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$Fti ~°~ NATIONAL VEHICLE AND FUEL EMISSIONS LABORATORY 

°~`° 2565 PLYMOUTH ROAD 

ANN ARBOR, MICHIGAN 48105 

MEMORANDUM FEB 2 7 1991 

SUBJECT: Cost of Phase II RFG NOx Control 

FROM : Lester Wyborny, Chemical Engineer ~./~,, 

Fuels Studies and Standards Group '~'~""- 

TO : Charles Freed, Director 

Fuels and Energy Division 

Introduction and Background 

OFFICE OF 

AIR AND RADIATION 

Recently, the American Petroleum Institute petitioned The Environmental 

Protection Agency (EPA) to review the RFG Phase II NOx standard . In part, this 

petition was based on an API review of several recent refinery model runs made by 

EPA/DOE in a study using the DOE contracted refinery model to estimate the cost of 

gasoline sulfur control. From this review, API concluded that the refinery model, the 

same one used by DOE to evaluate the RFG program NOx standard in 1993,' does not 

represent the way refineries operate. To support their contention, they supplied 70 

comments on how the refinery model should be improved. API therefore concluded 

that the refinery model used by DOE in 1993 and 1994 underestimated the cost of the 

NOx standard required by Phase II RFG program (sulfur control is expected to be the 

method of choice by the refining industry to meet the RFG NOx control requirement) . 

They also concluded that because EPA partly based its cost-effectiveness evaluation 

on the 1993 DOE refinery model RFG case runs, that the standard was set too 

stringent . 

EPA responded to API's concerns in two ways. First it asked DOE to upgrade its 

refinery model based on the comments submitted by API . DOE agreed and its refinery 

modeling contractor worked to improve the operating capabilities of the refinery model, 

consistent with the API comments. DOE's contractor addressed the 70 original API 

concerns, and then addressed additional concerns which arose during the improvement 

process . All together, over 200 improvements were made to the refinery model . EPA 

also responded to API by requesting DOE to initiate an estimate of the costeffectiveness of the Phase II NOx standard using the revised version of the DOE 

'Estimating the Costs and Effects of Reformulated Gasolines, Department of 

Energy, Office of Policy, December 1994. 

Printed on Recycled Paper 
refinery model which would then be compared to the previous cost-effectiveness 

estimates made by the previous version of the DOE refinery model . 

Prior to beginning the Phase II RFG NOx review, the capability of the revised 

DOE refinery model to yield representative costs was assessed . This was done by 

forcing sulfur reductions with the revised PADD 3 refinery model and comparing them 

with other refinery models that have also been used to estimate sulfur control . Figure 1 

below summarizes the results of this analysis. 

Figure 1 - Cost Comparison of Various PADD 3 Refinery Model Runs for Gasoline 

Sulfur Reductions - Costs are in 1990 Dollars, capital costs are amortized at 10% ROI 

Refinery Model and Run Year Change in Percent of Fuel Cost (c/gal) 

Sulfur Conc. 

(ppm) 

Bonner/Moore for EPA 1992 440-160 55% 0.45 

(B3-BDD) 

Turner Mason for Auto/Oil 1991 340-160 100% 0.42 

(12-A12) 

Turner Mason for API 1993 300-150 63% 1 .3 

(VAT-NT-NH) 

DOE: for EPA (improved 1996 320-150 81% 1 .6 

model) (R7/S7) (July) 

These various costs must be considered with caution as different refinery 

modelers make different assumptions about raw material and product prices and 

volumes, and refinery capabilities . These differing assumptions can lead to differences 

in cost estimates regardless of similarities in the various refinery models . These 

differences remain regardless of general cost adjustments such as using the producer 

price index to adjust costs to the same base year. The percent of the gasoline pool 

treated can also be important when less than all of the gasoline pool is treated. The 

most important issue is ensuring that the sulfur content of the unaffected pool (the 

balance of the gasoline not treated) did not increase resulting in a "free" gasoline sulfur 

reduction (which could be brought about by gasoline blending modifications) . The 

studies with less than 100 percent gasoline treatment were reviewed to ensure that 

sulfur was not merely shifted to the nontreated pool, and in no case did that occur. 

However there still may be cost differences from this effect as lower percent 

reformulation is normally associated with lower costs . 

What is most striking about the cost comparison is that the revised DOE- 
contracted refinery model costs are the highest relative to the other studies . The costs 

are even higher than the API-funded study, which employed some very conservative 

assumptions.' Even considering the likely variance in costs due to differing modeling 

assumptions, the DOE model costs seemed to be high . Based on this observation, 

another run was made with the revised DOE refinery model with some of the 

constraints removed . The removed constraints are ratio controls which serve as a 

control against the unrealistic splitting of intrarefinery streams. Although this change 

would arguably reduce the realistic nature of the refinery model, the resultant cost was 

0.6 cents per gallon which was in line with the lower cost studies . 

After analyzing the range in costs developed by the two versions of the refinery 

model with and without ratio controls, DOE and its contractor made an important 

observation with respect to the ratio controls . With the ratio controls in place the 

refinery model can underoptimize by not reflecting the blending flexibility normally 

present with different refineries. Without the ratio controls, however, the refinery model 

can overoptimize by representing too much flexibility in blending inter and intra refinery 

streams. The two versions of the refinery model thus represented a range in possible 

costs within which the true costs most likely can be found . 

