# Presentation: 493072

## Availability of Gasoline Imports in the Short to Mid Term: U.S. Perspective

**Joanne Shore**
**John Hackworth**
**Charles Shirkey**
**Energy Information Administration**
**NPRA Annual Meeting**
**San Antonio, Texas**
**March  2002**

**www.eia.doe.gov**

**Notes:**
For a number of reasons that will be reviewed, the Department of Energy’s Policy Office asked EIA to look into the potential availability of gasoline and distillate imports to the United States in the short to mid-term time period.   

This presentation is a summary of our preliminary findings on the need for and availability of gasoline imports to the United States. 

## Capacity Utilization Is High

**Source: EIA**

**Notes:**
There are several factors that have raised interest in future availability of product imports to the United States.

The first is the growing awareness that petroleum demand has caught up with U.S. refining capacity.  

For almost 20 years, we had an excess of refining capacity in this country, but that is no longer the case.

The surplus capacity diminished between 1980 to 1995.  Since 1995, demand and capacity have grown by about the same volumes, with a small amount of spare capacity remaining.

Where will new supply come from to meet growing demand?

## U.S. is Dependent on Gasoline Imports

**Source: EIA Data for Year 2001**

**Notes:**
Another reason for better understanding of gasoline import potential is that the United States is dependent on gasoline imports.

During the summer months, when gasoline demand is highest, U.S. refineries often run at or near their maximum capability, and imports are essential to meeting demand.

The East Coast is the main region using those imports.   In 2001, gasoline imports supplied about 22% of East Coast demand on average.

## Atlantic Basin is Important Source of Gasoline Imports

**Source: EIA **

**Notes:**
EIA is focusing on the Atlantic Basin for its import study since the Atlantic Basin countries are the sources of most of our gasoline and distillate imports.

This slide shows gasoline imports by source country coming into the eastern portion of the United States.  Keep in mind that most of these volumes come into the East Coast (PADD 1).  

Canada, the Virgin Islands, and Venezuela export volumes that are directed to the United States on a regular basis.  Western Europe, on the other hand, can be thought of as a swing supplier in that volumes come to the United States if the economic opportunity window opens.  
Canada supplied from 11 to 20% of U.S. gasoline imports since 1996;
Venezuela supplied about the same (11-19%) over the same period; and 
Western Europe has been providing 25-32% of gasoline imports since 1996.
Saudi Arabia supplied 1-8% (1996-2001), and Eastern Europe supplied 3-6%.

## U.S. Situation Today: Change and Uncertainty

**Today’s gasoline imports essential to meet demand**
**High utilization: Growth in capacity or imports?**
**Changing product specifications -- reduces fungibility**
- Within the U.S.
- Without the U.S.

**Notes:**
In summary, DOE’s interest in imports stems from several issues.  Today we are dependent on gasoline imports, and our refineries are running at high capacity utilization.  As demand grows in the future, will that growth be met by domestic capacity or imports?    

In addition, product specifications for gasoline and diesel are changing to meet clean fuel requirements.  If U.S. specifications make U.S. products unique and difficult to make, some foreign refiners will not find it economic to serve this market.  

Fuel specification changes are not just taking place at the federal level, but at the state level as well.   The net result is a growing number of different products that are not fungible within the United States.  California, for example, uses a clean fuel that only a limited number of other refiners can produce.  Given the size and specialization of this market, little incentive exists for many exporters to adjust their refineries to meet these specifications.

## Areas to be Covered

**U.S. Ability to Produce Gasoline**
**Import Potential from Largest Import Sources**
**U.S. Balance Issues in 2007**

**Notes:**
The subject of import availability must be analyzed in the context of import needs.  So the project was designed to explore U.S. refinery production potential as well as to estimate the potential supply of imports.

The last step of the analysis is to put the two pieces together (U.S. potential with import potential) in order to understand the issues that arise as the system balances.

## Factors Influencing Future U.S. Light Product Production

**Capacity**
**Maximum Utilization**
**Light Product Yield**
- Downstream Unit Capacity v Distillation
- Product specifications
- Loss of oxygenates and mandated oxygenate additions

**Notes:**
Initially, we must determine what factors may influence the U.S. need for gasoline imports, which means we need to examine what will likely influence U.S. production of gasoline.  

