Nick Snow
Washington Correspondent
WASHINGTON, DC, Oct. 4 -- Bob Slaughter is pleased that limited US refining capacity finally is getting wide attention in the days and weeks following Hurricanes Katrina and Rita. But the National Petrochemical & Refiners Association president doesn't like many of the responses that have been proposed.
"You can't make rash decisions on issues that affect the country's long-term energy future. We need sustained consideration of the issue, not one that is spasmodic," he told OGJ in an interview at NPRA's Washington, DC, headquarters.
"I think the debate is fairly simple and the solutions are pretty clear. They're not that difficult," Slaughter said.
"We just have to get rid of the national state of mind that energy supplies are an entitlement and can be taken for granted. We need to care as much about fuel supplies and their infrastructure as we do about our cars and environmental policies."
Returns on investment have improved the past 2 years, and more capital sources are interested in refining, according to Slaughter. But he added that incentives are needed to address remaining concerns "not for the industry and its investors, but for consumers who would pay lower prices if there was more refining capacity."
Market-driven incentives
Slaughter and NPRA would prefer to see those incentives come from increasing oil refining's appeal in the capital markets than from outright government incentives. In terms of environmental and other regulations, "we've asked people to prioritize their goals and consider impacts of what they propose on supplies," he said.
He added that the Environmental Protection Agency and other parts of the administration of President George W. Bush responded promptly and appropriately with regulation waivers following the hurricanes. "But in gasoline sulfur and diesel sulfur rulemakings, fuel supply considerations were clearly a secondary priority relative to environmental goals," Slaughter said.
Except for the gasoline additive methyl tertiary butyl ether, the sulfur reduction rulemakings have established the oil products supply environment for this decade. "The incredible thing about the MTBE issue is that the federal government essentially has taken a walk on it," said Slaughter.
Refiners applaud some proposals that have been made the past few weeks, he said, noting that Sen. Orrin G. Hatch (R-Utah) reintroduced legislation on Sept. 28 to reduce refiners' depreciation schedules from their current 10 years to the 5 years other industries use.
The measure originally was part of the wide-ranging energy bill that Congress passed this summer but was dropped for budgetary reasons, according to Hatch. "The current 10-year depreciation for refiners is unwarranted, and it is past time that we leveled the playing field on depreciation for this critically important sector of our energy industry," the senator said in introducing his bill.
Proposals assessed
NPRA generally supports the bill that cleared the House Energy and Commerce Committee last week "because it's a statement that we need more refining capacity," Slaughter said. "If the House passes it, there's a greater chance the Senate will move forward with some focus on the refining question."
But he questions parts of the bill developed by Energy and Commerce Committee Chairman Joe Barton (R-Tex.) as well as with ideas offered by the Bush administration and Democrats in the House and Senate. These include:
-- President Bush's idea of building new refineries at closed military bases. "We've said it's an interesting proposal, but the actual availability of such land will vary," Slaughter said. "Refineries need to be close to a crude oil supply, a water supply, and a products market. They also would need to be built in areas that would allow it. But it's a helpful suggestion."
-- Providing risk insurance to help protect investors in new refining projects. The NPRA president said this sounded similar to loan guarantees, which were tried in the 1970s. "No one has discussed it with us. But the industry is reluctant to rely on government policy instead of market forces," he said. "The government gives, and the government takes away. It's hard to rely on those programs for a long-lived asset."
-- Development or designation of refining for the armed forces. "Our industry is a lot more comfortable supplying the government from existing facilities under competitive contracts," said Slaughter. "There doesn't seem to be anything broken there. We have some questions about that provision."
-- A provision in the Barton bill to reduce the number of "boutique" motor fuels. Refiners are far from unanimous on this question, according to Slaughter. "We want to make sure the question is adequately considered, and that whatever is done occurs after careful thought and consideration," he said.
-- Development of gasoline and jet fuel reserves along the lines of the Strategic Petroleum Reserve. "The product reserve idea has been around since the 1970s and has not been adopted because such reserves are more difficult to maintain. Oil products can deteriorate," Slaughter explained.
"If you establish such reserves, you pull product off the market just to fill them and have an impact," he continued. "The SPR has worked because it's been used for emergencies only. If we established product reserves, the pressure to use them for nonemergency situations would be very strong and have a negative impact. It would discourage foreign suppliers from acting to alleviate a US product shortage. Once a product reserve was tapped, it would take the incentive of higher prices that would interest an outside supplier. Refiners wouldn't know what to do."
Considering several of the proposals that have been made, Slaughter observed, "I think the simplicity of the answer to the refining capacity question is masked by people on both sides who are trying to approach this with ideological preconceptions. We have to catch the crest of this wave of interest in refining so people who have alternatives will invest in it."
Contact Nick Snow at [email protected].
