LIQUID FUELS MARKET MODEL COMPONENT DESIGN REPORT Prepared for Office of Integrated Analysis and Forecasting Energy Information Administration U.S. Department of Energy Prepared by OnLocation, Inc. Energy Systems Consulting 501 Church Street, Suite 300 Vienna, VA 22180 (703) 938-5151 October 26, 2010 Liquid Fuels Market Model Component Design Report Executive Summary This document presents a proposal for a new model to replace the Petroleum Market Model (PMM) currently used in the National Energy Modeling System (NEMS) by the Energy Information Administration of the Department of Energy. The new Liquid Fuels Market Module (LFMM) prototype proposed here will incorporate some of the same model structure and use similar data inputs as the PMM, but with modifications and additions to reflect more current liquid fuel market trends. Like the current PMM, the proposed LFMM will incorporate a linear programming structure to model petroleum-based fuels production – both a model block diagram and general equation sets are provided in this documentation for the prototype. The inputs to the model (both NEMS and exogenous) as well as desired outputs from the model (projections of liquid fuel production costs, petroleum and alternative fuels supplies, refinery energy consumption, refinery and alternative fuel plant capacity and utilization, capacity additions and retirements) are also very similar to those of the current PMM. However, in the proposed LFMM some key differences stand out: 1. Regional breakout: The LFMM will have the flexibility to go beyond the PADD level regions used in the PMM to more accurately reflect current regional distinctions in refinery characteristics. For example, PADD 2 could be broken down into two regions to distinguish those that do and/or will likely have access to Canadian crude from those that do not. Furthermore, PADD 5 could be combined with PADD 4 with the exception of California, which would be its own region due to the distinctive complex nature of refining and crude sources in that State. In addition, an offshore region (Eastern Canada/Caribbean) could be added in the LFMM. 2. Refinery aggregation: The LFMM will provide increased flexibility in modeling refinery configurations. The PMM currently models two refineries (marginal and complex). The LFMM will have the flexibility to model varying numbers of refinery types (e.g., topping, hydroskimming, cracking, and coking). 3. Calibration: The LFMM will incorporate an iterative calibration procedure that will refine technical coefficients in the model to adjust for recent historical refining outputs (e.g., product volumes, prices). 4. The prototype LFMM will be constructed and tested for the capability to incorporate and analyze a wide variety of policy and regulatory cases in a straightforward and transparent manner. 5. Modeling platform: The prototype LFMM will employ the GAMS modeling platform, although the decision for the modeling platform of the final LFMM model is undecided at this point. Page 1 of 127 Liquid Fuels Market Model Component Design Report In addition to these major changes, one of the over-arching goals of the LFMM is to create a model that is more robust, more transparent, and more accessible to more modelers than the current PMM. A significant challenge in the prototype development, therefore, is to adhere to this goal without undue sacrificing of accurate representation of liquid fuels market dynamics. Finally, there are several approaches currently used in the PMM that will not be fundamentally changed in the prototype development. These include aspects of the alternative fuels modeling, the international component (e.g., the use of import product supply curves), and the capacity planning algorithm. Further improvements in these areas will be done at a later stage for the final LFMM model. Page 2 of 127 Liquid Fuels Market Model Component Design Report Table of Contents 1. Overview ............................................................................................................................ 8 2. Statement of LFMM Model Purpose ............................................................................ 11 Overview of LFMM Purpose .................................................................................................... 11 LFMM Capabilities within NEMS ........................................................................................... 12 Model Design Considerations ................................................................................................... 12 LFMM Capabilities for Special Policy Studies ........................................................................ 13 Software Considerations ........................................................................................................... 14 3. Background ..................................................................................................................... 15 Current PMM Approach ........................................................................................................... 15 Past Modeling Approaches and Efforts .................................................................................... 16 Pure Statistical/Econometric Approaches ............................................................................. 16 Statistical Approximations of Large Refinery LPs ............................................................... 17 Use of Large LPs and Reduced-Form Modeling to Estimate Parameters of a Smaller Liquids Model LP That Approximates the Behavior of the Detailed LP........................................... 17 Linear Optimization Representation of Refineries ............................................................... 18 Nonlinear Optimization Representations of Refineries ........................................................ 18 4. Input and Output Requirements ................................................................................... 19 General Requirements for NEMS ............................................................................................. 19 Input and Output Boundaries of the LFMM ............................................................................. 20 LFMM Reporting Requirements .............................................................................................. 22 LFMM Data Sources ................................................................................................................ 23 Categories of Refinery Modeling Data ................................................................................. 23 Prospective Sources of Refining Data .................................................................................. 28 5. Classification Plan ........................................................................................................... 30 Definitions ................................................................................................................................ 30 Attributes and Domains ........................................................................................................ 30 Model Statement and Model Instance ................................................................................... 31 Matrix Schematic (Block Diagram) Representation of LP Models ...................................... 31 Case Management ................................................................................................................. 33 LFMM Attributes ...................................................................................................................... 34 Selected LFMM Domains ......................................................................................................... 37 Regionality ................................................................................................................................ 45 Domestic Refinery Region Disaggregation .......................................................................... 45 International Treatment/Interrelationships ............................................................................ 50 Relationship to NEMS Demand Region Disaggregation ...................................................... 50 Classification of resource inputs: .............................................................................................. 50 Crude Oil Categories and Regional Crude Oil Slates ........................................................... 50 Alternative Fuels Production ................................................................................................ 55 Product Slate Flexibility ....................................................................................................... 59 Petroleum Product Categories .................................................................................................. 59 Page 3 of 127 Liquid Fuels Market Model Component Design Report Refinery-Produced Products ................................................................................................. 59 Refinery Representation ........................................................................................................... 59 Refinery Aggregation ............................................................................................................ 59 Ability to Address Natural Gas Liquids ................................................................................ 62 Energy and Emissions Accounting Framework ...................................................................