Apart from short-term economic incentives, generally, the production of light products will be affected by:
Growth in refinery capacity;
The maximum utilization rate of that capacity; and
Yield of light products.

The yield of light products between now and 2007 will change as a function of:
Changes in downstream unit capacities compared to distillation capacity;
Changes in product specifications such as sulfur removal; and 
Bans of MTBE and mandated use of renewable fuel volumes.  

With the exception of the mandated use of renewable fuels, each of these areas will be explored briefly in the following slides.

## U.S.Trends Leading to Today’s Capacity Balance

**Closures of small refineries**
**Capacity reductions at operating refineries**
**Expansion at 70% of refineries with continuing operations**
**Shifts in capacity size**
**Shifts in capacity ownership**

**Notes:**
The evolution to today’s high capacity utilizations is sometimes blamed on the shutdown of refineries that has been occurring since the early 1980’s.  However, the story is more complex.

The closure of small refineries is certainly one piece of the puzzle, but if you recall the earlier slide showing operable capacity, the large decline in number of refineries and capacity occurred in the early 1980’s after the removal of the Domestic Crude Oil Allocation program in 1981.  That program gave an economic advantage to small, less efficient refineries, and with its removal, these refineries could no longer compete.  After the mid 1980’s, capacity changes were small in comparison.  However, since 1987, small refineries have continued to close. 

From 1987 to 1993, Chevron reduced distillation capacity by 512 thousand barrels per calendar day (MB/CD) at its two large California refineries and its Port Arthur, Texas refinery, and Exxon reduced capacity at its Baytown and Baton Rouge refineries by 131 MB/CD.  Also, capacity was reduced at seven smaller refineries by 116 MB/CD.  Yet 70% of refineries remaining in operation expanded, countering the declines.  More recently, since 1995, total distillation capacity has grown.

Along with the capacity changes, we have also seen shifts in capacity size and ownership, which can have implications for future capacity growth.

## Refinery Closures Continue

**Source: EIA**

**Notes:**
Looking more closely at refinery closures, we note that long after the removal of the Domestic Crude Oil Allocation program, refineries continued to close.  

Small refineries are the group with most of the shutdowns.  

The rate of closures was higher in the late 1980’s and early 1990’s when refinery margins were weak, yet closures continue.

Since 1987, almost 1.6 million barrels per day of capacity was closed.  This represents almost 10% of today’s capacity of 16.7 million barrels per calendar day.

We still have 1.8 million barrels of capacity under 70 MB/CD in place, and closures are expected to continue in future years.  Our estimate is that this will occur between now and 2007 at a rate of about 50-70 MB/CD per year.   
All refineries face investments to update or replace old equipment, to meet environmental operating requirements and fuel specification changes.  
But smaller refiners may find their lack of economies of scale and the size of the investments required puts them at a competitive disadvantage and would keep them from earning the returns needed to stay in business.    

## Growth of Refineries Remaining in Operation by Size & Region

**Source: EIA**

**Notes:**
These tables show the expansion of U.S. refineries that have remained in continuous operation from 1987 through 2000.  

Growth increased significantly since 1995 compared to the prior 5 years, and it has been the highest for refineries in the mid-size range of 40-230 MB/CD.

Regionally, growth rates since 1995 exceeded 2% in the Midwest, the Gulf Coast and Western refineries outside of California.  PADD 4 consists of smaller refineries, so its low growth is consistent with the lower growth rates of smaller refineries.

## Changing Distribution of Capacity By Size

**Source: EIA**

**Notes:**
Closures combined with growth in continuously operating refineries have resulted in a shift in the size distribution of U.S. refineries.
In 1987, smaller refineries (less than 70 MB/CD and those 70-140 MB/CD) represented the largest amount of capacity in the United States; 

However, by 2000, closures in the smaller refineries and growth in continuously operating refineries resulted in the largest amount of capacity shifting to those refineries in the 140-210 MB/CD and 210-280 MB/CD categories.  

The graph shows how the capacity in refineries of 70 MB/CD or less has declined from 1987 to 2000, while capacity in the 140-280 MB/CD range has increased.  

