Assumptions to the Annual Energy Outlook 2002
Petroleum Market Module
The NEMS Petroleum Market Module (PMM) forecasts petroleum product prices and sources of supply for meeting petroleum product demand. The sources of supply include crude oil (both domestic and imported), petroleum product imports, other refinery inputs including alcohol and ethers, natural gas plant liquids production, and refinery processing gain. In addition, the PMM estimates capacity expansion and fuel consumption of domestic refineries.
The PMM contains a linear programming representation of refining activities in three U.S. regions. This representation provides the marginal costs of production for a number of traditional and new petroleum products. The linear programming results are used to determine end-use product prices for each Census Division using the assumptions and methods described below.104
Key Assumptions
Product Types and Specifications
The PMM models refinery production of the products shown in Table 56.
The costs of producing different formulations of gasoline and diesel fuel that are required by State and Federal regulations are determined within the linear programming representation by incorporating specifications and demands for these fuels. The PMM assumes that the specifications for these new fuels will remain the same as specified in current legislation, except that the sulfur content of all gasoline will be phased down to less than 10 percent of recent levels to reflect new regulations published by EPA in February 2000.105
The PMM models the production and distribution of three different types of gasoline: conventional, oxygenated, and reformulated (Phase 2). The following specifications are included in PMM to differentiate between conventional and reformulated gasoline blends (Table 57): oxygen content, Reid vapor pressure (Rvp), benzene content, aromatic content, sulfur content, olefin content, and the percent evaporated at 200 and 300 degrees Fahrenheit (E200 and E300). The sulfur specification for gasoline is reduced to reflect recent regulations requiring the average annual sulfur content of all gasoline used in the United States to be phased-down to 30 parts per million (ppm) between the years 2004 and 2007. PMM assumes that RFG has an average annual sulfur content of 135 ppm in 2000 and will meet the 30 ppm requirement in 2004. The reduction in sulfur content between now and 2004 is assumed to reflect incentives for “early reduction”. The regional assumptions for phasing-down the sulfur in conventional gasoline account for less stringent sulfur requirements for small refineries and refineries in the Rocky Mountain region. The 30 ppm annual average standard is not fully realized in conventional gasoline until 2008 due to allowances for small refineries. The sulfur specifications assumed for each region and type are provided in Table 58.
Conventional gasoline must comply with antidumping requirements aimed at preventing the quality of conventional gasoline from eroding as the reformulated gasoline program is implemented. Conventional gasoline must meet the Complex Model compliance standards which cannot exceed average 1990 levels of toxic and nitrogen oxide emissions.106
Oxygenated gasoline, which has been required during winter in many U.S. cities since October of 1992, requires an oxygenated content of 2.7 percent by weight. Oxygenated gasoline is assumed to have specifications identical to conventional gasoline with the exception of a higher oxygen requirement. Some areas that require oxygenated gasoline will also require reformulated gasoline. For the sake of simplicity, the areas of overlap are assumed to require gasoline meeting the reformulated specifications.
Reformulated gasoline has been required in many areas in the U.S. since January 1995. In 1998, the EPA began certifying reformulated gasoline using the “complex model,” which allows refiners to specify reformulated gasoline based on emissions reductions from their company, 1990 baseline or the EPA’s 1990 baseline. The PMM reflects “Phase II” reformulated gasoline requirements which began in 2000. The PMM uses a set of specifications that meet the “complex model” requirements, but it does not attempt to determine the optimal specifications that meet the “complex model.” (Table 57).
The Clean Air Act Amendments of 1990 (CAAA90) provided for special treatment of California that would allow different specifications for oxygenated and reformulated gasoline in that State. In 1992, California requested a waiver from the winter oxygen requirements of 2.7 percent to reduce the requirement to a range of 1.8 to 2.2 percent. The PMM assumes that Petroleum Administration for Defense District (PADD) V refiners must meet the California Air Resources Board (CARB) phase 2 specifications through 2002 and the recently developed “CARB3" specifications after 2002. The CARB3 specifications reflect the removal of the oxygen requirement designed to complement the State’s plans to ban the oxygenate, methyl tertiary butyl ether (MTBE) by the end of 2002. Without a waiver from the U.S. EPA, a minimum oxygen content will still be required in the areas of California covered by the Federal reformulated gasoline program (Los Angeles, San Diego, Sacramento, and the recently added San Jonquin Valley). AEO2002 assumes that the oxygen requirement remains intact in these areas because no waiver had been granted at the time of the development of the forecast.
