1



## Hawaii Fuel Oil and Diesel : Supply and Demand Balance

Introduction

Petroleum fuel supplied to Hawaii's economy is primarily sourced from imported crude oil refined locally into petroleum products. A pproximately 90 percent of all liquid

- bulk cargo imports are crude oil and 10 percent are refined products. The majority of fuel suppl ied to Hawaii passes through the Chevron and

Tesoro refineries , the only two petroleum refineries on Oahu

, mak ing the m critical links in Hawaii’s
petro leum product supply system.

Mainland states are interconnected by an extensive network of product pipelines, navigable waterways,
rail lines, and tank truck routes that contribute greater market stability and flexibility in the supply and distribution of petroleum products. Hawaii is different in this respect from most other states and fuel
market s

. In contrast , s upply shortfalls in Hawaii re q uire imports over grea t dis tances and at greater

expense than faced by mainland markets. In addition, e xcess supply of petroleum products must be exported and compete s in global markets

.



### Overview of Refinery Operations

Hawaii’s unique pattern of demand for petroleum produc ts determines the operation and the product output of the two refineries. Hawaii an petroleum refineries are configured to meet Hawaii’s high demand for residual fuel oil and jet fuel and as a result are far less complex than the average U.S. refinery. The Hawaiian refineries ’ processing configuration s are somewhat complementary, with one configuration aimed primarily at gasoline (Chevron) and the other primarily at middle distillates jet fuel
and diesel (Tesoro ). As Table 1 below illustrates, the re fineries are both equipped with cracking
facilities and other processing units to assist in upgrading the product slate into more valuable products.

Table 1

- Hawaii Refining Capacity 1

Refining Capacity (bbls/d ay ) Chevron Tesoro
Atmospheric Distillation 54,000 93,500

Vacuum Distillation 31,300 43,000

Catalytic Distillation 21,000

- Cat Hydrotreating* 3,500 12,000

Cat Hydrocracking

- 17,500

C4 Isomerizer 3,200

- Alkylation 5,000

- LP Catalytic Reforming

- 13,000

Thermal Cracking & Visebreaking

- 13,000

Asphalt & Road Oil 1,500 1,000

Sulfur (short ton/day)

- 34

Hydrogen (MM scf/day) 3 18

1 The refinery process is basically divided into two stages, the primary distillation process and the downstream processes. The primary distillation process yields an output slate that maps the quality and consistency of the crude oil that is processed. Heavy crude oil yields more residual fuel and less gasoline than light crude. In the downstream (secondary) process, the product s of the primary distillation are converted to higher value products such as gasoline.2

The Chevron refinery is equipped with catalytic cracking to break the residual fuel oil into gasoline (and also create ‘cycle oils,’ which are blended back into the remaining fuel oil to lower the viscosity). Chevron also has alkylation and isomerization units, which tak e gases from processing and converts them into high

- octane blend stocks for gasoline. Additionally, s ome portion of Chevron’s f uel oil is diverted to asphalt.

Tesoro’s central cracking technology is hydro

- cracking that converts a portion of the fuel oil to lighter products. However, unlike Chevron's catalytic cracking unit

– where the focus in on gasoline

– hydro

cracking is mos t often used to maximize the output of jet fuel and diesel. The Tesoro refinery also has a viscosity breaking unit specifically to cut fuel oil viscosity.

In general, the Chevron refinery is ‘gasoline

- oriented’ and the Tesoro refinery is ‘jet

- fuel and diesel

oriented

. ’ ( Note, however, t he gasoline output of the two refineries is similar in volume, despite the
fact that Tesoro’s capacity for crude in put is about twice that of Chevron .)

What is similar between the two refineries is their lack of capacity to remove sulfur. T he two refineries are both constrained in the kinds of crudes they can process and low sulfur products they can produce

. N either refinery is in a position to process a slate crude oil composed entirely of high

- sulfur crudes. For example

, p roducing LSFO requires certain minimum runs of very sweet (low sulfur) crudes

.

Crude Oil Supply to Hawaii

The supply of crude oil is of prime importance for the petroleum supply of the island. Hawaii’s refineries depend on a quality of crude oil that matches their process capabilities in order to maintain the ir product slate to meet current local market needs. The quality of crude purchased by Hawaii refiners is constrained by the configuration and design of its refineries

.

The refinery requirements for sweet and higher gravity crude oils limit purchase options for the island's
refiners

. In 2010, Hawaii received about 96 percent of the crude oil from foreign sources. All of the domestic supply comes from Alaska. Russia, Indones ia and Saudi Arabia are the largest sources of supply, accounting for 70 percent of total imports. No other country was responsible for more than 9
percent. Pacific Rim countries were the source of 50 percent of total imports.

