ethanol and the economics of octane · ethanol and the economics of octane the superior solution...

Ethanol and the

Economics of Octane The Superior Solution

Geoff Cooper

Renewable Fuels Association

October 20, 2017

Today’s Presentation

• What is octane and why is it important?

• Options for boosting octane in gasoline

• Ethanol’s octane advantage

• The economics of octane

2 Copyright © 2017 Renewable Fuels Association. All Rights Reserved.

What is Octane? • Spark-ignition gasoline engines work by

compressing an air-fuel mixture and

then igniting the mixture (with a spark

plug) at a specific instant during the

cylinder’s compression stroke.

• A fuel’s octane number is the

standard measure of its ability to

resist pre-ignition (or “knocking”) in

the cylinder of a gasoline engine.

3

Chevrolet LT4

Copyright © 2017 Renewable Fuels Association. All Rights Reserved.

Higher Octane = More Knock Resistance

4

• Pre-ignition occurs when there is too

much pressure in the combustion

chamber and the air/fuel mixture is

incorrect.

• This causes uneven combustion and

“knocking,” which can lead to poor

performance and engine damage.

• The higher the octane number, the

more compression the fuel can

tolerate without pre-igniting.

• Engines with high compression ratios

require high octane gasoline.

Normal combustion Premature combustion


Measuring Octane

5

RON

MON

AKI

• Research Octane Number

• Knock resistance at low-load operations (e.g., highway driving)

• Posted on pump in most of the world (e.g., Europe and Asia)

• Motor Octane Number

• Knock resistance at high-load (e.g., acceleration, hauling)

• MON is always less than RON

• Anti Knock Index…also called (R+M)/2

• Equal to (RON + MON)/2

• Posted on the pump in North America


Pure Component Octane

Versus Blending Octane

• Pure component octane:

– Anti-knock performance (RON or MON) of an individual, pure compound by itself

• Blending octane:

– Anti-knock performance (RON or MON) of a blending compound when it is a component of a gasoline blend


U.S. Octane Standards for

Finished Gasoline

7

Gasoline Grade AKI

Premium 91-93

Mid-grade 89

Regular 87 Note: Octane standards are about 2 AKI points lower in some

states in the High Plains and Rocky Mountain region.

Octane standards in the U.S. are

set by individual states.


International Octane Standards “Regular Grade”

8

91 RON

92 RON

92 RON

95 RON

91 RON

90 RON

95 RON

91 RON

92 RON

92 RON 95 RON

87 AKI (91 RON)

87 AKI (91 RON)

87 AKI (91 RON)

87 AKI (91 RON)

93 RON 93 RON


Source: ICCT

95 RON

88 RON

Octane and Gasoline Blending • The “naturally occurring” octane in the crude oil fractions

that become gasoline is far less than what engines need.

• Refiners “create” the additional required octane by: – Carrying out chemical processes that “upgrade” low-octane

hydrocarbon molecules into high-octane molecules; and/or

– Purchasing and blending high-octane blendstocks.

• Making octane in the refinery is costly and energy intensive.

• Refiners must balance octane needs with other specifications and properties. – e.g., volatility, sulfur content, benzene content


Key Hydrocarbon Refining Octane Sources

• Alkylate – Blending octane = 93-95 AKI

– Low volatility, no sulfur, no benzene

• Reformate – Blending octane = 87-100 AKI

– Low volatility, some sulfur, contains benzene

• Aromatics (Benzene, Toluene, Xylene) – Blending octane = 94-107 AKI

– Upgraded from reformate

• Butane – Blending octane 92-94 AKI

– Very high volatility


Source: MathPro, Inc.

https://en.wikipedia.org/wiki/File:Benzene_Toluene_and_ortho-,meta-,and_para-xylene.svg

Ethanol’s Octane Advantage

11

• Ethanol’s pure component

octane number is 100 AKI.