AEO2002 reflects legislation which bans or limits the use of MTBE in twelve additional States: Arizona, Colorado, Connecticut, Illinois, Iowa, Kansas, Michigan Minnesota, Nebraska, New York, and South Dakota, and Washington. Since the oxygen requirement on RFG is assumed to continue in these States, the MTBE ban is modeled as a requirement to produce ethanol blended RFG. Ethanol blends were assumed to account for the following market percentages:
- 29.0 percent of RFG in Census Division 1
- 36.5 percent of RFG in Census Division 2
- 97.7 percent of RFG in Census Division 8
- 100.0 percent of RFG(with 2.0 percent oxygen requirement) in Census Division 9
- 100.0 percent of oxygenated gasoline in Census Division 4
- 100.0 percent of oxygenated gasoline in Census Division 8
- 100.0 percent of oxygenated gasoline in Census Division 9
Rvp limitations are effective during summer months, which are defined differently in different regions. In addition, different Rvp specifications apply within each refining region, or PADD. The PMM assumes that these variations in Rvp are captured in the annual average specifications, which are based on summertime Rvp limits, wintertime estimates, and seasonal weights.
Motor Gasoline Market Shares
Within the PMM, total gasoline demand is disaggregated into demand for conventional, oxygenated, and reformulated gasoline by applying assumptions about the annual market shares for each type. The shares are able to change over time based on assumptions about the market penetration of new fuels. In AEO2002, the annual market shares for each region reflect actual 2000 market shares and are held constant throughout the forecast. (See Table 59 for AEO2002 market share assumptions.)
Diesel Fuel Specifications and Market Shares
In order to account for diesel desulfurization regulations related to CAAA90, low-sulfur diesel is differentiated from other distillates. In NEMS, Census Division 9 is required to meet CARB standards. Both Federal and CARB standards limit sulfur to 500 ppm.
AEO2002 also incorporates the “ultra-low-sulfur diesel” (ULSD) regulation finalized in December 2000. ULSD is highway diesel that contains no more than 15 ppm sulfur at the pump. The ULSD regulation includes a phase-in period under the “80/20” rule, that requires the production of 80 percent ULSD and 20 percent 500 ppm highway diesel between June 2006 and June 2010, and a 100 percent requirement for ULSD thereafter. As NEMS is an annual average model, only a portion of the production of highway diesel in 2006 is subject to the 80/20 rule and the 100 percent requirement does not cover all highway diesel until 2011.
NEMS models ULSD as containing 7 ppm sulfur at the refinery gate. This lower sulfur limit at the refinery reflects the general consensus that refiners will need to produce diesel with a sulfur content below 10 ppm to allow for contamination during the distribution process.
Revamping (retrofitting) existing units to produce ULSD will be undertaken by refineries representing two-thirds of highway diesel production; the remaining refineries will build new units. The capital cost of the revamp is assumed to be 50 percent of the cost of adding a new unit.
The capital cost for new distillate hydrotreaters reflected in AEO2002 are $1,690 to $2,545 (2000 dollars) per barrel per day, ISBL. The lower estimate is for a 25,000 barrel per day unit processing low-sulfur streams with incidental dearomatization. The higher estimate is for a 10,000 barrel per day unit processing higher sulfur feed streams with greater aromatics improvement.
The amount of ULSD downgraded to a lower value product because of sulfur contamination in the distribution system is assumed to be 10 percent at the start of the program, declining to 4.4 percent at full implementation. The decline reflects that expectation that the distribution system will become more efficient at handling ULSD with experience.
