High on butane, refiners celebrate winter’s arrival

LONDON: The switch to winter gasoline specifications across the US, which began on September 15, should take some of the heat out of gasoline prices, and ease any residual tightness in the oil market, by enabling refiners to blend increasing amounts of butane into the gasoline supply.
Gasoline dispensed at the pump is actually a complex mixture of hydrocarbons, ranging from light molecules with just 4 carbon atoms to moderately large ones with up to 12 or so. Even larger molecules are used to make diesel, heating oil and heavy fuel oil.
With just 4 carbon atoms (C4) butane is the lightest and among the cheapest components which refiners and distributors blend together to make gasoline.
Butane’s low boiling point helps improve fuel efficiency and makes engines easier to start in winter. But it is also liable to evaporation in hot weather, causing vapor lock, where liquid fuel changes to a gas in the fuel lines, and the evaporation contributes to air pollution.
During the summer, the amount of butane blended into the gasoline supply is therefore tightly restricted across the southern US and in some mostly urban parts of the north with a particularly poor history of air pollution.
Since 1989, the Environmental Protection Agency (EPA) has prescribed standards for the maximum evaporation (volatility) of gasoline sold, supplied, dispensed, distributed or transported between May 1 and September 15 across the lower 48 states. The limits come into effect for refiners from May 1 and for retailers from June 1.
Volatility is expressed in terms of Reid vapor pressure (RVP). In winter, the RVP of motor gasoline can rise toward 15 pounds per square inch (psi). The absolute limit is normal atmospheric pressure, which is around 14.7 psi, which puts a practical cap on the RVP of gasoline.
But between May and September, the maximum allowable RVP is capped at 9.0, 7.8 or even 7.2, depending on the area. The state of California enforces its own, stricter, standard, which caps RVP at 6.9 or 7.0.
Hotter areas and those with a worse history of pollution have the most stringent caps. In some parts of the country, the cap is phased in, with a higher limit enforced in the shoulder month (May) and stricter limits from June onwards.
Because it is so light, butane has an RVP of 52, so the amount that can be blended into the fuel supply in the summer must be severely limited to ensure the RVP for the whole fuel blend remains below the EPA limits. In summer, butane blending may be limited so that butane accounts for no more than 2 percent of the volume of gasoline sold.
Refineries, however, produce butane continuously throughout the year. In the summer, much of this butane is put into storage, and then blended into the fuel supply during the winter when the RVP limits are more generous and butane’s volatility makes it a desirable additive to help start engines at very low temperatures.
The result is a huge swing in refineries’ production and consumption of butane, and an equivalent seasonal build up and draw down in stocks. Refiners are big net producers of butane in the months and then net consumers in winter.
The swing is equivalent to almost 500,000 barrels of butane per day between Jun/July/Aug and Nov/Dec/Jan, roughly 3-4 percent of total inputs to US refineries.
The swing in butane implies an equal and offsetting swing in crude consumption. In summer, refiners have to buy and process more crude to compensate for not being able to blend much butane into the finished fuel supply. In winter, refiners’ crude purchases are lower because they can extend the gasoline pool by taking butane out of storage for blending.
Butane is usually fairly cheap compared with other molecules that can be put into gasoline like octane. But it is even cheaper at present because of a big build up of stocks. As with so many other aspects of the North American energy industry, the explanation likes in fracking and horizontal drilling.
Most butane is produced at oil refineries. But not all. Some is produced from natural gas at gas processing plants, which separate out valuable natural gas liquids (NGLs) like ethane, propane and butane (wet gas components) from methane (dry gas) to sell them separately.
Surging domestic production of both crude and natural gas is producing a similar rise in the amount of associated natural gas liquids like butane produced alongside them.
In North Dakota, the rise in oil output from the Bakken formation is producing a boom in associated gas with a very high liquids content. While as much as 40 percent of the gas is being flared because of the lack of proper gathering infrastructure across the new oilfields, even more is being captured and a big proportion is being processed to strip out NGLs like butane for sale separately.
In other parts of the country, such as the Eagle Ford in Texas, companies drilling for gas are targeting the liquid-rich parts of formations which yield a big percentage of NGLs to maximize profits amid slumping prices for dry gas.
The result has been a mini-boom in non-refinery butane production. Field production of butane rose to more than 180,000 barrels per day in the first half of 2012, up almost 18 percent compared with 153,000 barrels per day in the same period last year and 135,000 barrels per day in H1 2009.
For the most part, rising domestic butane production has displaced imports. But it is also contributing to a growing overhang in butane stocks and other NGLs, which now stand at record levels (Chart 2).
With butane now cheap and abundant, refiners therefore have every incentive to blend as much as possible into the gasoline supply this winter.
In most of the United States covered by the EPA’s summer gasoline specifications, the control period ended on September 15, though in parts of Arizona and eastern Texas the summer specifications do not end until September 30/October 1. California own standards end between September 30 and October 31, depending on the part of the state.
As the summer standards end, refiners and blenders will ramp up the amount of butane they blend into the fuel supply, and slightly cut the amount of crude they need to purchase.
Winter butane blending substantially increases the amount of molecules available for gasoline blending, and contributes to the seasonal drop in gasoline prices and crack spreads.
In the oil market, the impact is much smaller. Butane is a very small fraction of the internationally traded crude market.
But most advanced markets enforce some form of volatility controls, limiting the use of butane in gasoline during the summer months. As restrictions on the amount of butane blending end across much of Europe and parts of Asia, it should provide some small seasonal relief for motorists as well as governments alarmed at rising fuel costs.
— John Kemp is a Reuters market analyst. The views expressed are his own.