The EPA recently proposed new Tier 3 standards to reduce U.S. gasoline sulfur content from 30 ppm to 10 ppm (maximum). Their analysis indicates the compliance cost would be about one cent per gallon (cpg) and the new standard would significantly reduce vehicle tailpipe emissions and associated health issues. The API, representing the Petroleum Refining Industry, takes exception to the EPA’s claimed costs and benefits. The API’s Tier 3 analysis indicates Refiner compliance capital costs could be $10+ Billion, gasoline processing costs would increase by 5-9 cpg, and, possibly somewhat lower health benefits. While the debate surrounding the health benefits is very complex and highly contingent on the data sources and assumptions, the actual compliance costs should be much more transparent. In addition, there could possibly be other more cost effective solutions to significantly reducing total U.S. petroleum sulfur emissions.
Recent EPA Tier 2 Gasoline Sulfur Reduction Standard
The costs and benefits of the new proposed EPA Tier 3 gasoline sulfur reductions are somewhat déjà vu of the most recent Tier 2 standards implemented in 2004. This last round of gasoline sulfur specification changes required reducing pre-2004 gasoline sulfur of 300 ppm by 90% to 30 ppm. At that time the EPA’s Tier 2 compliance cost estimate was less than 2 cpg vs. the Refining Industry’s 5-6 cpg estimate. Claimed Tier 2 health benefits were surprisingly similar to Tier 3. My past analysis of Tier 2 cost impacts found that many Refiners experienced actual costs in the 3-6 cpg range; depending on available existing excess gasoline desulfurization-reforming processing capacity at individual refineries and how capital intensive the Tier 2 compliance actually was to install required new processing capacity.  Increasing the desulfurization severity (level of sulfur reduction) for gasoline stocks significantly reduces its octane. The lost octane must be restored by increased reforming severity/capacity and other processing octane increase options.
Proposed EPA Tier 3 Gasoline Sulfur Standard Compliance Cost Estimates
The Tier 3 requires reducing gasoline sulfur by another 2/3’s (30 ppm -10 ppm). The EPA and their consultants claim this gasoline sulfur reduction will only cost about 1 cpg vs. the API’s estimated 5-9 cpg. (Note: both studies also include the cost impacts of Tier 3 reduced RVP; vapor pressure.) As previously described, substantially desulfurizing gasoline is fairly complex, and, much more costly-energy intensive, the lower the target specification becomes. The cost to reduce hydrocarbon sulfur is not linear as the EPA and their consultants have apparently assumed, it’s more of an expediential function. Based on my 30+ years Refining experience and brief analysis, an estimate on the order of 5 cpg appears to be far more reasonable than 1 cpg.
A Possible Non-Partisan Tier 3 Cost Estimate
The basic problem of establishing the actual cost for achieving Tier 3 10 ppm compliance is due to the complexity of modern refineries and the normal politics involved by those in support of and those against a given new standard or regulation. The EPA obviously hired consultants to support their proposed Tier 3 standards and the API has done likewise in support of their position. While I personally try to approach all issues and regulations in a balanced-objective manner, due to my past oil refining experience, some may believe my bias would be directionally towards my past employers and customers.
In reviewing the proposed Tier 3 standards I looked for possible studies or examples that were reasonably non-partisan, easy to understand and transparent. I explored the international refining industry where 10ppm gasoline is currently produced and surprisingly found a reasonably good example within the U.S., the state of California. California has a history of leading the country in many environmental areas including gasoline specifications. Today, California’s CARB gasoline requires 20 ppm maximum sulfur vs. the EPA’s current 30 ppm. Other than this significant difference in sulfur, other specification differences between CARB & EPA gasolines are relatively small.
CARB gasoline cost or market prices have historically been greater than the average U.S. For example, since 2007 average CARB gasoline prices have been $0.22/gallon greater than U.S. average gasoline. Part of this price difference is due to state fuel tax differences. California has one of the nation’s highest gasoline tax of $0.38/gallon vs. average U.S. of $0.24/gallon; for a difference of $0.14/gallon. Adjusting the EPA-CARB gasoline price-cost difference for this increased sales tax indicates that on average CARB gasoline is ($0.22 – $0.14 =) $0.08/gallon greater than the average U.S.; rough cost for an average reduction in sulfur of 10 ppm. Assuming the cost to reduce current EPA gasoline sulfur by 20 ppm were linear (directionally a very conservative assumption), the cost to achieve the Tier 3 10 ppm sulfur would be roughly (2 x 8cpg =) 16 cpg.
