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Breaking the Chains, Part 4 - Credit System Provides U.S. Refiners a Way Around Tier 3 Specifications

If you buy premium gasoline, you’ve probably noticed its price differential versus regular has been increasing in recent years. That is a sign of the rising value of octane, the primary yardstick of gasoline quality and price. In this blog series we’ve examined a new gasoline sulfur specification called Tier 3, which is causing complications for U.S. refiners looking to balance octane and gasoline production while still meeting the regulatory limits on sulfur. In today’s RBN blog, the fourth and final on this topic, we provide an analysis of the obscure Sulfur Credit Averaging, Banking and Trading (ABT) system, which allows refiners to buy credits to stay in compliance with the Tier 3 specs. The price of these credits quintupled in 2022, another sign of a tight octane market that will be attracting increased attention in the months and years ahead.

In Part 1 of this series, we detailed how the price of octane has marched steadily higher, driven 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, which has gone from a 20-cent differential to about 80 cents per gallon over the past decade.

In Part 2, we focused on a critical refinery stream called fluid catalytic cracker (FCC) gasoline. The Tier 3 sulfur specification requires that this refinery stream, which makes up 40% of U.S. gasoline supply, must be severely desulfurized to remove 99% of the sulfur it contains. That is necessary to meet the Tier 3 gasoline specification, which requires an average of not more than 10 parts per million (ppm) of sulfur in all finished gasoline sold in the U.S. That desulfurization step is where the connection between octane and sulfur enters the picture. The problem is that such severe desulfurization can reduce the octane quality of FCC gasoline, which can cause a major problem for those who must meet both sulfur and octane specifications when blending the finished gasoline.

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