NPRA: US refiners ready for 2006 supply challenge

March 27, 2006
Refiners, although facing numerous challenges in 2006, will be able to maintain supplies of transportation fuels, according to William Klesse, National Petrochemical & Refiners Association chairman and chief executive officer of Valero Energy Corp.

Refiners, although facing numerous challenges in 2006, will be able to maintain supplies of transportation fuels, according to William Klesse, National Petrochemical & Refiners Association chairman and chief executive officer of Valero Energy Corp.

“The refining industry must comply with stringent new environmental standards and changes in fuel specifications,” Klesse said at NPRA’s annual meeting in Salt Lake City. “Last year was especially difficult for refiners and petrochemical manufacturers. We believe that 2006 will be another challenging and eventful year.”

Robert Slaughter, NPRA president, said, “The question is not whether there will be difficult times, but how can companies keep adding value while meeting the difficulties.” He cited challenges posed by supply and demand as well as by nature.

Despite damage to Gulf Coast facilities from two major hurricanes and high feedstock prices, US refiners were able to maintain supplies of transportation fuels in 2005.

The US refining industry’s challenges include continued uncertainty about crude supplies, strong demand for transportation fuels as refiners prepare to meet summer US gasoline specifications, implementation of the ultralow-sulfur diesel (ULSD) program, the renewable fuel standard (ethanol mandate), and serious concerns about US supplies of natural gas and NGLs, according to Klesse.

“Despite these challenges, we remain hopeful that increasing the nation’s supply of oil, oil products, and natural gas will be a public policy priority,” he said. “NPRA believes that we can and must confront the energy supply challenge. It remains the single most important step that can be taken to improve US energy policy.”

Refiners and NPRA will also face public policy challenges in that high crude and gasoline prices may lead to more legislation, said James Mahoney, incoming NPRA chairman and vice-president of Koch Industries Inc.

“We believe last year’s energy bill did little to address the nation’s most critical issue in meeting the supply challenge,” he said. “We were extremely disappointed that it failed to include liability protection for federally mandated fuels.”

But he said refiners were pleased with a tax provision allowing them to charge to expense specific outlays for expanding refining capacity.

“This is the first tax incentive for refiners in over 50 years,” Mahoney said.

Petrochemical producers face challenges posed by increased competition and higher feedstock costs, as in past years. In 2005, these were exacerbated by the hurricanes.

To increase natural gas supplies, “We believe that Congress needs to allow ANWR [Arctic National Wildlife Refuge] production and increase domestic gas development from the Outer Continental Shelf,” Mahoney said. “We were encouraged recently by the bill recently introduced into the Senate to begin leasing parts of [OCS Sale] Area 181 offshore Florida.”

ULSD standard

Implementation of the ULSD standard will pose one of the bigger challenges in 2006, according to the three speakers.

“Holistically, the program’s got a lot of challenges associated with it,” Mahoney said. “The first hurdle we’ve got to get over is June 1, when we have to have ULSD inside the refinery fence. Once you get beyond that, the focus is on the issues associated with distribution: transmix and possible cross-contamination at manifolds and terminals.”

Slaughter called the requirement “very sweeping regulation” and said: “It was designed with less of a margin for safety than the industry recommended. Transition periods are historically difficult. But we’re certainly hoping that the immense investment and consultation with regulatory authorities will help us get over this hump.”

Slaughter said the industry does not expect refiners to need ULSD waivers, such as the fuel waivers that the US Environmental Protection Agency issued in the wake of Hurricanes Katrina and Rita.

“The general impression I get from talking with [EPA] is that there will not be waivers unless there is a demonstrated need for them,” Slaughter said. “At this point all the signs are that they expect this transition to go ahead as currently scheduled.”