Figure 1

- 2010 Imports of Foreign Crude Oil3



### Petroleum Product Supply and Demand

As mentioned above, t he se refineries have been built and designed to meet the petroleum product
demands of Hawaii 's island economy. Hence they are designed to maximize jet fuel production (due to high demand for jet fuel ), and residual fuel production to supply required fuel for power generation and ship bunkering. F igure 2 below compares the output slate of Hawaii’s refineries to the average output
slate o f a typical refinery in the U.S

.

Figure 2

- Product Slate and Yields

T he refineries in Hawaii produce a significantly higher portion of jet fuel and residual fuel oil than their U.S. mainland counterparts and produce significantly less motor gasoline and diesel fuel. W hile
refineries on the mainland U

. S

. can minimize the production of residual fuel to less than 2 gallons per barrel (4%) as a result of coking and FCC capacity, the Hawaii refineries still produce 11.7 gallons of fuel
oil from each barr el of crude (27%). Production of the most valuable product, gasoline, is 46% of total refinery output for the US as a whole, and only 19% in Hawaii.

Hawaii 's consumption of the five major petroleum products is s ignificantly different from the mainland

U. S

. For example, g asoline represents about one

- half of all petroleum used in the U.S. but represents only about one

- quarter of total petroleum product consumption in Hawaii.

Similarly, t he amounts of residual fuel and jet fuel consumed on a percentage ba sis are significantly higher in Hawaii than in the rest of the U.S. While fuel need ed for ground transport in Hawaii is about

one

- half of total petroleum consumption compared to the entire U.S., petroleum required for air transport is more than three time s higher than in the U.S. The percent of petroleum products used for electric power generation in Hawaii is about 15 times higher than the U.S. average

.

The significant drivers behind these differences are Hawaii’s high jet fuel demand, resulting from significant military and civilian airline consumption, and Hawaii’s power generation that is base d primarily on petroleum fuels, unlike the electric generation fleet on the mainland. Figure 3 below demonstrates these differences in consumption patterns.4 Figure 3

- Comparison of 2009 Hawaii and U.S. Petroleum Product Consumption



### Analysis of Residual and Distillate Supply Demand Balance

Two fuel switching options are being evaluated as strategies to lower SOx emissions from nine MECO and HELCO power plants that currently burn medium sulfur fuel oil (MSFO). The sulfur concentration of the MSFO burned by MECO and HELCO currently is between one and two percent. Th e first o ption
include s replacing t he 1.2 million barrels of MSFO burned in the se plants with a new residual fuel oil,
l ow s ulfur i ndustrial f uel o il (LSIFO) . LSIFO is low sulfur industrial fuel oil with a pour point similar to
MSFO and but is not currently produced at either refiner y on O ahu nor imported to the islands

. Accordingly, it is anticipated that LSIFO would be created by refiners blending current production runs o r stocks o f residual fuel oil wi th other petroleum products and additives or imported blends

.

The second fuel switching option being evaluated is to substitute the MSFO a t both utilities with lower sulfur distillate (diesel) fuel oil

. The fact that MSFO has a 7.5% higher BTU content than diesel fuel means an additional 90,000 barrels , or a total of 1. 29 million barrels of diesel fuel

, will be required to generate the same amount of electricity generated from the 1.2 0 mill i on barrels of MSFO currently
burned at these facilities

. Table 2 below highlights the generation plants under review and provides a comparison of the MSFO versus Distillate Fuel Oil requirements.

Table 2

- Power Plants Proposed for Fuel Switching5

A critical question under considera tion is whether Hawaii's existing petroleum product network has sufficient capacity, supplies

, and blending stocks to produce 1.2 million barrels of new product in the
form of LISFO

, or if deliver y of a n et additional 1.29 million barrels of diesel fuel to utilities to displace
the MSFO can be accommodated by the island’s fuel supply infrastructure

.

T able 3 below, Hawaii Residual Fuel Oil Supply and Demand Balance

, provides a summary of the interaction between the supply and demand for residual fuel oils in the Hawaii economy. The table demonstrates how closely balanced local refinery production and imports (primarily LSFO) are with consumption in the Hawaii market. The data also indicates that in most years demand exceeds supply, though the percentage is typically so small that supply and demand are judged to be in balance. For example, for the years 2008

- 2010, the average percentage difference between supply and demand is
less than f our tenths of one percent.

Table 3

- Residual Fuel Oil Supply Demand Balance

Table 4 below illustrates the balance between supply and demand for diesel fu el in the Islands. Diesel fuel (distillate) demand is met primarily from local refinery production but also require s imports of very low sulfur diesel to meet fuel specifications of the transportation and utility sector . Historically, diesel6

fuel producti on from Hawaii's refineries falls short of meeting the islands full demand, even when imports are included.

