Rules of the road

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Road fuels are evolving across the world as countries target air pollution by setting tougher gasoline sulfur standards and looking to blend in more renewable fuels

The road fuel market is set to evolve as refiners adapt to optimize gasoline production and meet increased demand for higher octane fuels, and governments require lower sulfur content and higher biofuel blending.

The transition to cleaner road fuels is evident in Europe’s gasoline market as nations move toward 10% ethanol content in gasoline.

The EN228 gasoline standard, which is widely adopted across Northwest Europe and became an EU directive, contains up to 5% ethanol, maximum 10ppm sulfur and minimum 95 RON. The market is moving to E10, driven by EU-wide targets under the Renewable Energy Directive and Fuel Quality Directive, but it is implemented differently in each member state.

The Netherlands — the largest gasoline-exporting nation in Europe with over 1.29 million b/d of capacity — introduced gasoline blended with 10% ethanol in October, joining Finland, Belgium, France, and Germany in the higher- ethanol blend at the pump.

Concerns about higher ethanol blends persist, particularly among Germany’s car enthusiasts, but the consensus is that E10 can be used in around 90% of gasoline-powered vehicles in Europe and in 99.7% of the gasoline-powered vehicles produced since 2010.

European consumers are becoming more conscious about environmental protection as well as vehicle efficiency.

The growth of the electric vehicle fleet will increase in importance in 2020, with countries such as the UK boosting both the number of cars on the road and the charging infrastructure. The UK offers grants of up to £3,500 for new electric cars, but the future of the subsidy is uncertain.

Another topic closely being monitored is the growth in sales of higher-octane, or premium, gasoline in Europe, which commands a higher price at the pump. Sales of higher- octane fuel have grown steadily in recent years, with a more advanced vehicle fleet across Europe’s more developed economies, although consumers’ environmental concerns have somewhat capped the increase.

US hard deadline for Tier 3

US refiners face challenges ahead for both major road fuels, diesel, and gasoline. Diesel cracks climbed above five-year levels ahead of the January 1 debut of the 0.5% sulfur limit for marine bunker fuel that the International Maritime Organization mandated.

Overshadowed by the whirlwind challenge of IMO 2020, US refiners faced another major sulfur cut January 1 with the US Environmental Protection Agency’s Tier 3 gasoline specifications — requiring US refiners to reduce the amount of sulfur in gasoline to 10 ppm from 30 ppm — going into full force.

Under the 2014 law, refiners had six years to phase in capital investments to be able to make enough low-sulfur gasoline to meet demand. In the interim, refiners have been able to fill the gaps with credits while making Tier 2 gasoline.

As the deadline neared, the price of Tier 3 credits spiked, while expiring Tier 2 sulfur credits “are nearly worthless,” said George Hoekstra, independent oil consultant and expert on Tier 3 gasoline. In August,

S&P Global Platts Analytics pegged Tier 3 credits at about $1,990/credit.

Hoekstra estimates that about 70% of US refiners are not making 10 ppm sulfur gasoline required by the Tier 3 gasoline specs.

“All refiners are compliant,” he said. “But not all refiners are making compliant gasoline. Most refiners who say they are Tier 3 compliant mean they will be shipping off-spec barrels with the intent to comply by buying credits later at unknown future prices.”

Hoekstra estimates that Tier 3 credit supply is “minuscule compared to likely demand,” which means prices will rise further.

“Tier 3 credits will go high enough that some refiners will pay hundreds of millions of dollars for them in 2020, 2021, and 2022. It will be similar to how the RINs issue played out,” he said, referring to US renewable fuel credits.

But sources with knowledge of the situation said most of the major refiners, like Chevron, Valero, and Marathon, are already complying with Tier 3 gasoline requirements, and are building up Tier 3 credits as a result.

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