Refinery Modeling 

The cost-effectiveness of Phase II RFG NOx control was reviewed using refinery 

models representing PADDs 1 and 3 . Although some RFG is produced in PADD 2, this 

demand is relatively small (less than 20 percent of the total RFG demand) compared to 

the PADDs modeled. In addition, the Auto-Oil refinery modeling study completed in 

1992 showed that the cost of fuel reformulation in PADD 2 falls somewhere between 

the costs in PADDs 1 and 3 . Thus PADD 2 costs would be expected to have a very 

small impact on a cost analysis based only on PADD 1 and 3 costs . The study used 

average 1995 RFG production rates in PADDs 1 and 3 as reported in the Motor 

Gasoline Watch, a DOE publication . These rates are 450,000 barrels of RFG per day 

by PADD 1 refineries (which is 62 percent of its gasoline output), and 650,000 barrels 

of RFG per day by PADD 3 refineries (which is 18 percent of gasoline output). The 

national cost of Phase II RFG NOx control was calculated by weighting the PADD 1 and 

2 The API funded study forced extraneous constraints on the PADD 3 refinery 

model. Surplus hydrotreating capacity was used up by forcing the purchase of higher 

sulfur crudes. All refineries (including the high cost refineries) were required to produce 

RFG despite the regional and partial nature of the RFG program . The PADD 1 refinery 

model also seemed to be overly constrained as the model chose to purchase sweet 

crude at about a 14 c/gal premium to gasoline costs ($3.30 per barrel of crude oil) 

instead of choosing other lower cost means. 

3 
3 cost-effectiveness values based on their relative volumetric contributions of RFG . 

The base data used in the recent refinery model runs were obtained in a manner 

similar to how the DOE collected data for the refinery model runs in 1993 . The refinery 

raw material inputs were based on the Petroleum Supply Annual, and extrapolated to 

the year 20023 using the Annual Energy Outlook. The crude oil costs, which are 

projected to the year 2002, were obtained from the Petroleum Marketing Monthly. 

Refinery capacity is based on reported capacity in the Petroleum Supply Annual for 

1995 . Thus, all investments made for Phase I RFG would be indicated in these 

capacity statistics . All costs used are in 1995 dollars. Only summertime runs are being 

made, thus operating costs or benefits which could occur in the wintertime with the 

availability of summertime capital will not be calculated . 

The NOx reduction case runs were similar to those used by DOE in 1993 to 

model PADDs 1 and 3 for the RFG program. The cases are summarized in Table 2 

below. The basecase is Phase I RFG with prices projected to the year 2000 (with no 

inflation adjustment) . The first case is run incremental to the basecase and imposes 

the Phase II RFG VOC and toxics reduction standards (27 .4 percent and 20 percent 

reduction, respectively) . The second case is also run incremental to the basecase, 

however a NOx reduction of 6 .3 or 6.4 percent is imposed, in addition to the Phase II 

RFG VOC and toxics standards. Finally, the third case is run, also incremental to the 

basecase, and it imposes a higher NOx reduction of 7.4 percent for PADD 1, and 7 .2 or 

8 .4 percent for PADD 3, in addition to the Phase II RFG VOC and toxics standards. All 

cases are run incremental to the basecase to permit the refinery model to pick the most 

cost-effective way to meet all the Phase II RFG standards imposed for that case . Only 

the basecase investments are sunk. 

Table 2 - Refinery Model Case Runs for Phase II RFG NOx Review 

PADD # Basecase First case* Second case"` Third case* 

PADD 1 Phase 1 RFG Basecase + Basecase + Basecase + 

Phase II VOC + First case + First case + 

toxics stds . 6 .3% NOx 7.4% NOx 

L reduction reduction 

3 Because the year 2000 is the first year of the Phase II RFG program, the year 

2002 was chosen to be the base year for calculating cost-effectiveness . 
PADD 3 Phase 1 RFG Basecase + Basecase + Basecase + 

Phase II VOC + First case + First case + 

toxics stds . 6 .3/6 .4% NOx 7.2/8 .4% NOx 

reduction reduction 

* These investments are not sunk 

Refinery Modeling Calculations and Results 

The same method of calculating fuel program cost-effectiveness used by the 

Agency to calculate cost-effectiveness in the RFG rulemaking to establish the RFG 

standards is used here . This method facilitates the comparison of fuel program costeffectiveness with other mobile source and stationary source programs . The method 

includes making an adjustment from the 15 percent return on investment (ROI) used by 

refiners to evaluate new investments, to 10 percent, which was found to represent the 

rate at which the refining industry actually recoups its investments . The EPA method 

also amortizes the capital costs only over the summer gallons of gasoline . This 

technique fully expresses the costs over the regulated gallons of gasoline. To make the 

cost-effectiveness analysis comparable to other cost-effectiveness studies, the NOx 

benefits incurred over the summer months are assumed to occur over the whole year. 

This adjustment compensates for the conservative summertime amortization of capital . 

While most cost-effectiveness studies only consider average cost-effectiveness, fuel 

program cost-effectiveness studies have been conducted as incremental analyses. 

This incremental method considers the proportional higher costs associated with higher 

levels of fuel reformulation and emissions control . The individual PADD contributions to 

cost in estimating an average cost-effectiveness is weighed by their respective 

production volumes of RFG . 

The series of calculations used to determine cost effectiveness in Tables 3 - 6 

are described here in more detail . The cost in cents per gallon is first calculated by 

dividing the objective function, which is the net income of the group of refineries being 

modeled, by the gallons of reformulated gasoline. The portion of the cents per gallon 

cost which is capital costs is determined by amortizing the investment cost the same 

way used by the refinery model, which is to amortize the costs over the whole year 

based on a 15 percent rate of return . The cost amortization factor used by the DOE 

refinery model for a 15 percent rate of return is 0 .242, which is different from the 0.226 

cost amortization factor used by Bonner and Moore for the RFG program . The capital 

costs are then recalculated based on a summer-only cost amortization scheme (168 

days per year) and 10 percent rate of return, applying a 0 .171 cost amortization factor. 

