline distribution and terminal structure will be able to supply the required volumes. Even then, legislative decisions will not resolve the effects of price spreads in adjacent RFG, oxygenated, or conventional gasoline markets.
Thacker says the requirement to segregate RFG from other refined products N%,M force pipelines to handle RFG in smaller batches, effectively reducing delivery capacity into RFG markets or alternately in all other markets, depending on the strength of localized RFG demand.
The need to ship smaller batches of RFG will increase the need for product interfaces, the material separating product batches as they move through pipelines to delivery points. When shipping fungible gasolines, pipelines sequence batches-premium gasoline first, followed by regular, etc. -to allow product interfaces to be cut from the product stream and blended with a lower grade product without damaging performance characteristics of the lower grade.
Because RFG rules require pipelines to consider RFG and other gasoline grades nonfungible, interfaces between RFG and other products must be cut precisely to assure the quality of the RFG.
Thacker said, "The result will be a reduction in the volumes of RFG batches and an increase in the amount of interface accumulated."
ADJUSTING PARAMETERS
Products pipeliners must decide how to handle or dispose of accumulated product interface, a problem heightened by RFG rules.
The federal RFG program requires independent laboratories approved by EPA to identify and certify the parameters of each batch of product staged in tanks to await shipment. The aim is to assure refinery compliance with 1990 baseline standards.
Once certified at the refinery, each product's specifications must be documented at each title transfer along the distribution chain to retail outlets. It's a trail that could include multiple exchanges among brokers, terminals, common carrier pipelines, and marketers.
Regulators are working with the industry to develop sampling techniques, testing equipment and procedures, and transfer documents needed for pipelines to manage the new administrative burdens. But Thacker says significant unresolved issues remain that will challenge refiners and pipelines to maintain the continuous flow of products to U.S. gasoline markets after Jan. 1.
Beyond the threat to continuous flow of products, Thacker says RFG provisions prohibiting terminals and retail outlets serving RFG areas from combining RFG with conventional gasoline likely will cause problems early in the implementation period with no apparent benefit to environmental quality.
Thacker maintains that mixing RFG with conventional gasoline during RFG's introduction would not necessarily harm air quality, but pumping storage tanks empty of conventional grade to make room for RFG would cause more VOC emissions to be released. Retailers in RFG areas would have to take some tanks out of service to convert them to RFG storage, limiting retail storage capacity for RFG and conventional grades.
Similarly, the ban on blending oxygenates or other components with RFG will interfere with the industry practice of blending at terminals to correct or seasonally adjust batch parameters. If terminals are not allowed to upgrade material already in storage, about the only options left would be to seal the tanks and wait for the next applicable season or try to find another market for off-spec material.
Anyone in the transportation, storage, and distribution chain suspected of illegally mixing nonfungible gasolines could be subject to a fine of $25,000/day/occurrence. Meanwhile, many motorists are likely to mix RFG with conventional gasoline, anyway.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
