U.S. refiners must piece together RFG, pollution control puzzle

Ultramar-Diamond Shamrock Corp.'s 140,000 b/d McKee refinery in the Texas Panhandle produces federal-specification reformulated gasoline for the Dallas-Fort Worth market. Ultramar and Diamond Shamrock's merger closed early in December, positioning the merged company to serve large and varied RFG markets. The 150,000 b/d Wilmington , Calif., refinery brought to the deal by Ultramar produces RFG to California's specifications. Such dichotomies may become more pronounced as U.S. refiners try to puzzle out the direction of federal and state air quality regulation. Photo courtesy of Ultramar-Diamond Shamrock.

Refiners in the U.S. face a new wave of uncertainty, as regulators revisit pollution control policies that could dramatically change the market for reformulated gasoline (RFG) in years to come.

While hardly being the only focus of regulatory revisions under way, motor fuels are subject to some especially far-reaching changes being advanced by the U.S. Environmental Protection Agency in a series of proposed rulemakings and procedural decisions.

At present, RFG's future is at issue in at least five planned or already-proposed EPA actions, some of which pose disputable interpretations of the agency's authority under the Clean Air Act Amendments (CAAA) of 1990.

In addition, the Ozone Transport Advisory Group (OTAG)-an EPA-appointed panel of environmental officials from 37 states east of the Rocky Mountains and the District of Columbia-is looking into use of RFG and other clean gasolines as part of its charge to examine ways to control ozone that travels from state to state (OGJ, Apr. 26, 1996, p. 26).

Today's scenario

Under CAAA, refiners began producing Phase I federal RFG under the so-called "simple" model on Jan. 1, 1995.

Phase I requirements step up on Jan. 1, 1998, under the complex model and production of more-advanced Phase II RFG is set for Jan. 1, 2000 (see table, p. 21).

Use of the fuel is mandatory in 10 areas designated by EPA to be in most severe nonattainment with existing National Ambient Air Quality Standards (Naaqs) for ozone. Another 20 areas with serious-to-moderate ozone nonattainment problems have opted-in to the Phase I RFG program as well.

Because California has the most extreme noncompliance problem, the state has implemented its own Phase II RFG program, administered by the California Air Resources Board (CARB), which goes well beyond the scope of the federal program (OGJ, Dec. 11, 1995, p. 21).

Refiners must produce federal RFG for the areas where it is now mandated. What isn't clear is how many more areas may be permitted-or compelled-to embrace federal RFG or some other clean gasoline as a result of initiatives being forwarded by EPA.

Moreover, 2000 is no longer the only timetable of concern. That's still the official timetable for delivering Phase II RFG where clearly mandated, but refiners are concerned that upcoming regulations could pose new and unpredictable demands on gasoline production in 2000 and beyond.

Jigsaw puzzle

The confusion is arising in large part because a host of overlapping provisions in the Clean Air Act are coming into play concurrently.

Like so many pieces of a jigsaw puzzle, the RFG-specific provisions of the statute create one piece of the picture, but when other provisions of the same statute are assembled, a different picture begins to emerge.

In essence, EPA is moving on several fronts at once, addressed in different portions of the same law.

On one front, EPA will address the transition to RFG Phase II in rules responding to this part of the law.

Questions at issue include which areas can "opt in" to the program, and how long the 20 areas that already have opted in will have to "opt out."

Much to industry's concern, EPA has signaled that it wants to test the waters for expanding the program to former ozone nonattainment areas and even to areas that have always attained ozone standards (OGJ, Nov. 4, 1996, Newsletter). If EPA forges ahead in this direction, it faces vehement protests from the industry that the Clean Air Act does not permit such broad application of the RFG program.

"There is an ongoing program mandated for RFG, " said Urvan Sternfels, president of the National Petroleum Refiners Association (NPRA)." Now we are seeing extra-statutory ap-proaches for dealing with fuel quality that will certainly impose additional requirements on the oil industry.

"What we were looking for was some certainty in capital investment. Now, we're seeing all the rules changed before this program is even halfway finished. It's not being done by Congress but at different levels, from EPA down to the states."

