U.S. EIA says cracked-stocks desulfurization cost could snag robust ULSD expansion

Diesel Fuel News, April 14, 2003

San Antonio -- The high costs of desulfurizing cracked-stocks components could snag aggressive investment in ultra-low sulfur diesel (ULSD), according to a new Energy Information Administration (EIA) study.

"If refiners have to produce more ULSD to meet off-road [U.S. EPA diesel sulfur] requirements, their challenge to meet supply targets increases," according to the EIA study presented to National Petrochemical & Refiners Association (NPRA) meeting here.

"Producing more ULSD raises the cost curve ... and makes it steeper, as refiners have to process greater fractions of the more difficult cracked stocks to produce the added volumes," the study shows.

What's more, if greater dieselization of the light-duty fleet occurs starting later this decade, then "ULSD volume requirements increase further and there likely would be a push for higher cetane and lower aromatics content" as automakers prefer. This has implications for refiner investment in ULSD.

Even under the EPA 80% scheme for highway diesel ULSD (starting in 2006), "the current ULSD rule leaves concern that the transition [to ULSD] may come up short of EPA target volumes. Many refiners can delay production of diesel, and with ULSD production cost disparity among refiners being high, there is economic incentive for some to delay."

Critical to the cost equation for individual refiners is economy of scale; whether a refiner can revamp an existing reactor or has to build a new unit; feed sulfur content, and percent of cracked stock fed to desulfurization unit, EIA notes. The question becomes whether refiners in the upper portion of the cost curve may delay aggressive investment of ULSD "thereby leaving supply short of EPA's 80% target at the beginning of the ULSD program."

While EPA isn't pushing desulfurization of other distillates (home heating oil or jet fuel), "we can expect tighter specification changes" in those fuels, EIA predicts, citing possible moves by state governments or other federal agencies. "As these specification changes occur, refiners have less flexibility in their operations, which affects supply," EIA warned here.