Engineering News

Dirty Crude In, Cleaner Fuel Out
April 10, 2009

U.S. refiners are increasingly producing cleaner-burning fuels from dirtier crude oil.

Corn-derived ethanol, biodiesel and other niche alternatives to conventional vehicle fuels hog the clean-energy spotlight. But refiners have been quietly performing their alchemy on dirty crudes amid stricter clean-air regulations, price incentives for processing, cheaper and more abundant grades of crude and billion of dollars in facilities upgrades.

Refiners produced more smog-reducing, ultra-low sulfur diesel fuel than ever last year and the trend will continue, analysts say. New clean-air regulations require that from June 2010 heavy off-road machinery must burn diesel fuel 97% cleaner than what's now required. That will bring those machines in line with trucks and diesel-powered cars that have been using the cleaner fuel since 2006. Locomotives and marine-diesel engines must convert to ultra-low sulfur diesel in 2012.

Andrew Reed, oil market analyst at Energy Security Analysis Inc. in Wakefield, Mass., estimates about 400,000 barrels a day of U.S. diesel is used off-road, and some users already have converted to the cleaner fuel. Higher imports will be needed initially to meet stronger demand, he said, while an industry trade group doesn't anticipate any problems in boosting supplies.

Ultra-Low Sulfur Diesel Cuts Smog

Use of ultra-low sulfur diesel in non-road engines cuts 738,000 tons of smog-causing nitrogen oxides and 120,000 tons of particulate matter annually, according to the Environmental Protection Agency.

Refiners have invested billions of dollars to meet the ultra-low sulfur diesel requirement. Because they require more and costlier processing, heavy grades of crude oil with high sulfur contents sell at a discount to light, low-sulfur - or sweet - grades such as the U.S. benchmark West Texas Intermediate crude.

But with growing global demand for diesel, refiners have garnered higher profit from processing more distillate fuel from lower quality crude.

In January, imports of heavy crude, such as oil from the Canadian tar sands, amounted to nearly half of total crude oil imports, the highest-ever percentage, data from the Energy Information Administration show. On average, refiners paid about 5% less for each barrel of domestic heavy crude in 2008 than they did for light crude, while comparative imports were 13% cheaper.

Output cuts by the Organization of Petroleum Exporting Countries have raised the price of heavy crude relative to light crude, but haven't eliminated the incentive to process more heavy crude.

With more ethanol being blended into gasoline, U.S. refiners have cut back on the proportion of gasoline they produce and increased the yield of distillate fuel, especially ultra-low sulfur diesel.

Distillate Yield Jumps

Gearing their refinery slates to heavier crudes, refiners lifted the distillate yield to a record 27.8% last year from 26.1% in 2007. The monthly yield reached a peak of nearly 30% in December.

In the face of record high prices before the deepening recession, total U.S. diesel and heating oil demand fell 6.1% last year. However, demand for ultra-low sulfur diesel fuel rose by a similar amount, in a shift from high-sulfur fuel. Ultra-low sulfur diesel accounted for 81.4% of distillate fuel demand, up from 70.3% a year earlier.

"I assume some (ultra-low sulfur diesel) has been used in the heating oil market already simply because there is not adequate space to carry three grades of distillate," said EIA analyst Joanne Shore. That would be a plus for clean-air concerns, as regulations allow fuel with a higher-sulfur content to be used as home-heating oil.

Source: Dow Jones Newswires

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