State plans

On other fronts, the Clean Air Act requires EPA to review air quality standards periodically and seek revisions in State Implementation Plans (SIPs) that spell out methods to be used to remain in Naaqs compliance.

EPA is moving aggressively in both areas-and both pose new challenges for refiners in how to predict RFG demand down the road.

Under a soon-to-be-issued call by EPA for new SIPs, states would have to decide during the next few years how to stay in attainment with air quality standards. But staying in compliance could be harder than ever before, as EPA recently proposed significantly more stringent Naaqs for ozone and particulates (OGJ, Dec. 9, 1996, p. 34).

If adopted, the standards would toss an estimated 335 counties into noncompliance for ozone compared with 106 under present standards. At the same time, about 167 counties would no longer meet a new standard for particulate matter (PM) vs. 41 unable to meet the current standard.

Industry fears more stringent ozone standards would pressure new nonattainment areas to look to motor fuels as a control option.

Some may scramble to opt in to the existing RFG program before 2000; others may wait until later-but what type of gasoline will be in demand is very much up in the air.

"The way Naaqs could play out is in a lot more of the hopscotch pattern, where different states are taking different approaches on different timetables," said Robert King, manager of environmental fuels for Sun Co. "One state could choose RFG, another state could choose low Rvp (Reid vapor pressure); still another could choose CARB gasoline. It adds another set of much-unneeded uncertainties to the planning process."

OTAG contributions

OTAG's contributions to the process are another area to watch.

EPA created OTAG in 1995 to model the extent of the ozone transport problem and recommend control strategies.

OTAG's work has included examining a variety of cleaner-burning gasolines-including RFG Phase II and a low-sulfur OTAG formulation. Motor fuels, however, are only one part of a very large agenda. It's not yet clear where the debate will lead.

Initially, OTAG was to wrap up its work by yearend 1996, and its findings are to be an integral part of EPA's guidance for SIPs. But OTAG's work has encountered delays, and the latest round of modeling isn't expected to be finished until at least February 1997.

Some believe the group will have trouble reaching a consensus, because attainment areas in the OTAG region-such as Nebraska and North Dakota-are protesting the prospect of having to adopt control measures to assist nonattainment areas. Meanwhile, EPA has forged ahead, disclosing plans to propose SIP calls by March 1997, casting doubt about how OTAG's input will fit into the overall picture.

NPRA's Sternfels said, "There are a lot of things up in the air. The EPA has set in motion a number of initiatives affecting RFG. Aside from initiatives like OTAG, and the recent consideration EPA has been giving to expansion of RFG requirements, there's the Naaqs revision for ozone and particulate matter. Any change in those would essentially move the goalposts and broaden who could be required to use RFG or who could opt in.

"We are very concerned that all of these different initiatives have a confluence in a very expensive-and perhaps unattainable-goal of having the industry make RFG for most, if not all, of the country. There was a lot of investment made to comply with CAAA for the areas that seriously needed help, and now it would appear that there are a number of initiatives that would supplant or even undercut that arrangement.

"As far as we can tell, very little attention has been given to logistics, capacity to supply, or even legality. These are questions that clearly need to be part of any program. Congress clearly had in mind to limit the Clean Air Act to areas in most serious need."

The process by which RFG and other clean air requirements may be altered the next few years is playing out in several interrelated arenas concurrently. What follows is a more detailed overview of how some of the major decisions are unfolding.

Opt-in/opt-out

When Phase I took effect in 1995, several states that had opted in to the program swiftly opted out after allegations arose that fuels containing the oxygenate methyl tertiary butyl ether (MTBE) triggered flu-like symptoms (OGJ, June 12, 1995, p. 42).

Although subsequent studies failed to support such a link (OGJ, Jan. 8, 1996, p. 34), refiners were nonetheless saddled with some sizable sunken costs when the market cratered as a result. Sun, for instance, had about $50 million in stranded RFG investment when portions of Pennsylvania dropped out of the RFG program.

