NPC: U.S. REFINERS CAN MEET ENVIRONMENTAL REGULATIONS, BUT...

The National Petroleum Council has reported to Energy Sec. Hazel O'Leary the U.S. refining industry will be able to meet current, stringent environmental rules on facilities and products. But the costs, already high, will climb much higher. If several of the study scenarios prove correct, the U.S. refining industry, the public, and Department of Energy will be paying a great deal more attention to the NPC report as the environmental bills fall due in this decade.

Sept. 13, 1993

7 min read

The National Petroleum Council has reported to Energy Sec. Hazel O'Leary the U.S. refining industry will be able to meet current, stringent environmental rules on facilities and products.

But the costs, already high, will climb much higher.

If several of the study scenarios prove correct, the U.S. refining industry, the public, and Department of Energy will be paying a great deal more attention to the NPC report as the environmental bills fall due in this decade.

O'Leary said DOE will use the NPC report in discussions with the Environmental Protection Agency on how to identify cost effective ways to meet the administration's environmental objectives.

Deputy Sec. Bill White and his task group working on the administration's domestic oil and gas initiative will review the NPC study and consider its findings when developing their report.

HUGE OUTLAYS

The NPC study, which has been under way for 21/2 years and is billed as the most comprehensive ever done of the U.S. refining industry, projects that during 1991-2000 the U.S. refining industry will face capital outlays of $36.5 billion in 1990 dollars to meet environmental demands.

About two thirds of that will be spent in 1991-95. About $22.8 billion will go for stationary sources facilities such as refinery emission controls, while $13.7 will be required to meet product quality-units and equipment to make reformulated gasoline, for example.

Total outlays are $5.5 billion more than the book value of the entire U.S. refining industry at present.

It's estimated that about half the $13.7 million for product quality has already been spent vs. about 15% of the projected $22.8 billion for stationary source facilities.

Longer term, the report said, outlays of $106 billion are projected during 1991-2010 for new facilities and programs required for compliance with existing and anticipated stationary sources regulations related to air, water, and waste and to safety and health requirements within U.S. refineries.

These are capital expenditures, one-time expenses, and operating and maintenance expenses.

In addition, $46 billion will be spent to operate and maintain similar facilities and programs now in place. That will bring total stationary facilities environmental health and safety expenditures to $152 billion.

These costs are in addition to those for manufacturing reformulated gasoline and ultralow sulfur diesel fuel.

COST INCREASE

A result of the required outlays will be an average cost increase for light products of 6/gal in 1995 over 1989 and another 10/gal in 2000.

Reformulated fuel taken alone will cost in 1995 about 8/gal more than 1989 conventional gasoline did and 120 and 14/gal more in 2000 and 2010, respectively.

On a positive note, the study sees adequate supply of oxygenates worldwide in 1995 for at least the legislated minimum requirement. By 2000 the potential supply is expected to cover essentially any situation permitted by the 1990 Clean Air Act amendments.

The heavy capital and operating costs will create pressure to shut down refineries. The NPC study did not consider or project shutdowns in its U.S. supply/demand scenarios, figured for three cases: growth, no growth, and a decline.

Kenneth T. Derr, chairman of the NPC study group and chairman of the board and chief executive officer of Chevron Corp., pointed out there are major environmental disincentives to shutting down even a poorly performing refinery. His company's Port Arthur, Tex., refinery is up for sale. Refinery data will be opened for potential buyers this year.

However, the NPC report said there will be pressure to shut down refineries in the U.S. if demand declines or lower cost refined products enter the U. S.

The study compares world regions and shows that each had lower standards than the U.S. refining industry in 1990. Refiners on the Pacific Rim and in the Middle East and Latin America must cope with far fewer regulations than U.S. refiners and could be sources of low cost product.

Many must beef up their refineries if they wish to supply advanced fuels to the U.S. For example, that is the objective of a major Saudi Arabian refining modernization program (OGJ, June 21, pp 39.)

However, the biggest threat to the U.S. refining system, according to comments by the study group, is a February 1993 proposal by the U.S. Environmental Protection Agency that would require stringent separation of reformulated gasoline in the country's pipeline system. Derr said if such a regulation is implemented, the game is over, and "we can all go home."

A member of the study group at a Houston press conference corrected him with: "We can all walk home."

API CONCERN

The American Petroleum Institute said the NPC study shows the U.S. refining industry is facing an imminent and staggering financial challenge to meet environmental regulations.

API Pres. Charles DiBona said, "We are concerned that this challenge comes at a critical point for the nation's petroleum refining industry, which is vital to the nation's economic health."

He too reminded that U.S. investments in the 1990s to meet environmental requirements on refineries and petroleum products are predicted to be billions more than the current book value of all refineries in the country.

He said that follows the 1980s, when the industry earned a profit of only 2.5/gal and realized an average return on investment of 8.8%, and 120 refineries were forced to close. Profits in 1991 and 1992 were much lower than in the last decade, and refineries have continued to close.

DiBona said, "In effect, the consumer pays an indirect tax for mandated environmental improvements and deserves to be assured of commensurate benefits. That's why it is critical, as the NPC study recommends, that policymakers carefully and realistically evaluate the impacts of policy before legislation is passed or policies established.

"Policies that unnecessarily reduce demand for petroleum products also result in lost jobs and, over the long term, refining expenditures will be reflected in the marketplace."

INDEPENDENT REFINERS

The Independent Refiners Coalition, which represents 12 nonintegrated refining companies, disagreed with some of the report's findings.

NPC said the cost of foreign supply delivered to the U.S. would increase at about the same rate as the cost of domestic petroleum supply, and the gap between environmental, health, and safety regulations for refineries in the U.S. and non-U.S. countries would narrow.

But IRC said the cost of producing petroleum products in the U.S. will rise faster than the cost of producing petroleum products abroad because of more stringent U.S. environmental specifications for refined products and refinery emissions.

IRC also said the NPC study failed to provide a detailed analysis comparing regulatory requirements on U.S. companies with other countries that export petroleum products to the U.S.

It said Wright Killen & Co., Houston, reviewed a draft of the NPC study and said, "The NPC's analysis in estimating these foreign costs, unlike their detailed analysis of U.S. environmental, health, and safety costs, is more arbitrary and assumption based and thus subject to greater uncertainty."

IRC also said a May 1993 U.S. Energy Association report differed with the NPC conclusions. USEA said the decline in U.S. refining capacity is likely to continue due to the costs of complying with environmental regulations, particularly amendments to the Clean Air Act, and due to narrow profit margins for most refining operations. The result will be increased petroleum product imports.