Patrick Crow
Washington Editor
Environmental regulations are dogging nearly every aspect of U.S. refining operations, threatening the existence of small plants and the future profitability of larger ones.
The industry is beset by government requirements at the federal and state levels for cleaner burning fuels at the same time other regulations demand substantially less air and water pollution from plants.
Salomon Bros. estimates environmental related capital costs could add $25-45 billion to refiners' investment requirements during the next decade. It is not clear these costs can be recovered in product prices, the analyst said.
Ashland Oil Inc. estimates industry will have to spend $41 billion in environmental outlays by the year 2000: $670 million/year in higher operating expenses to meet the carbon monoxide nonattainment program, $32 billion for reformulated gasoline, at least $3.3 billion to produce low sulfur diesel, and $6 billion to reduce refinery emissions. It contends as much as 13% of U.S. capacity could be lost because small refiners may choose to close rather than make the investments.
For the most part, cost estimates of refiners' projected environmental outlays cover only the federal environmental rules. Environmental regulations covering refinery operations are proliferating at the state level as well.
Especially noteworthy are gasoline reformulation standards under stringent new air quality rules in California, deemed tougher than comparable federal rules, that other states are considering adopting (OGJ, Dec. 23, 1991, p. 26).
The Oil & Gas Journal estimates U.S. refinery spending will be a record $6.2 billion this year, up 8.3%, and almost all of that will be for environmental compliance projects (OGJ, Feb. 24, p. 25).
A study for the Energy Department predicts initial reformulated gasoline requirements in 1995 won't pose significant technical problems, but nearly all refiners will have to make additional investments (OGJ, Feb. 17, p. 27),
An underlying problem is that the Environmental Protection Agency has been slow to issue reformulated gasoline requirements.
Salomon Bros. said refiners fear they may not be able to recover the extra 10 cents/gal they will have to spend to make reformulated gasoline and 5 cents/gal to make desulfurized diesel fuel next 5 years.
All of this comes when the outlook for gasoline demand growth is expected to be flat in the 1990s because cars will be more fuel efficient and the driving population older and thus less likely to drive.
REFINERY INDICATORS DOWN
Industry is being required to make these massive investments at an especially inopportune time.
Sluggish demand stemming from the current economic recession has depressed the refinery crack spread, as tabulated by the Oil & Gas Journal, to less than $5/bbl in recent weeks, down 50% from a year ago.
The American Petroleum Institute reports refinery operating rates are at the lowest level in nearly 5 years. Input to crude distillation units was 12.55 million b/d in February, down 5.1% from the same month a year ago.
"With primary inventories falling more than usual for February and with crude and product prices falling throughout much of the month, it is believed that refiners cut throughput to lessen the price risks of holding excess inventories," it said.
API also noted refinery utilization dropped to 79.9%, down 5.3% from a year ago. That was the lowest level since March 1987.
The institute also noted while refiners are facing continual demands for lighter, cleaner products, U.S. crude oil slates have been getting heavier and dirtier as high quality crudes become more scarce. Since 1982, sulfur levels in U.S. crude runs have increased nearly 30%, API said.
Since 1981, for various reasons, 4.3 million b/d of processing unit capacity has been closed, API said, noting the U.S. currently is importing about 1.5 million b/d of products.
CLOSURES IMMINENT
Salomon Bros. predicted the industry will have to close more refineries because slack operating rates have denied refiners decent returns on their existing investments, "let alone on the heavy noncommercial outlays that they face in the future."
Salomon Bros. noted that many of the 194 U.S. refineries are small by world standards, 90 less than 30,000 b/d capacity, and many are too small to invest as much as $3,000/bbl of capacity for reformulated gasolines and low sulfur diesel fuels. It expects a number of closings by 1994.
In recent months:
- Chevron U.S.A. Products Co. said it would cut capacity at its aging Port Arthur, Tex., refinery to about 200,000 b/cd from 315,000 b/cd, but still must invest $333 million for environmental compliance (OGJ, Mar. 16, p. 30).
- Amoco Corp. closed its 30,000 b/d refinery in Casper, Wyo., to avoid spending $150 for environmental improvements (OGJ, Oct. 21, 1991, p. 41).
- Farmland Industries closed its 27,500 b/d Phillipsburg, Kan., refinery due to the need for environmental upgrading (OGJ, Nov. 18, 1991, p. 118).
- Shell Oil Co. sold part of its Los Angeles refinery to Unocal Corp., and between them 108,000 b/d of capacity left the market.
- Phillips Petroleum Co. tried to sell its 25,000 b/d Woods Cross, Utah, refinery, but now will spend more than $50 million for environmental and other improvements.
