There have been a number of milestones on the road to cleaner diesel. Ultra low sulfur diesel regulations came and—despite a range of concerns from availability to quality control—went without causing too much heartburn for the industry.
On its heels there are new diesel engine emissions standards set for Jan. 1, 2010. The goal is to reduce nitrous oxide emissions up to 90 percent; hydrocarbons and carbon monoxide emissions by 50 to 90 percent and particulate matter emissions by 30 to 50 percent. While similar to European requirements, the standard is actually far more stringent. All diesel vehicles from class I to class 8 are included in this requirement.
There are two primary solutions from engine manufacturers needing to meet these requirements: exhaust gas recirculation and selective catalytic reduction.
EGR is already used to some extent in a range of engines (both gasoline and diesel) for NOx reduction, and it operates by recirculating some exhaust gas back to the engine cylinders. It basically speeds up combustion, which retards the formation of NOx. However, it also reduces fuel economy by up to 2 percent.
SCR is a newcomer to automotive systems, but is a well established solution for emission issues related to power plants and has also been used on diesel vehicles in Europe since 2005. With SCR, a urea-based solution is injected into a catalytic system to create a chemical reaction that converts some of the NOx emissions into pure nitrogen and water vapor. A diesel particulate filter can be added to the system for even greater emission reductions. Because of early European branding, the word “blue” typically features into the brand names of many solutions.
SCR technology does not reduce power like ERG, or create heat issues, and it is said to deliver a 3 to 5 percent diesel improvement in mileage as the engine can be fully optimized for performance. It does add weight, complexity and cost (at least $9,000 to a new Class 8 truck). There is also the cost of the diesel exhaust fluid to consider. However, the benefits are said to offset the disadvantages, including a positive return on investment for the added costs.
According to the SCR supporting Web site, FactsAboutSCR.com, an online study conducted in May 2009 noted that 51.2 percent of truck buyers are likely or very likely to consider the purchase of SCR to meet the 2010 EPA standards, compared to only 31.2 percent that are likely or very likely to consider increased EGR. Currently, only Navistar is holding out aggressively as an EGR provider.
Tank sizes for the DEF solution will be in the 13 to 25 gallon range. DEF consumption will be approximately 2 percent of diesel consumption, giving the range on a DEF tank fill up of approximately 4,000 miles. Although there is no damage caused by running an SCR equipped vehicle without the fuel, the vehicle manufacturers have worked with the EPA to set in place disincentives, such as dramatically reducing the engines output, if an engine is operated for too long without the fluid. For example, with Daimler a truck can drive 1,000 miles without the fluid before a computer de-rates the engine and limits vehicle speed to 5 mph.
Trucks and diesel automobiles are going to need DEF, and our channels represent definite sources of supply. So, exactly what’s in it for petroleum marketers and retailers? The answer to that question right now is that no one really knows for sure. Although this technology has been around in Europe for a few years, that experience was based more on fleet central fueling than the broader retail market found in the United States.
However, there are some common assumptions that can be drawn. The good news out of the gate is that margins will likely be notably better than gasoline on a per-gallon basis. The bad news is that volume will start out low, perhaps exceptionally low, and that even when it ramps up to full penetration, it will still lag well behind motor fuels. But, ramp up it will.
“The generally accepted turnover rate is about 3 percent per year for new vehicles. So you have 3 percent in 2010, 6 percent in 2011 to 30 years, you have a whole fleet turned over,” said Bob Renkes, executive vice president and general counsel of the Petroleum Equipment Institute. “And then there's the automobile side. Currently, about one out of every 20 (automobiles) in this country is a diesel.”
Although the Jan. 1 deadline will build demand for DEF, it’s anticipated to be slow going in the immediate future. The economic slowdown has impacted truck sales. In addition, older technology engines that are already in the supply chain can be used until they are exhausted. On the plus side, unlike what was seen with the ULSD deadline, the economy is also suppressing the heavy purchase of existing 2009 models that are not required to meet the new standards ahead of the deadline. So, although truck purchases will likely be sluggish to start, once the economic conditions improve and confidence builds there should be a notable bump in purchasing activities. Finally, as noted not every vehicle will be using SCR to meet the emission requirements.
Even so, the market that eventually develops will be comparable to other aspects of industry business. The volumes are not going to match fuel by any means, but a closer comparison can be made to motor oil.