A revenue loss is assumed to occur when a portion of ULSD that is put into the distribution system is contaminated and must be sold as lower value product. The amount of the revenue loss is estimated offline based on earlier NEMS results and is included in AEO2002 ULSD price projections as a distribution cost. The revenue loss associated with the 10 percent downgrade assumption for 2007 is 0.7 cents per gallon. The revenue loss estimate declines to 0.2 cents per gallon after 2010 when the downgrade assumption declines to 4.4 percent.
The capital and operating costs associated with ULSD distribution are based on assumptions used by the EPA in the Regulatory Impact Analysis (RIA) of the rule.107 Capital costs of 0.7 cents per gallon are assumed for additional storage tanks to handle ULSD during the transition period. These capital expenditures are assumed to be fully amortized by 2011. Additional operating costs for distribution of highway diesel of 0.2 cents per gallon are assumed for the entire forecast. Another 0.2 cents per gallon is assumed for the cost of lubricity additives. Lubricity additives are needed to compensate for the reduction of aromatics and high-molecular-weight hydrocarbons stripped away by the severe hydrotreating used in the desulfurization process.
Demand for highway-grade diesel, both 500 ppm and ULSD combined, is assumed to be equivalent to total transportation distillate demand. Historically, highway-grade diesel supplied has nearly matched total transportation distillate sales, although some highway-grade diesel has gone to nontransportation uses such as construction and agriculture.
The energy content of ULSD is assumed to decline by 0.5 percent because undercutting and severe desulfurization will result in a lighter stream composition than that for 500 ppm diesel.
No change in the sulfur level of non-road diesel is assumed because the EPA has not yet promulgated these standards.
End-Use Product Prices
End-use petroleum product prices are based on marginal costs of production plus production-related fixed costs plus distribution costs and taxes. The marginal costs of production are determined by the model and represent variable costs of production including additional costs for meeting reformulated fuels provisions of the CAAA90. Environmental costs associated with controlling pollution at refineries (Table 60) are reflected as fixed costs (associated operation and maintenance costs prior to 1996 are excluded).108 Assuming that refinery-related fixed costs are recovered in the prices of light products, fixed costs are allocated among the prices of liquefied petroleum gases, gasoline, distillate, kerosene, and jet fuel. These costs are based on average annual estimates and are assumed to remain constant over the forecast period.
The costs of distributing and marketing petroleum products are represented by adding fixed distribution costs to the marginal and refinery fixed costs of products. The distribution costs are applied at the Census Division level (Table 61) and are assumed to be constant throughout the forecast and across scenarios.
Distribution costs for each product, sector, and Census Division represent average historical differences between end-use and wholesale prices. The distribution costs for kerosene are the average difference between end-use prices of kerosene and wholesale distillate prices. Distribution costs for M85 are assumed to be equivalent to distribution costs for gasoline.
State and Federal taxes are also added to transportation fuels to determine final end-use prices (Tables 62 and 63). Recent tax trend analysis indicated that State taxes increase at the rate of inflation, therefore, State taxes are held constant in real terms throughout the forecast. This assumption is extended to local taxes which are assumed to average 2 cents per gallon.109 Federal taxes are assumed to remain at current levels in accordance with the overall AEO2002 assumption of current laws and regulation. Federal taxes are deflated as follows:
Federal Tax product, year = Current Federal Tax product / GDP Deflator year
Crude Oil Quality
In the PMM, the quality of crude oil is characterized by average gravity and sulfur levels. Both domestic and imported crude oil are divided into five categories as defined by the ranges of gravity and sulfur shown in Table 64.
A “composite” crude oil with the appropriate yields and qualities is developed for each category by averaging the characteristics of specific crude oil streams that fall into each category. While the domestic and foreign categories are the same, the composite crudes for each category may differ because different crude streams make up the composites. For domestic crude oil, estimates of total regional production are made first, then shared out to each of the five categories based on historical data. For imported crude oil, a separate supply curve is provided for each of the five categories.
Regional Assumptions
PMM reflects three refining regions: PADD I, PADD V, and a third region including PADD II-IV. Individual refineries are aggregated into one linear programming representation for each region. In order to interact with other NEMS modules with different regional representations, certain PMM inputs and outputs are converted from a PMM region to a non-PMM regional structure and vice versa.