## Shifting Ownership

**Source: EIA**

**Notes:**
Refinery growth has varied by size and by region of the country, but growth by ownership category is perhaps most revealing as to the dynamics behind some of the changes.  The phrase “capacity creep” has been used to describe the small net growth increases we have seen recently, but such a term implies incidental, non-strategic growth.  A closer look shows that refinery expansion has been a strategic decision and that strategies are different depending on who owns the refinery.

One story is the changes in independent refiners versus integrated majors.  A large shift occurred between 1987 and 2000 as integrated majors spun off refineries into alliances and sold facilities to independent refiners.  The significant number of shifts in ownership over the past 5 years makes it difficult to get a clear view of some of the ownership differences, but a sample of integrated majors and independent refiners shown in the table above illustrates the major versus independent changes.
Independents have been growing both by acquisition and by expanding refineries.  Many independents have grown capacity in the 3-5% range per year.
The majors have spun off refineries, many of which were acquired by the independents, and, with the exception of Exxon/Mobil, the majors have not expanded the refineries they kept very much.   

The last ownership group worth mentioning, but not shown on this slide, are the foreign-crude-producing countries that have sought a foothold in the U.S. refining industry and product market, such as Saudi Arabia (Motiva alliance), Pemex (part owner of Deer Park, TX refinery) and PDVSA (Citgo, and part owner of Lyondell-Citgo  and Chalmette, LA refinery).  These owners have not increased distillation capacity much, but have made changes to be able to run more of their crude oil, which frequently involves adding coking capacity.  

## Distillation & Downstream Unit Capacity Trends for Operating Refineries

**Source: EIA**

**Notes:**
In general, downstream capacity has grown more than distillation capacity, but in 1987, the capacity of downstream units was not sufficient to handle all the volume that could be throughput to distillation units.  Since 1987, the higher growth in downstream capacity has brought distillation and downstream capacities into close alignment.

Coking capacity stands out with its high growth.  Much of this growth stemmed from foreign-crude-oil-producing refinery owners converting their facilities to be able to run more of their heavier crude oils.

In the future, we anticipate downstream capacity growth to equal or exceed distillation capacity growth.  Whether that will mean higher yield of light products is a more difficult question to answer, given possible changes in crude oil and product qualities.

## Distillation Capacity Forecast

| Time Period | Annual Average Shutdown Capacity(*)
(MB/CD) | Growth of Continuously Operating Capacity |
| --- | --- | --- |
| 1990-1995 | 139 | 0.5% |
| 1995-2000 | 96 | 2.0% |
| 2000-2007 | 60 | 2.0% |
| (*)Historical shutdowns are for years 1990-94, 1995-1999. |  |  |

**Source: EIA**

**Notes:**
In summary, between now and 2007, we expect refinery expansion to continue similarly to the period 1995-2000. 
Capacity growth of operating refineries will occur at existing sites, rather than new facilities.
Independent refiners, which have consolidated, should have adequate financial strength to continue their expansion.
Some expansion at refineries owned by majors is likely to occur, but not at the rate seen by the independents.  
As will be discussed shortly, availability of RFG imports is expected to diminish, improving expansion incentives for refiners serving the Northeast.
Growth in gasoline demand is expected to resume at a healthy pace, helping to increase the incentives to expand.
This leaves operating refineries growing at about 2%.

Countering the expansion of refineries continuing in operation will be the shutdown of about 50-70 MB/CD of small refinery capacity each year, which detracts from the growth of operating refineries.

The net growth rate is about 1.7%

## Maximum Utilization Limits Production

**Source: EIA**

**Notes:**
Given the capacity expansion potential, what can we assume about utilization potential?

Since about 1995, we have been running at high enough utilizations to explore what might be reasonable maximum utilization rates.  

Annual maximum utilization rates must reflect the high summer utilizations and low winter utilizations shown in this chart.  

## Average Utilization for All Months& Peak Months

**Source: EIA**

**Notes:**
This graph shows, on an annual basis, the difference between the U.S. annual utilization rates that occurred historically and the peak month (May–September) utilization rates.  They can vary by 2-3%.