The difference between these two cents per gallon capital costs is subtracted from the 

previously calculated cents-per-gallon cost, to develop the adjusted cents-per-gallon 

cost based on a 10 percent ROI and amortized over the summer months. 
The aggregate NOx reduction in tons is calculated from the NOx reduction in 

milligrams per mite based the fuel qualities being modeled as analyzed by the Complex 

Model embedded in the refinery model . The first step in this calculation series is to 

calculate the difference in automobile NOx emissions in milligrams per mile between 

two refinery model runs . Next, since the refinery model bases its emission calculations 

on 1990 vehicle NOx emission factors, the difference in NOx emissions must be 

adjusted to reflect reductions in NOx emissions from year 2002 vehicles. This 

adjustment is made by applying a ratio of projected NOx baseline emissions in the year 

2002 which is 938 mg/mile, divided by the estimated baseline emissions in 1990, which 

is 13,10 mg/mile .' The NOx emission reductions for the whole year are then totaled . 

The emissions are first determined for the summer only which represents actual 

expected reductions for 168 days. These reductions are then projected over the entire 

year using a ratio of 12 divided by 5.5, which is the total number of months divided by 

the number of months during the summer. This annualized NOx reduction is used to 

calculate cost-effectiveness to counter the inflated cost caused by the summertime 

amortization of costs . 

The cost-effectiveness is next determined using the annual NOx reduction in 

tons and the adjusted cost in cents per gallon . The cost in cents per gallon is changed 

to an aggregate, summertime cost using the summertime production of reformulated 

gasoline . The total cost in dollars is then divided by the annual NOx reduction in tons to 

yield a dollar per ton cost-effectiveness value. The cost-effectiveness value applies to 

the end of a NOx reduction range since it reflects the cost and benefits which occurs 

over that level of NOx control . The cost-effectiveness is calculated over the NOx 

reduction range from the previous NOx control value, instead of from the no NOx 

control case, which makes it an incremental cost-effectiveness calculation and not an 

averaged calculation . 

Cost-effectiveness was calculated differently for the unconstrained version of 

PADD 3's refinery model because the model did not project the need for any additional 

capital investments .s Since there are no wintertime capital costs to amortize over the 

4These emission factors were developed by running EPA's MOBILE5 emission 

factor model on year 1990 and year 2002 fleets of vehicles. 

SAs discussed in more detail in the summary and analysis of comments section 

below, the projected lack of capital investment by PADD 3 refineries, as determined by 

the version of the refinery model without ratio controls, is very possible considering that 

a substantial portion of PADD 3 refineries are already producing gasoline which would 

likely meet the Phase 11 standards. 
summertime, which inflates summertime cost relative to other studies, it would be 

appropriate to only claim the benefits over the summertime. Thus, the costeffectiveness only reflects summertime costs divided by the summertime benefits. 

The calculations for NOx cost-effectiveness are shown in Tables 3 - 6 below. 
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standard promulgated by EPA) for each individual PADD. A national value of NOx 

reduction at 6.8 percent NOx reduction is calculated from the PADD-specific data by 

weighting the NOx cost-effectiveness values for PADDs 1 and 3 by their respective 

RFG production levels (this provides an equivalent weighting of 0.41 for PADD 1 and 

0.59 for PADD 3) . The cost-effectiveness values of the version of the PADD 1 and 3 

refinery models without ratio controls are weighted together, as are the values of PADD 

1 and 3 versions of the refinery model with ratio controls . Table 7 shows that the 

national average NOx reduction cost-effectiveness for the unconstrained and 

constrained versions of the refinery model are $2180 and $6000 per annual ton of NOx 

emissions reduction, respectively, at 6.8 percent NOx reduction . These costeffectiveness values are based on costs in year 1995 dollars . Because 1990 was a 

relatively expensive year for producing petroleum products, no inflation adjustment was 

made to adjust these projected costs back to 1990, which is the year the other refinery 

modeling studies that this study will be compared with are based in . 
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Discussion of the RFG program Cost-Effectiveness 

As stated above, the goal of this work is to determine if the revised version of 

DOE"s refinery model yields NOx reduction cost-effectiveness values which are similar 

or different from the previous version, then assess the similarity or difference . The 

Phase II RFG cost-effectiveness determined by the 1993 version of the DOE refinery 

model was calculated for each PADD individually . Thus, for simplifying this 

comparison, those earlier DOE cost-effectiveness values will be combined together to 

form a single national cost-effectiveness value. The cost-effectiveness of Phase II NOx 

control projected by the earlier version of the DOE refinery model was $2490 and 

$1590 per annual ton for PADDs 1 and 3, respectively (based on EPA's costeffectiveness calculation methodologys). When these cost-effectiveness values are 

weighted by their respective RFG production volumes, the average cost-effectiveness 

for PADDs 1 and 3 is $1780 per annual ton . The $1780 cost-effectiveness value is 

near the lower part of the range of $2180 - $6000 per ton projected by the revised 

refinery model . 

