NPC says US refiners facing 'unprecedented' regulatory burden

The National Petroleum Council, the US energy secretary�s oil and gas industry advisory panel, issued a report Tuesday on the refining industry�s ability to meet new fuels specifications. It said, 'The timing and size of the necessary refinery and distribution investments to reduce sulfur in gasoline and diesel, eliminate methyl tertiary butyl ether, and make other product specification changes such as reducing toxic emissions from vehicles are unprecedented in the petroleum industry.'


WASHINGTON, DC�The National Petroleum Council has warned that the US Environmental Protection Agency is mandating too many fuels changes simultaneously for the nation's refining industry to meet them efficiently.

NPC, the US energy secretary�s oil and gas industry advisory panel, issued a report Tuesday on the refining industry�s ability to meet new fuels specifications. The report, titled "US Petroleum Refining�Assuring the Adequacy and Affordability of Clean Fuels," said, �The timing and size of the necessary refinery and distribution investments to reduce sulfur in gasoline and diesel, eliminate methyl tertiary butyl ether, and make other product specification changes such as reducing toxic emissions from vehicles are unprecedented in the petroleum industry.

�Large investments will be required at essentially all domestic refineries and many product terminals." The exact costs depend on the specific requirements for any renewable fuel content as part of the elimination of MTBE, says NPC.

"If a renewable content standard does not require an increase in volume or shift in geographic use of ethanol from today, the required refinery investment would be about $1.8 billion to replace lost octane and volume while preserving the current RFG [reformulated gasoline] air toxics reduction. If a renewable standard essentially requires meeting the current oxygen content requirement for RFG, total investment would be about $5 billion, including $3 billion to double ethanol production."

Recommendations
The NPC report urges EPA to sequence fuel specification changes and the resulting required investment with minimum overlap �to mitigate the potential for major disruptions in supply and resulting significant price variations.

�Furthermore, regulatory agencies must streamline the environmental permitting process or significant implementation delays will result," said the report. �Given timely permits, proper sequencing of fuel quality changes with minimum overlap, and sufficient lead time to respond to each major specification change, the NPC believes that the domestic refining industry can be expected to satisfy product demand under the more stringent product specification requirements.�

The study said EPA should work to base its regulations on sound science and thorough analysis of cost effectiveness.

It said regulations should be phased: �The Tier 2 gasoline sulfur reduction and other product specification changes should not be mandated for implementation in the same time frame, otherwise permitting, engineering, and construction resource constraints will likely result in higher costs, inability to meet the mandated schedules, and product supply disturbances.�

It said EPA should complete any timing and specifications for on and off-highway diesel sulfur reduction and MTBE use in a timely manner. �Potential efficiencies exist for providing support facilities common to these programs and gasoline sulfur reduction.�

The report said industry needs a minimum of 4 years' lead time to invest in required facilities, and more than that as the magnitude of the investment increases.

The report urged regulators to give refiners certainty in scope, timing, and requirements.

�For example, the Tier 2 rule includes an expectation that EPA will develop a future provision dealing with gasoline sulfur cap flexibility during processing unit down times," said NPC. "Until the flexibility that such a provision might provide is known, refiners are unable to plan effectively for necessary facilities.�

The study said policymakers should recognize that policies or regulations favoring or promoting renewable or alternative fuels will tend to discourage investments to supply petroleum fuels.

It urged EPA not to impose gasoline or diesel sulfur limits below 30 ppm until studies show they are needed. �There is a significant risk of inadequate supplies should levels below 30 ppm be mandated,� the study concluded.

The report said the permitting process should be streamlined wherever possible, and state and local agencies should process permits quickly.

And it said that states and localities that are considering localized restrictive fuel requirements, such as lower sulfur and limitations on MTBE use, should recognize that the requirements will increase cost and reduce reliability of product supplies.

Refinery viability
The product quality changes examined in the NPC study will require "substantial investment" at virtually all US refineries and many product distribution terminals. This investment is in addition to the capital that will be required to meet stationary source emissions controls.

These capital requirements are expected to affect the viability of US refiners.

The number of US refiners has fallen steadily since World War II, except during a period of price controls in the 1970s, notes NPC. "Recent shutdown history has included a range of sizes, configurations, and geographies."

Meanwhile, the average refinery size has increased.

"The NPC expects that individual refinery shutdowns will likely continue to occur in the future," says the report.

The council said it was unable to determine a profile for a refinery prone to closure. "Some refinery owners may be either unwilling or unable to finance necessary investments. However, shutdown is not inevitable in such cases, since sale to another entity may be more attractive than incurring shutdown costs."

The report warned, "The industry must ultimately recover its costs in the marketplace to remain financially viable and able to provide consumers with reliable product supplies.�

Reactions
The National Petrochemicals & Refiners Association agreed with the findings of the report.

Urvan Sternfels, NPRA president, said, �The refining industry is already severely stressed. The industry is facing more than 12 major regulatory actions over the next 10 years. The cost of these programs, which are largely uncoordinated, is astronomical.

�As a result of this crushing burden on refiners and fuel distributors, we are already starting to see signs of stress in the system. The impact of unforeseen situations such as a refinery outage, a pipeline malfunction, or even the weather, is magnified under such conditions.�

Sternfels said the NPC report suggests that planned and likely changes in product specifications may well result in supply shortages and higher-cost fuels, along with price volatility.

Lee Raymond, ExxonMobil Corp. chairman and head of the NPC refining committee, said, "The current gasoline supply situation in the upper Midwest adds emphasis to this report.

Raymond said, "People don't understand that [gasoline] prices are made up of a lot of components. Regulators and Congress need to recognize that, when you set up boutique markets, you set your set yourself up for price volatility."

More in Companies