Anyone complacent about supply of ultralow-sulfur diesel fuel, requirements for which begin in mid-2006, should read the National Petroleum Council's report to the US energy secretary on refining issues. It tells a story different from the US Environmental Protection Agency's September status report on program compliance.
Under the assumption that the strictest environmental regulation is automatically best, EPA in December 2000 mandated that most highway diesel made and sold in the US contain no more than 15 ppm sulfur. That was the lowest ceiling EPA legally could impose, a 97% cut from the pool average of the time. It effectively will require refiners to produce diesel with 10 ppm sulfur or less.
Industry alternative
The refining industry supported a large cut in diesel sulfur—to 30 ppm, a 90% reduction. Environmentally, the difference between 15 ppm and 30 ppm sulfur in diesel fuel is insignificant. Catalytic converters, to be required in new diesel engines beginning in 2007, perform virtually the same at either concentration.
To refiners, however, the difference between the two specifications is great. In most cases, refiners could have met the 15 ppm standard by adjusting the operation of existing equipment and using different catalysts. To meet the stricter standard, they must invest heavily to upgrade or convert processing units or install new ones. They also must invest in new hydrogen capacity and catalysts.
Before EPA ruled, the industry pointed out how much more a 97% sulfur reduction would cost than a 90% cut, and how little environmental gain the tougher standard would achieve. EPA chose the stricter standard anyway. It also ignored refiners' warnings about requiring investments in diesel-sulfur reduction that coincided with spending necessitated by other new fuel specifications. Again in conflict with industry recommendations, EPA set enforcement of the diesel-sulfur standard at the point of sale rather than the refinery gate.
Healthy refiners are making the investments they must to produce ultralow-sulfur diesel. The outlays might total $9-15 billion, according to one recent estimate, which puts the cost of revamping a low-pressure, 30,000 b/d hydrotreater at $15-30 million and of buying a unit that size at $35-45 million (OGJ, Oct 18, 2004, p. 48). Small refiners unable to raise the capital will buy credits or not sell ultralow-sulfur diesel at all. Some probably will shut down.
In its September status report, EPA said more than 95% of the nearly 3 million b/d of highway diesel produced in the US will meet the 15 ppm standard in 2006. A press statement said: "EPA's analysis of information from more than 120 refineries shows that fuel suppliers are positioned to comply with the 15 ppm highway diesel standard on time; highway diesel fuel production will be sufficient to meet demand; and 15 ppm sulfur diesel will be widely available nationwide."
That's comforting. But it doesn't account for the refiners that might yet decide against risking capital to produce ultralow-sulfur diesel or for the cost impediments to capacity expansions to meet future demand growth. And there's more to supply of highway diesel than desulfurization capacity. The need to isolate low-sulfur streams, for example, will reduce blending flexibility, which will tend to lower average operating rates.
NPC foresees other supply problems. At a Dec. 1 presentation on the council's new report, officials raised concerns about timing and enforcement. Don Daigle, vice-president, refining, of ExxonMobil Refining & Supply Co. and chairman of the NPC refining committee, warned of degradation of ultralow-sulfur diesel by high-sulfur product lingering in distribution systems. The supply detriment, Daigle said, "could be quite large (see story, p. 24)."
Price effect
In several ways, then, the ultralow-sulfur diesel requirement will constrain supply in a market expected to grow. It thus will exert upward pressure on prices of highway diesel. Environmentalists argue that cleaner air and improved health are worth the cost, whatever it turns out to be. They're right. What no one should forget, however, is that air-quality and health improvements resulting from the shift to ultralow-sulfur diesel didn't have to cost as much as they will.
US consumers soon will overpay for environmental benefits because regulators overregulated at the expense of fuel supply. This is a pattern in energy policy-making in the US. It needs to stop.