Cogeneration Assumptions
Electricity consumption in the refinery is a function of the throughput of each unit. Sources of electricity consist of refinery power generation, utility purchases, refinery cogeneration, and merchant cogeneration. Power generators and cogenerators are modeled in the PMM linear program as separate units which are allowed to compete along with purchased electricity. Both the refinery and merchant cogeneration units provide estimates of capacity, fuel consumption, and electricity sales to grid based on historical parameters.
Refinery sales to the grid are estimated using the following
percentages which are based on 1998 data:
|
Region |
Percent Sold To Grid |
|---|---|
|
1 (PADD I) |
56.9 |
|
2 (PADD’s II, III, and IV) |
4.3 |
|
3 (PADD V) |
20.1 |
| Source: Energy Information Administration, Office of Integrated Analysis and Forecasting. Derived using EI-860B, “Annual Electric Generators Report-Nonutility”. | |
The PMM is forced to sell electricity back to the grid in these percentages at a price equal to the average price of electricity.
Merchant cogenerator’s are defined as non-refiner owned facilities located near refineries to provide energy to the open market and to the neighboring refinery. The PMM assumes that 66 percent of electricity from merchant cogenerators in every region is sold to the grid. These sales occur at a price equal to the average of the generation price and the industrial price of electricity for each PMM region. Electricity prices are obtained from the Electricity Market Model.
Capacity Expansion Assumptions
PMM allows for capacity expansion of all processing units including distillation capacity, vacuum distillation, hydrotreating, coking, fluid catalytic cracking, hydrocracking, alkylation, and methyl tertiary butyl ether manufacture. Capacity expansion occurs by processing unit, starting from base year capacities established by PADD using historical data.
Expansion occurs in NEMS when the value received from the additional product sales exceeds the investment and operating costs of the new unit. The investment costs assume a10-percent hurdle rate in the decision to invest and a 10-percent rate of return over a 15-year plant life. Expansion through 2000 is determined by adding to the existing capacities of units planned and under construction that are expected to begin operating during this time. Capacity expansion plans are done every 3 years. The PMM looks ahead in 2002 and determines the optimal capacities given the estimated demands and prices expected in the 2005 forecast year. The PMM then allows one-third of that capacity to be built in each of the forecast years 2003, 2004 and 2005. At the end 2005 the cycle begins anew, looking ahead to 2008.
Strategic Petroleum Reserve Fill Rate
AEO2002 assumes no additions for the Strategic Petroleum Reserve (SPR) during the forecast period. Any SPR draw is assumed to be in the form of a swap with a zero net annual change.
Short-term Methodology
Petroleum balance and price information for the year 2001 is projected at the U.S. level in the Short-term Energy Outlook, (STEO). The PMM assumes the STEO results for 2000, using regional estimates derived from the national STEO projections.
Legislation and Regulations
The Tax Payer Relief Act of 1997 reduced excise taxes on liquefied petroleum gases and methanol produced from natural gas. The reductions set taxes on these products equal to the Federal gasoline tax on a Btu basis.
Title II of CAAA90 established regulations for oxygenated and reformulated gasoline and reduced-sulfur (500 ppm) on-highway diesel fuel, which are explicitly modeled in the PMM. Reformulated gasoline represented in the PMM meets the requirements of phase 2 of the Complex Model, except in the Pacific region where it meets CARB 3 specifications. The reformulated gasoline in areas of the Pacific region covered by the Federal RFG program continue to require 2.0 percent oxygen.
AEO2002 reflects legislation which bans or limits the use of the gasoline blending component MTBE in the following states: Arizona, California, Colorado, Connecticut, Illinois, Iowa, Kansas, Michigan, Minnesota, Nebraska, New York, South Dakota, and Washington.
AEO2002 reflects “Tier 2" Motor Vehicle Emissions Standards and Gasoline Sulfur Control Requirements finalized by EPA in February 2000. This regulation requires that the average annual sulfur content of all gasoline used in the United States be phased-down to 30 ppm between the years 2004 and 2007. The 30 ppm annual average standard is not fully realized in conventional gasoline until 2008 due to allowances for small refineries.
