Final Ruling Could Ignite Supply Concerns

Watch Your Tank Levels Because It’s Going to Get Complicated

Opportunities and Risk with New Gasoline Specifications in Midwest

 
The Environmental Protection Agency (EPA) on February 22 announced a final ruling granting eight states in the Midwest their petitions to remove a gasoline volatility waiver, clearing the way for year-round E15 sales in 2025.

A year earlier, on March 1, 2023, EPA had signaled its intent to grant the request by eight governors following a public comment period, although the implementation date was uncertain, with concerns that a start date this year would lead to supply shortfalls and sharply higher retail prices. No doubt those concerns ahead of the U.S. presidential election factored heavily into delaying implementation to April 28, 2025, to the disappointment of ethanol producers.

Nearly two years earlier, the governors of Illinois, Iowa, Minnesota, Missouri, Nebraska, Ohio, South Dakota, and Wisconsin used their authority under the Clean Air Act to formally petition EPA for the removal of the 1-pound per square inch volatility waiver for E10, which results show increases emissions in their state. Under the CAA, governors can request a change in gasoline specifications if they can prove the change would reduce pollution.

The concerted effort by the states, where most of the ethanol production in the United States occurs, was born out of frustration in an inability to expand greater consumption of the blendstock. E15 sales are largely prohibited during the summer driving season outside of the federal reformulated gasoline zone and certain regions of the country working with the EPA to reach attainment with the CAA through a State Implementation Plan because it violates the 9psi RVP summer volatility standard. Ethanol increases RVP.

“In some cases, this would be expected to increase the distances traveled, which may in turn require the purchase of additional tank trucks and hiring of additional drivers…”

For more than 40 years, E10 was granted a 1psi RVP waiver by U.S. Congress, but that allowance was not extended to E15. On July 2, 2021, in striking down an EPA decision granting E15 the waiver during the Trump administration, the U.S. Court of Appeals for the District of Columbia Circuit was unequivocal that only Congress has the authority to extend the waiver beyond E10. The Nationwide Consumer and Fuel Retailer Choice Act, a proposed federal legislation which would allow E15 sales year-round, has stalled in Washington.

The ruling is consequential, requiring two new fuel types, regular and premium, during the summer season that affect the quality and supply of gasoline beyond the petitioning states in the highly interconnected gasoline distribution system. There are 11 refineries in the states that petitioned for ending the waiver, and 29 refineries located in states that border the petitioning states. Refineries farther away from the region could also decide to produce the new 8psi RVP gasoline blendstock, namely in Texas, which are connected to the region by pipeline.

Refineries located in Petitioning and Adjacent Non-Petitioning States (Source: EPA)

“Refineries providing fuel to the petitioning states would have to modify their summertime production operations and potentially add capital equipment to accommodate the 1-psi lower RVP standard in the summer,” said EPA.

EPA estimates 30,000 to 80,000 bpd of gasoline production could be lost in implementing the ruling as refineries seek to produce the lower 8psi RVP CBOB by reducing butane, which they estimate results in a 2% loss from the gasoline yield compared with producing 9psi RVP CBOB. Lost gasoline production could be greater for refineries that do not have the ability to remove or store butane, requiring pentanes or NGLs to be removed which could lead to as much as 10% loss in gasoline production. Refineries processing heavy crude are also challenged in producing the low-RVP gasoline.

A refinery risks having a stranded asset if they spend capital for a debutanizer column to remove more butane to provide lower-RVP gasoline should Congress decide to pass legislation granting E15 the 1psi RVP waiver nationally, or if a governor of a petitioning state seeks to reinstate the 1psi RVP waiver. This might occur should the removal of the waiver lead to supply shortages and price spikes.

“If refiners and fuel distributors are concerned that any capital investments could be stranded, they are less likely to invest in them even if they have sufficient time to plan for such investments,” said EPA.

By dividing the fuel market, significant operational changes by pipeline systems would be required, including smaller batch sizes and changes in scheduling, and potentially cutting off historic supplies from some sources.

Concept of Pipeline Movements After Removal of the 1-psi Waiver (Source: EPA)

“Having the wrong fuel grades in the wrong volume can result in an inability for the pipeline to move fuel in and out of tankage as needed, which, in turn, can result in significant supply disruption not only for the gasoline grade in question, but also for all of the fuels shipped on the pipeline,” said EPA. “For the longer term, due to the bifurcation of the market into different grades, some areas in the petitioning states may lose redundancy for supply, which may then lead to more frequent shortfalls in supply during times of disruption (e.g., refinery fire, pipeline outage, hurricane, etc.).”