The company had already delivered RFG to the areas, but could not charge enough to recover its manufacturing costs and had to sell the fuel for the same price as conventional gasoline, (OGJ, Nov. 6, 1995, p. 23).

"We're looking for a procedural way to prevent this because of the refinery investment required," said Charles Freed, director of EPA's fuels and energy office. "We are considering a rule to deal with issues on opting out."

A proposed rule is expected early this year that would create a "lock-in" period, during which no changes could be made until 2004 if a voluntary RFG area decided to remain in Phase II of the program. Areas would have to make this decision about 5 months after a final rule is issued. If a final rule appears by midsummer, opt-out decisions should be made by late 1997.

Industry officials termed this a considerable improvement over the existing 90-day notice for opt-outs. Still, a 2-year lead time is tight for refineries that require major upgrades to produce Phase II RFG.

"When the permit process is factored in, it can take 4 years," said Sun's King. There's no way refiners can expect the ideal amount of lead time, but the planning window may be even narrower, depending upon how EPA rules on new opt-ins.

Assuming EPA's proposed Naaqs go forward, refiners could face a last-minute rush of newly designated nonattainment areas seeking to use RFG.

They also would be obliged to stay in the program until 2004, but at present, there's no plan to limit when they could enter the program, Freed said.

Refiners could face still greater challenges if EPA presses to expand the program. A proposal allowing former nonattainment areas into the Phase II RFG program may be published early this year. It would allow entry to about 30 areas that weren't in compliance when the 1990 law passed but have since come into compliance, said one EPA staffer. "It would be a contingency measure in case they fall out of compliance again," the staffer added. Less certain is whether EPA will move ahead with earlier plans to issue a guidance document exploring the agency's authority to allow attainment areas into the program.

NPRA has signaled that it is willing to go to the mat on the legality of expanding the program. It says EPA is essentially forwarding the argument: "Well, the Clean Air Act doesn't say we can't do it." The group says a similar rationale was cited when the industry won a suit it waged against an EPA decision to require ethanol or other renewable fuels for 30% of the oxygenates in RFG (OGJ, May 8, 1996, p. 32). In ruling on that decision, NPRA noted, the court said it would not "presume a delegation of power based solely on the fact that there is not an express withholding of such power."

EPA's Freed said the agency wants to explore the extent to which the opt-in opportunity exists: "We need to propose and publish the rule and see what others believe the act provides. It may be expandable."

The potential for opening more areas to RFG has refiners anxious, especially with new air quality standards and SIPs on the agenda.

"Demand could ramp up on short notice, so we might be caught short," said one industry official.

Naaqs controversy

EPA proposed revised Naaqs for ozone and PM late last November, a deadline imposed by court order-at least for the PM issue-following a lawsuit brought by the American Lung Association.

The Clean Air Act requires the agency to review air quality standards every 5 years, but the same standards for ozone and PM have remained in place since 1979 and 1987, respectively.

The court order requires EPA to have a final PM rule in place by June 1997, and the agency is targeting the same month for its final ozone rule.

The ozone standard has the earliest and most direct implications for gasoline, because areas in non-attainment for the ozone standard are candidates for RFG use. The existing standard sets a limit for exposure at ground-level ozone at 0.12 ppm measured over 1 hr. EPA's proposal would set the new standards at 0.08 ppm measured ober 8 hr.

EPA issued a two-part proposal for PM. The agency is essentially keeping intact part of the existing standard to regulate PM10-particulates 10 micrograms (mcg) or smaller-in concentrations limited to 50 mcg/cu m averaged for a year. But EPA also proposed a second standard to regulate for the first time very small particulates-2.5 mcg or smaller (PM2.5)-in concentrations of 15 mcg/cu m/year and 50 mcg/cu m/day. PM emissions result from combustion at stationary sources, such as smokestacks and incinerators, as well as from vehicular diesel fuel.

States would be required to have plans in place by 2000 for meeting the new ozone standard and for PM2.5 by 2002. Deadlines for achieving full compliance would be a few years later.