The higher range of cost-effectiveness values determined by the revised DOE 

refinery model, however, does not diminish the confidence in the $5000 per ton costeffectiveness determined by the Bonner and Moore refinery model for EPA. This is 

because the revised DOE refinery model range of cost-effectiveness is now much more 

similar to the $5000 per ton value calculated by Bonner and Moore. In fact, the $5000 

per ton cost-effectiveness value determined by Bonner and Moore, and similar values 

projected by other refinery modeling analyses which corroborated the Bonner and 

Moore cost-effectiveness, would likely decrease if the refinery models were rerun with 

the same levels of RFG production as we are seeing today (these models generally 

assumed higher levels of RFG production). This adjustment would make the revised 

DOE refinery model even more consistent with these other analyses, thus providing 

higher confidence in the cost-effectiveness at a value somewhere less than $5000 per 

ton . 

Figures #1 and #2 show how the unconstrained and constrained costeffectiveness (C/E) curves for each PADD of the DOE NOx study compare with the 

previous refinery modeling studies that EPA evaluated and considered when it set the 

RFG Phase II NOx standard . These plots are intended to clarify how this recent study 

by DOE compares with the other studies . For clarity and simplicity, the 1994 DOE C/E 

curves are not plotted . The DOE unconstrained refinery model C/E curves are lower, 

PADD 3 is considerably so, than the other refinery model runs, and much lower than 

the API curves. The DOE constrained PADD 3 refinery model C/E curve is similar to 

the Bonner and Moore curve and somewhat higher than the Auto-Oil curve and the 

6 DOE applies another cost-effectiveness calculation methodology which would, if 

not adjusted, preclude a fair comparison between studies . 

14 
NPC data point. The relatively close tracking of the DOE PADD 3 C/E curve to the 

Bonner and Moore and Auto-Oil PADD 3, considering the much lower reformulated 

gasolline production rate, suggests that the DOE model is more constrained . As stated 

above, the cost-effectiveness of these other studies would likely be lower if they were 

rerun with 1995 reformulated gasoline production levels . The C/E curve of the DOE 

PADD 1 curve is significantly higher that the Bonner and Moore curve which likely 

reflects the constrained nature of that version of the DOE refinery model. Although the 

DOE C/E curve is still lower than the API C/E curve. 
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It is also important to review several of the premises which affect the cost and 

cost-effectiveness . Most of these would likely decrease costs and cost-effectiveness . 

The first issue is that two refining technologies just becoming available to the refining 

industry for desulfurizing gasoline were not inserted in the refinery model and thus 

couldl not be picked by the model to desulfurize gasoline. One process is called 

Octgain and it is licensed by Mobil Oil. The advantage of Octgain is that FCC gasoline 

can be desulfurized without losing much of the octane value of FCC gasoline, thus 

greatly improving the attractiveness of this desulfurization methodology. The second 

process is called Synsat which was developed by Criterion Catalyst. Synsat is an 

improved hydrotreating-cat cracking process which lowers gasoline and diesel sulfur 

concentration levels at a lower cost . Both of these process have become more 

acceptable to the refining industry and other interested entities after a Coordinated 

Research Council meeting in late 1996 on petroleum desulfurization technologies. At 

that meeting the costs and benefits of these two technologies were presented and 

discussed at length, and the presentations were well received . 

Another premise which likely caused costs and cost-effectiveness to be higher 

than ,actual is the assumption built into the refinery model that every refinery would 

participate in producing reformulated gasoline, thus in the refinery model the building of 

new refinery units to reformulate gasoline would be forced to occur in every refinery. 

The assumed building of these new refinery units in all refineries of a PADD tends to 

increase costs as the units built would have to be smaller and thus more expensive 

than the building of fewer but larger units . This refinery participation assumption may 

be a -fair premise for PADD 1 which, as a PADD, is mostly producing RFG . However, 

this would not seem to be a logical assumption for PADD 3 which is only reformulating 

about 20 percent of its gasoline pool. Arguably, many of the less complex refineries in 

PADD 3 are in a less favorable position to produce RFG and would likely not do so for 

economic reasons. 

Another assumption which may be conservative is that the 1995 Phase I RFG 

PADD-specific production levels (52 percent in PADD 1 and 19 percent in PADD 3) will 

still pertain in the year 2000 . This assumes that PADD I refineries, which are expected 

to incur a greater per-unit-cost to reformulate gasoline than PADD 3 refineries, will 

continue to produce the same share of RFG. Alternatively, PADD 3 could produce 

more RFG at a lower cost which would relieve some of PADD 1's burden and result in a 

more favorable cost-effectiveness . Table #8 below contains a similar analysis to that in 

Table #7, except that the RFG production levels were changed in a sensitivity analysis 

to refNect an assumed 100,000 barrels per day higher production in PADD 3 coupled 

with a similar assumed reduction in PADD 1 . This simple analysis does not consider 

the changes in cost-effectiveness which would occur with changed RFG production 

levels . Most likely, the reduction in PADD 1 C/E would be greater than the increase in 

PADD 3 and further improve overall cost-effectiveness than that examined below. This 

18 
analysis shows that the combined PADD 1 and 3 unconstrained refinery model C/E 

would decrease from $2180 to $2040 per ton NOx, and the constrained refinery model 

C/E would decrease from $6000 to $5700 per ton NOx. 
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Modeling the entire PADD 3 for a partial fuel reformulation program such as RFG 

likely introduces additional increased costs. Increased costs arise because PADD 3 

includes refineries of all capabilities, and the PADD-wide model averages all these 

capabilities for the cost analysis . However, the more "gifted" refineries will logically 

produce RFG because they can do so at a lower marginal cost. Thus if a subset of only 

the gifted refineries were modeled, the reformulated costs for these refineries is 

expected to be lower. In its submission of comments to the RFG program, API included 

a profile of gasoline sulfur levels for PADD 3 . This profile showed that 20 percent of 

PADD 3 gasoline contains 120 ppm sulfur or less. Additionally, with the need to meet 

the Phase I RFG requirements, refiners are blending MTBE into gasoline which would 

dilute the gasoline sulfur levels even more (probably 12 percent) . As can be seen from 

the refinery model runs, this gasoline sulfur level is about the level needed to meet the 

Phase II RFG requirements . Thus, it is likely that most or all participating PADD 3 

refineries would be able to meet the Phase II RFG NOx requirement without making 

any additional investment. 

