coker gasoils, and bitumen-derived gasoils to make high- value Tier 3 gasoline with little octane loss. We analysed a proposed $300 million cat feed hydrotreater investment, giving a net present value of $180 million.⁸ That investment is worth more when the high vola- tility of gasoline margins is considered. Figure 6 shows normalised probability distributions for gasoline margins derived from historic prices of reformulated blendstock for oxygenate blending (RBOB) gasoline and West Texas Intermediate (WTI) crude oil. The consistent movement to the right (higher margins) and increasing breadth of these curves (higher volatility) show how the level and variance of US gasoline margins increased in 2022 (dark blue) and 2021 (green) compared to the previous eight years (turquoise). In a second phase of economic analysis, we quantified the benefits of the flexibility an FCC feed hydrotreater provides in adjusting production to capture high margins (when they occur). Considering the value of flexibility increases the net present value of the $300 million investment to as high as $700 million.⁹ Tier 3 effect on stock prices The financial impacts described here are enough to move profit needles and stock prices. A 2018 assessment of US refineries indicated Marathon Petroleum Company (MPC)’s refining portfolio was well-equipped for Tier 3 compared to Phillips 66 (PSX)’s refineries.1 In October 2021, Hoekstra Trading recommended buying a stock spread based on the differential price of MPC minus PSX stock and began publicly tracking and discussing that price differential on our blog page, the Seeking Alpha investment forum, and industry meetings. Figure 7 shows the fractional change in price of those two stocks since the first trading day of 2021. (Before 2021, MPC and PSX had tracked mostly in tandem.) In 2021, they started to diverge, and the divergence has grown steadily. The value of MPC stock is now 3.57 times its reference value, and PSX stock is 1.64 times its refer - ence value. Our theory is this difference reflects the differences in the capabilities and flexibilities of the two companies’ refining portfolios, especially for capturing high margins on Tier 3 gasoline when those margins are high. Conclusion Five-fold increases in octane destruction, octane price, and sulphur credit price provide unmistakable evidence that the Tier 3 gasoline sulphur specification has increased the pro - duction cost of gasoline. The cost has grown from $1.3 billion/year estimated in 2013 by the EPA to near the $10 billion/year predicted in 2017 by Hoekstra Trading. The reason is high octane destruction occurring in gasoline desulphurisers in refiner - ies not well-equipped for Tier 3 duty. This state of affairs agrees with the predictions made by Hoekstra Trading based on a multi-client research programme, as docu- mented in four annual research reports. 1,2,3,6 Some refineries, foreseeing this problem, acted over the
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last seven years to improve octane/sulphur performance through strategies involving feed optimisation, low-cost revamps, new processes, improved catalysts, and credit strategies. These success stories can be replicated by any refinery. Refineries without FCC feed hydrotreaters should consider investing in one to enable higher margin capture in today’s highly volatile crude and product markets. References 1 Hoekstra G, Hoekstra Research Report 9, Tier 3 Field Tests and Predicted Business Impact , Oct 31, 2019. 2 Hoekstra G, Hoekstra Research Report 7, Field Testing for Gasoline Desulphurization , Oct 31, 2016. 3 Hoekstra G, Hoekstra Research Report 8, FCC Gasoline Desulphurization for Tier 3 Compliance , Oct 31, 2017. 4 Draft Regulatory Impact Analysis: Tier 3 Motor Vehicle Emission and Fuel Standards, U.S. Environmental Protection Agency, Mar 2013. 5 Hoekstra G, T ier 3 Gasoline – a Wolf in Sheep’s Clothing? , presenta- tion at OPIS Fuels and Octane Forum, Oct 24, 2019. 6 Hoekstra G, Hoekstra Research Report 6, Catalyst Testing for Gasoline Desulphurization , Oct 31, 2015. 7 Hoekstra G, Feed Modeling for Gasoline Desulphurization , presenta- tion at 2021 Gulf Coast Conference, Oct 13, 2021. 8 Hoekstra G, Da Silva M W, Murphy T, Tier 3 Gasoline production: challenges and opportunities for refiners, Hydrocarbon Processing, Feb 2023. 9 Hoekstra G, Da Silva M W, Murphy T, Tier 3 gasoline production: The value of flexibility in volatile fuel markets, Hydrocarbon Processing, Jul 2023. 10 Hoekstra Trading Blog – Gasoline Desulphurization for Tier 3. George Hoekstra is President of Hoekstra Trading LLC which spon - sors multi-client research projects in refining technology, catalysts, and fuels economics. He retired from BP in 2009 after working for 35 years in refinery process research, fuels and lubricants technology and mar - keting with Amoco and BP. He has served on many industry panels and councils as an expert in refining technology and authored dozens of articles and presentations in these fields. He holds a BSc degree in chemical engineering from Purdue University and an MBA from The University of Chicago. Email: george.hoekstra@hoekstratrading.com Figure 7 For two and a half years there has been a consistently growing gap between MPC and PSX stock price performance
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