Diesel supply woes remain major industry concern

Maureen Lorenzetti
Washington Editor

WASHINGTON, DC, Nov. 19 -- Industry continues to voice strong concerns that US environmental regulators are not addressing potential supply problems associated with upcoming diesel fuel standards.

"We are still concerned about the supply impacts of the on-road sulfur rule," Ed Murphy, American Petroleum Institute downstream manager told OGJ Friday. "Supplies could turn out to be inadequate."

But Murphy rejected charges by environmental groups and state air-pollution regulators that industry wants to relax or delay the sulfur reduction rules.

"We are not trying to change the 2006 date. Nor are we trying to change the 15 ppm (sulfur limit) level. We're committed (to the premise) that the trucks that need that fuel (should) have it. But we want (the Environmental Protection Agency) to consider the overall supply picture."

To that end, API and five other industry trade associations are holding a workshop on supply and distribution issues in Houston Nov. 20-21. US Environmental Protection Agency officials will attempt to answer questions but will not be receiving formal comments on potential changes to either the on-road or off-road rules.

Last month, the EPA formally presented a clean diesel review panel report that gave an update on technical advances being made to comply with the on-road, or "highway," rule. API and the National Petrochemical and Refiners Association endorsed the work of the independent panel, whose members determined that technology issues would not prevent regulators from moving forward with the rule. The panel did acknowledge some refiners' concerns over the impact the rule may have on distribution, but the majority of its members concluded those issues were outside the scope of the panel's charter (OGJ, Nov. 11, 2002, p. 7).

Since that meeting, industry officials said they are still worried about diesel standards: both the highway diesel fuel standard, due to begin implementation in mid-2006, and a yet-to-be published non-road standard. EPA, in conjunction with the White House's Office of Management and Budget plans to offer an official proposal on non-road engine and fuels in first quarter 2003; EPA originally had hoped to provide a document to industry before yearend. The White House is said to favor a model that would allow "the potential use of market-based averaging, banking, and trading programs" that might include permission to trade emissions-reduction credits between off-road and highway engines (OGJ Online, May 31, 2002).

Non-road considerations
On non-road diesel, environmental groups are monitoring what they believe to be EPA'0s desire to consider a range of options. EPA's primary option currently would require all non-road diesel to meet a 15 ppm sulfur limit by mid-2008. Industry, meanwhile, wants the agency to consider an alternative two-step process: 500 ppm in mid-2007, followed by 15 ppm by 2010.

In an Oct. 30 notice to small business owners, the agency acknowledged it was mulling the industry option. It also acknowledged efforts with OMB to consider a credit-trading program under a two-step standard. Industry officials say the timing and implementation of the non-road rule will significantly impact how industry can meet challenges associates with highway diesel.

"One of our concerns is that we need to get this off-road rule settled quickly," said Murphy.

Meanwhile, environmentalists and states want a more aggressive timetable than favored by industry, although they say they are willing to work with fellow stakeholders on fuel supply worries.

"Non-road diesel emissions cause massive public health problems. That's why environmental and health groups and state and local officials have urged EPA to set tough non-road diesel fuel and emission standards on a timetable similar to those for highway diesel fuel and engines," said Frank O'Donnell, executive director of the Clean Air Trust. "However, the groups do want to work cooperatively with industry to ensure a strong program."

Highway fuel
On highway fuel standards, there is support by some policymakers within the Department of Energy to dramatically reduce diesel fuel volumes that meet the 15 ppm "ultra low" sulfur standard from 80% to 40% of total production by mid-2006. But that position has not been officially supported by the White House and is vehemently opposed by EPA. Fuel suppliers also are worried that changing volume levels only 3 years before the rule begins would not give truck stops or service stations the lead time needed to install additional storage tanks and pumps that likely would be needed to separate high-sulfur and low-sulfur fuels.

"We've not made that recommendation," said API's Murphy. "Attention should have been paid to that 5 years ago by the agency."

At its Oct. 30 public meeting with EPA on this issue, API offered several recommendations that it maintains the government should take to protect consumers from potential supply problems. One key item would be reconsidering the 20% downgrade limit from ultra-low-sulfur diesel to low-sulfur diesel fuel, which is 500 ppm.

"Because of the tight sulfur limit on ultra-low sulfur diesel fuel, interface volumes will increase. With the increased interface volumes and accidental contamination, the 20% limit may not be sufficiently flexible to allow suppliers, especially at the end of the supply lines, to meet the limit," API said. "Moreover kerosine that is designated as No. 1 ultra-low sulfur diesel and used for winterization blending should not be subject to a downgrading limitation if used to winterize 500 ppm S max diesel."

Another key item of interest to industry is the rule's sulfur credit-trading system. API says EPA should modify the rule to allow an adequate credit market to be formed and "therefore permit the 80/20 ultra-low sulfur diesel to low-sulfur diesel ratio to be achieved and maximize highway diesel production potential. It is important that the credit-trading system encourage the early production of ultra-low diesel to ensure that adequate supplies of both ultra-low sulfur diesel and low-sulfur diesel will be available in mid-2006," API said.

Specifically, API wants EPA to remove the Petroleum Administration for Defense Districts restrictions from the credit-trading system, saying it does very little to ensure widespread distribution of ultra-low sulfur diesel.

"Given the importance of a workable credit-trading system and adequate supply, especially in mid-2006 and shortly thereafter, it is best to err on the side of ensuring that the credit-trading system will work," API said.

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