The refinery model may also be inflating costs because there may be lower 

sulfur levels in all gasoline compared to what the refinery model predicts. Gasoline 

survey data collected in 1995 for the RFG Program showed that the RFG gasoline 

sulfur levels determined from data just becoming available are lower now than what the 

refinery model estimates . Average RFG sulfur levels are about 230 ppm now for 

reformulated gasoline which contrasts with the 330 ppm levels projected exist by the 

refinery model for 1995 . Lower level is likely due to the implementation of the Phase I 

RFG Program regulations in 1995 . This may mean that the refinery model is 

underestimating the ability for refinery units to produce lower sulfur gasoline, and likely 

overestimating desulfurization cost and cost-effectiveness . 

Another questionable premise is that the refinery model is programmed to 

ensure that there is a 1 .5 volume percent butane minimum in gasoline blendstocks. 

This premise, which is discussed in more detail below in the summary and analysis of 

comments, may have caused a cost-increasing effect on toxics and VOC control, while 

slightly lowering NOx control costs . However, this cost-decreasing effect on NOx, if it 

were decided to be inappropriate, would be more than offset by the cost-increasing 

effects discussed above . 

Summary and Analysis of Comments on Cost-Effectiveness 

API and NPRA along with a several refiners commented that the ratio-free model 

is flawed by not representing actual refinery blending operations, thus the refinery 

model is overoptimized and EPA should rely on the version of the refinery model with 

ratio controls, or another version of the refinery model which better represents the 

refining industry . 

21 
In its response to comments on this issue, DOE demonstrated how ratio controls 

can lead to underoptimization (costs which are too high) . This occurs when the ratio 

controls do not permit the refinery model to simulate the blending practices of multiple 

refineries that would occur in reality . While the ratio-free version of the refinery model 

may allow unrealistic blending practices that could lead to costs which are 

overoptimized, or too low, DOE concluded that the two versions of the refinery model 

provide a range within which the actual costs and cost-effectiveness is believed to lie . 

A cost comparison of gasoline sulfur control with both the ratio and ratio-free versions of 

the refinery model with other refinery modeling studies of gasoline sulfur control 

corroborate the use of these two versions of the refinery model . 

One refiner commented that although refinery models are lower cost estimates, 

the consumer will pay the cost at the margin based on simple economics . 

It may be true the highest cost producer will drive the final price, however, EPA 

does not justify its programs on prices, only the cost of the program which would be 

reflected as the average cost for the refiners who will produce Phase II RFG. The 

marginal difference between prices which may be higher than the average costs is not 

a cost but profits for the oil industry which reflects transfer payments from the consumer 

to the oil companies. 

API and a couple refiners stated that the ratio model does not reflect anticipated 

cost allocation between VOC, toxics and NOx. Based on a retrospective DOE analysis 

which showed that a 1 .5% minimum butane constraint may have caused high 

VOC/toxics cost with countering decreases in NOx reduction cost, one refiner 

suggested that the refinery model should be operated without the 1 .5% butane 

requirement . One refiner commented that the 1 .5% butane constraint is reasonable if 

RVP removes butane, and that it increases the importance of reviewing VOC and NOx 

together. 

DOE believes that at least a significant reason for the higher than expected 

VOC/toxics cost is the 1 .5% minimum butane requirement. The reasons why DOE 

used that minimum is that it is consistent with previous industry studies . DOE's 

conclusion that the minimum may be at cause for the cost is based on a couple of 

nonoptimized refinery modeling case runs in which the 1 .5% butane requirement was 

not imposed . These runs showed the VOC/toxics costs to be much lower and the NOx 

costs to be slightly higher. In reality, the need for any toxics reduction can be 

questioned since AAMA survey data has shown Phase I RFG in the Northeast to 

already be meeting the Phase II toxics requirement. Furthermore, any associated 

increase in NOx control cost which may be incurred by rerunning the refinery model 

without the 1 .5% butane minimum is expected to be small and this cost is likely already 

reflected in the conservative aspects of the study. For example, as a leftover from a 

previous analysis, PADD 3 was forced to build new capital necessary to meet the NOx 

22 
requirement in each refinery of the PADD. This is obviously a very conservative 

assumption in the case of PADD 3 as less than 20% of that PADD's gasoline output 

was assumed to be RFG. One refiner commented that the butane minimum is 

reasonable. In response to the comment that EPA should have reviewed the VOC 

requirement along with reviewing the NOx standard, the Agency felt that it is not 

necessary to meet the refiner's need for a decision. The RFG rulemaking process 

demonstrated that NOx cost-effectiveness can be evaluated separately from VOC 

control. 

A number of commenters stated that the model pooled the grades and thus did 

not determine the average NOx reduction needed to meet the 3% minimum standard, 

refiners will have to overachieve on the averaging standard and thus must incur much 

greater costs 

Oil industry comments point out that DOE's updated report states that its cost 

estimates do not include the impact of the requirement that RFG achieve a three 

percent minimum NOx reduction per gallon, or the impact of any potential enforcement 

tolerance associated with that three percent minimum standard . EPA believes that the 

minimum NOx reduction requirement and any associated enforcement tolerance 

compliance costs are separate costs associated with these provisions and do not 

change the cost-effectiveness analysis of the 6.8 percent standard . While EPA is 

denying API's petition to reconsider the 6 .8 percent average standard, it will continue to 

evaluate and reach a decision on the separate issues associated with the three percent 

minimum per-gallon standard . 

