Tier 3 is the gasoline sulfur regulation introduced in the US in 2017 reducing the maximum average sulfur content of gasoline to 10ppm.

Regulation details

The Tier 3 regulation is applied to all primary suppliers of gasoline and gasoline blending components.  This includes refiners, importers and producers of blend stocks such as butane, and ethanol.

The regulation requires each supplier to reach an annual average quality for all gasoline and gasoline blend stock volumes used in the domestic US market of no more than 10ppm sulfur.  Individual batches can have up to 80ppm sulfur. Exported batches are exempt.

Sulfur credits can be used to achieve the target.  Suppliers who have average sulfur of less than 10ppm generate credits that can be sold and purchased by other suppliers to offset an average that is above 100ppm.  Determination of compliance and generation of credits is done annually based on total year production.  Credits can be banked for up to 5 years.

Small refiners were granted an exemption up until 2020 and the ability to petition for an extension of that exemption if they can demonstrate economic hardship from compliance.

Compliance strategies

Reducing sulfur to achieve compliance is primarily achieved through hydrotreating to reduce the sulfur in the blending stocks that are the primary source of sulfur in gasoline, namely FCC gasoline.  This is done in three ways

•  Hydrotreating of the VGO feed to the FCC using and VGO hydrotreater.  This typically reduces sulfur in the VGO to less 0.5%, reducing but not eliminating the need for further Hydrotreating downstream

• Hydrotreating the FCC gasoline produced by the FCC using a FCC gasoline hydrotreater.  This has the ability to remove most of the remaining sulfur but also lowers octane in the process.  Refiners have to balance the two based on how much lower than 10ppm sulfur blend stock they have to offset the sulfur in the FCC gasoline.

• Increasing the relative volume of lower sulfur gasoline blend stocks such as reformate, isomerate, and alkylate. This requires expansion of these process units, which is typically more expensive than adding hydrotreating capacity. 

Impact on refinery profitability

Implementation of the Tier 3 regulation resulted in significant capital investment in Hydrotreating capacity by most refiners to reduce the sulfur in FCC gasoline and achieve compliance and in many cases generate some credits.  This resulted in some loss of octane supply that required some expansion of octane capacity.

At the same time, enough refiners have relied on the use of credits for compliance to create a an active market in sulfur credit trading.  The value of the credits swings with the supply demand balance of the sulfur credits market.  Generally, higher gasoline demand makes compliance harder and increases demand for sulfur credits.  Generating more credits requires more hydrotreating of FCC gasoline, which destroys octane.  The value of this lost lost octane has to be covered by the price of the credits.  Making up for lost octane requires running reformers at higher severity and throughput, which raises the price of octane and thus also the price of credits.

This dynamic leads to periodic fly ups in sulfur credit and octane values, that increase profitability for refiners who have over-invested in octane and/or sulfur removal capacity, and puts other refiners at a competitive disadvantage.