• But it’s blending octane

number is 109-119 AKI,

depending on the octane

of the finished fuel.

• Ethanol’s blending octane

number is highest when

used with lower-octane

hydrocarbon blendstock. 108

110

112

114

116

118

120

86 87 88 89 90 91 92 93 94

Eth

an

ol's

Ble

nd

ing

Oc

tan

e (

AK

I)

Finished Gasoline Octane (AKI)

Ethanol's Blending Octane Number

Regular

Premium

Copyright © 2017 Renewable Fuels Association. All Rights Reserved. Source: MathPro, Inc.

Average

Ethanol’s Octane Advantage

12

84

93 94 95

101 104

107 110

114 117

70

75

80

85

90

95

100

105

110

115

120

GasolineBlendstock

n-Butane Alkylate Reformate Benzene Toluene Xylene MTBE Ethanol Methanol

Octa

ne N

um

ber

(AK

I)

Blending Octane Number (AKI) of Various Gasoline Octane Sources

Regular

grade

gasoline

(87 AKI)

Extremely

high

volatility

High toxicity

Banned in

26 states

Not approved

by automakers

Known

human

carcinogen

Copyright © 2017 Renewable Fuels Association. All Rights Reserved. Source: RFA; DOE; MathPro, Inc.

BTX Aromatics

Ethanol Blending in the Past

• Prior to circa 2002, ethanol was used mainly as a volume extender not as an octane enhancer.

– Refiners did not assume gasoline would be blended with ethanol downstream.

– Gasoline (E0) leaving the refinery already met state octane specifications.

– Ethanol was “splash-blended” far downstream of refinery in some locations (mostly Midwest).

– Result of “splash-blending” was gasoline with more octane than required to meet specifications for “regular grade.”


Ethanol Blending Today • Regulations and policies significantly expanded the use of ethanol in 2002-

2010 timeframe.

– Winter oxygenated gasoline; Reformulated gasoline; State MTBE bans; RFS

• By 2010, most gasoline in the U.S. blended with 10% ethanol.

• Thus, refiners reconfigured operations to capture ethanol’s octane benefit and avoid octane “give-away.”

– Began widespread production of sub-octane gasoline Blendstocks for Oxygenate Blending (BOBs) designed for blending with 10% ethanol

– BOB + Oxygenate = Finished Fuel


Blending Octane (AKI) Share of Blend Octane (AKI)

Regular grade BOB 84 90% 75.5

Ethanol 117 10% 11.7

Finished E10 87.2

Ethanol has rapidly emerged as a significant

source of octane in U.S. gasoline

15

84

85

86

87

88

89

2000 2002 2004 2006 2008 2010 2012 2014 2016

Octa

ne (

AK

I)

Octane Contribution from Ethanol, MTBE, and Refinery Hydrocarbons in U.S. Gasoline

Ethanol

Refinery

Hydrocarbons

MTBE

Pool Octane

Copyright © 2017 Renewable Fuels Association. All Rights Reserved. Source: MathPro, Inc.

The Economics of Octane • What is the economic value of octane?

– A common measure used in the U.S. is the “Premium-Regular Bulk Spread”

– Difference between bulk spot prices for premium (90 AKI) and regular grade (84 AKI) gasoline BOBs

• (PRM – REG)/6 pts AKI = value per AKI point of octane

– Considered by refiners to represent the market value of octane

– Good indicator of refining cost to produce incremental octane


17

$-

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60Jan-0

5

Jun-0

5

No

v-0

5

Apr-

06

Sep-0

6

Feb

-07

Jul-0

7

De

c-0

7

Ma

y-0

8

Oct-

08

Ma

r-0

9

Aug-0

9

Jan-1

0

Jun-1

0

No

v-1

0

Apr-

11

Sep-1

1

Feb

-12

Jul-1

2

De

c-1

2

Ma

y-1

3

Oct-

13

Ma

r-1

4

Aug-1

4

Jan-1

5

Jun-1

5

No

v-1

5

Apr-

16

Sep-1

6

Feb

-17

Jul-1

7

$/G

allo

n

Premium-Regular Price Spread

Premium-Regular BOB Bulk SpreadSpread

($/Gal.)