The National Petroleum Refiners Association commented that single grade 

refinery modeling results do not account for the extra hardship involved in blending two 

or more streams of different octane values which must meet specific grade 

requirements . 

EPA agrees that the refinery modeling of single gasoline streams, as was done 

in this analysis, does not represent any additional costs associated with the modeling of 

separate grades. However, the purpose of this analysis was to determine the costeffectiveness of the Phase II NOx standard and compare it to the previous DOE 

analysis completed in 1993 for the RFG rulemaking . Since the previous DOE analysis 

did not model separate grades, the comparison is facilitated by not modeling gasoline 

grades in this study. 

A refiner commented that a high cost spread was assumed between butane and 

isobutane (16 .5 c/gallon in PADD 1, versus the actual of 3 .5 c/gal in PADD 3). 

As stated in DOE's response to this comment, the cost spread of 16.5 c/gal was 

suggested by API's consultant Turner, Mason and Co . 

23 
One refiner commented that the PADD 3 model blended poly gasoline into RFG 

which is unrealistic, and failed to blend alkylate into the basecase RFG . 

Refinery models are programed to minimize costs when it models the blending of 

various blendstocks . When the cost optimizing aspect of the refinery model is coupled 

with low relative production levels, which is the case with PADD 3 as less than 20 

percent of the gasoline pool is reformulated, it may to pursue strategies which may 

differ from normal refinery practices to realize a small cost advantage . This is a likely 

contributing factor to why the refinery model deviated from normal blending practices. 

Additionally, a check was made on the blending properties of poly gasoline and 

alkylate . In the case of poly gasoline, when the blending RVP was compared to values 

actually reported, the values in the refinery model were lower. This difference also 

could contribute to the different blending practices . While alkylate was not blended into 

RFG in the basecase, it did show up in all the other cases, and since the NOx standard 

was evaluated using cases later than the basecase, it is doubtful that the alkylate 

blending anomaly would have any effect on the cost-effectiveness of this study . 

One refiner stated that the refinery model's basecase benzene and sulfur levels 

seem unreasonably high . 

In response to this comment, DOE made a comparison of its PADD 1 and 3 

basecase sulfur and benzene levels with NIPER gasoline survey data . While there is 

some deviation, the basecase levels are very close. In addition, the benzene levels 

shouNd not affect the cost nor cost-effectiveness of NOx control in any way. While sulfur 

levels do have a direct impact on cost, there may be little or no impact on costeffectiveness as cost-effectiveness is determined by the slope of the cost curve at the 

control level . 

A refiner stated that the Phase II RFG VOC and NOx cost-effectiveness should 

be evaluated together, not just the NOx standard alone, and that cost should not 

exceed 0.71 cents per gallon to stay under $5000/ton 

Because of API's request in its petition, in which API only asked EPA to review 

the NOx standard, EPA did not evaluate the VOC standard . Also EPA set the NOx 

standard separately from the VOC standard which can be done as the control 

strategies used to meet the VOC and NOx standards are very different (RVP control for 

VOC, and sulfur and olefin control for NOx). Finally, the per-gallon cost and costeffectiveness, while they are related, are not directly linked . This is because the slope 

and length of the line at the initial point of sulfur control can vary quite dramatically 

without affecting the cost-effectiveness at the level at which the standard is set. 

One refiner stated that cost-effectiveness should be calculated based on the 

average cost of the version of the refinery model with ratio controls and challenged 

24 
refineries. Another refiner stated that the most efficient refiners cannot be the only 

ones which will produce RFG as it omits important considerations such as market 

location, logistics, distance issues and oxygenate portfolio . A third refiner stated that all 

refineries will produce RFG in PADDs 1 and 2, but gifted refineries may produce RFG in 

PADD 3 because of their greater flexibility . AAMA commented that the more capable 

refiners will likely market Phase II RFG which would drive the costs toward the ratio-free 

version of the refinery model . 

Basic economic theory suggests that the most capable refineries will tend to 

produce RFG. As pointed out in the comments, marketplace forces which cause a shift 

from the most capable refiners theory include location of the refinery, logistics, and fuel 

reformulation capabilities such as oxygenate production capabilities . According to EIA, 

about 50% of PADD 1's current gasoline output is RFG . At that level, EPA felt that all 

the refineries in the Northeast would produce some RFG and the cost would be driven 

by the PADD average . By default from a previous analysis, all the refineries in PADD 3 

were assumed to also produce RFG. However, PADD 3's RFG output is only 20% of its 

gasoline pool . Considering the small output of RFG and the wide diversity of 

capabilities within the PADD, it is very unlikely that all the refineries in PADD would 

produce RFG. Based on that conclusion, the modeling of the entire PADD would have 

to be considered conservative yielding both higher cost and cost-effectiveness . The 

comments from the one refiner supports this statement. 

One refiner suggested that modeling must include a reasonable operating 

cushion, e.g ., 0 .90% benzene. 

As responded to by DOE, the 0.95% benzene target was recommended to 

DOE''s consultant by the oil industry consultant. 

One refiner commented that the PADD 1 model should not include the ToscoTrainer refinery since it is shut down . 

As pointed out by DOE, the EIA capacity values were used in this analysis which 

simplifies the analysis and avoids potential biases which could arise by adjusting 

refinery modeling inputs . 

