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Breaking the Chains, Part 2 - Tier 3 Gasoline Mandate Tests Refiners, U.S. Octane Production

A potentially important factor affecting the supply of octane — the primary yardstick of gasoline quality and price — has been lurking in the background over the last few years. The Environmental Protection Agency’s (EPA) Tier 3 gasoline sulfur standard applies to all refiners and importers who deliver gasoline to the U.S. market, and while delayed compliance requirements and the onset of the pandemic have blunted its full impact to refiners and consumers so far, the implications of meeting the new standard are beginning to take shape. In today’s RBN blog, we explain how the Tier 3 specs are linked to octane supply, where octane destruction comes into play, and how refiners are adapting to the octane-sulfur squeeze.

We began our look at the octane market in Part 1 of this series, which detailed how the price of octane has marched steadily higher over the past decade, led by a market now impacted more by demand than production costs. Just as octane demand has been increasing, however, a number of factors have been tamping down octane supply and recently spurred a run-up in the retail “price” of octane, measured by the difference between the pump prices of premium and regular gasoline. The focus of today’s blog is on another factor affecting octane supply: the Tier 3 standard.

Implemented in 2014 with initial phase-in beginning in 2017 and full implementation in 2020, Tier 3 requires that gasoline contain no more than 10 parts per million (ppm) sulfur on an annual average basis, and no more than 80 ppm sulfur on a per-gallon basis. There were special compliance rules for small refiners that applied during the three-year phase-in period that allowed some to delay compliance until 2020, and other phase-in rules allowed most large refiners to also delay compliance to 2020. Consequently, the effective Tier 3 compliance date was January 1, 2020. Soon after that date, COVID-related lockdowns left refineries operating at low utilization rates until mid-2021, a period during which it was easy to meet the 10 ppm sulfur specification. Only in 2022 with the rebound in consumer demand for gasoline have refiners been challenged, for the first time, to meet this new gasoline sulfur specification while running at full speed. 

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