One reason for the delay is the need to redesignate which areas are not in compliance. This poses a particular challenge for PM2.5, sources said, because monitors are not in place to measure concentrations this low.

EPA maintains that more stringent standards are needed to carry out its mandate to protect human health. The agency says it relied on the findings of its Clean Air Science Advisory Committee (Casac), which reviewed 185 studies on the health effects of ozone and another 86 on the links between PM and human health, in reaching the decision to revise existing standards.

"The studies show that serious health effects would occur even if the current standards were being met, indicating the need for stronger health protection," EPA said.

The agency says the new ozone standard will result in more than 1.5 million fewer cases per year of "significant breathing problems," where lung capacity is reduced by as much as 20%. Citing an increase in childhood asthma cases during 1980-93, EPA said the new standards will reduce asthmatic episodes in children serious enough to require medical treatment. The new PM2.5 standard, EPA asserts, will cut premature deaths linked to PM by 50%, or 20,000/ year.

Dispute

EPA's proposal has drawn a firestorm of criticism.

Leading the charge on the industry front is the Air Quality Standards Coalition, a group representing about 500 businesses and interest groups, including API. The coalition says that EPA failed to consider other scientific studies linking increased asthma to indoor air pollution, passive tobacco smoke, allergens, and poor prenatal care.

"The notion that increased incidences of asthma are tied to ozone are contradicted by the fact that ozone is declining nationwide." The coalition notes that EPA's own studies show a 12% decline in ozone and a 20% decline in PM over the last decade.

And the group alleges that EPA is misrepresenting the actual conclusions of the Casac report, which said there were still "many unanswered questions and uncertainties associated with establishing causality of the association between PM2.5 and mortality."

Industry groups say EPA has the option to keep existing standards in place, and should do so unless there's a clear, scientific basis showing a direct public health benefit from the changes.

Opponents say the standards pose annual costs in billions of dollars. One API analysis, for instance, estimated that a 0.08 ppm/8 hr ozone standard would cost Chicago alone as much as $7 billion/year, or $124-722 in additional pollution controls for every $1 of additional health benefits.

But EPA contends the Clean Air Act directs the agency to base Naaqs revisions "solely upon the best current scientific opinion, not economic impacts."

The potential cost implications of EPA's proposals will garner considerable attention, but the future of the new standards likely will hinge on EPA's ability to prove that it's on firm scientific ground.

"It's certainly going to be an uphill battle to challenge the standards for failure to look at costs," said one industry attorney.

The proposal will be aired in forums beyond EPA. Senate Environment Committee Chairman John Chafee (R-R.I.) said his panel will hold hearings early this year to study EPA's rationale for proposing such major changes (OGJ, Dec. 16, 1996, Newsletter).

Adoption of the proposed standards holds implications well beyond the potential to open more areas to RFG use. Among them is the prospect for additional investments in new stationary emissions controls at refineries, right on the heels of investments in refinery upgrades to produce Phase II RFG.

Said one industry official: "Anybody who burns fuel oil would have to look at stack clean-up." Pressure also could intensify for more severe restrictions on sulfur in both diesel and gasoline, he predicted.

State plan-OTAG wrangle

Meanwhile, EPA is still wrestling with how to bring states into compliance with existing ozone standards.

Many states, particularly in the eastern third of the U.S., are having trouble meeting these targets. OTAG was formed to assist areas that cannot come into attainment by applying area-specific measures alone.

The group is examining the extent to which controls are needed both in non-attainment and boundary areas to reduce ozone and the ozone precursors volatile organic compounds (VOC) and nitrogen oxides (NOx).

In early November, Mary Nichols, EPA's assistant administrator for air and radiation, dispatched a letter to OTAG's chair, Mary Gade, that caught some by surprise.

In the letter, Nichols disclosed that EPA would be pushing forward with a proposed SIP call rule in March, the same month OTAG is expected to send recommendations to the agency.

The timing would allow little or no leeway for EPA to review OTAG's final product, which is supposed to provide scientific underpinning for the state planning process. Moreover, Nichols revealed in the letter that EPA had already reached a key decision -namely, to focus on steep cuts in NOx and mandate reduction levels.