AEO2002 reflects Heavy-Duty Engine and Vehicle Standards and Highway Diesel Fuel Sulfur Control Requirements finalized by the EPA in December 2000. Between June 2006 and June 2010, this regulation requires 80 percent of highway diesel contain no more than 15 ppm sulfur while the remaining 20 percent of highway diesel contain no more than 500 ppm sulfur. After June 2010, all highway diesel is required to contain no more than 15 ppm sulfur at the pump.
A number of pieces of legislation are aimed at controlling air, water, and waste emissions from refineries themselves. The PMM incorporates related environmental investments as refinery fixed costs. The estimated expenditures are based on results of the 1993 National Petroleum Council Study.110 These investments reflect compliance with Titles I, III, and V of CAAA90, the Clean Water Act, the Resource Conservation and Recovery Act, and anticipated regulations including the phaseout of hydrofluoric acid and a broad-based requirement for corrective action. No costs for remediation beyond the refinery site are included.
Lifting the ban on exporting Alaskan crude oil was passed and signed into law (PL 104-58) in November 1995. Alaskan exports of crude oil have represented about 60 percent of U.S. crude oil exports since November 1995 and are assumed to equal 60 percent of total U.S. crude oil exports in the forecast.
Biofuels (Ethanol) Supply
Background
The PMM provides supply functions on an annual basis through 2020 for ethanol produced from both corn and cellulosic biomass to produce transportation fuel.
Assumptions
- Corn feedstock supplies and costs are provided exogenously to NEMS. Feedstock costs reflect credits for co-products (livestock feed, corn oil, etc.). Feedstock supplies and costs reflect the competition between corn and its co-products and alternative crops, such as soybeans and their co-products.
Cellulosic Biomass feedstock supplies and costs are taken from the NEMS Renewable Fuels Model. Capital and operating costs for biomass ethanol are derived from an Oak Ridge National Laboratory report.111
- Current U.S ethanol production capacity is aggregated by census division in the PMM. Cellulose ethanol demonstration plants are modeled in Census Divisions 2 and 7. However, the majority of cellulose ethanol growth is projected in Census Divisions 3 and 4 using corn stover as feedstock, and in Census Division 9 with rice straw and forest residue as the primary feedstock.
- The tax subsidy to ethanol of $0.54 per gallon of ethanol (5.4 cents per gallon subsidy to gasohol at a 10-percent volumetric blending portion) is applied within the premium. This subsidy is scheduled to be reduced to 51 cents by 2007. The tax subsidy is held constant in nominal terms, decreasing with inflation throughout the forecast. The subsidy is assumed not to expire during the forecast period.
Interregional transportation is assumed to be by rail, and the associated costs are included in PMM.
Methyl Tertiary Butyl Ether Ban Case
This alternative case reflects a nationwide ban on MTBE and other ethers starting in 2006. A strong political impetus for restricting the use of MTBE has developed because the chemical has made its way from leaking pipelines and storage tanks into water supplies throughout the country. Thus far, 13 States have passed legislation to ban or reduce the use of MTBE, and there have been similar proposals in other States and the U.S. Congress. The MTBE ban case assumes that bans or restrictions currently scheduled in 13 States will be implemented as planned over the next few years.
The use of MTBE began to increase as a result of the introduction of oxygenated gasoline in the fall of 1993. The MTBE ban case provides a most severe scenario in terms of gasoline blending, because the oxygen specification in RFG is assumed to remain unchanged. PMM does not account for the possible conversion of MTBE units to alkylation or iso-octane processes. Other than the ban on ethers in gasoline, the model inputs and assumptions are the same as in the AEO2002 reference case. Imports of reformulated blendstock for oxygenate blending (RBOB) are assumed to be available.
High Renewables Case
The high renewables case uses more optimistic assumptions about renewable energy sources. The supply curve for cellulosic ethanol is shifted in each forecast year relative to the reference case, making larger quantities available at any given price than are available in the reference case.