Keeping in mind that these utilizations are calculated on a calendar day basis, in peak summer months, average U.S. capacity utilization can go as high as 101%.  In the off-peak season, capacity utilization declines both because demand declines and because of maintenance.  Refinery maintenance removes capacity, and the maximum possible utilization in high maintenance months can decline 3-6%, but that is not a problem because of the lower seasonal demand during those periods.  

The highest utilization years were 1997 and 1998.  They provide a benchmark that implies annual utilization of about 95% is about the highest one might want to assume, with 94% being a more comfortable level.

## Yet Total Mogas Yield Increased from Use of Other Components

**Source: EIA**

**Notes:**
The last dimension impacting gasoline production is yield.  Total gasoline yields have benefited from the addition of oxygenates and other non-crude-oil based products.  

This graphs shows that oxygenates, motor gasoline blending components, and n-butane inputs to gasoline have gone from about 280 MB/D on average during 1991 through 1995 to almost 500 MB/D since 1995 – about a 220 MB/D increase.  

If MTBE is banned, and ethanol replaces MTBE, the oxygenate area of the graph will diminish to about half its size, and n-butane volumes may also fall significantly.

The next graph explores gasoline yield from crude and unfinished oils alone.

## Yields of Light Productsfrom Crude & Unfinished Oils

**Source: EIA**

**Notes:**
This graph shows yields from crude oil and unfinished oils (i.e., excludes oxygenates and n-butane and other blending component refinery inputs).  Gasoline yield has been relatively constant, while distillate yields have increased about 3% since the late 1980’s.

The increased distillate yields have been needed to meet high demand growth rates of diesel and jet fuel.

As we look into the future, the historic gasoline yields on crude oil and unfinished oils will provide a base line that will be adjusted based on possible gasoline specification changes.  An MTBE ban, Mobile Source Air Toxics, a possible lower DI requirement and the ultra low sulfur specifications could all work to reduce yields. 

But keep in mind that this gasoline yield hides the fact that oxygenates added significant volume growth during this time period.  

## Summary Of Future Gasoline Production Drivers

**Capacity – Net growth about 1.7%**
**Maximum Utilization – About 95%**
**Gasoline Yield from Crude & Unfinished Oils – Decline in MTBE Ban World**

**Notes:**
In summary, we see economic conditions and company strategies continuing to support capacity growth of about 2% among refineries staying in operation.  When continued shutdowns are taken into consideration, net growth of about 1.7% is expected.

The refinery system can push to 95% on average for the year.

Finally, gasoline yield from crude and unfinished oils likely will remain unchanged, staying slightly above 48% with MTBE, but dropping in an MTBE ban environment.  

Now we are ready to talk about import availability.

## Import Potential from Major Atlantic Basin Import Sources

**“****Dedicated” Supply**
**Canada**
**Venezuela**
**Virgin Islands **
**Opportunistic Supply**
**Western Europe**

**Notes:**
The four import areas explored in detail for their future potential to provide gasoline volumes to the United States were the dedicated suppliers from Canada, Venezuela and the Virgin Islands, and the large opportunistic supply region of Europe.  

## Methodology: Domestic BalanceVenezuela Gasoline Production & Demand

**170**

**120-170**

**Source: Olade and EIA Estimates**

**Notes:**
We analyzed the potential future flow of gasoline imports to the United States from major exporting areas by:  
Looking at a region/country’s historical domestic supply/demand balances;
Looking at forecasts from other sources compared to historical trends;
Incorporating information about refinery expansion plans to derive some estimates of future supply/demand balances;
Estimating some ranges of future import/export needs.
International data is not readily available for many countries, and consistency and accuracy are problems.  As a result, much judgment is used to establish appropriate historical data and to project what future supply and demand may be.
This slide shows Venezuela and highlights some of the uncertainties we explore.
Domestic gasoline demand is expected to grow, but by how much?  It will reduce export volumes if it exceeds the country’s historical growth rate shown as the lower consumption projection in the graph.
Venezuela’s gasoline production capacity is likely to increase.  The Olade data (Latin American Energy Organization) indicated expansion, and since about 60% of Venezuela’s exports go to the growing US market, gasoline production expansion makes sense, including capacity changes needed to meet upcoming low sulfur standards.  Uncertainty in Venezuela’s economic climate could hamper that expansion, but we believe we will see some added capability between now and 2007.  
If the balance results in fewer export volumes available in 2007 than seen in 2000, we feel the United States still could see an increase in volumes, even at the expense of some other Venezuelan export markets.  Between 2000 and 2007, that increase could be between 5 and 15%.  

