1 Title: Memo to the Docket Regarding Economics of Ethanol Blending and Refining Sector Flexibilities developed to support EPA decision on 2012 RFS volume waiver requests (EPA

HQ

- OAR

- 2012

- 0632)

Date: November 1 5 , 2012

Introduction This memo briefly examines the economics of blending ethanol into motor gasoline and some of the technical factors that refiners and blenders would consider when considering how a waiver of

R enewable F uel S tandard (RFS) requirements might affect them. This memo was informed by various discussions and by comments from multiple stakeholders, including the Department of Energy, IHS, API, AFPM, Marathon Petroleum Company , and Chevron.

Ethanol’s Value to Blenders/Refiners

Domestic ethanol production in the United States has incr eased in the past 10 years , allowing greater quantities of ethanol to be blended into the gasoline pool. Ethanol’s widespread availability and blending economics have resulted in refineries modifying their operations to maximize the profitability of blending ethanol into gasoline , even exceeding the statutory
mandate for biofuels blending established in the Energy Independence and Security Act (EISA)

.

T wo components determine the blend value of eth anol to blenders/refiners. The first is ethanol’s

“extender value”

. As a gasoline extender

, ethanol is expected to have approximately the same value as gasoline when blended into the gasoline pool at low levels ( up to 10% or 15% by

volume ). We would expec t blenders and refiners to continue the discretionary blending of

ethanol as long as the value of the ethanol was greater than its cost

.

The second component is the “quality premium” that results because ethanol has a higher octane rating compared to re gular unleaded gasolin e (ethanol’s octane rating is 11 5

, while finished regular gasoline’s octane rating is 87)

. Some blenders are likely to continue blending ethanol

even if it s cost should rise above its extender value d epending on th e cost of alternative high

octane blendstocks in the market

. When ethanol’s price is below its maximum blend value in gasoline, refiners and gasoline blenders are able to earn an increment al margin for blending

ethanol above ethanol’s extender margin.

Current Etha nol Utilization and Refiner Flexibilities

Over time

, refineries have transitioned from primarily producing finished gasoline to primarily producing blendstocks for oxygenate blending (BOBs)

, which require the addition of high octane components (generally ethanol) in order to meet the specifications of finished gasoline

. In 2005, refineries produced 60% finished motor gasoline in the U.S.; by 2011, that number was down to

10%

. An estimated 85% of the ethanol blended into the gasoline pool was “match blended ” into blendstocks for oxygenate blending, or BOBs, while the remaining 15% was “splash blended” into finished gasoline 1

. For match blending

, octane and RVP are set with the anticipation that

ethanol will be blended downstream of the refinery.

1 Finished gasoline is gasoline that meets all applicable regulatory or industry standards without requiring further blending or modification before it could legally be sold.2 As a result , current refinery operations have evolved w ith the expectation that octane blending components will be readily available ex

- refinery gate and that a n unfinished (suboctane) gasoline will be produced at the refinery. However, r efineries and refinery proces s units were developed during different engineering “eras”. In other words, there are existing refineries that were originally configured to produce finished motor gasoline at the refinery

. As a result, refineries have responded to decreased demand for octane and high octane blend components through a series of operating and/or hardware changes that serve to maximize the individual refinery’s profitability. Th ese refineries have adapted to t he current era where high octane blending components are available at a discount, by altering operating parameters or idling process units.

T he options that refineries have available to increase gasoline octane involve a combination of operating changes and hardware changes. The two types of changes differ greatly in the t imeline for implementation: operating changes can be implemented in a matter of weeks and require a number of operational tradeoffs , whereas hardware changes could take several months t o a year and generally require capital expenditures. Refineries could respond to a decrease in ethanol availability by increasing severity (operating temperature) of their catalytic cracking, hydrocracking, or catalytic reforming units, which would have an impact on the refinery’s product slate. In addition, provided that the refinery has idle capacity in upgrading un i ts, they could increase the utilization of catalytic reforming, isomerization, and alkylation processes to produce higher octane blending com ponents.

An example of an operational change that a refinery could undertake in order to increase octane of the finished gasoline product is to increase severity of their fluid catalytic cracking unit (FCCU)

. At higher severity, additional gasoline blendi ng components of mid

- octane would be produced , as more energy is input into the process

. However, i ncreased gasoline production

would occur at the expense of distillate production , which has been a significant contributor to refinery profitability. Alternatively (or in addition), a refinery could increase utilization and severity of the catalytic reforming unit. Increasing severity of catalytic reforming would increase

the octane number of the finished reformate, but would have a number of drawbacks. First, more energy would be required to run the process; second, the yield of co

- products would be increased at the expense of other, more valuable products ; and third, the overall yield of r eformate would

be reduced. In the event there is available reform er capacity, increased utilization could help counteract some of the loss in reformate yield; however, increased utilization would only exacerbate the increase in energy use and co

- product p roduction.