Thi Chang
OGJ Refining/Petrochemical Editor
Leo R. Aalund
OGJ Senior Editor�Conferences
NEW ORLEANS, LA, Mar. 21�National Petrochemical & Refiners Association Pres. Urvan Sternfels said this week that the US Environmental Protection Agency�s tougher gasoline and diesel sulfur limits for 2006 are "a train wreck coming at us."
EPA rules would limit sulfur in gasoline to an average of 30 ppm by Jan. 1, 2005. The rule requires a per-gallon maximum of 80 ppm by Jan. 1, 2006. And EPA would reduce sulfur in on-road diesel to 15 ppm by June 2006.
Sternfels and Jerry Thompson, NPRA chairman and senior vice-president of Citgo Petroleum Corp., said there is insufficient time for the refining industry to build units to meet either of those specifications.
They said the introduction of both in the same year exacerbates the problem and will cost billions of dollars. In June 2000, a National Petroleum Council report estimated that gasoline sulfur requirements, implemented in 2004-06, will require at least $8 billion. Industry estimates at least the same investment will be required to achieve on-road diesel fuel compliance.
With those costs, Marathon Ashland Petroleum LLC's Michael E. Leister said there will not be enough money for the usual upgrading projects until 2007.
NPRA wants the Bush administration to delay implementation of the diesel rule to avoid a "double whammy." Thompson said he fears the timing of the standing regulations will cause a shortage of diesel.
NPRA sued to overturn the diesel sulfur rule in February, and the American Petroleum Institute filed a similar suit this week (OGJ Online, Mar. 19, 2001). Odds for those lawsuits were not improved by a recent US Supreme Court opinion in an ozone standard case. The court held that EPA did not need to consider costs when setting environmental specifications (OGJ Online, Feb. 28, 2001).
Chester J. France, director of the EPA's assessment and standards division, told the NPRA meeting that the agency expects to issue an advanced notice of proposed rulemaking for nonroad diesel fuels late this year. It will likely use the same tiered approach as with on-road diesel, but on a later timetable.
Thomas D. O'Malley, chairman and CEO of Tosco Corp., chastised refiners for not working more closely with EPA on the sulfur-reduction rules.
"We have a really poor reputation as an industry," he said. Although sulfur removal was inevitable, O'Malley said, the industry proposed no reasonable specification and thus had little if any input with the EPA.
Diesel supply
The NPRA meeting was told the low sulfur diesel rule threatens to disrupt the market.
Besides the inconvenience of overlapping gasoline sulfur regulations, refiners making ultralow sulfur diesel will have to deal with higher diesel demand, increasing processing severity, and the advent of nonroad diesel specifications.
During a panel discussion. EPA's France said that US diesel sales are 1 million bbl/year. By 2007, when these rules take effect, he expects sales to be more than 1.5 million bbl/year.
Thus, France said, it is imperative the sulfur limits in diesel be reduced to allow better emission control technologies for significant reductions in nitrogen oxide and particulate matter.
Heavy catalytic cracker distillates and heavy coker distillates are harder to desulfurize, however. "As we try to produce more products at lower sulfur," said Thomas R. Eizember, business planning executive of ExxonMobil Corp., Fairfax, Va., "the challenge becomes increasingly difficult."
Eizember suggested several options to reduce the potential for marketplace disruptions. They were: increase the on-road sulfur limit to 50 ppm, delay on-road diesel implementation until at least 2008, and implement the rule consistently with new engine needs and refiners� resources.
Other developments
Thompson noted that 2000 was a very good year for refining.
Barring a long worldwide recession that would suffocate demand, Thompson was optimistic that higher margins would continue in 2001 and help generate the $20 billion industry needs to invest in projects to comply with clean fuels regulations.
Other good news for the industry, said Thompson, is that global product demand is catching up with refining capacity. Twenty years ago, global capacity exceeded demand by 35%. In 2000, it exceeded demand by 2-3%.
He said even so, the US refining industry has little excess capacity, and the growth of the number of distinct gasoline types increases the potential for temporary supply disruptions and increases price volatility.
Thompson issued a similar warning at last year's NPRA meeting (OGJ, Apr. 3, 2000, p. 28), which was followed in the summer by gasoline price spikes in the Midwest.
Phillips Petroleum Co. is acquiring Tosco.
O�Malley said, "The merger between our two companies is part of the trend that we've seen in our industry. That trend says size matters, and indeed it does.�
He said that "bigger is better" in the refining industry, and predicted other independents would merge with upstream companies. "I have trouble believing that today's list of independent refiners will exist in 2-3 years. I'd be shocked and surprised if we didn't see that list cut in half."
He observed the industry has done well for one that is so regulated by government, that has few tax breaks, and that is difficult to expand.