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 Chevrolet LT4 the cylinder of a gasoline engine.

• 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 Normal combustion Premature combustion tolerate without pre-igniting. • Engines with high compression ratios require high octane gasoline.

• Research Octane Number • Knock resistance at low-load operations (e.g., highway driving) RON • 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 • MON is always less than RON

• Anti Knock Index…also called (R+M)/2 • Equal to (RON + MON)/2 AKI • Posted on the pump in North America

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

6 Copyright © 2017 Renewable Fuels Association. All Rights Reserved. U.S. Octane Standards for Finished Gasoline Octane standards in the U.S. are set by individual states. 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.

95 RON 87 AKI 92 RON (91 RON) 95 RON 87 AKI (91 RON) 95 RON 92 RON 90 RON 92 RON 91 RON 87 AKI 91 RON (91 RON) 92 RON 88 RON 87 AKI (91 RON) 91 RON 93 RON 95 RON 93 RON

8 Source: ICCT Copyright © 2017 Renewable Fuels Association. All Rights Reserved. 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 9 Copyright © 2017 Renewable Fuels Association. All Rights Reserved. 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

Ethanol's Blending Octane Number 120 • Ethanol’s pure component

Regular octane number is 100 AKI. 118 • But it’s blending octane 116 number is 109-119 AKI, depending on the octane 114 Average of the finished fuel. 112 • Ethanol’s blending octane 110 number is highest when Ethanol's BlendingEthanol's(AKI) Octane Premium used with lower-octane 108 86 87 88 89 90 91 92 93 94 hydrocarbon blendstock. Finished Gasoline Octane (AKI)

11 Source: MathPro, Inc. Copyright © 2017 Renewable Fuels Association. All Rights Reserved. Ethanol’s Octane Advantage Blending Octane Number (AKI) of Various Gasoline Octane Sources Not approved 120 Banned in by automakers 26 states 115 117 Known High toxicity 114 110 human 110 carcinogen 105 107 Extremely 104 Regular 100 high 101 grade volatility 95 gasoline 94 95 (87 AKI) 90 93

Octane Number (AKI) 85 84 80

70 Gasoline n-Butane Alkylate Reformate Benzene Toluene Xylene MTBE Ethanol Methanol Blendstock BTX Aromatics 12 Source: RFA; DOE; MathPro, Inc. Copyright © 2017 Renewable Fuels Association. All Rights Reserved. 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.”

13 Copyright © 2017 Renewable Fuels Association. All Rights Reserved. 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 14 Copyright © 2017 Renewable Fuels Association. All Rights Reserved. Ethanol has rapidly emerged as a significant source of octane in U.S. gasoline

Octane Contribution from Ethanol, MTBE, and Refinery Hydrocarbons in U.S. Gasoline 89 Pool Octane

88 MTBE

87 Ethanol

86 Octane (AKI) Refinery 85 Hydrocarbons

84 2000 2002 2004 2006 2008 2010 2012 2014 2016

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

16 Copyright © 2017 Renewable Fuels Association. All Rights Reserved. Premium-Regular Price Spread Annual Averages (Bulk) Premium-Regular BOB Bulk Spread PRM % Spread Increase $0.60 ($/Gal.) over REG 2005 0.11 7% $0.50 2006 0.17 9% 2007 0.16 8% $0.40 2008 0.15 6%

2009 0.14 9% $0.30 2010 0.11 5% $/Gallon 2011 0.14 5% $0.20 2012 0.24 9% 2013 0.25 9% $0.10 2014 0.26 10% 2015 0.26 16% $- 2016 0.18 13% Jul-07 Jul-12 Jul-17 Apr-06 Oct-08 Apr-11 Oct-13 Apr-16 Jan-05 Jun-05 Jan-10 Jun-10 Jan-15 Jun-15 Feb-07 Mar-09 Feb-12 Mar-14 Feb-17 Nov-05 Sep-06 Dec-07 Aug-09 Nov-10 Sep-11 Dec-12 Aug-14 Nov-15 Sep-16 May-08 May-13 2017 0.21 14%

