The Murky World of Avgas Prices
If I were to break down the quest for an unleaded avgas into seasons, I think we're in the long, hot summer phase. From here until two years from now, progress may be like watching the grass grow. At AirVenture last month, the only meaningful activity was that Shell showed up to talk about its entry in the 100-octane sweepstakes without revealing much detail. But it's possible to read between the lines. In this longish podcast I conducted with two Shell executives in Oshkosh, you can glean the barest sense of where Shell is going and also a bit of spinning. More on that later.
So, at this stage, what do we care about? Mainly that a replacement fuel will get through the FAA's Byzantine PAFI approvals process, that it will have the required octane, that it won't require expensive recerts and, last, that it will be affordable. I think the first two are all but a given, the second two are open to debate. If Shell's fuel somehow stumbles, there's always the BP/Total/Hjelmco candidate. Swift is still in the game. For all we know, two could make the cut and the market will be left to sort things out. What could be more capitalistic?
The price point is another matter. In writing in this space, the accepted wisdom has been that the replacement fuel would be more expensive than 100LL is by some unknown amount. This is not just my blue sky opinion, by the way, but an informed judgment based on conversations with people in the petrochemical field actively involved in aviation fuels. They decline to be quoted, but will talk on the subject on a background basis.
The reasons for believing the replacement fuel will sell for more are several and sound. Avgas volume is in steady decline and has been for awhile. There are no more than seven refineries making it and the assumption has been that new entrants won't be lining up to get into the aviation gasoline business. Those that do will want a juicy margin on the investment they'll have to make to blend a new unleaded avgas. Avgas has traditionally been a high-margin, high-profit product for refineries and if they hate anything in this business, it's giving away margin or excess quality. They'll get every penny from it that the market will bear.
But Shell appears to be mildly challenging the higher price assumption. We don't know enough about the formulation to run it past our experts and we won't until the company has to show its intellectual cards to ASTM and the FAA, eventually. But it seems likely that Shell is angling to produce, through its R&D, a spec for a 100-octane fuel that could be blended under license by anyone who's interested. That might be Shell's refineries or someone else's. Nothing new about that in the petro industry, which is famous for producing fungible, universal products.
Furthermore, Shell says the assumption that the new fuel will require a high-quality aviation alkylate base misses the point, insisting that its magic sauce is how its additive chemistry interacts with a high-octane base to produce engine performance results. Our sources are skeptical of this claim, but are open-minded. Whether true or not, perhaps the new avgas could be blended outside the refinery fence and although that's done routinely for hundreds of other petrochemicals, the idea is new to avgas, as far as I know. That's probably because of the special handling requirements for tetraethyl lead, which is lethally toxic. It makes more sense to blend the locally produced alkylate with some aromatics, dose it with lead at the refinery and send it on its way.
Conceivably, then, unleaded avgas could be blended outside the refinery fence. That opens some intriguing possibilities. There are about 139 operating refineries in the U.S. and 660 worldwide. But in the U.S. alone, there are some 1500 terminals and bulk facilities capable of various kinds of product blending and distribution. If only a dozen of them were capable of and interested in avgas production, that would double the number of avgas sources, perhaps yielding greater geographic spread and more competition. The terminals could, conceivably, rail in the avgas components, blend them, then rail or truck out finished fuel. A source in the terminal business told me the concept pencils out, but since the components aren't known, neither can prices be estimated. Just understand that the components that go into avgas don't necessarily drive its retail price.
But reducing the distance to market reduces transportation costs and that's a net plus for the consumer. If it doesn't exert downward price pressure, it at least flattens the upward trend. Perhaps that knocks the legs out of higher prices being assumed, perhaps it doesn't. At least it's encouraging. If avgas and/or its components could be pipelined instead of railed, that would help, too. But the volumes involved are just too small to ever see pipeline transportation for finished fuel.
And, unfortunately, avgas volume remains dismally low and continues to decline. According to the Energy Information Administration, avgas reached a historic monthly low in March 2014, with 7.9 million gallons refined. Although it seasonally rebounded in April and May, the overall trend since 2006 has been downward. Avgas demand has declined by about 38 percent since 2000. There may be some signs that activity is picking up and demand is at least flattening, but it's too soon to say if this is an established trend. I'll put on my optimist hat and predict the decline will soon bottom out.
Even if it does, there's not likely to be much growth in avgas and this is certainly a consideration for anyone eyeing producing an unleaded 100-octane, whether a refiner or a blender. It has been widely noticed and remarked upon that ConocoPhillips, an aviation stalwart, declined to submit a candidate fuel to the FAA approvals process. Does this suggest that the company doesn't see a future in piston aviation fuels or is it content to let Shell develop the spec then produce under license? No one but ConocoPhillips seems to know and they aren't saying. Chevron and Exxon are also sitting it out.
If I owned an aircraft requiring 100-octane fuel, I wouldn't be particularly worried that the entire process will run off the rails and no fuel will emerge. There's enough business remaining, even with anemic demand, for refiners to make a buck. Someone will serve the market. If Shell—or anyone else—delivers a non-proprietary, readily blendable formula, maybe more companies will go where ConocoPhillips and Exxon fear to tread. We'll know more in a year or so. For now, we know squat.
Meanwhile, look for more detailed reporting from AVweb on avgas economics in the coming weeks.