Between 2005 and 2010, 5 of 6 years showed diesel supply was net short. The average percent short fall was nearly 10 percent over that six year period. However, when considered for the years 2008

- 2010, the average percentage net difference between supply and demand was only 3.6%. Again, 2007 proved to be a year of abnormally high demand in which 9.3 mill ion barrels of diesel fuel were reported consumed by EIA.

Table 4

- Distillate Fuel Oil Supply Demand Balance

These findings on Hawaii's petroleum supply system are consistent with conclusions reported in other public documents and data researched and compiled for this assessment

. The island's supply and
demand for all petroleum products is closely balanced and H awaii ’s petroleum market requires both refinery production and ongoing imports and exports of petroleum products to sustain and balance
market demand.



### Summary Comments

Does Hawaii's existing petroleum product n etwork has sufficient capacity, supplies, and blending stocks to produce 1.2 million barrels of new product in the form of LISFO?

There is strong current demand for residual fuel in Hawaii for both power generation and ship bunkering
and the refiners that service the Islands are configured to me et those demand s

. A switch to LSIFO may

not necessarily change the total volume of fuel oil required on the Islands in general and by the electric generation sector in particular

. The question remains what refining and supply scenarios are possible
with r espect to a future demand for LSIFO for power generation roughly equal to the current demand7

for MSFO. The options by which the LSIFO supply could reach required levels includes investment in additional refinery capacity to produce lower sulfur fuel oil, importation of lower sulfur fuel oil, adjustment to the crude oil slate, or a combination of these options.

Investment by the refineries in additional processing units could provide one avenue for expansion of
low sulfur fuel oil (as well as diesel) produ ction. Recent reports that Tesoro has put its Oahu refinery up for sale, as well as a 2009 Bloomberg report stating that Chevron was studying the possibility of shutting down its Kapolei refinery and supplying Hawaii from other sources, however, suggests both refiner s may be seeking means to reduce their investment and that interest in large new capital investments in their plants may be limited . Moreover, the volumes of LSIFO involved may not be sufficient to economically justify upgrades of refinery uni ts or additions of new refining processes.

W ithin certain ranges

, Hawaii's refiners can adjust the crude and product slate s to match market
conditions

– accepting some degree of additional lower sulfur crude and blends to produce LSIFO. Thus, as it pertains to LSIFO as a replacement for MSFO, it’s reasonable to expect that the some portion
of the increase in low sulfur fuel oil production required to provide sufficient LSIFO for the MECO and HELCO power plants in question c ould come from a combinati on of increasing the refinery run slate of lighter, sweeter crude oils to a point economically justified by each refinery, along with increases in
low er sulfur blends . Given the current levels of production of MSFO at each refinery today, t his

assessment would conclude that meeting an increase in the demand for LSIFO could likely be accommodated by Hawaii's current petroleum supply network, including importation of needed crudes
and blends to meet the standard.

Can Hawaii refiners deliver an additional 1.29 million barrels of diesel fuel to utilities to displace the MSFO they are currently burning to generate electricity?

In contrast to the production and supply of residual fuel oils, supplies of distillate fuel oil have been shown to be consistently short relative to demand during the period 2005

- 2010. Fuel switching from MSFO to diesel fuel at the nine power plants will result in a net increase in the demand for diesel fuel in
the Ha waii market. Using average consumption data from Table 4 for the period 2005

- 2010, a net
demand increase of 1.29 million barrels represents a n 18 percent increase in the average volumes of diesel fuel required to serve the Hawaii market. 2

T here is very little excess capacity for Chevron to increase and sustain operating capacity above current
levels. I n 2010 it operated at 91 percent capacity and in the last 6 years has operated as high as 94
percent. Even in 2006

, when both Chevron and Tesoro where r unning their refineries at 90 percent and above, the volume of all qualities of diesel fuels produced was estimated to be only 7 million barrels.

The Tesoro refinery has be en operating at capacity factors of less than 76 percent in each of the last fo ur years. In order to achieve a balan ce in diesel supply required to replace MSFO at the MECO and HELCO plants , the refinery would have to substantially increase its level of crude runs thus increas ing its operating capacity back in the 90 percent range. Even then , with the incremental increase arising from the fuel switch at the nine power plants, the supply of diesel fuel would be approximately 1.3 million
barrels short of the estimated 8.3 million barrels needed to meet Hawaii's total demand for this f uel.

2 Other than 2007

, when consumption of diesel fuel was reported to be 9.3 million barrels, EIA's SEDS for Hawaii reports

c onsumption has only exceeded 8 million barrels 3 year out of the last 40 years

.8

The volumes of low sulfur diesel fuel required to enable a switch from MSFO for the nine power plants represents a significant increase in demand and appears incapable of being met by Hawaii's refineries given limited sulfur processing capacity and current market conditions. Practically then, even if the
refineries operate at high levels, it will be necessary to import volumes of low sulfur diesel fuel in excess
of 1 million ba rrels per year.