A range of solutions will bring the product to market, and work to provide a cost-effective entry point for the product that will meet current expected needs. These include 1-gallon jugs; 2-gallon jugs; 2.5-gallon jugs; 55 gallon drums; 275 and 330 gallon totes; 725 gallon mini-bulk solutions; and conventionally dispensed above ground and below ground storage tank options in the $50,000 price range holding a thousand gallons or more.
Just where will the trucks fill up on DEF? The answer to that is a combination of where trucks currently get both fuel and service. DEF will likely be offered at the dealership (an initial core option); at the central truck facility for fleets that self fuel; at truck stops and other diesel-heavy retail units; at cardlock sites; lube and service shops; and likely mobile fueling opportunities exist. The auto centers in big-box retailers and dedicated auto repair stores will most certainly carry jugs.
Automobiles will likely utilize the dealer as a guaranteed source of fluid. Beyond that, and more common as distribution develops, jugs at retail seem the most likely primary channel given convenience and cost factors and the fact that automobiles require much more limited quantities to fill the tank.
“As far as the infrastructure is concerned, the first players that need to be involved are the truck stops certainly, with perhaps an emphasis on the small pack approach with 2.5 gallon jugs,” said Alan Smith, business development manager – DEF, for Brenntag. Brenntag is a leading distributor of diesel exhaust fluid under the TerraCair® brand. ”Basically, you’ll see very small quantities in a very large area. The truck are going to have 20 to 25 gallon tanks so it's probably more case of topping off rather than filling up the tanks and a jug will get you about 600 miles or so. A large truck may only need 300 gallons of this per year. The market is going to grow, and it's going to eventually become a large market, but it's going to be gradual.”
Smith also noted that the larger for hire fleets that are putting a lot of miles on their trucks and the companies that do home fueling are primary early adopters, as are municipalities. Beyond that, “…if you look at the light and medium duty truck market -- your furniture delivery vans and such -- that is going to be scattered all broadly and they'll need a jug here or there and maybe a drum at their shop. Dealerships will also be a guaranteed alternative if you can find a product at a truck stop or your local convenience store.”
The major truck stop companies have already started making their initial moves. TravelCenters of America LLC, headquartered in Westlake, Ohio, already stocks its 234 TravelCenters of America and Petro Stopping Centers with 2.5 gallon containers of DEF from Colonial Chemical Company for retail sale. Also, DEF is now available to every one of the 400 RoadSquad emergency roadside assistance vehicles at TA and Petro locations for trucks that run out of DEF while on the highway. TravelCenters announced in May the successful launch of the nation’s first retail DEF bulk dispensing operation at its facility in Ann Arbor, Mich.
Pilot Travel Centers LLC., based out of Knoxville, Tenn., is also prepared for the new diesel systems, and is beginning the rollout of 100 diesel exhaust fluid "at-the-pump" locations. The company will also carry pre-packaged supplies of DEF at all 350 Pilot retail stores.
“We don't anticipate new trucks really rolling off the line until about February, but we wanted to be out in front and be prepared for our customers,” said Bill Mulligan, Pilot’s vice president of development, facilities and environmental compliance. “So we put in bulk fueling facilities at about a hundred locations starting in the third quarter of this year (dedicating one lane with the offer) and finishing in the second quarter of next year. And in December were going to put out in all our facilities prepackaged DEF in 1 gallon and two and a half gallon containers. The primary motivation is that we need to have it to satisfy our customers’ needs, but we intend to make a profit off of it just like anything else we sell. Whether you're selling hot dogs or Coke or diesel fuel, you’re going to make a profit off of it. But first and foremost we’re looking to serve our customers’ needs.”
The maximum distance between any two Pilot locations will be 2,618 miles, which is within the normal range for one tank of DEF on a Class 8 on-highway truck. Pilot expects to offer its bulk solution at prices that are equal to or less than diesel fuel.
As Mulligan noted, perhaps the core motivation at this point for marketers and retailers to carry the product is to maintain diesel business. If a marketer operates truck stops or does a significant amount of diesel commercial business either through retail sites or card locks, carrying DEF jugs and even bulk-type solutions is likely unavoidable to maintain business. It is also likely a sound option to carry DEF jugs at retail in convenience stores in the same way antifreeze and motor oil are stocked.