## Methodology: Venezuelan Export Options

**Notes:**
Another factor entering into our import availability estimates are the alternative markets for the major exporters.  

Again using Venezuela as an example, its geographical location makes Latin American its best alternative market.  But even here, it is unlikely that growing import needs of other Latin American countries could replace the U.S. market between now and 2007.

Our initial look at Brazil implies it will not need much in the way of gasoline imports.

Mexico, on the other hand, will likely need more imports, and could provide a market for some of Venezuela’s volumes.  

Still, it is hard to find an economic replacement market for 100 MB/D of Venezuelan gasoline (primarily RFG) now being used by the United States.  

## Europe to U.S. – Fewer Clean Streams 

***But What About Canada to Europe?***

**Notes:**
We are leaving the discussion about Europe to another speaker, but our bottom line is that, with Europe’s growing incentives for clean gasoline, those clean streams that were coming to the United States will diminish.  The total volumes of all gasoline available for export will not likely decline, but the quality of the those volumes be different – i.e., less RFG.

Canada is likely to remain a major exporter to the United States. But an interesting balancing feature arises as Europe’s clean fuel tax incentives grow.  Some of Canada’s volumes are well positioned to move to Europe, should the price be right.

On balance, we see Canada continuing to export to the United States with some growth in volumes to meet growing East Coast RFG needs.

## Status Quo Scenario: Potential Growth in Total Gasoline Imports(PADD’s 1-3) 

**Source: EIA**

**Notes:**
This slide looks at the potential for growth under today’s world – that is no MTBE bans.  This provides a base from which to explore the impact of MTBE bans.

In summary, between now and 2007, the major dedicated suppliers (Canada, Venezuela, and Virgin Islands) will continue to export to the United States, and those refineries will grow similarly to U.S. refineries.

European volumes, on the other hand, are likely to remain about the same.   

Overall growth from these four major sources could be about 100 MB/D between 2001 and 2007.

## Details Show A Different Story 

**Source: EIA**

**Notes:**
But the old adage “the devil is in the details” is true here.  This graph shows the split between available conventional imports and RFG and blending component imports.  Conventional import potential grows between 2001 and 2007, but RFG and blending components may shrink slightly.  

The situation worsens should an MTBE ban be put in place.  Foreign refiners have similar production capability losses when producing RBOB as U.S. refiners, and some foreign refiners may have no incentives to make the required refinery adjustments to produce RBOB.

## Western Europe RFG Supplies Could Diminish Significantly Under MTBE Ban

**Source: EIA**

**Notes:**
In particular, we expect Canada, Venezuela and the Virgin Islands to produce RBOB for the U.S. market, since they have capacity devoted to this market and few alternatives.

But Western Europe is not in that situation.  With a few exceptions, MTBE use will continue in Europe, and they will have increasing incentives to keep their clean streams.  While we already expect a reduction in RFG and blending component streams without an MTBE ban, the ban would further reduce these volumes.

Now we are ready to explore whether or not these volumes will leave the U.S. refinery system strained.  

## Putting Together U.S. Production Potential with Import Potential

**Source: EIA**

**Notes:**
In the next few slides, I will develop a supply/demand balance within the United States for 2007, first assuming no MTBE bans, which is a continuation of the current situation.  Then I will show the impact of a total MTBE ban.

Begin by assuming the United States will import all RFG and blending components available.  Conventional gasoline imports are readily available and are assumed to grow in proportion to the conventional gasoline demand growth for the period.

Demand is assumed to grow at about 1.7-1.8%.  This growth rate is in line with longer term growth rates historically.

The difference between imports and demand is what the U.S. system must supply, if possible. So now we can explore U.S. refiners’ ability to meet this requirement.

## U.S. Refinery Balance: With & Without MTBE

- (*) Base yield before adjustments to meet specification and oxygenate  requirements.
- (**) Includes base ethanol blending of 106 MB/D in 2000.

