Sunoco executive warns of US gasoline supply disruptions this summer
Salt Lake City-ExxonMobil sees a "fairly rapid"
phase-out of MTBE-blended gasoline by US refiners ahead of
the May 5 repeal of the US oxygenate mandate, CEO Rex Tillerson said March 21 at the
National Petrochemical & Refiners Association
annual meeting.
Big East Coast refiner Sunoco also sees a rapid
phase-out, with possible "temporary disruptions" at
gasoline terminals this summer if supplies of MTBE replacement ethanol, which faces logistical concerns,
fail to get to refiners, Sunoco executive vice president Joel Maness told Platts on the sidelines of the
meeting.
He stressed that while terminals may run out of gasoline, "we certainly don't anticipate seeing any
interruption of supply to [retail] customers at all," since refiners can do exchange agreements with each
other or access other terminals.
EIA thinks a rapid transition has put the gasoline market at risk for price volatility,
while RFA says refiners are planning a staged phase-out.
US refiners are in the process of replacing MTBE, known to contaminate drinking water, with ethanol, and
there is some disagreement in the industry over whether there will be enough ethanol to go around ahead of
the summer driving season. The East Coast is particularly vulnerable as it shifts to blending corn-based
ethanol which must be transported from Midwest plants. Ethanol, unlike MTBE, tends to absorb water, so
many refiners are trying to move it mainly on trains or trucks.
Last week, ethanol lobbyists at the Renewable Fuels
Association publicized a letter they wrote to the Energy
Information Administration criticizing an EIA report that warned of possible gasoline price spikes due
to the sudden need for more ethanol.
The biggest bone of contention is the speed at which refiners will be switching to ethanol. EIA thinks a
rapid transition has put the gasoline market at risk for price volatility, while RFA says refiners are
planning a staged phase-out.
Unlike ExxonMobil and Sunoco, Valero Energy sees an
"orderly" transition, at least for itself. Valero is the biggest refiner in North America, followed by
ExxonMobil.
CEO William Klesse told Platts on the NPRA sidelines that the US will have enough ethanol to blend into
gasoline during the current spike in demand.
Valero will stop selling MTBE-blended gasoline on May 5, Klesse said. "It's a two-month phase-out
[for Valero]...To me that's orderly..."
Both ExxonMobil and Sunoco are currently phasing out RFG blended with MTBE, they said. ExxonMobil will
stop blending MTBE into gasoline "by early second quarter," according to spokeswoman Prem Nair.
Sunoco expects most of the industry to halt MTBE-blended RFG sales by May 5, with a few refiners selling
RFG with MTBE only weeks to a couple months after that date, said Maness.
Both ExxonMobil and Sunoco see sufficient ethanol supply with logistical concerns. In Sunoco's case, its
big Philadelphia refining complex is taking ethanol by rail, mostly on a delivered basis. Ethanol
producers have said a lack of unit trains will make it hard to get ethanol where it needs to go in the
short term. "The rails seem to be fully occupied," said Maness.
"If you look at the situation broadly...it would appear there will be sufficient ethanol..," said
Tillerson. "It's a logistics and a distribution challenge in terms of ensuring [ethanol] gets to the right
places where it's needed."
"We're not expecting the worst, but we're not expecting the best" this driving season, said Maness. He
said Sunoco's biggest concern is "just getting [the ethanol] there."
"Obviously [ethanol supply is] tight because the price is higher than gasoline," Klesse said. However,
"we think there is enough ethanol."
Valero's decision to stop using MTBE is directly related to the new US energy law's lack of a liability
waiver coupled with the oxygenate mandate repeal, said Klesse: "Now that you've lost the oxygenate
mandate...with that gone, we don't think we have this protection now from defective product and that we're
just wide open [to potential lawsuits], and I believe the industry feels that way too."
Valero is also eyeing potential "opportunities" in the ethanol industry, he said. "It's still very much in
the study phase," said Klesse, adding, "we're looking at the [ethanol] market to try to make sure we
understand it and to see what opportunities might really be there." He would not give further details.
US refiners have been working feverishly to meet a blizzard of new formula changes this year. There are
also many projects planned to increase overall plant capacity.
Looking ahead, the US EIA does not think the US will have an oversupply of product if all announced
refining capacity expansion plans come to fruition, according to EIA senior analyst Joanne Shore.
However, the Middle East could experience overexpansion because the economics of those projects differ
from US projects, she told NPRA participants.
"If you take the US alone, I don't think we're going to be in an oversupply situation....I believe that
there's a stronger potential for undercapacity," said Shore.
The area most likely for refinery capacity overexpansion "is probably Asia and the Middle East," she said,
adding that projects in those regions "are not just being driven by returns on refining, but also on the
projects and the jobs that they may supply in the region."
US projects are driven more by increased refining profitability, a high light-heavy crude price
differential, and increased cash and personnel availability as companies finish low sulfur fuel
investments, said Shore. Looking at US refinery plans announced for 2005-2010, the EIA sees 1.7 million
b/d of crude unit expansion, she said.
EIA expects the largest capacity additions to occur in the Asia-Pacific area, with an estimated 3.6
million b/d of crude capacity expansions planned for 2005-2010. Middle East exporting capacity is the next
highest with 2.5 million b/d of crude capacity expansion plans that will serve both the Asia Pacific area
and Europe.
"Fast growing Asian demand is accompanied with plans for large capacity expansions, particularly in China
and India," she said, noting that India is planning enough new capacity to increase product exports.
The Middle East "seems to be in a let's develop capacity for export markets game again," she said, citing
a 400,000 b/d export-oriented refinery at the Red Sea port of Yanbu being planned by Saudi Arabia and a
600,000 b/d refinery at Al-Zour planned by Kuwait.
Crude distillation plans indicate large increases in all regions except for Europe, said Shore. Those
refiners are focusing on hydrocracking, which produces more distillate to meet growing diesel demand. She
said while European refiners plan only a 30,000 b/d increase in crude capacity 2005-2010, plans call for
hydrocracking to increase 275,000 b/d to produce more distillate.
Shore said European refinery yield changes would mostly raise distillate yield and reduce residual fuel
oil production, with little change in gasoline yields. Much of that gasoline is exported to the US.
Created: April 6, 2006
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