Shell's New Avgas: Inside Comments
Shell’s announcement of an unleaded replacement for 100LL last week has drawn lots of attention, deservedly. At this week’s ASTM meeting in Tampa, I spent time buttonholing the world’s fuel experts about what this means for the world of GA. The fuel guys are mostly curious—intensely so—about what formulation Shell has cooked up, but the company didn’t so much as tip a face card at the meeting. So all we know is what we reported last week—it’s an alkylate-based fuel with an aromatic additive package. We know nothing about its performance, its producibility and, above all, its price.
That is, understandably, where most of the consumer curiosity lies. After all, we can reasonably expect that a $467 billion international petrochemical conglomerate can figure out how to refine a few hundred million gallons of 100-octane fuel, provided they’ve got the formula right. No promises there, but I’ll stipulate that for the purposes of this blog.
Our mail following the Shell announcement indicates there are some misconceptions about price expectations. In all the reporting I’ve done on this subject, no one in the fuels, aircraft or engine industry has assumed that the replacement for 100LL will be cheaper. At the very best, it will be comparable and how you define that is rubbery. Will it be within 5 percent or 10 or 15 of 100LL? Take your pick. (I’m going with between 10 and 15 percent.)
Some people think because lead will be eliminated, the refiners will save a bunch of dough on both additives and transportation. But there’s no reason to believe this is so and no one in the petroleum industry has ever said this to me. As an octane enhancer, lead is close to dirt cheap compared to other alternatives. I’ve been told as little as a dime a gallon to up to 40 cents. I suspect for most refiners, the real number is between the two. In any case, the aromatic hydrocarbon packages that seem likely to replace lead are more expensive and likely to remain that way, since they’re commodities driven by broader economic conditions.
One letter writer thought that refiners and distributors will save a bundle on these new fuels because they can be transported by pipeline while leaded fuels can’t be. But there’s a better chance of seeing Diet Pepsi bubble through the Colonial than there is unleaded avgas. The volume simply isn’t there. One source told me the minimum volume for a pipeline batch is 5000 barrels or about 210,000 gallons. Sounds like a lot, but anemic, widely dispersed demand at the other end means that stuff will have to be stored somewhere and refiners and terminals don’t like to do that. It costs money for tankage and unsold inventory has value that can eat up any savings in transportation. Also, there’s the transmix—liquid fuels mix when the products are changed in the pipeline and that has to be trucked back to the refinery for recovery. More than likely, truck and rail will be the transport of choice, unless Amazon decides to move avgas by drone.
Further, because of the liability issue, it’s quite likely that aviation fuel will continue to be sequestered in dedicated storage, lead or not. The liability of off test fuel is real and high and I’ve been told that refiners aren’t going to want to risk contaminating a batch. (Recall that Chevron had that very problem in 1994, when it paid $40 million to replace engines potentially damaged by off-spec avgas.) It may be true that distributors will no longer need dedicated tankers, but that’s unlikely to swing the economics downward much, if at all.
The most powerful market force here may be something no one can control: declining volume. The less avgas is made, the less likely there are to be production economies of scale and, perhaps, the less likely there will be either new entrants into the business or meaningful price competition. I don’t mean to depress you, but the data here is grim. According to the U.S. Energy Information Administration, the production of avgas has been in continuous decline for more than 40 years, although there have been plateaus and brief spikes. The last high was in 2006, when EIA reported 276 million gallons of avgas refined. For 2012, the number dropped to 204 million. Trends in Europe are similar, while Asia has shown spotty growth. Even China’s avgas consumption is down since 2009. (Note: there’s argument about the accuracy of EIA numbers; some insist the U.S. volumes are larger than EIA says. But it’s the directionality that’s important.) The point is, this is not a market which is likely to incite intense price competition nor, perhaps, new entrants for the next half decade or so.
One hope was that a new avgas could be a terminal product—that is, something blended up from large-volume stock sloshing down the pipelines. That’s what Airworthy Avgas will be doing with it’s new mogas product. Nice idea, but for avgas, it’s hard to see how this will work. Shell says its base feedstock is aviation alkylate, a pricey, low-volume refinery product that neither moves by pipeline nor is found hanging around in the average terminal. So that argues for Shell’s unleaded avgas being a refinery product. But how many refineries? Too soon to say. Shell signaled that it might re-enter the avgas refinery business in North America or simply license refining of its avgas to other facilities, of which there are many. But it’s not clear how many have the high-quality alkylation plants Shell will probably need to make its fuel work.
As for timing, we may not see this new fuel before 2018 and perhaps not before 2020. Because it’s clearly going to be as expensive or more expensive than leaded avgas, there’s no price push to draw unleaded fuel into the market. It will be done by regulatory declaration. Figuring out when EPA is actually going to move on this makes reading tea leaves look like child’s play, but the FAA’s approval timeline for these fuels—and they plan to perform final testing on only two fuel candidates—runs to 2018. It might happen faster, but that’s the outside line. The FAA testing plan hasn’t been detailed yet, but it’s involved. The rest seems to be up to EPA or perhaps the courts.
So, my informed-as-I-can-get-it guess is, allowing for inflation, the 2019 average cost of avgas will be between $6.80 and $7.25. As of December 2013, AirNav.com reports the U.S. national average at $5.87. The perverse thing about avgas prices is that the spread between the very highest ($11.21) and the lowest ($3.99) is more than a buck higher than the national average price.
If that doesn’t make a mockery of supply-and-demand theory, I’m sure I don’t know what does. In the next blog, we'll look at the FAA approval process.