One refiner asked for how cost of PADD 2 refineries would compare with PADDs 

1 and 3 . 

A comparison of the reformulation costs of PADDs 1, 2 and 3 can be made using 

the PADD by PADD analysis of reformulation costs by the Auto-Oil study. In that 1992 

study, the relative costs of controlling the olefins, aromatics, T-90 and adding 

oxygenate were determined for the entire gasoline pool for each PADD . Although 

sulfur control was not a part of that study, the Auto-Oil analysis is likely representative 

25 
of PADD-average refinery reformulation capability with a more capable PADD of 

refineries being able to reformulate gasoline at a lower cost than a less capable PADD 

of refineries . The analysis showed that PADD 2 reformulation costs are between PADD 

1 and 3 reformulation costs at a level about 20 percent lower than PADD 1 costs 

relative to PADD 3 costs . Arguably, the RFG production cost of PADD 2 relative to 

those of PADDs 1 and 3 would drop fairly significantly if the reformulation volume of 

PADD 2 were considered, as PADD 2's RFG production volume is less than 20 percent 

of its gasoline production . Thus, PADD 2 cost and probably its cost-effectiveness 

would likely fall somewhere in the middle between PADDs 1 and 3 and thus have 

virtually no effect on this cost analysis which is based solely on PADDs 1 and 3 . 

One refiner stated that EPA should consider the increase in stationary source 

emissions associated with the anticipated building of new refinery processing units in 

addition to considering the emissions savings of requiring cleaner burning fuel . AAMA 

commented that the hydrocarbon, carbon monoxide, sulfur dioxide and toxics benefits 

of reducing sulfur should be accounted for. 

EPA's goal in responding to API's petition was to compare the Phase II NOx 

costs of this version of the DOE model with the previous version of the DOE refiner 

model considered by EPA in setting the RFG NOx standard to see if the more recent 

version of DOE's refinery model gives different costs . Since EPA did not evaluate 

stationary source emissions in its previous analysis, then it did not make sense to do 

that here . Similarly, it did not evaluate the emission reductions of sulfur dioxide and 

carbon dioxide in the previous analysis, however, the benefits of associated 

hydrocarbon and toxics reductions were accounted for by the complex model . If the 

Agency were to expand its program cost-effectiveness assessment to consider other 

pollutants or different sources of the same pollutants, it would then be important to 

evaluate both the increases and decreases of all the pollutants. 

A refiner stated that a tabulation of incremental cost estimates of making RFG 

over CG would be helpful. 

EPA nor DOE can provide such numbers with this recent refinery modeling study 

because it was not necessary to evaluate the RFG/CG cost difference to determine 

NOx reduction cost-effectiveness, and it was not asked for in the API petition . 

One refiner asked EPA to ensure that all capital and operating costs are 

amortized over summer gallons of fuel . One refiner commented that EPA's capital 

amortization methodology is reasonable, and also that refineries have passed capital 

investment costs on to the shareholders because of foreign competition. 

Indeed, all the NOx control operating costs and capital costs are amortized over 

the summer gallons of RFG. This is the same procedure used by EPA to determine 

26 
cost-effectiveness for the RFG rulemaking, and this procedure is spelled out in the 

Regulatory Impact Analysis (RIA) of the RFG program. The Agency appreciates the 

information of how some refiners are being reimbursed for their costs. 

One refiner stated that DOE and EPA should use the PIMs refinery model to do 

these types of analyses since it is the industry accepted standard 

DOE performed the NOx cost-effectiveness analysis for EPA with a refinery 

model highly scrutinized by oil industry representatives . While it may not be the 

industry standard, it is a very tight refinery model and because it is the property of the 

Oak Ridge National Laboratory, it is publicly available. 

One refiner commented that RFG standards do not change emissions very much 

relative to automobile standards ; and that actual Phase II standards are very expensive 

$49,000/ton NOx and $29,000/ton for VOC 

For the rulemaking process, the Agency evaluates pollution control programs 

based on their cost-effectiveness . Choosing programs to implement based on their 

cost-effectiveness makes sense in that the most efficient programs for reducing 

emissions of pollutants should be considered first . Through a review of a number of 

refinery modeling studies which it evaluated, including the Agency's Bonner and Moore 

study, the Auto-Oil study, DOE's study and the study by the National Petroleum 

Council, the Agency determined that Phase II RFG VOC control is attained at about 

$500 per ton, and NOx control at about $5000 per ton, and these values were 

considered appropriate . During the rulemaking process, the benefits were determined 

to be large and the cost-effectiveness sufficiently attractive which provided incentives to 

promulgate the program . This process is meant merely to serve as a check on the 

viability of the previous DOE study completed in 1994 . 

The American Petroleum Institute commented that PADD 3 sulfur and olefin 

reductions were realized with no capital expenditures. 

API data shared with EPA during promulgation of the RFG rule showed that 20 

percent of the gasoline from PADD 3's gasoline output is at 120 ppm or less. This low 

level of gasoline sulfur would likely allow those refineries to meet PADD 3's RFG NOx 

contribution with either very small or no new capital investment . The PADD 3 refinery 

model without ratio controls recognized this capability to produce clean gasoline within 

the PADD and therefore did not make any new investments . The refinery model with 

ratio controls, however, built a lot of new facilities, despite the availability of clean 

gasoline, which may indicate that it is overly constrained to not recognize the PADD's 

capability to produce clean gasoline. 

One refiner stated that Mathpro, a contractor which did a NOx reduction study for 

27 
OTAG (Ozone Transport and Assessment Group), showed that NOx control costs 96% 

of the incremental cost of a 12% NOx reduction and VOC and Toxics control . Thus the 

cost of VOC/toxics control determined by the DOE commissioned refinery model is too 

high . 