- Hondo Oil & Gas Co. last week reached agreement to sell its 29,657 b/d Fletcher refinery at Carson, Calif. Signal Hill Petroleum Inc., Signal Hill, Calif., will buy the Fletcher refinery, Hondo's asphalt barge operations and two asphalt terminals in Hawaii for $10 million subject to adjustments and certain liabilities. The deal is to close in 30-45 days. Until then the refinery will process crude for Enron Oil Trading & Transportation Co.
The refining industry's environmental woes are not unique to the U.S. Last year the Mexican government closed a 105,000 b/d refinery in the Mexico City area to reduce air pollution. Due to sluggish product demand in Canada, Petro-Canada is closing one refinery and trimming capacity at another, lowering its overall capacity 65,000 b/d. Other closings are possible (see related story, p. 22, and OGJ, Feb. 3, p. 22).
GASOLINE REQUIREMENTS
The key problem facing the refining industry is EPA's mandate governing the content of reformulated gasoline, effective Jan. 1, 1995 (OGJ, Jan. 27, p. 21).
EPA recently issued a supplemental notice to require use of reformulated gasoline in nine areas of the country with the worst ozone pollution.
The pact was an outgrowth of a "regulatory negotiation" process involving EPA, the refining industry, environmentalists, and state and local governments (OGJ, Aug. 26, 1991, p. 37).
Reformulated gasoline is expected initially to cut volatile organic compounds (VOCs) and air toxics by 15% and as much as 25% by the year 2000 from 1990 baseline gasoline levels.
The 1990 Clean Air Act Amendments (CAAA) require EPA to issue parameters for reformulated gasoline and oxygenated gasoline sold in U.S. cities with air pollution problems.
The program is due to begin Jan. 1, 1995 in Baltimore, Chicago, Hartford, Houston, Los Angeles, Milwaukee, New York City, Philadelphia, and San Diego. Other areas exceeding the federal ozone air quality standard also can opt into the program.
So far, Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Virginia have said they will join the program.
EPA said the rule is the first to deal specifically with toxic reductions from vehicles, claiming vehicle emissions are responsible for more than half of the cancer caused by all toxic air pollutants.
William K. Reilly, EPA administrator, said, "We have come a long way in cutting auto emissions and toxic air pollution, especially in the face of sizable growth in automobile use and economic activity over the past 20 years.
"This new program will get at the next increment of pollution, reducing air toxics and smog by 15-25%, in as cost effective a manner as we know.
"We've already seen cleaner burning fuels from some refiners. The promise of this rule is that it will unleash the engineering genius of American industry to come up with new, less polluting fuels," Reilly said.
The notice proposes specifications for reformulation and emission standards for reformulated gasoline. Refiners could not transfer benzene and other high polluting compounds not used in reformulated gasoline into conventional gasoline sold elsewhere.
The proposal includes an optional averaging program for oxygen content, benzene content, and VOC content. The averaging program will provide refiners flexibility in meeting the requirements.
EPA has asked industry for suggestions on methods to allow all oxygenates, including ethanol, to compete for use in reformulated gasoline.
The EPA proposal also has an optional averaging program for oxygen and benzene content to give refiners more flexibility to meet the requirements.
EPA based initial reformulated gasoline rules on a simple model but is developing a more complex model refiners must use in making reformulated gasoline beginning in 1997 to achieve a 25% reduction in overall emissions.
It also published a notice for oxygenated fuel requirements in 39 urban areas exceeding the federal carbon monoxide standard. That program, due to start in November, has the goal of a 20% cut in carbon monoxide emissions.
Cambridge Energy Research Associates noted the rule requires winter gasoline to be 2.7 wt % oxygen but said oxygenate supplies should be adequate.
"Production capacity during the winter will fall short of requirements by 41,000-126,000 b/d, but the industry should be capable of building inventories in advance to fill the gap," CERA said.
OTHER CAAA REQUIREMENTS
The 1990 clean air law required EPA to develop standards for 189 air pollutants believed to be hazardous. The agency is required to set a standard by November requiring refiners to install maximum achievable control technology (MACT) for those chemical compounds.
The amendments also required EPA to study the potential hazards from use of hydrofluoric acid at refineries, and report to Congress by November 1992. That report could help determine if refiners will be able to continue operating hydrofluoric acid alkylation units.
The amendments ordered EPA to issue new permit program regulations. They will determine what is a modification to an existing facility, and what degrees of modifications will be required to go through the entire new source permitting process.