17 Source: EIA Copyright © 2017 Renewable Fuels Association. All Rights Reserved. Premium-Regular Price Spread Annual Averages (Retail) Premium-Regular BOB Bulk Spread Premium-Regular Retail Spread PRM % Spread Increase $0.60 ($/Gal.) over REG 2005 0.21 12% $0.50 2006 0.24 12% 2007 0.25 11% $0.40 2008 0.26 11%

2009 0.27 15% $0.30 2010 0.27 12% $/Gallon 2011 0.27 9% $0.20 2012 0.28 9% 2013 0.29 10% $0.10 2014 0.33 12% 2015 0.45 24% $- 2016 0.47 29% Jul-07 Jul-12 Jul-17 Apr-06 Oct-08 Apr-11 Oct-13 Apr-16 Jan-05 Jun-05 Jan-10 Jun-10 Jan-15 Jun-15 Feb-07 Mar-09 Feb-12 Mar-14 Feb-17 Nov-05 Sep-06 Dec-07 Aug-09 Nov-10 Sep-11 Dec-12 Aug-14 Nov-15 Sep-16

May-08 May-13 2017 0.52 28%

Value per Point of Octane (AKI) based on Bulk Prices $0.050 • Based on current $0.045 Premium–Regular BOB $0.040 bulk spread, each point $0.035 of incremental octane

$0.030 (AKI) is worth 3.5 cents $0.025 per gallon to the refiner

$/Gallon $0.020 • Ethanol’s current $0.015 theoretical octane value $0.010 is $1.05/gallon over 84 $0.005 AKI BOB price! $- • (114 – 84) x 3.5 cpg

Premium Share of Constrained Increased Total U.S. Gasoline Sales Supply Demand 20%

• Increased volume of light • Higher domestic demand 16% tight oil (LTO) and for all gas grades 12% condensate • Demand for premium is • Produces lower quality rising (as share of total) 8% gasoline blendstock (more • Higher compression low-octane naptha) and turbo charging 4% • Octane loss from tighter • Increased export sulfur standards demand for gasoline and 0% • Refining industry slow to add high-octane blendstocks octane-producing capacity Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16

Ethanol and RBOB Nearby Futures Prices, 2010- $3.50 Ethanol-RBOB Spread $3.00 RBOB

$2.50 Ethanol

$2.00

$1.50

$1.00

$/Gallon $0.50

$(0.50)

$(1.00)

$(1.50) Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Ethanol, Reformate, Alkylate, MTBE Spot Prices

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

Cents/Gallon Cents/Octane Point (AKI) 400 4.0

350 3.5

300 3.0

250 2.5

Cents/Gallon 200 2.0

150 1.5 Cents/Blending Octane Point (AKI) 100 1.0 Jul 2012 Jul 2013 Jul 2014 Jul 2015 Jul 2016 Jul 2017 Jul 2012 Jul 2013 Jul 2014 Jul 2015 Jul 2016 Jul 2017 Apr 2012 Oct 2012 Apr 2013 Oct 2013 Apr 2014 Oct 2014 Apr 2015 Oct 2015 Apr 2016 Oct 2016 Apr 2017 Oct 2017 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017 Apr 2012 Oct 2012 Apr 2013 Oct 2013 Apr 2014 Oct 2014 Apr 2015 Oct 2015 Apr 2016 Oct 2016 Apr 2017 Oct 2017 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017

• 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. 23 Copyright © 2017 Renewable Fuels Association. All Rights Reserved. Ethanol Priced Far Below Other Octane Sources

• Argus reports weekly market prices and a calculated

“octane blending value” 253.7 for various octane sources. • In addition to octane number, the “octane 152.3 blending value” formula takes into account energy density, RVP, and other important blending factors.

• QuikTrip station in Kansas on April 7, 2017 • Buc-ee’s station in Texas on June 27, 2017

• 87 AKI ethanol-free gasoline priced 20% • 87 AKI ethanol-free gasoline priced 53% above 87 AKI E10 and just 1.5% below 91 above 87 AKI E10 and 22% above 93 AKI AKI premium E10! premium E10!

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