Understanding Octane Value in North America

by Tyler Wilson and Uday Turaga (ADI Analytics) The value of an octane barrel has risen significantly in recent years going from $2.30 in 2010 to $3.58 in 2015. This has surprised industry analysts since the refining industry has been blending a growing amount of ethanol, which has an octane rating of ~113, and the general consensus was that the industry had a surplus of octane. However, there are multiple factors behind why the value of octane has increased over the past several years.

Growing use of light tight oil in North America: The North America shale revolution has led to a dramatic growth in the supply of light tight oil. Over the past five years U.S. refiners have increased the share of light tight oil processing from 600,000 bpd in 2010 to 4.5 million bpd in 2015. Figure 1 shows the amount of tight oil used in U.S. refineries in 2010 and 2015. In general, light tight oil is higher in paraffins than traditional crude oil. High-paraffin crude oil typically produces gasoline with lower octane ratings. To cope, refiners and blenders must obtain higher octane blend stocks from other sources driving up the value of octane.

Ethanol fuel blending has reduced catalytic reforming capacity: Due to the Renewable Fuel Standard a certain number of gallons of ethanol must be blended with gasoline each year. In 2015, ethanol accounted for ~10% of the total volume of gasoline in the United States. Pure ethanol has an octane rating of ~113. As the share of higher octane ethanol in gasoline has increased refiners’ need for higher octane blendstocks have diminished. As a result, traditional supplies of high octane blendstocks such as naphtha reformers have decreased in importance and utilization.

As a result, catalytic reforming as a percentage of total refining capacity has steadily decreased over the past 20 years. Figure 2 shows catalytic reforming as a percentage of refining capacity and the price per barrel of octane from 1995 to 2014 both globally and in the U.S.

Collectively, the value of octane has increased for several reasons. First, gasoline demand is increasing faster than demand for other distillates. Second, refineries are relying more heavily on high paraffin crude oil as feedstock, which typically produces gasoline with lower octane ratings. Third, global catalytic reforming capacity is growing at a slower rate than refining capacity. READ MORE