Senate committee starts work on US refining bill

Oct. 19, 2005
Less than 2 weeks after the US House of Representatives passed a bill on the same subject, the Senate took up legislation aimed at increasing domestic refining capacity. The Environment and Public Works Committee held a hearing Oct. 18 on S. 1772, the Gas Petroleum Refiner Improvement and Community Empowerment (or Gas PRICE) Act.

Nick Snow
Washington Correspondent

WASHINGTON, DC, Oct. 19 -- Less than 2 weeks after the US House of Representatives passed a bill on the same subject, the Senate took up legislation aimed at increasing domestic refining capacity. The Environment and Public Works Committee held a hearing Oct. 18 on S. 1772, the Gas Petroleum Refiner Improvement and Community Empowerment (or Gas PRICE) Act.

Chairman James M. Inhofe (R-Okla.) insisted that the bill was not simply a reaction to Hurricanes Katrina and Rita. "Rather, S. 1772 builds on the committee's consideration of issues facing the refining sector since its hearing in May 2004," he said in his opening statement.

"The fact that the hurricanes shut down one third of US refining capacity did, however, highlight what many objective, nonpartisan experts have concluded some time ago: The US lacks sufficient refining capacity to make the clean transportation fuels the public demands, and tight capacity translates to significantly higher prices at the pump," Inhofe continued.

But the committee's chief minority member, James M. Jeffords (I-Vt.), said the bill takes the wrong approach. "Instead of punishing the refineries for price gouging—at a time our nation can least afford it—I believe this bill rewards them for bad behavior with the promise of new subsidies and lax regulation," he maintained in his opening statement.

Jeffords said he also had "grave concerns" about S. 1772's potential environmental impacts. "I have seen no evidence that environmental permitting is the reason for a lack of refinery capacity. Nor am I convinced that relaxing our environmental laws will do anything to lower gas prices, either in the short term or the long term," he said.

The committee probably will start to mark up the bill in a week, a committee spokesman said.

Similarities, differences
Inhofe said the bill directs the Commerce Secretary and Economic Development Administration to provide additional funds to communities—"not to industry, as some claim" —considering building refineries on closed military bases. "Refineries are not just a good source of local high-paying jobs but are in the nation's interest," he said.

Because states play a significant part in issuing refining permits but may be limited financially and technically, the bill also would allow governors to opt in to a program that would require the Environmental Protection Agency to coordinate and concurrently review permit applications with the relevant state agencies, according to Inhofe.

Section 201 of the bill also tries to streamline refinery permitting by giving the EPA administrator authority to accept "a consolidated application for all permits that the refiner is required to obtain to construct and operate a refinery." It would give government regulators 270 days to approve or reject a consolidated application to build a refinery and 90 days to approve or reject a consolidated application to expand an existing plant.

HR 3893, which the House passed on Oct. 7, designated the Department of Energy as the federal refining permit application coordinator, but only if a state's governor requested it or the US president designated a site as suitable for a new refinery (OGJ, Oct. 17, 2005, p. 22).

The Senate bill also addresses the boutique motor fuel issue. "Bipartisan senators have sought to reduce the number of boutique fuels to promote greater supply stability. Yet boutique fuels address environmental needs of each region," said Inhofe. "Therefore, I have proposed a cautious approach that will reduce fuel blends pursuant to the environmental and consumer preferences in each state."

The bill would allow the EPA administrator to remove a fuel from the list if it's no longer part of a state's implementation plan or if it's identical to a fuel that's part of a federal clean air improvement plan. The bill approved by the House would require the EPA administrator to identify six gasoline and diesel formulations for a federal fuels list, reducing the number from its current level of 17.

Four witnesses
The committee heard from four witnesses: Brian Mannix, associate EPA administrator in the Office of Policy, Economics and Innovation; Eric Schaeffer, a former head of EPA's Office of Regulatory Enforcement who now heads the Environmental Integrity Project in Washington; Jonathan H. Adler, associate director of Case Western Reserve University's Center for Business Law and Regulation; and Colorado State Sen. Shawn Mitchell.

