The explosion in octane values

Author Simon Palmer, VP Global Aromatics, and Anjani Singh, Aromatics Consultant

Traditionally newcomers to the aromatics business in the US have been taught that the measure of “blend value” alternatives for aromatic products like toluene and mixed xylenes was based on the spread between premium and regular gasoline, or the “regrade spread”.

These alternate values would set a floor beneath prices for aromatic products separated for sale into the chemical markets. This regrade spread would allow the calculation of the value of upgrading from regular 87 octane gasoline to premium 93 octane grade and thus the value of aromatic octane could be derived.

Adjustments could be made for vapor pressure and thus you had a benchmark blend value for each product based on its specific blending characteristics. This approach was later expanded to cover the “BOBs” (RBOB and CBOB) to reflect values in non-attainment areas of the country.

This straightforward approach has worked well for many years, especially when used for quick and ready analysis. It has been challenged at times especially when used as a mechanism for pricing or transfer pricing of product but the results continue to be published as a representative measure of the value of octane to this day.

Attempts have been made to introduce alternative benchmarks using octane barrel values derived from a basket of similar blend components such as reformate, alkylate and so forth, but the traditional “regrade spread” calculations are still very widely used.

One of the challenges presented to the regrade method of calculating octane values was that of cause and effect. Was a high regrade spread the thing which caused octane values to be strong or was a high regrade spread more a symptom of high costs of octane.

This has become an especially relevant question as light tight oil has become the prevailing crude feed for many US Gulf coast refineries.

One major aspect of refining which the regrade spread has not specifically represented is the value opportunity for blending sub-octanes up to regular gasoline. The “regrade” opportunity, and hence the value for a refiner to make more premium sales can be influenced by many individual factors, not least that the premium gasoline markets are not especially liquid, whereas upgrading sub octanes is a much more universal means to derive additional value within refineries.

An indicator for that upgrade would provide another insight into what the value of aromatic octane would be to this less recognized but much larger volume octane lift. This measure of octane has not really been given much airtime in the chemical markets up until now.

Padd3 naphtha & lighter monthly average exports ('000 b/d)

Most US Gulf coast refineries are long naphtha. As the naphtha export chart above clearly shows, Padd3 (US Gulf coast) exports of naphtha range products to the international markets have risen to more than 300,000b/d since the beginning of the pandemic. Even before the pandemic, exports were trending slowly but steadily higher.

US exports as a whole are also expanding but Padd3 accounts for the large majority. Due to growing impact of domestic light crudes in refinery feed slates and refiners also dropping as much heavier material into the higher margin distillate pool as they can, these naphtha surpluses are growing and are mostly light and largely paraffinic.

These large volumes of light material are a refiner's worst nightmare for meeting octane, summer RVP and T50 targets, so historically a refiner’s blending LP might elect to export the naphtha out rather than struggle to blend it away. This might have worked when naphtha was only modestly discounted below gasoline but those days appear to be gone.

Currently a refiner would face a penalty upwards of 130¢/USG or $460/t for a naphtha merchant sale versus sending it down the pipe upgraded to regular gasoline. The naphtha to gasoline spread chart in this blog illustrates how quickly and significantly these discounts have expanded.

US Gulf coast naphtha to gasoline spread ($/t)

As a result, faced with the fact that shipping a naphtha surplus out is not currently a fiscally prudent option, what can a refiner or indeed blender do to mitigate the problem? Blending gasoline is like balancing a teeter-totter (see-saw).

You have a basket of hydrocarbon products to blend away as finished gasoline. Each component has its own unique combination of volume, octane rating, vapor pressure, T50 characteristics and sulfur content, and will sit at different points along the hypothetical teeter-totter.

The further away from the pivot point (the blending target) on the sub-octane, high RVP side of the equation, the larger the challenge to balance it out with something on the higher-octane side. Light, paraffinic naphtha typically has a R+M/2 octane rating in the lower 60’s, so is firmly a “sub-octane” component.

The RVP is around 12 to 14 psi which is not far below the limit of what can be stored and shipped from a floating roof tank. Light naphtha, often with high C5 paraffin content, would be seen as a “problem child” by a blender.

Argus assesses a Gulf coast waterborne naphtha with 70pc min paraffin content, and this is what we use for assessing light naphtha market value in this context. This product is typically slightly higher octane (~70) but has a similar RVP and is judged largely typical of the alternative value on the Gulf coast.

To balance out against a low octane, high RVP light material such as this, you would ideally have a high octane, low RVP component such as a 104 RON heavy reformate containing a high proportion of C9A, C8A and C7A, or if you are an independent blender some separated components such as mixed xylenes, toluene, ethanol (but only if you’re under the blending and RVP limit) or MTBE ( but only if you’re exporting the finished gasoline outside of the US).

If you have a really light naphtha cut with 60 octane and RVP over 16 psi, a refiner is going to have no choice but to blend it away as storage and shipping is going to be impractical due to the high vapor.

A refiner will normally throw reformate at the problem, as reformate is largely the “fix-all” for these kinds of issues within most Gulf coast refineries.

