The California Energy Commission (CEC) retained MathPro Inc. to assess the effects on the California refining sector of the 2007 Amendments to the Phase 3 California Reformulated Gasoline regulations (CaRFG). The California Air Resources Board (CARB) developed the Amendments primarily to account for the increase in vehicle emissions of volatile organic compounds (VOC) due to the permeation effects of blending ethanol in CaRFG. Ethanol’s permeation effects, along with changes in the profile of the California vehicle fleet’s emission control technologies, are reflected in the Amended California Phase 3 Predictive Model (Amended PM-3), which will be used by refineries to certify that gasoline complies with CaRFG emission standards.

We assessed the refining economics of the proposed Amendments using an updated version of an aggregate model of the California refining sector employed in previous studies of the California refining sector. Updates to the model were based on a survey conducted by CEC of California refinery operations for the summer of 2006.

We analyzed two scenarios, denoting different compliance schedules for the Amendments: a near-term scenario in which California refining capacity remains unchanged from its 2006 level and a long-term scenario in which refineries make “optimal” investments in process capacity. Within each scenario we assessed four levels of ethanol blending: 0, 5.7 vol%, 7.7 vol%, and 10 vol%.

Study findings were as follows:

• Near-term: Compliance with the Amended PM-3 probably would force the California refining sector to curtail CaRFG production, sell high sulfur blendstocks in distant markets (the U.S. Gulf Coast or foreign markets), and sell or seasonally store larger volumes of high-RVP C5 blendstocks. Refineries could moderate gasoline volume loss by purchasing certain high-value gasoline blendstocks, if available, (e.g., alkylate and C6 isomerate) or by blending higher volumes of ethanol in CaRFG.
  
  California refineries in the aggregate could maintain (energy-adjusted) CaRFG out-turns by blending ethanol at 10 vol%. However, a subset of refineries, accounting for about 25% of CaRFG production, would have substantial difficultly producing a compliant, high-ethanol-content CaRFG under Amended PM-3.


• Long-term: The refining cost of complying with the Amended PM-3 in the long-term decreases with higher levels of ethanol blending (at the assumed delivered, net-of-subsidy price of ethanol – set equal to the marginal refining cost of CARBOB), as does refinery investment in new process capacity. Estimated refining costs are about 7½ ¢, 4¢, 1½¢, and 1¢/gal of finished CaRFG with ethanol blending, respectively, at 0, 5.7, 7.7, and 10 vol%. Corresponding estimated investment in refinery process capacity is about 2, 1, ½, and ½ $ billion.

These results suggest that the Amended PM-3 will lead California refineries to increase ethanol blending to at least 7.7 vol% and most likely to 10 vol%. At these ethanol concentrations, the long-term cost of compliance, including both refining cost and the cost of mileage loss, would be in the range of about 2½ to 3¢/gal, if ethanol were priced close to the marginal refining cost of CARBOB. Investment in new refining process capacity would be on the order of $ ½ billion.