"Based on information that is currently available, including recent OTAG analyses, NOx emissions must be substantially reduced in broad areas of the country, including areas that are currently in attainment, in order to meet the ozone standards," Nichols wrote, adding that EPA is ready to allocate NOx reductions state-by-state and follow-up with federal enforcement "if states are unwilling or unable to act in a timely manner."

Although EPA had previously signaled that it might prescribe emissions reductions by yearend 1997 if OTAG does not reach a consensus, the Nichols' letter said the agency would propose reduction levels in March, with a final SIP call published this coming summer. States would be required to submit plans 18 months later, spelling out the measures they will use to reduce NOx, the primary ozone precursor EPA is targeting.

Nichols' disclosure underscored some mixed industry sentiments about OTAG's purpose and progress.

On one hand, American Petroleum Institute Pres. Charles DiBona, at the group's annual meeting last November, blasted EPA-created panels such as OTAG to be a "profoundly undemocratic" form of "government by stealth."

Expressing alarm that OTAG's recommendations could be factored into state plans as something of a fait accompli, DiBona said such decisions bypass the normal "safety valve" of allowing input by state legislatures and citizen groups (OGJ, Nov. 18, 1996, p. 23).

On the other hand, some industry officials seemed concerned that EPA might be giving short shrift to worthwhile analysis.

"The rug was pulled out of OTAG's authority," said one industry representative to OTAG. "In our mind, technical analysis was moving in the right direction."

Industry has been working to persuade OTAG that fuels are one of the costliest ways to achieve NOx reductions and felt it was making headway.

The industry OTAG representative said, "An OTAG-like battle will occur in every state if this goes forward. Decisions will be made on a state-by-state basis."

Still others gave little credence to EPA's decision to press ahead with a SIP call. Said one environmental consultant: "All they're trying to do is buy time. It jumps out at me that EPA is trying to avoid a lawsuit and show that they are meeting obligations under the Clean Air Act."

Another analysis holds that EPA was merely trying to put pressure on OTAG so the group doesn't fall further behind schedule. OTAG is now conducting modeling to narrow down where controls are most needed.

Sulfur push?

EPA's emphasis on NOx reductions has potential implications for the fuels debate.

"It looks like sulfur is the big driver on NOx," said Horace Hobbs, senior manager at Houston's Ernst & Young/ Wright Killen.

Sulfur content is not rigidly regulated in federal RFG.

For Phase I gasoline, sulfur cannot go above a refiner's 1990 baseline on an average annual basis, although individual batches can go higher. The 1990 industry average is estimated at 338 ppm.

In 1998, under the complex model for Phase I RFG, there is a cap of 500 ppm on RFG sulfur content on an average annual basis. Beyond, that, there are no specific requirements for sulfur content.

Sulfur content for Phase II RFG will be guided by existing NOx emissions targets. Regulations call for NOx reductions of 6.8% for summer and 1.5% in winter. Refiners have the option of meeting NOx targets by reducing either sulfur or olefins.

According to industry analysts, sulfur content in Phase II gasoline is expected to drop to 150-200 ppm in summer, a level that most agreed refiners should be able to meet as long as averaging is allowed. But when flat limits of below 200 ppm are set, "It starts to get expensive," Hobbs said.

Prior to OTAG's formation, the oil industry was already battling drives to reduce sulfur content in gasoline, primarily by automakers. Automakers were seeking nationwide requirements for low-sulfur gasoline as part of plans to develop a 49-state low emissions vehicle (LEV) program (OGJ, Apr. 22, 1996, p. 23), arguing that excessive sulfur impairs onboard diagnostic equipment for catalytic converters.

A 49-state car proposal may still move forward, but sources agree it will not include any new fuel standards.

The issue arose again after OTAG convened.

Originally, OTAG selected five fuels that were factored into various modeling efforts. Two called for RVP reduced to different levels, one set a flat limit on sulfur at 150 ppm, another examined Phase II RFG, and the fifth put CARB Phase II gasoline in the equation.