PRM %

Increase

over REG

2005 0.11 7%

2006 0.17 9%

2007 0.16 8%

2008 0.15 6%

2009 0.14 9%

2010 0.11 5%

2011 0.14 5%

2012 0.24 9%

2013 0.25 9%

2014 0.26 10%

2015 0.26 16%

2016 0.18 13%

2017 0.21 14%

Annual Averages (Bulk)

Copyright © 2017 Renewable Fuels Association. All Rights Reserved. Source: EIA

18

$-

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60Jan-0

5

Jun-0

5

No

v-0

5

Apr-

06

Sep-0

6

Feb

-07

Jul-0

7

De

c-0

7

Ma

y-0

8

Oct-

08

Ma

r-0

9

Aug-0

9

Jan-1

0

Jun-1

0

No

v-1

0

Apr-

11

Sep-1

1

Feb

-12

Jul-1

2

De

c-1

2

Ma

y-1

3

Oct-

13

Ma

r-1

4

Aug-1

4

Jan-1

5

Jun-1

5

No

v-1

5

Apr-

16

Sep-1

6

Feb

-17

Jul-1

7

$/G

allo

n

Premium-Regular Price Spread

Premium-Regular BOB Bulk Spread Premium-Regular Retail SpreadSpread

($/Gal.)

PRM %

Increase

over REG

2005 0.21 12%

2006 0.24 12%

2007 0.25 11%

2008 0.26 11%

2009 0.27 15%

2010 0.27 12%

2011 0.27 9%

2012 0.28 9%

2013 0.29 10%

2014 0.33 12%

2015 0.45 24%

2016 0.47 29%

2017 0.52 28%

Annual Averages (Retail)

Copyright © 2017 Renewable Fuels Association. All Rights Reserved. Source: EIA

Value of Incremental Octane

19

$-

$0.005

$0.010

$0.015

$0.020

$0.025

$0.030

$0.035

$0.040

$0.045

$0.050

$/G

all

on

Value per Point of Octane (AKI) based on Bulk Prices

• Based on current

Premium–Regular BOB

bulk spread, each point

of incremental octane

(AKI) is worth 3.5 cents

per gallon to the refiner

• Ethanol’s current

theoretical octane value

is $1.05/gallon over 84

AKI BOB price!

• (114 – 84) x 3.5 cpg


Why is the Value of Octane Increasing?

20

Constrained

Supply

Increased

Demand

• Increased volume of light

tight oil (LTO) and

condensate

• Produces lower quality

gasoline blendstock (more

low-octane naptha)

• Octane loss from tighter

sulfur standards

• Refining industry slow to add

octane-producing capacity

• Higher domestic demand

for all gas grades

• Demand for premium is

rising (as share of total)

• Higher compression

and turbo charging

• Increased export

demand for gasoline and

high-octane blendstocks

0%

4%

8%

12%

16%

20%

Jan-9

2

Jan-9

4

Jan-9

6

Jan-9

8

Jan-0

0

Jan-0

2

Jan-0

4

Jan-0

6

Jan-0

8

Jan-1

0

Jan-1

2

Jan-1

4

Jan-1

6

Premium Share of Total U.S. Gasoline Sales

Copyright © 2017 Renewable Fuels Association. All Rights Reserved. Source: EIA, MathPro, Inc.

