Refiners already are taking out more of it. Gas stations will be pumping less of it. Tailpipes will be spitting out less of it -- or so the federal government hopes.
As 2017 nears it is bringing broad changes to how producers such as refineries and market players manage sulfur at most parts of the US gasoline stream -- except for the nation's pipelines.
Meanwhile, talk is starting to circulate among traders how the sulfur restrictions will affect cash markets. And the swaps trade in July for US Gulf Coast gasoline is pointing to stronger values for January product after the switch compared with December contracts, according to S&P Global Platts data.
Officials at most major US pipelines said this month that the Tier 3 standards that appear poised to reduce sulfur in gasoline by more than half do not apply to them.
The federal government is requiring that finished gasoline average 10 ppm sulfur by January 1. This happens while regulators are finalizing standards for the refinery gate at a maximum of 80 ppm sulfur and a downstream cap of 95 ppm. According to an energy glossary published by the Cornell University law school, the refinery gate is defined as the point at which refined products leave the plant.
COMPLIANCE IN 2-3 YEARS
The largest impact will be seen at the refinery, where the law means a reduction of sulfur in gasoline during production. The US Environmental Protection Agency expects that the majority of the gasoline refineries impacted by the Tier 3 standards either already meet the 10 ppm sulfur requirement or will be able to come into compliance within two to three years.
"10 ppm is the new annual average," an EPA spokeswoman said in an email. "It used to be 30 ppm. Individual batches can be as high as 80 ppm from a refinery. They would just have to be offset with a lot of other batches less than 10 ppm to still average 10 ppm."
Two years ago, the EPA said 40 US refineries were ready to meet the 10 ppm standard. That figure has not been updated, the EPA spokeswoman said.
"Those were projections we made for the rule," she said. "We have not been tracking the individual actions to comply of the various individual refineries to see how they line up with our projections. However, we have heard from engineering firms, technology vendors and the refiners themselves that across the industry they are taking the necessary steps to comply."
CREDITS ON SECONDARY MARKET
Refiners will be able to compensate for additional expenses through trade of credits, and some small refiners have been granted exceptions, the EPA said.
"My thought is refiners will be ready," a US refined products trader said about the Tier 3 change. "If not on January 1, they will be ready shortly thereafter. They just have to meet the standard in 2017 on an annualized basis. It's not a drop-dead January 1 requirement."
Executives in charge of products at one major East Texas refinery said last month that their plant is already in compliance with 2017 sulfur standards.
For pipeline operators, however, the impact is minimal to nonexistent. Pipelines, which publish specifications for sulfur amid their hundreds of restrictions of what goes into their systems, say there will be no change in their operations.
US PIPELINE SURVEY
An executive at Colonial Pipeline -- the nation's largest pipeline system, based in Alpharetta, Georgia -- said the shift to stricter sulfur standards does not apply to the company's lines in the East and Deep South and there would be no changes coming from the company in specifications or operations.
"The standards are focused on the refinery level, with [the refineries] having to lower their average sulfur," the executive said this month. "From our point of view, there is no impact, and our level of sulfur will remain at the maximum 80 ppm."
Colonial's gasoline-only Line 1 carries about 1.37 million b/d of fuel from the Houston area to Greensboro, North Carolina.
At other pipelines:
* BP OLYMPIC PIPELINE: "The compliance obligation falls on the refiners and shippers, not the pipeline," BP spokesman Michael Abendhoff said. BP operates the Olympic Pipeline, which carries refined products from Puget Sound, Washington, into Oregon.
* MAGELLAN: Spokesman Bruce Heine at Magellan Pipeline, the major Midwest-based pipeline system, said Magellan's 80 ppm sulfur maximum requirement will remain in place.
* KINDER MORGAN: The company, which operates major refined products pipelines in the US Southeast and the West Coast, will be unaffected, Kinder Morgan spokeswoman Melissa Ruiz said. "The downstream caps for pipelines and terminal operators remains the same at 95 ppm with a refinery gate maximum of 80 ppm, so there is no change for us," she said.
* BUCKEYE: Officials at the company that operates Midwest and East Coast pipelines carrying gasoline did not respond to repeated requests for comment.
The EPA spokeswoman said "there should be no impact on pipelines or terminals" from the Tier 3 changes.
MARKET REACTION TO TIER 3
One Atlantic Coast gasoline source said sulfur specifications could cause some confusion in the market, as traders are unsure what sulfur specifications will apply. All import cargoes on the East Coast will reflect 10 ppm sulfur, while the pipelines will reflect a maximum of 80 ppm.
"The pipelines will continue to be 80 ppm, but importers will have to hit the 10 ppm spec or have sulfur credits to cover," he said.
With the cost of sulfur credits unknown, arbitrage flows become more uncertain, he said.
Since January 2003, Platts has assessed European premium unleaded gasoline to reflect the 10 ppm sulfur specification. The year preceding that, the assessment reflected 50 ppm maximum, and before that, the maximum sulfur was 150 ppm.
PLATTS ASSESSMENTS AND SWAPS
Platts publishes sulfur requirements for only a small fraction of gasoline assessments. Gulf Coast CBOB and premium CBOB and West Coast unleaded and premium unleaded gasoline are assessed at maximum 80 ppm sulfur. Arizona gasoline is assessed at a maximum of 89 ppm sulfur. Meanwhile, trade in gasoline swaps this month points to more value for fuel in January after the Tier 3 switch and a flip from 2015's pattern.
From July 1-27, 2015, the December 2015 swaps contract for Gulf Coast 87-unleaded topped the January 2016 contract every trading day but one, with an average edge of 51 points for December swaps that year over January, according to Platts data.
But from July 1-27 this year, the January 2017 contract has averaged an 18.5-point premium to the December 2016 contract.
That's a small sample, but extending the analysis also points to stronger January swaps in Gulf Coast futures when compared with December this year.
From May 1 through July 13, 2015, December swaps averaged a 1.08-cent premium over January swaps. In the same period this year, December's edge on January contracts has narrowed to 76 points.
The US refined products trader said he expects an uptick early in 2017, but it may not last long.
"My experience on specification changes is that the product seems to rise more early, then come off not long after implementation," he said.
