| NEW YORK
NEW YORK Dec 16 U.S. refiners such as Valero
Energy Corp and Marathon Petroleum Corp are
bracing for stricter, smog-busting gasoline regulations set to
hit in January, threatening more headwinds for an industry that
has just endured its least profitable year since the shale boom
started five years ago.
Many refiners are grappling with record costs to meet U.S.
biofuel standards and the prospects of rising crude prices in
the wake of the decision by OPEC and other oil producers to cut
"The new rules are certainly going to increase costs and
impact margins. But how much, we'll have to wait and see," said
Ed Hirs, an energy economist at the University of Houston.
The Obama administration's so-called Tier 3 standards
require all but the smallest refiners to produce gasoline with
an average sulfur level of 10 parts per million (ppm), down from
the current standard of 30 ppm. Reducing sulfur cuts tailpipe
emissions but also strips out octane, which must be replaced at
President-elect Donald Trump has promised to cut regulations
but did not address this issue during his campaign. Any
substantive changes would potentially punish refiners who have
already invested millions to comply with the new rules.
The U.S. Environmental Protection Agency awards credits to
refiners who produce gasoline with sulfur levels below regulated
levels, and they may transfer credits from the existing Tier 2
program into the new one. Refiners can dip into their own pile
of credits or buy them from their competitors to offset their
production of higher-sulfur gasoline.
The low-sulfur credits cost $25 a few years ago but are now
trading at roughly $350 each, a trader said. The number of
credits a refiner must buy depends on how much sulfur is in the
gasoline. The higher the sulfur level, the more credits
Many refiners, such as PBF Energy and Phillips 66
signaled plans to rely on the credits to phase in
implementation of the program.
The U.S. government said up to 40 of the 108 refineries
affected by the new standards will need to purchase additional
credits to comply, according to a 2014 peer-reviewed analysis by
Dennis Nuss, a spokesman for Phillips 66, said the company
has a multi-year compliance plan, but added the company may
consider the use of sulfur credits as part of its strategy.
Mark Broadbent, a refinery analyst with Wood Mackenzie, said
he believes biofuel costs and rising crude prices are more
threatening than the cost of credits. A similar system that
requires refiners to blend biofuels like ethanol into the fuel
pool or purchase credits has been blamed for industry layoffs
and project delays this year.
"If Tier 3 credits turn, that would accelerate the
investment process, and that might be a short term hit to
margins. Ultimately, the refiners will need to invest,"
Barclays analysts said the new Tier-3 standards will
actually boost margins in the first half of 2017, as refiners
pass along the cost to consumers.
Refiners who plan on cutting sulfur must also contend with a
loss of octane. Components like reformate that boost octane will
increase in value under the new regulations, experts said.
"The new rules make it more expensive to produce high-octane
gasoline at a time we are seeing more cars require premium
gasoline," said Mark Routt, chief economist for the Americas at
KBC Advanced Technology in Houston.
One contractor who works with refiners to replace the
catalysts within units that reduce sulfur said companies are
working hard to determine the effect on octane.
"They are running computer models to see how much octane
they are losing and how much it costs to replace it," said the
contractor, who requested anonymity because he was not
authorized to speak about client relationships.
(Reporting By Jarrett Renshaw; Editing by David Gregorio)