Alkylate has good octane, but is higher RVP and higher on sulfur. Reformate is all the above, high octane, low RVP, good on T50 and low on sulfur. Reformate is also of course your extraction or separation feedstock for BTX production and hence a high blending incentive means a high BTX feed cost.

Reformate has a specific internal blend value at every refinery, particularly as many have multiple reformers running different feed naphtha and under different operating conditions but there is also a merchant market for reformate and hence a benchmark market price.

Argus assesses a price for typical Blendstock Reformate based on a 100 octane, 1 psi RVP and 30ppm sulfur max specification, waterborne in Houston, Texas. A differential above the Colonial Pipeline conventional unleaded gasoline price is also derived.

This measure of the value of octane as the spread of reformate prices over benchmark unleaded regular gasoline is another very useful tool in analyzing the value of aromatic octane to the pool.

As can be seen from the graphic below, the reformate premium over gasoline has been steadily increasing over time, in part as recognition of the incremental benefit it presents as refinery operations and gasoline regulations evolve.

As refiners emerge from the pandemic and are running their kit at high throughput rates, this reinstates the value of reformate as a fix-all for the finished product blenders. The recent expansion in the naphtha to gasoline discounts has merely served to emphasize this value.

US Gulf coast reformate premium over regular unleaded gasoline ($/t)

In the light of all this, what is the meaning for aromatics for the petrochemical industry? Firstly, aromatic octane is becoming more valuable over time in the US Gulf coast as refining evolves to new circumstances. A lighter crude slate brings much higher yields of light paraffinic naphtha.

The disposition of large portions of this light naphtha to the domestic olefins crackers is no longer practical nor economic, and the international value is in relative decline. The value to blending is also falling markedly, which in turn enhances the incentive to blend it off with aromatic octane in reformate.

This appreciation in the relative value of reformate is showing through as higher feed costs and reduced rewards to aromatics recovery for the petrochemical industry. This is an established long-term trend but one which is coming much more into focus as the industry recovers from the pandemic.

By almost any measure, the business of recovering aromatics on the Gulf coast is on a clear downward slope as far as profitability is concerned. This is in a large part down to the fact that its feedstocks are becoming more expensive on a relative basis.

The BTX margin chart illustrates the decline using a volume-weighted BTX mix spread above breakeven value based on merchant product sales at contract or term basis prices. If you plotted a simple linear trend line it would show a halving of the margin spread in nominal terms over this ten year period.

This deterioration in the rewards to the industry also serves to harm its international competitiveness as derivatives are often highly reliant on the export marketplace for their disposition, or are the victims of high volume imports from the international market.

US BTX reformate extraction extraction versus floor at contract price (USC/USG)

Secondly, this long term cost pressure is heightened in the shorter term by the seasonality of the gasoline market in the US. The preponderance for higher gasoline consumption between Memorial Day and Independence Day concentrates refinery production of gasoline in between the spring turnaround season and the beginning of July.

This boosts alternative values and pressures BTX margins. This impacts the industry at a time when it too is emerging from its spring turnaround season. This is a well known phenomena but the recent cost pressure on aromatics recovery has been of a wholly different character.

Thirdly, but by no means lastly, the business of recovering aromatics in the US will always play second fiddle to the pull from gasoline. Strong gasoline alternatives have already caused the structural demise of the volume export of mixed xylenes from the Gulf coast and have led to the intermittent shutdown of disproportion units due to high toluene feed values.

Midnight raids on finished toluene and mixed xylenes inventory are still a thing for the integrated chemical businesses and blenders have on occasion gone after other high octane petrochemical products like cumene, ethylbenzene and cyclohexane to feed their appetite.

The petrochemical business generally expects these occasions to be mostly fleeting as the gasoline market is notoriously choppy by nature and chemical prices normally rise in response to send the blenders elsewhere.

The recent run up in gasoline values however has been on a whole new level and the petrochemical industry is reeling as a result.

So what are the final takeaways here? Firstly, the pandemic has exposed some of the impacts of an imbalanced refining business. As refineries struggle to cope with diverging demand in different transportation segments, the values of aromatic reformate as a fix-all have risen.

Alternative values for aromatics in the avgas pool have suddenly come into play and gasoline alternatives are off the charts. Will blend values of aromatics into avgas become another influence of reformate feed costs for the aromatics business? We’ll have to see.

Secondly, the processing of light domestic crudes on the Gulf coast is producing structural length in light naphtha which is no longer an easy disposition to the steam crackers in Asia. This is now requiring large volumes of aromatic octane in the form of reformate to capture the upgrade and blend it away to gasoline. This is valuing reformate on a different basis and one which the petrochemical industry needs to keep a track of.

As in life, simple rules and guidelines for octane alternatives for aromatics are becoming more complex and multi-dimensional. The simple “regrade” octane calculation that we all used to use is now only part of the answer. Keeping track of these alternative values is also becoming far more important, as the pressure on feed costs for the US aromatics industry intensifies.

This article is driven by data and insights from:

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