Mannix said events of the last 2 months demonstrated the country's need to expand and diversify its refining capacity. A streamlined permitting process could be part of the solution, but the US also should improve its motor fuel production and supply system in other ways, he told the panel.

Refiners who contemplate building a new installation or expanding an existing one face a broad scope of environmental issues under the Clean Air Act, Clean Water Act, Resource Conservation and Recovery Act, National Environmental Policy Act, and other federal, state, and local laws, according to Mannix.

"Substantial 'up-front' work is also required regarding site and design factors prior to the submission of an application for a new refinery," Mannix said. "Depending on the complexity of the refinery and the siting, the permitting process can take between 1 and 2 years after a complete application is filed," he said. Application revisions by refiners and administrative appeals during permitting and judicial review also can add time to the process, he said.

Mannix also noted that roughly 15 states have adopted their own clean-fuel programs, typically requiring fuels sold within the state or within certain areas in the state to have a lower seasonal volatility than federal standards. He said EPA believes that reducing the number of boutique fuels potentially could improve fuel distribution and fungibility but added that such an action should be done carefully.

But Schaeffer warned that provisions of S. 1772 intended to improve refinery permitting could do the opposite. "While this legislation tries to address a real problem, the solutions it offers could increase environmental risks without making much difference to the availability or cost of gasoline," the former EPA official said.

He said the bill might yield poorly written permits that increase the likelihood of accidents that could shut down refinery capacity; delay refinery start-ups by encouraging litigation over vague new standards; exclude communities from decisions that affect their health and property values; subsidize refinery construction on government property for "some of the richest companies in America"; reward refineries that locate or expand in hurricane zones; and have little effect on refinery investment decisions that are ultimately driven by profit margins and conditions in the market.

"Ultimately, the bill may rest on a shaky premise, as Clean Air Act permitting provisions seem to have only a marginal effect on decisions by oil companies to invest in new refining capacity," said Schaeffer. "Industry and government analysts alike agree that profit margins are the most significant factor, and record profits from high gasoline prices have encouraged a major investment in added refining capacity. Projects already reported or announced are expected to add nearly 600,000 b/d to our existing capacity over the next several years."

Profits in perspective
Adler said that trying to expand domestic refining capacity is an important goal, but he added that federal responses to recent motor fuel price increases should seek "to remove or ameliorate regulatory barriers to efficient market responses to current and prospective price changes." He added, "Such strategies are more sensible than chasing after alleged 'price gouging' or adopting new mandates or subsidies for energy efficiency, as such market-enhancing strategies can unleash the market's natural tendency to equilibrate supply and demand."

It's also important to place recent increases in refining profits in perspective, Adler continued. "By historical measures, profit margins in the refining sector have been lower than in other segments of the oil and gas industry, and lower than the average for S&P 500 companies. Moreover, the greater the profit margin in the refining sector, the more rapidly the marketplace will adjust to meet increased demand for fuel products of various types," he said.

"Insofar as this committee is concerned that some suppliers are able to charge unduly high prices for gasoline, and reap 'excessive' profits, the best policy response is to take measures that will ensure such firms are exposed to competition," Adler maintained.

Mitchell, a Republican from one of the Colorado Senate's Denver districts, said provisions in the US Senate's bill designed to consolidate environmental permitting are good. Colorado's legislature had two ideas in mind when it gave the governor that authority in 2003, he said.

"First, we believe that a single process ensures that there is one timeline for issuance of a permit," he said, adding that the time required would be shortened if a single permit merged different requirements now with their own permits.

"Second, multimedia permitting is good for the environment. Colorado is currently piloting a multimedia performance-based permit because we believe that eventually we will have to move to this kind of permit to continue making environmental improvement," Mitchell said, adding that S. 1772 "captures that concept and will not only provide needed relief from administrative burdens but will also provide a better way to enhance environmental quality."

Contact Nick Snow at [email protected].