The amendments codified EPA's rules requiring sulfur content of highway diesel fuels to be reduced to 0.05 wt % beginning Oct. 1, 1993. Refiners have the options of desulfurizing their whole distillate pool, part of it, or abandoning the diesel fuel segment of the market.
BENZENE RULE
EPA has delayed a rule requiring a 93% reduction in benzene emissions from refineries and other plants "due to substantial confusion in industry" (OGJ, Mar. 2, 1991, p. 25).
It will issue clarifying amendments, and the rule will not take effect until Dec. 1.
A National Petroleum Refiners Association spokesman said the final rule will be "very expensive" for refiners. NPRA is asking the Bush administration to reconsider the rule.
EPA issued its final benzene waste rules for chemical plants, refineries, coke byproduct recovery plants, and commercial treatment, storage, and disposal facilities on Mar. 7, 1990. They were to become effective Mar. 7, 1992, but several industrial groups urged postponement.
EPA admitted there is "widespread misunderstanding of many of the provisions (of the rule) by key officials of affected industries, consulting firms, and local and state regulatory agencies." The agency said the longer lead times will help industries prepare for compliance, but stressed it does not plan to change the basic control requirements of the original rule or the level of public health protection provided.
EPA said facilities should continue efforts toward compliance while the rule is being clarified.
Generally, the rule would require that all waste streams containing benzene of more than 10 ppm by weight to be treated and reduced.
When the final rule is issued, it will require industry to comply within 90 days. EPA may issue a 2 year waiver for facilities that try to comply but need more time.
OTHER ISSUES
The U.S. military's Defense Fuel Supply Center is phasing out its requirements for naphtha jet fuel, and is converting all of its U.S. jet fuel purchases to JP-8, a military specification version of Jet A-1 kerosine based jet fuel.
NPRA urged the military to consider the effects of the change on refiners and extend the phaseout over a longer period. It will leave many refiners with surplus stocks of naphtha.
EPA is due to issue a rule by May 1 on whether to classify used motor oil as a hazardous waste. A 1988 court decision overturned EPA's 1986 decision that used oil was not hazardous.
The oil industry fears the hazardous designation will increase regulation and raise the cost of recycling, resulting in more illegal dumping of motor oil.
Another court decision requires EPA to decide by August 1995 what refinery waste streams should be considered hazardous under the Resource Conservation and Recovery Act. The agency plans a 2 year study on the subject.
This year EPA plans to issue final rules implementing spill prevention, control, and countermeasures rules for refineries.
Last October it proposed rules covering nontransportation facilities with aboveground storage of more than 1,320 gal or underground storage of more than 1,900 gal, if leaks from those could enter either coastal or inland waters.
SILVER LINING?
API and Phillips Petroleum Co. Chairman C.J. Silas thinks eventually the CAAA could lead to better supply/demand balance for U.S. refined products.
He reasons that it will force inefficient and small refineries to close and some foreign competitors will be unable to meet U.S. fuel requirements. That combination would help the economics of the remaining U.S. refineries.
Silas said last week, "In 1990, for the first time in our history, U.S. oil companies invested more in exploration and development overseas than at home. Unfortunately for the future of the domestic refinery business, it would appear to be only a matter of time before downstream operations follow upstream's lead."
He said CAAA "is likely to reshape the downstream side of the business almost beyond recognition in the years ahead. As they contemplate how to react to the law, refiners face a Catch-22. If they are to comply in time to meet the law's deadlines, they need to act now.
"But if they act now, they run the risk of investing scarce capital in the wrong technology, because our friends in Washington have yet to spell out exactly what they want. Refiners who make commitments now could be caught short when final specifications for reformulated gasoline are issued.
"Washington is demanding that we retrofit our refineries, but local authorities may hold up the permits we need to begin construction. The provisions of the law allow up to 100 additional cities to opt into the reformulated gasoline program. This creates another set of uncertainties.
"Refiners, especially Midcontinent refiners, don't know whether to gear up to produce reformulated fuel now or hold off until cities in their market area make their intentions known.
"If refineries don't build now, they risk losing market share come 1995. But if they invest now and it turns out there customers don't opt in, they will have spent capital they can't afford, to build assets they don't need, to produce fuel whose production costs they can't recover.
"The only certainty in all this is that the politicians will throw up their hands in consternation when refiners decide to throw in the towel, closing down obsolete plants rather than spend a fortune to upgrade them."
Silas argued the need for environmental protection should be balanced by economic common sense.
"Every time we start a project or build a new plant, the regulators make us fill out an environmental impact statement. What we really need before any more regulations are put into place is a mandatory economic impact statement for each and every one of them. This has got to include using common sense when it comes to risk assessment."
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
