It may be surprising to most people who don’t work in petroleum refining, but the four-carbon molecule butane has a high octane (about 91, similar to mid-grade gasoline at the pump), which makes it suitable as a gasoline blendstock. The downside is that butane has a low boiling point, so it vapourises easily, promoting undesirable atmospheric emissions from gasoline. Vapour pressure measures the tendency of a gasoline blend component to vaporize and increases with temperature.

Butane’s high vapor pressure (approximately 50-60 pounds per square inch) makes its use in gasoline highly seasonal. During the Spring and Summer, when gasoline vapor pressure must be reduced to minimize gasoline vapor emissions, butane blending into gasoline almost ceases entirely. However, during the colder fall and winter seasons, butane can be blended into gasoline at proportions of about 3-5%, depending on various factors. In the winter, butane is desirable as it helps with the cold starting capability of gasoline.

With the increased production of natural gas from shale formations in the U.S., production of butane has grown significantly, while its demand has not increased appreciably. Over the years, this has led to increased butane exports and widening butane price discounts to gasoline. These widening price discounts provided increasing economic incentives for refiners and independent blenders to maximize the amount of butane blended during winter. Although 3-5% doesn’t seem significant, large price discounts for butane compared to gasoline provide healthy cash flow incentives to maximize butane blending.

While butane production has increased, gasoline has not, so blending opportunities are limited. Blending more butane into gasoline upstream in the value chain removes opportunities downstream. Baker & O’Brien was engaged to quantify the economics associated with blending gasoline when a new entrant added blending capability, almost eliminating a downstream blender’s ability to blend butane.

Baker & O’Brien consultants developed a gasoline blending economic model that calculated cash flows from blending butane in gasoline, given assumptions about incoming gasoline quality and forecasts of butane-gasoline price spreads. The projected cash flows from butane blended were discounted in calculating the net present value of the company’s butane blending business. Our analysis was summarized in two expert reports and used in commercial damages claims and settlement negotiations.