Ethanol Consistently Priced Below RBOB Gasoline

21

$(1.50)

$(1.00)

$(0.50)

$-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

Jan-1

0

Apr-

10

Jul-1

0

Oct-

10

Jan-1

1

Apr-

11

Jul-1

1

Oct-

11

Jan-1

2

Apr-

12

Jul-1

2

Oct-

12

Jan-1

3

Apr-

13

Jul-1

3

Oct-

13

Jan-1

4

Apr-

14

Jul-1

4

Oct-

14

Jan-1

5

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

Apr-

16

Jul-1

6

Oct-

16

Jan-1

7

Apr-

17

Jul-1

7

Oct-

17

$/G

all

on

Ethanol and RBOB Nearby Futures Prices, 2010-

Ethanol-RBOB Spread

RBOB

Ethanol

Copyright © 2017 Renewable Fuels Association. All Rights Reserved. Source: CME

22

100

150

200

250

300

350

400

Jan 2

01

2

Apr

20

12

Jul 201

2

Oct 20

12

Jan 2

01

3

Apr

20

13

Jul 201

3

Oct 20

13

Jan 2

01

4

Apr

20

14

Jul 201

4

Oct 20

14

Jan 2

01

5

Apr

20

15

Jul 201

5

Oct 20

15

Jan 2

01

6

Apr

20

16

Jul 201

6

Oct 20

16

Jan 2

01

7

Apr

20

17

Jul 201

7

Oct 20

17

Cen

ts/G

allo

n

Ethanol, Reformate, Alkylate, MTBE Spot Prices

Reformate (Houston) MTBE (USGC) Alkylate (Houston) Ethanol (Chicago)

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan 2

01

2

Apr

20

12

Jul 201

2

Oct 20

12

Jan 2

01

3

Apr

20

13

Jul 201

3

Oct 20

13

Jan 2

01

4

Apr

20

14

Jul 201

4

Oct 20

14

Jan 2

01

5

Apr

20

15

Jul 201

5

Oct 20

15

Jan 2

01

6

Apr

20

16

Jul 201

6

Oct 20

16

Jan 2

01

7

Apr

20

17

Jul 201

7

Oct 20

17

Cen

ts/B

len

din

g O

cta

ne P

oin

t (A

KI)

Cents/Gallon Cents/Octane Point (AKI)

Ethanol Priced Far Below Other Octane Sources

Source: Argus Copyright © 2017 Renewable Fuels Association. All Rights Reserved.



• University of Illinois analysis

compares ethanol prices to an

average price for the BTX

aromatics from 2007-2017.

• “Over the entire period, the

price premium of the

aromatics relative to ethanol

averaged $1.06 per gallon.”

Source: Irwin, S., and D. Good. "On the Value of Ethanol in the Gasoline Blend." farmdoc daily (7):48, Department of Agricultural and

Consumer Economics, University of Illinois at Urbana-Champaign, March 15, 2017.

http://farmdocdaily.illinois.edu/2017/03/on-the-value-of-ethanol-in-the-gasoline-blend.html


152.3

253.7

• Argus reports weekly market

prices and a calculated

“octane blending value”

for various octane sources.

• In addition to octane

number, the “octane

blending value” formula

takes into account energy

density, RVP, and other

important blending factors.


Proof of the Ethanol Advantage


• QuikTrip station in Kansas on April 7, 2017

• 87 AKI ethanol-free gasoline priced 20%

above 87 AKI E10 and just 1.5% below 91

AKI premium E10!

• Buc-ee’s station in Texas on June 27, 2017

• 87 AKI ethanol-free gasoline priced 53%

above 87 AKI E10 and 22% above 93 AKI

premium E10!

Summary • Octane is a critical consideration for efficient operation of

spark-ignition engines

• Refiners can meet octane standards by “creating” octane at the refinery or purchasing octane boosters from other sources – Producing octane at the refinery is costly and energy intensive

• Demand for octane is increasing globally; supply is tightening

• Ethanol is a superior octane booster due to its: – Extremely high RON and blending octane numbers;

– Economic competitiveness; and

– Benign effects on the environment and human health


ethanol and the economics of octane · ethanol and the economics of octane the superior solution...

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