In fact, Old World Industries, headquartered in Northbrook, Ill., a leading supplier of functional fluids, has announced plans to distribute its BlueDEF™ brand of diesel exhaust fluid to meet the demands of the North American commercial diesel vehicle industry beginning in 2010 at over 4,500 distribution points. “The challenge for the industry will be to maintain ample and uninterrupted supply as demand for DEF grows,” noted Old World’s Kal Mahmood, senior vice president of commercial sales, when announcing the launch. “Our extensive supply chain offers an established distribution infrastructure. Few manufacturers have the opportunity to supply and distribute to so many diverse networks as we do. Our expertise and relationships across the heavy-duty market allows us to provide BlueDEF through an already established network.”
Beyond retail, how does marketer supply work into the picture? Although the chemical companies will be out in front on bulk in the early stages, these companies realize that as market penetration ramps up the existing fuel and lubricant supply channel has many advantages for bringing product to the broader industry, and they express interest in utilizing that channel. However, most voices caution that bulk is not really there yet in any broad sense.
“It will likely take some time for the market to develop to the point where a marketer sends a truck to the rack to pick up a load of DEF,” said Smith. “We get a lot of calls from people saying they want to buy 5,000 gallons in bulk, and we're like, ‘You know, it does have a shelf life.’ We’re not sure it's quite there just yet. I think the smart companies, as we saw in Europe, minimized their initial investment and grew smartly with the market.”
That thought is echoed by Jim Spooner, vice president and general manager of Colonial Chemical Co., Tabernacle, N.J. “Initially, the market is going to be smaller packages and not big-time bulk,” he said. “So the distributor has to ask if they are really prepared to offer that product, form factor and service to their customer base. That's the big challenge.”
Product availability should also be a non-issue out of the gate. Demand will be limited, and production is already online in huge quantities for other applications.
“Product is already available. We have it in inventory both in packages and in bulk here at the plant in New Jersey, and we will offer it in other regional manufacturing locations as the market ramps up,” said Spooner. “We produce DEF solutions for stationary SCR systems—literally tens of millions of gallons per year—so in the early days of this market there will not be any difficulty in supplying the demand. It's fair to say that our competitors have product available today as well. Product is available as we speak in various truck stops, and we’re making product available to OEMs so it will be available.”
As to the best business model in offering the product, it comes down to the familiar: price, convenience and existing commercial fueling and service agreements.
From a price/margin standpoint, DEF is reportedly averaging a retail price of about $3.25 per gallon in Europe with reasonable (though unspecified) margins being reported. What the price and margin will be in the U.S. will come down to market factors (estimates range from $3.00 to $6.00 per gallon), but the retail margin should be notably better than gasoline and other motor fuels, though, the volume will certainly be far lower. The cost to commercial customers with packaged jug solutions will be high compared to bulk pricing, but with less initial investment challenges for the retailer/marketer. Given the nature of the SCR system, a driver can choose to pass up filling the DEF tank when stopping for fuel until he or she finds a low price and similarly a more convenient, dispensed solution. This can make the earlier adoption of a higher volume solution a reasonable play for the appropriate markets.
Similarly, marketers with cardlock and mobile fueling operations or supplying home-fueled fleets and municipalities should certainly consider offering DEF as part of this service, at the very least to protect business. A fleet could easily take DEF in-house and still get fueled at a card lock or from a mobile fueling solution. But that also encourages a good customer to begin to consider alternatives and potential competitors to the existing relationship. And, as the years pass, the product will move into the profit center category.
Another consideration is if the customer will simply top off the tank with a gallon, here or there, or run it dry and refill. It will probably be a mixture of both, with price and convenience coming into play. This also plays into the decision on a jug or higher volume solution. For starters, DEF weighs in at about nine pounds-per-gallon, so each large jug will weigh over 20 pounds. As noted, jugs are likely going to be more expensive. And, jugs take up space and not just on the store shelf. “If people decide to fill their entire tank with jugs, and we’re talking two and a half gallon jugs, how many 55 gallon drums am I going to have to have at the island to hold those empty containers?” said Tom Glahn, director of Austin, Texas-based Dresser Wayne’s Fleet Fueling Group. “And if your competitor is offering bulk liquid you may lose the diesel sale.”
Where 55 gallon drums of DEF itself are concerned, solutions, such as the one provided by GoatThroat™ Pumps, provide an interim capability between jug and totes and could be appropriate for a mobile fueling top off program.
Handling the DEF solution is both less challenging and more challenging than motor fuels or lubricants.
DEF is basically an aqueous solution of 32.5 percent high purity urea and 67.5 percent
deionized water. It has, and builds up, trace levels of ammonia, but not to notable health levels. The EPA currently classifies DEF as a non-hazardous substance. Furthermore, there has been sufficient experience with urea in both industrial and agricultural applications (as a fertilizer component) that few surprises should crop up in the future. It is non-flammable, not explosive and poses few health risks short of consumption.
