Speeches/Testimony

Remarks of Bob Slaughter,
General Counsel, NPRA
at the RFA, National Ethanol Conference,
Panel on Environmental Requirements Driving Energy Markets

February 19, 2001
Las Vegas, Nevada

Thank you for inviting me to RFA's national ethanol conference. I am Bob Slaughter, General Counsel of the National Petrochemical and Refiners Association (NPRA). NPRA represents virtually all of the nation's refiners, as well as petrochemical manufacturers with processes similar to refining.

The subject of this panel is "environmental regulation driving energy markets" — which is a very true statement. Energy policy has really been made in the environmental arena for more than a decade. The most important energy legislation in the Nineties was certainly the Clean Air Act Amendments of 1990, not the Energy Policy Act of 1992, which has had zero impact on fuels and other energy issues, with the possible exception of electricity.

And we can point to the National Petroleum Council study of 1995, which found that environmentally mandated expenditures for refiners in that decade — roughly $37 billion — exceeded the book value of the entire refining industry — about $35 billion. That figure did not include other billions of investment capital needed to maintain and upgrade capacity to meet increasing demand for refined petroleum products.

The first decade of the new century doesn't look much different from the last decade of the previous one. Already refiners are being asked to make around $20 billion in environmentally-related investments to comply with EPA's gasoline sulfur rule, diesel sulfur rule, gasoline toxics rule, as well as potential MTBE-related and possible driveability index-related expenditures.

At the same time, those refiners will be forced to spend at least that much money to maintain existing capacity and build new capacity. Demand for petroleum products will continue to increase, although the rate will depend on our overall economy.

No new U.S. refineries have been built from the ground up since the late Seventies. The number of U.S. refineries has fallen from 205 in 1990 to roughly 158 today. The most recent closure was an 80,000 barrel per day refinery in Blue Island, Illinois.

Despite the closure of many refineries, the industry was able to achieve a very slight growth in U.S. refining capacity during the 1990s (from 15.6 mb/d to 16.5 mb/d). To keep up with increased demand, the average utilization rate of refineries also grew from 87% to 94 % over that period.

Unfortunately, the last EPA launched an enforcement campaign targeted at the steps the industry was able to take to keep up with demand. In 2000, refiners were deluged with related information requests from EPA at the same time that the DOE urged the industry to concentrate every effort on maximizing production of home heating oil or gasoline, depending on the season.

It is unclear whether this hazing operation will continue under the new EPA, but that activity has left a residue of uncertainty about the rules of the game. Because it is unlikely that new refineries will be built, we must either make changes at existing facilities or accept the fact that imports of refined petroleum products will increase, perhaps significantly.

This is an area in which environmentally-related requirements have run into themselves. For example. it is still unclear whether the industry will be able to obtain permits that are needed for plant changes, which are crucial to compliance with the Tier 2 gasoline rules, effective in 2004-6. (This puts aside for the moment whether even more permits can be obtained in time to comply with the controversial diesel sulfur rule which is also effective in 2006.)

Refiners are thus in somewhat of a Catch-22 situation, in which certain environmental rules require them to provide new fuels, but other environmental rules may prevent their doing so.

The industry must work itself out of this situation somehow, but the task won’t be easy. We have learned during the past two years or so that many of our energy-related laws and regulations are malfunctioning.

NPRA hopes that some of the damage can be undone, either through Administrative or legal action. You may have noticed that we will litigate the diesel sulfur regulation, seeking more time to meet the environmental goals set by the previous EPA.

Contrary to the claims of the environmental lobby NPRA is not out to undo the diesel rule. But it can not be implemented in its current form and must be fixed. We are merely pointing out what this chart shows—that the refining industry faces a very ambitious and probably unprecedented agenda of final rules or other regulatory actions, which must be implemented in the next five years. These initiatives have been pancaked on top of one another without any attempt to prioritize or rationalize them.

Perhaps the attempts to legislate a National Energy Bill, now underway in both Houses of Congress, will help untangle the mess. But that legislation has a long way to go before it becomes law. And there is as yet no solid plan to deal with the environmental requirements of the Clean Air Act, the real energy policy driver in most instances.

One area in which policymakers are interested is clear, however. This chart shows the various grades of gasoline which refiners must make in different parts of the country. This and similar information came to the attention of Congress during last year's hearings on Midwestern gasoline problems and apparently made an impression.

Policymakers are asking if it wouldn't make more sense to have greater fungibility and commonality of petroleum products across the United States. Our response is that it would make the job of supplying the growing demand for petroleum products significantly easier, eliminating production constraints and supply bottlenecks.

But it will be hard to achieve. If even more stringent requirements are the price of greater fungibility, supplies will not increase, but costs of manufacture will. Even more refineries will reduce capacity or close. Regulators always seem to overregulate, even when reducing regulations is the professed goal.

Recent experience is not encouraging. The diesel sulfur rule has added an additional grade of diesel to the already overcrowded distribution system. And, on Capitol Hill, the Senate Environment Committee’s MTBE bill in the last Congress was shaped by the agendas of special interests, with little attention to the impact on gasoline supply or cost of manufacture.

Nevertheless, NPRA will participate in the legislative and regulatory processes wholeheartedly, and hopefully. We know that the new Administration, Chairmen Murkowski, Tauzin and Barton — and Senator Bingaman, and Congressman Dingell, too — would like to improve energy policy.

The outcome of these efforts will determine our future, and may greatly affect your own. The refining industry — and many others — know that ethanol is an increasingly important component of the nation's energy supply. You just heard Duane Gilliam of Marathon Ashland underscore that fact in his remarks.

Ethanol is needed as a gasoline blendstock, but refiners also need your help to make our way out of the current regulatory mess towards a more workable future. Frankly, NPRA must express some disappointment that activities in the past year have seemed at times to be as much focused on maximizing leverage from our problems as at helping to solve them. This is especially true in efforts involving the California waiver request and the Senate Environment Committee bill.

If gasoline becomes even more costly and difficult to make then both gasoline manufacturers and blendstock suppliers will suffer — as well as consumers. We hope that the ethanol industry will join in an attempt to put the nation's energy policy, particularly that regarding transportation fuels, on a safer and saner course — one that balances environmental and other policy goals with the need for an adequate supply of competitively-priced petroleum products.

Thank you again for inviting me to be here with you today.