The results of the Mathpro study cannot be compared to the results of this 

analysis because the NOx reduction levels are much higher. At the high levels of NOx 

control reflected in the Mathpro study, which is most cost-effectively met by sulfur 

reductions, there are large associated VOC and toxics reductions . However, at the 

level of NOx control currently required by the RFG program, the lower level of sulfur 

control required does not deliver as much toxics reduction thus significantly more 

additional toxics reductions is required. 

Refinery models tend to overoptimize hydrogen availability since a portion is 

always sent to refinery fuel . 

According to DOE's response to this comment, both versions of the refinery 

model downgrade a significant portion of hydrogen to refinery fuel, and this portion was 

recommended to DOE by NPRA. 

NPRA and API commented that PADD 1 conventional gasoline was allowed to 

exceed the NOx maximum . 

This oversight likely had no effect on the NOx cost-effectiveness as this is an 

incremental analysis. The comment is noted, however, for future analyses . 

AAMA commented that the costs may be biased high for sulfur reduction levels 

to 100 - 150 ppm . 

Prior to beginning the Phase II RFG NOx cost-effectiveness analysis, EPA and 

DOE checked the cost-estimating performance of the refinery model by comparing the 

sulfur reduction cost of this model relative to other refinery models . When the costs, of 

the what is now termed the ratio version model, came in higher than any other study, 

another version of the refinery model was run without ratio controls . The costs of this 

other refinery model was significantly lower and it corresponded to the low end of the 

range of sulfur control costs . EPA is confident that the range of costs represented by 

the two versions of the refinery models represent the range in costs within which the 

actual NOx reduction costs are found . EPA is considering the full range costeffectiveness generated by the costs from the two versions of the refinery model. 

AAMA commented that bracketing the costs with a range in NOx reduction on 

either side of the actual NOx control standard biases the cost on the high side due to 

nonlinear cost curves . 

28 
There is a cost-increasing effect caused by interpolating between data points in 

a cost or cost-effectiveness curve. Understanding that, EPA still asked DOE to study a 

range in NOx control above and below the 6 .8 % NOx reduction standard to understand 

the cost-effectiveness above and below the current standard . The actual standard of 

6 .8% NOx control was not included to minimize the time and cost of adding another 

data point. The cost-increasing effect of this method was minimized, to what is believed 

to be very low levels, by using a smaller change in NOx reduction for PADD 1 than 

PADD 3 since the PADD 1 cost curve is more nonlinear . 

AAMA commented that only proven technologies are included in the refinery 

model which is different from how the automobile industry is treated, this approach 

leads to higher costs than otherwise. 

DOE did not include emerging refining technologies, such as Mobil Corporation's 

OCTGAIN, in the refinery model because of their uncertain applicability, use and 

benefits for the refining industry. To allow the refinery model to build such processes, 

DOE stated that it would have to assign a heavy investment penalty to account for the 

uncertainty of in investment. To the extent that these potentially more effective 

processes eventually penetrate the refining industry, the cost and cost-effectiveness of 

this analysis would likely be somewhat overstated . Based on recent increased 

acceptance of these technologies, incorporating such technologies into the refining 

model will be assessed for future refinery modeling studies. 

AAMA commented that EPA does not weight the two PADDs when determining 

national costs. 

The two PADDs studied were weighted based on their RFG production volumes. 

AAMA commented that a substantial cost increasing factor of sulfur control is 

maintaining octane which is largely a voluntary strategy by the oil industry ; thus the cost 

of maintaining octane should not be included in these costs . 

When the Agency evaluates program costs, a base presumption is that the 

business practices, other than the one(s) being targeted for change, do not change. 

This presumption was applied in this analysis, but it may lead to a conservative result . 

AAMA commented that there is no flexibility in crude slate which constrains the 

refinery model and increases estimated costs. 

There are inherent inflexibilities in PADD-wide refinery modeling, such as a fixed 

crude slate, which have a cost increasing effect on costs and cost-effectiveness . For 

this reason, DOE, in consultation with EPA, created a version of the refinery model 

without ratio controls which therefore represents a version of the refinery model with 

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increased flexibility to offset the cost-increasing tendencies of refinery modeling . 

AAMA commented that advanced technology vehicles will be greatly affected by 

gasoNine sulfur and this impact is not accounted for by the complex model . In addition, 

AAMA stated that OBD II will change the proportion of high versus low emitters and 

thus ,affect emissions . 

The cost-effectiveness of the RFG program was determined by the emissions 

benefit described by the Complex Model . The Complex Model is based on the effects 

of fuels on motor vehicle engines and emissions control technology of cars and light 

trucks sold in 1990 . As new cars with new engine families and more advanced 

emission control hardware are introduced, and the effects of fuels is tested on those 

newer vehicles, the data can be integrated into the complex model for fuels modeling . 

At this time, however, the affects of fuels on the emissions from newer vehicle 

technology is not sufficiently understood . 

AAMA commented that the emission benefit of Phase II RFG without the NOx 

standard is severely compromised because T50 and driveability index increases 

resulting in increased exhaust emissions and driveability problems. 

The refinery modeling work undertaken by EPA during the RFG rulemaking did 

not show a refinery associated impact between sulfur control, which is the likely method 

the refiners will use to control NOx to meet the Phase II NOx standard, and T-50 and 

driveability. This makes sense in that hydrotreating removes sulfur compounds and 

normally does not affect the mix of hydrocarbons which composes gasoline. EPA will 

continue to evaluate this issue as more emissions data becomes available.