In case of a spill, current recommendations are for the spill to be contained and absorbed using inert, noncombustible absorbent material, such as sand. If spilled into a drain the recommendation is to thoroughly flush the drain with water.
Temperature provides a major challenge in colder climates, with the product freezing at 12 degrees Fahrenheit. This requires heating both the tank (if above ground and exposed) and dispensing system. The product also crystallizes when exposed to air requiring that nozzles be “decrystallized” on a regular basis using distilled water. DEF has a shelf life of six to 18 months.
Contamination is perhaps the most critical issue with the product. DEF leaches copper, brass, some grades of aluminum, carbon steel, zinc, nickel and other ions. Fiberglass tanks and epoxy lined tanks have not currently been approved. DEF is compatible with most plastic material (polyethylene and PVC), rubber and stainless steel. Equipment material guidelines are laid out under the ISO 22241 standard.
This issue is critical for marketers because of the potential liability issues and how that liability can transfer to marketers if they provide the source of contamination. SCR systems are not cheap to replace. “It's very important to keep the product from becoming contaminated. So you can't share systems or pieces of equipment or hoses or piping—you have to have a separate infrastructure for DEF,” said Spooner. “Contamination will very adversely affect how it works in an exhaust system.”
It can also damage the exhaust system. Because of this, it is expected that the chemical suppliers will be focused on ISO compliant solutions downstream. “We want to make sure that no issues crop up in the whole supply line from manufacturing to the customer's tank,” said Smith. “We want to ensure that somebody is watching through the entire process, so we are going to be pretty diligent about who is taking this product to market for us and how they were doing it and what equipment they have and that sort of thing.”
A variety of dispensing solutions are coming into the marketplace. As noted, most will be following ISO guidelines on the materials used, in many cases porting a European solution for the U.S. market. The roundup at the end of the article provides more details. It should be noted that in many cases the equipment specified is still undergoing tests and that some of the equipment is “anticipated” as being ready for service by the deadline.
Although DEF is classified as a non-hazardous substance with few obvious trouble points, this industry can be excused for having a degree of well-deserved paranoia where such products are concerned. And there are several areas of uncertainty. The Petroleum Equipment Institute is expected to play a significant role in addressing these potential concerns in coming months, as it develops a recommend practices for operating DEF systems and works with regulators on some of the potential sticking points.
There should be few issues on the EPA front, but time will tell. There are apparently some voiced concerns over the trace amounts of ammonia in DEF, but they come in well under that found in typical cleaning products.
Renkes noted that fire marshals will need to be educated on the product. Although DEF itself doesn't pose a flammable or explosive or broad health hazard, its association with fuel and the island location will raise questions. There are also the heaters used in colder climates. There will likely be approving permits and inspections and PEI will be actively working to help move the education process along so that the likelihood of snags and unnecessary regulatory hurdles is minimized.
The major challenge comes with Weights and Measures. If the product is made available for meter sale, the meters will have to have the standard calibration. The typical procedures (filling a container and measuring the fill to the indicated dispensed quantity) will work, but unlike gasoline, the product cannot simply be dumped back into the tank because of contamination issues. At $3 to $6 per gallon, every dispenser calibration becomes more expensive. Effective and efficient procedures in this area need to be adopted and accepted in what is hopefully a fairly uniform manner, nationally. If a top off program is developed, such as found in lube shops (perhaps also applicable to a mobile fueling service model), this concern is avoided.
Similarly, PEI is fast tracking a Recommended Practices for DEF, with a draft due at the PEI/NACS show and finalization by the end of the year. This should help clarify and unify installation, operation and maintenance issues.
So, the industry faces another regulatory challenge. Fortunately, the challenge this time involves a new profit center. While there are many questions about going to market yet to be answered, the good news is that there are low cost and low-headache retail solutions to get started and an easy ability to ramp up as the market develops. Given the industry’s experience with Washington a few doubts invariably persist. “My only fear is that in a couple of years some Einstein is going to come up with a new way to meet the air quality standards without using the DEF equipment, and then your investment is worth a lot,” said Pilot’s Mulligan. “But I'm fairly confident because this is what Europe uses, and it works pretty well, and it's pretty basic, and it’s not a toxic chemical, and it's easy to deliver—so it should be here for some time to come.”