NPRA: U.S. REFINERS FACE RECORD STACK OF LAWS AND REGULATIONS

The U.S. refining industry is subject to more legislation and regulation than it ever thought possible, says National Petroleum Refiners Association Chairman Roger Beach, Unocal Corp., Los Angeles.

Among the regulations are specifications for reformulated gasoline, some of which still are not known, as well as limits on stationary emissions and refinery wastes and Oil Pollution Act and process safety management requirements.

In his keynote address at NPRA's annual meeting in San Antonio last week, Beach said, "Compliance with these new laws and regulations will require additional staff and ... resources of all kinds. And while we're racing to comply, competition from imported products will grow.

"Over the years, our industry has faced ... many challenges. And we've enjoyed a great deal of success. I'm confident that our success will continue, but I doubt that there's ever been a time in our history that we've faced more challenges and opportunities."

BTU TAX

In a panel discussion on the Clinton administration's proposed BTU tax, Philip Verleger of the Institute for International Economics, Washington, D.C., conceded that the U.S. government needs money and the energy sector must make a contribution. He sees the proposed BTU tax, however, as the worst way to tax the energy sector.

Verleger told refiners the legislative process may turn what is already bad for the oil industry-and seriously bad for the refining sector-into a complete disaster. Among his reasons for disfavoring the tax is that it will be full of exemptions.

Verleger believes a BTU tax will force down world oil and gas prices and the whole package will not be recoverable. He estimates the refining sector may have to absorb as much as $2.5 billion/year of the tax, as fully imposed, while trying to pay for environmental compliance measures.

The costs of administering the tax will be at least $1 billion/year, Verleger said, and in the worst case as much as half of the revenues it generates.

Beach also opposes the proposal. NPRA wants to spread the tax burden across the greatest number of people and the greatest number of industries.

Beach pledged to continue working toward fashioning the least onerous tax possible and urged refiners to contact their congressmen to express their views on the proposal.

Sen. Bob Krueger (D-Tex.), another keynote speaker, promised to support collecting the taxes as near as possible to the ultimate consumer.

ENVIRONMENTAL FORCES

The U.S. refining industry has been in a constant state of uncertainty since passage of the Clean Air Act amendments of 1990, said Calvin Cobb, president of Wright Killen & Co., Houston. After the struggle with rationalization in 1981-87 and profitable operations that reflected a balanced industry in 1988-90, the future of refining remains uncertain.

Cobb said the need for more market channels and capital will drive U.S. refiners to develop new strategic alliances among strong competitors because:

• The petroleum products market is mature.

• Refineries are the world's most modern, safe, and capable.

• Refining assets are undervalued compared with new refinery construction elsewhere.

There are opportunities in rapidly growing products markets in the Far East, upgrading of South American refineries, and meeting environmental requirements in Europe and the U.S., Cobb said.

Krueger championed legislation based on sound science. He told refiners he wants to see government hold industry to performance standards rather than prescribe solutions. He believes this freer rein will produce more innovative solutions to environmental problems.

Daniel Yergin, Cambridge Energy Research Associates Inc., Cambridge, Mass., said the oil industry will remain central to global economic well-being into the 21st century. He said there is no question that oil is economically competitive. But what is less well known-perhaps even within the industry-is that oil is also environmentally competitive.

In the last few years, oil has made remarkable progress in meeting environmental quality constraints, Yergin said. The statistic that best reflects this is that smog in southern California has decreased by 25% during the past 10 years, while population has increased 30%.

GLOBAL COMPETITION

Yergin said the two global movements most affecting the oil industry are environmentalism and the growing privatization-commercialization-deregulation trend. As an example of the latter, he pointed out that the last great oil play of the 20th century could take place in the former Soviet Union.

Neither Yergin nor Krueger believes conversion from fossil fuels will occur in their lifetimes.

Martin Tallett, president of EnSys Energy & Systems Inc., listed these forces reducing U.S. refiners' global competitiveness:

• Declining U.S. oil production is diminishing the traditional competitive advantage U.S. refiners gained by processing mostly local, high grade crudes.

• Demand growth for U.S. petroleum products is generally flat-or with fuel substitution, potentially negative.

• Current refinery investment patterns are reducing the proportion of global distillation and secondary processing capacity held by the U.S.

• New environmental and safety rules are jacking up U.S. refiners' costs.

• Refiners in selected export regions will be more willing to invest or have lower requirements for return on capital.

• The trend toward cleaner, reformulated fuels will swing the advantage to regions with ample supplies of low cost gas and NGL.

• Non-U.S. refiners have the flexibility to produce small amounts of reformulated gasoline for export.

CAPITAL SPENDING

In mid-1990 the National Petroleum Council undertook a broad study of the effect of U.S. environmental regulations. Preliminary results, reported by Harold Elkin, senior environmental consultant for Sun Co. Inc., reveal several trends:

• Capital spending in the waste water sector eventually will be greatest, overtaking the air sector after 1995.

• Capital spending in the hazardous and nonhazardous waste sectors will account for one fifth or more of total capital spending.

• The major portion of one time costs is spent for soil remediation.

• All environmental facilities and programs will require operating and maintenance costs, the largest single item being implementation of handling requirements for newly defined hazardous wastes.

Copyright 1993 Oil & Gas Journal. All Rights Reserved.