**Notes:**
For U.S. gasoline production, we will assume capacity growth as previously described and gasoline yields remaining constant.  Crude oil throughput, however, will be allowed to increase to meet demand.  The resulting capacity utilization in the second line will be an indicator of how strongly the refining system is being pushed.  We also show the historical and projected gasoline pool volumes coming from butane and MTBE.  
With the forecast butane and MTBE inputs, the capacity utilization is changed to generate adequate volumes of gasoline from crude and unfinished oils to meet demand.  The “2007 No Bans” case shows that, with our estimates for future capacity and demand, refiners would have no trouble supplying the market, even with slightly lower RFG imports.  Utilization would actually be slightly lower than it was in 2000.
But the MTBE ban case tells a different story.  Not only do we have lower RFG and blending component imports available, U.S. refiners have several adjustments that tighten supply as well.  The net result is a 1.7% increase in utilization to meet demand.
The table shows the loss of almost 340 MB/D of MTBE supply in the last column.
  Ethanol is expected to replace about half of that supply.  The table shows less than half, because, in this time frame, some ethanol volumes would be expected to shift out of gasohol into the RFG market.
The high blending RVP for ethanol requires removing some C4’s and C5’s that were included in gasoline blends in the No Bans case.  Loss of light and heavy components represent a 0.8% yield penalty.
Refinery-based MTBE production and some merchant MTBE facilities will be replaced with added alkylate and iso-octane production.
And last, we show a line for new additional supply for California that will be discussed in the next slide.
These first order approximations may be optimistic in that they do not take into consideration the recent Mobile Source Air Toxics standards or all of the distillation requirements, which would mean additional yield penalties requiring higher utilizations. 

## California Can Resolve New Supply Needs in Various Ways

**Source: EIA**

**Notes:**
This slide shows the gasoline supply/demand balance for California.  Refinery capacity and gasoline yield from crude and unfinished oils is consistent with our U.S. forecast.  California has used substantial MTBE imports that will not be available in the MTBE ban case.  The table also shows 
An increase in imports of iso-octane from the known Canadian project;
Some extra alkylate and iso-octane from refineries previously producing MTBE;
Additional ethanol use;
Reduction of light ends to compensate for ethanol’s high blending RVP, and a reduction in the heavy end of the FCC gasoline to meet CARB’s distillation specifications.
The bottom item (New Supply) shows that some further additional supply volumes need to be found. The Californai Energy Commission has funded studies that speculate on potential sources for these volumes (www.energy.ca.gov).  These might come in the form of a combination of:
Increased ethanol use;
Expanded refinery capacity; 
Further imports and expansion of refinery production of iso-octane and alkylate components;
Or even some additional blending components from other PADD’s that could be obtained by refineries in other PADD’s running at higher utilizations. 
The new supply quantity is large (almost 9% of demand), illustrating that, while the goal is achievable, the trip along the way could be bumpy.  Recall from the previous slide that the overall U.S. capacity utilization had to increase to almost 95% before supplying any additional volumes to California.

## Conclusion

_**Capacity and Imports**_
**Will keep up with growth in gasoline demand in the U.S.**
_**MTBE Ban Impacts**_
**Will significantly impact U.S. gasoline supply**
- Net Loss of Production Capability
- Reduced Import Availability
- Increased Utilization
- Refinery Changes on Top of Low Sulfur Changes

**Notes:**
If none of the proposed MTBE bans occurred, estimated changes in refinery capacity and imports would keep up with demand growth, and we would have a little capacity utilization to spare.  Occasional price spikes could occur because of timing of capacity additions and demand growth, but mostly would result from regional supply problems similar to those seen in the past several years.

But MTBE bans impact the U.S. gasoline supply significantly. Volume is lost from removal of MTBE and is only partially made up by conversions of refinery and merchant plants to alkylate and iso-octane.  Ethanol becomes the high octane replacement for MTBE, but because of its high blending RVP, C4’s and C5’s must be backed out.  Furthermore, RFG import volumes are likely to be reduced further in the short to mid term.  The net result of a total U.S. MTBE ban is that a significant increase in utilization is needed along with additional environmentally desirable components such as iso-octane and alkylate.  Without adequate time to prepare, the result will be a potentially difficult transition period, with greater possibility for more frequent and severe price spikes.