Meanwhile, an OTAG mini-workgroup on mobile sources has been studying a special formulation that could substitute for federal RFG Phase II in subsequent analyses or recommendations, if accepted by the panel.

The idea was to see if there's a custom-designed OTAG fuel that "maximizes NOx reduction with a cost in line with federal Phase II RFG," said Marlin Gottschalk of Georgia's Department of Natural Resources, who heads the mini-workgroup. While many variations of one base fuel were examined, the theory behind all was to see if costs could be held down by eliminating specific requirements for oxygenate levels and, in some cases, trimming VOC and toxics standards.

A recent study by Math Pro Inc., Bethesda, Md., did not support this theory.

The study found that the "control" option-which calls for a summertime NOx reduction of 12% vs. 6.8% in federal Phase II RFG-would cost about 3.5-5¢/gal more than the federal RFG, with the variations due to differing MTBE cost assumptions.

Moreover, achieving such a NOx cut would require a sulfur level of 50 ppm, only 10 ppm more than California's flat standard.

According to the study, refiners' capital investment would jump to $3.6-4.4 billion for the OTAG control option from about $1.3-1.7 billion for federal Phase II RFG. A variation calling for a 10% NOx reduction, meanwhile, would cost about 2¢/gal more than federal RFG, drive sulfur down to 90 ppm, and require capital investment of $4.1 billion.

The results, in keeping with the direction industry had predicted, were still under review by Gottschalk's panel at presstime.

The panel is expected to decide prior to OTAG's mid-January meeting whether the new fuel should be included in a matrix of options passed on for consideration by other committees. "This would document our work and reflect what we've looked at," Gottschalk said.

Still another level of decision-making might involve actually recommending the fuel as a control strategy, he added.

That would be a much stronger referral, but whether the panel can agree on such a course, given the cost estimates, remains to be seen.

State debates

OTAG's work continues despite some sentiment that time constraints and geographical sensitivities could prevent the group from reaching any decisive conclusions.

"There's a belief that OTAG is not going to get to a point where it will have a comprehensive set of recommendations," said William H. Lewis, partner with the Washington, D.C., law firm Morgan, Lewis & Bockis. "Personally, I have never expected that there would be a consensus reached by OTAG."

But a consensus may not be needed for OTAG's work to be influential down the road, others believe: "Right now, it appears the driver will be decisions made at the state level. OTAG will provide a menu for the states, if you will," said an industry official.

Another industry official said, "We in the industry are taking it pretty seriously, even though science says fuels solutions should be way down the path. Fuel controls are seen as an effective thing to do. They can be easier to sell politically. There's been a great tendency to regard fuel controls as a first resort. Consumers resist vehicle inspection."

The potential does exist for states to propose their own fuels programs, Lewis said. A mechanism under the Clean Air Act enables EPA to approve state-specific fuel measures if needed to meet national air quality standards.

On the other hand, the law also requires EPA to make a finding that no other measures would bring about timely attainment. Even if those other measures are technically possible, EPA must find them unreasonable or unworkable to reject them as options. "I think that is a sufficiently heavy burden to be met by the agency," Lewis said.

Even so, Lewis said, it's "understandable why the industry is quite concerned." States may be "in a better position" than EPA to demonstrate that a particular fuels program is all that's really workable.

Just how the debate will play out is anyone's guess, but as states come under more pressure to shave NOx emissions, fuels will likely continue to be a key part of the agenda.

One industry analyst said, "People just have to realize that if you want to control NOx, fuels are a very expensive option."

The regulatory puzzle facing refiners should start coming together this year. By or before midyear, for instance, two core pieces of the puzzle-EPA's proposals for new NOx and PM standards-are slated to have completed the public hearing process. That will clarify how many new nonattainment areas may enter the scene, but it will hardly complete the picture.

During the next 2 years, as states weigh in with plans to comply with existing standards, other portions of the image will take shape.

In short, only as refiners head toward the finish line for federal RFG Phase II may it become clear what other challenges still lie ahead.

Copyright 1997 Oil & Gas Journal. All Rights Reserved.