Granted, California is one of the most expensive states to operate a petroleum refinery in, which potentially also contributes to the EPA-CARB increased cost-price difference. So, if one assumes up to half the increased CARB gasoline cost is due to operating within California (increased energy costs, higher union labor wages and taxes, other small CARB-EPA specification differences, etc.), a fairly conservative estimate to reduce average U.S. EPA gasoline sulfur content by 20 ppm would be (16/2 =) 8 cpg. This reasonably transparent estimate appears to more strongly support the API’s estimated 5-9 cpg vs. the EPA’s 1 cpg.
Possible Alternatives to the EPA’s Tier 3 Standards
Gasoline is not the only or the largest source of U.S. petroleum fuels sulfur emissions. Other petroleum motor or heating fuels such as marine bunkers (residential fuel oil), jet and diesel contribute very significantly to total U.S. sulfur emissions. Refer to the following Table:
U.S. 2012 Petroleum Consumption and Associated Sulfur Emissions
Data source: EIA Table 3.5, Product Supplied, and Table 3.7c. ‘Maximum Sulfur’ based on applicable EPA standard data, and ‘Average Sulfur’ and ‘Average Gravity’ based on industrial data. Note; KBD = thousand barrels per day and SO2, KMT/yr. = sulfur dioxide (equivalent), thousand metric tons per year. Also note the average sulfur data is less than the maximum allowed. This is common industrial practice to ensure reliable-continuous regulatory compliance.
The above table shows that reducing gasoline sulfur from Tier 2 to Tier 3 standards (28 ppm to 9.5 ppm) would reduce the Transportation Sector’s SO2 (equivalent) emissions by (20.9 -7.1 =) 13.8 KMT/yr. While this reduction would be quite significant for most countries, compared to total U.S. sulfur emissions from residual fuel oil and jet fuels consumption, the proposed Tier 3 standard’s benefits appear to be relatively small. Note: despite being able to produce residual fuel oil, jet fuel/kerosene, and even aviation gasoline with sulfur contents substantially higher than current averages, factors such as processing economics encourage Refiners to produce these fuels at significantly lower sulfur levels than allowed by EPA regulations.
As discussed previously, it’s normally more economical to reduce petroleum sulfur contents from higher concentrations to medium concentrations vs. the much higher costs of reducing lower concentrations to extremely low concentrations. For example, reducing jet fuel sulfur from current average 650 ppm to about 545 ppm would reduce total U.S. sulfur emissions by 13.8 KMT/yr.; equivalent to the Tiers 2-3 sulfur reduction level. The costs for this alternative strategy would very likely be a small percentage of the cost required by the current Tier 3 standards (i.e. in the lower range of the API’s Tier 3 estimated costs).
Of the total 345 KBD of U.S. residual fuel oil consumed in 2012, 225 KBD is from some combination of marine fuels (Transportation Sector). If existing 0.5 wt.% (5000 ppm) fuel oil sulfur regulations were applied to all U.S. marine fuel oils, total sulfur emissions would be reduced by 57 KMT/yr.; over four times gasoline Tier 3 standards. Costs once again could be substantially less than the proposed EPA Tier 3 standards. While desulfurizing residual fuel oil is somewhat more expensive than distillates (jet/diesel) and gasolines per barrel, the reduced volume of only 225 KBD vs. 8,703 KBD of gasoline would result in total costs being a small fraction of what is likely required to comply with the EPA’s proposed Tier 3 standard for gasoline.
Recommended Alternative Procedure for Reducing U.S. Petroleum Sulfur Emissions
Rather than developing new regulations or environmental standards unilaterally and with excessively narrow focus, the EPA needs to change its past-current practices and more fully engage the primary stakeholders most affected by the proposed regulations. In the case of petroleum sulfur emissions, the development of the possible reduction standards obviously needs to include a much broader review of the most significant and economically feasible solutions. The detailed costs and benefits analysis to optimize the feasible solution options should also be carried out in a much more cooperative/coordinated process with the primary affected stakeholders. Such an improved regulation development process could not only result in identifying the truly most optimum solutions to improving the environment, but also do so in the most economically feasible manner possible. This improved process will not only facilitate improving the environment, but also minimize the cost impacts for most consumers.