EPA notes there are an estimated 250 large gasoline refined product terminals in the petitioning states with a storage capacity of at least 50,000 barrels per terminal. There are roughly another 100 smaller fuels storage and transfer facilities or bulk plants that serve more sparsely populated areas, 110 breakout tank terminals located in the petitioning states, and more located outside this area that serve both petitioning and non-petitioning states. All terminals would be impacted to some extent, with the “more challenging transition in the spring from winter gasoline to summer gasoline, particularly in the first year,” said EPA.

Terminals Located in and Around the Petitioning States (Source: EPA)

Terminals “blend down” remaining winter grade gasoline amid the transition, which could prompt pipelines and terminals to request even lower RVP gasoline, potentially as low as 6psi RVP. Terminals would also likely drain tanks to as low as possible, especially those located near petitioning states, which could lead to timing constraints.

Moving fuel by truck from the terminal to retail outlets outside the petitioning states could also incur “considerable stress” on operations if product is limited to the lower RVP fuel grade. “In some cases, this would be expected to increase the distances traveled, which may in turn require the purchase of additional tank trucks and hiring of additional drivers,” said EPA.

“The decision to focus on a particular market or fuel type may also be dictated by a fuel marketer on the retail side,” said EPA, while noting whatever the decision, it could impact fuel supply, cost, and price for both markets.

“Approximately 75 such terminals are located close to the borders (i.e., 30 miles) between petitioning states and non-petitioning states. These terminals are more likely to provide gasoline in both types of states and would need to change their gasoline distribution patterns if they lack extra tankage to handle lower RVP gasoline grades,” said EPA. “Since terminals can serve gasoline markets up to 200 miles away, the number of terminals impacted could be significantly greater.”

Where the supply of low-RVP gasoline is limited, prices would increase sending a market signal to move more supply to the location. As a result of the capacity constraints in both low-RVP gasoline production and distribution, EPA believes some low-RVP gasoline, “potentially a significant amount,” will need to be supplied to at least part of an area in non-petitioning states adjacent to petitioning states.

“Ideally this sorting out would occur as contracts are established for supplying different gasoline markets in advance of the summer season,” said EPA. “It is unlikely, however, that the supply of low-RVP gasoline to every single gasoline market in the petitioning states can be sorted out in advance.”

In consultation with the U.S. Energy Information Administration, EPA calculates conventional gasoline demand volume in the eight petitioning states averaged 39.6 million gallons per day in 2021 from March through August when refineries would need to produce low-RVP gasoline. The limitations of the fuel distribution system just described, which would be most acute in the first year without the RVP waiver, EPA expects some low-RVP gasoline in bordering non-petitioning states. Gasoline demand volume in those states during the same six-month period in 2021 is calculated at 68.205 million gallons per day.

Conventional Gasoline Volume in the Petitioning States in 2021 (kgpd) (Source: EPA)

 

Conventional Gasoline Volume in Adjacent Non-Petitioning States in 2021 (kgpd) (Source: EPA)

EPA estimates the highest impact to adjacent non-petitioning states is to those with two borders with the petitioning states — Indiana, Kansas, Michigan, and North Dakota. The impact to single borders states is 25% or less than the two border states, which include Arkansas, Kentucky, Pennsylvania, West Virgnia, and Wyoming. The estimated impact scenarios fade over time as the fuel distribution network adjusts to the multiple fuel types.

“If fuel distributors find it infeasible to distribute low-RVP gasoline solely to the petitioning states without also distributing low-RVP gasoline to non-petitioning states, and refiners can produce more low-RVP gasoline even if doing so is at a higher cost, we expect the impacted volumes will be towards the high-impact scenario,” said EPA.

The estimated daily volume of low-RVP gasoline in both petitioning and non-petitioning states in a low impact scenario is 45.9 million gallons, and 67.1 million gallons in a high impact scenario.

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About the author

Brian L. Milne, DTN Editor, Analyst

Brian L. Milne is a 28-year veteran of the energy industry, serving in multiple roles at DTN, including editor and analyst. Milne has delivered dozens of presentations on a wide range of topics discussing the energy markets and has been quoted widely in the media, including the Wall Street Journal, Barron’s, USA Today, Newsweek, CNN, National Public Radio, and major regional news outlets. He has authored numerous articles for international magazines, exploring market dynamics and providing forward-thinking commentary and analysis. Milne graduated from Monmouth University in New Jersey with a Bachelor of Arts in history and an interdisciplinary in political science (magna cum laude).