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Speeches/TestimonyTestimony of Charles Drevna, Director of Technical Advocacy NPRA, the National Petrochemical & Refiners Association, is a national trade association with more than 450 members, including virtually all U.S. refiners and petrochemical manufacturers. NPRA's refining members include large independent refiners, large integrated refiners, and regional independents and small refiners. NPRA continues to urge policymakers in Congress and the Administration to focus on the supply side of the energy equation and not to take adequate energy supply for granted, as we believe has been the case in recent years. NPRA supports the Agency's proposed two-step program for non-road, locomotive and marine (NRLM) diesel fuel sulfur reductions which includes:
NPRA's concerns about the supply impacts of the highway diesel sulfur rule, however, remain. Unfortunately, new NRLM diesel fuel standards in the same timeframe, however designed, can not alleviate the potential diesel supply problems. This judicious two-step proposal for NRLM diesel fuel is much better, in terms of overall diesel supply, than a one-step program. But, we must continue to emphasize the fact that the new NRLM diesel fuel rule will put additional pressure on overall diesel supplies. Concerns on the NPRMNPRA is generally supportive of the major aspects of this NPRM. We would like to comment on four key topics: First, the petroleum industry appreciates the Agency's efforts to establish a two-step approach to provide flexibility for the fungible distribution of highway and NRLM diesel fuel meeting the same 500 ppm maximum sulfur standard. Along with the obvious additional flexibility of this approach over an alternative, single-step, 15 ppm limitation in 2008 is the important but often overlooked benefit of early and significant emissions reduction. These early reductions will provide corresponding health benefits a year earlier than the more expensive, less flexible single-step option. Further, compared to any one-step process, adoption of the phased approach for reducing sulfur content in NRLM will mitigate additional potential diesel fuel supply and distribution problems associated with the convergence of both the highway and non-road diesel sulfur rules. NPRA believes, however, that the proposed refinery baseline option for compliance can be improved. This can be done in such a way as to provide the Agency the regulatory certainty it requires while providing maximum flexibility to refiners. NPRA is investigating several variations or modifications to the Agency proposal concerning baseline options and approaches and we will supply specific recommendations in our written comments this August. We hope that our suggestions will lead to a more viable and flexible program. This does not suggest, however, that NPRA agrees with incorporation of production baselines as regulatory tools or approaches, or that establishment of such a mechanism for this particular rule become a precedent for any future rulemakings. Rather, we recognize the unique situation surrounding this proposal and its inter-relation to the highway diesel sulfur rule. NPRA remains concerned that baseline approaches, even temporary, may well create an anti-competitive environment and that government policy should not foster such conditions. Next, NPRA opposes reducing the sulfur cap of LM diesel fuel to 15 ppm as part of this NRLM rulemaking. Additional LM diesel fuel controls should wait for a possible future locomotive and marine engine emissions standard rulemaking. Further sulfur reductions to LM diesel fuel without availability and application of appropriate after-treatment technology would provide negligible environmental benefits which could be completely overshadowed by the negative impact on supply. As NPRA has stated throughout the development of the NPRM, both timing and scope are critical components of the two-step process. Any variation that requires either earlier compliance or further limitations only places additional burdens on an severely strained fuel supply system. Third, similar to our last point, NPRA opposes any attempt to accelerate the time-frame for compliance with the NRLM rule. Maintaining the proposed effective dates as part of the two-step approach is vital. We must seek to minimize potential diesel fuel supply disruptions as both the highway rule and non-road rules converge. Lastly, NPRA supports EPA's proposal to allow regulated parties to adopt a performance-based test method approach for diesel fuel subject to the 15 ppm sulfur standard, as well as an option for diesel fuel subject to the 500 ppm sulfur standard. Industry has long advocated a performance-based approach toward qualification of test methods, and we thus welcome the Agency's proposal. As you may know, the ASTM recently conducted an ASTM round robin test program involving four sulfur test methods to determine the current precision of these methods. The precision aspect involving the measurement difference between laboratories (i.e., "reproducibility" of a test method) is particularly critical for refinery certification and EPA enforcement purposes. While each of the four methods has its own level of precision, the ASTM round robin program showed that the differences measured between laboratories for all four methods is larger than we'd like, especially when the 15 ppm per-gallon diesel sulfur standard requirement is effective. The API Test Methodologies Work Group will be working with industry and sulfur test method vendors to identify testing improvements that can reduce the differences in results between laboratories. NPRA has three key recommendations regarding EPA's proposal involving the sulfur test method:
A Quick Look at Supply Concerns: Why We Must Err on the Side of CautionWith the decline in the number of operating refineries from more than 200 in 1990 to less than 150 today, the nation's cushion of excess refining capacity has also disappeared. The supply/demand balance in the gasoline market has tightened over the years due to steadily increasing gasoline demand; growing population, larger cars, more miles traveled; relatively little growth in aggregate domestic refining capacity-US capacity has increased by only 7% since the late 1980s-limited opportunities for expansion at existing refineries; and low returns on investment. The supply/demand balance will probably tighten in the diesel market in the future due to EPA's very challenging ultra low sulfur highway diesel standards (effective in 2006). High average capacity utilization rates at U.S. refineries, growing petroleum product demand for transportation fuels, and the need to address several overlapping fuel regulatory specifications may stretch supply capabilities dangerously close to the breaking point. Sustaining adequate petroleum supplies will largely depend on maintaining sufficient growth in refining capacity and operating at near maximum utilization. Historically, the refining industry has kept pace with increasing demand and quality requirements given adequate time and realistic expectations. However, with average refining utilization projected to remain high, and as refined petroleum product requirements approach actual technological, economic, and practical limits, supply capability becomes less certain. High average capacity utilization rates at refineries may not be sustainable without the risk of short-term petroleum product supply disruptions. Thus, it is becoming more probable that we will experience future periods of tight fuel supplies and consequent price volatility. Each refiner must evaluate the effects that more restrictive petroleum product will have on its refineries. Some may choose not to invest in certain refineries and some may choose not to invest at all. Others may invest in capacity additions as part of a coordinated, optimized improvement program. These independent decisions and individual circumstances may result in short-term supply disruptions and accompanying price volatility, particularly during the initial implementation of new petroleum product standards. The U.S. refining industry is also facing significant clean motor fuels investment requirements in a business that has recently experienced prolonged low rates of return on investment. Additional capacity expansions to meet rising domestic demand-and maintain dependable petroleum product supplies at reasonable prices-may not materialize if stringent new motor fuel composition standards and/or New Source Review settlements divert available capital and/or discourage investment in needed domestic capacity. Ultimately, refiners do not have to make these investments and the aggregate affect of 50 individual decisions made by 50 different refining companies may be a shortfall in capacity for specific fuels. Of course, imports are an alternate source of fuel products. But NPRA believes that our energy security requires maintaining a healthy and diverse domestic refining industry. The chart, "Gasoline Distillates and Jet Fuel Imports" shows the significance of imported gasoline,1 distillates (diesel and home heating oil) and jet fuel: Imports contribute about five percent to total U.S. gasoline supplies and 5-10 percent of the total domestic supply of distillates and jet fuel. With recent high capacity utilization rates at U.S. refineries, these imports are vital in order to maintain adequate petroleum product supplies. As chart "Typical Refinery Production in 2001" illustrates, gasoline is the largest volume petroleum product, accounting for half of U.S. petroleum product production. Highway (or on-road) diesel represents 16 percent of the average production at a domestic refinery. Local refinery production, net imports and net receipts (from one PADD to another, excluding imports and exports) are also possible sources of highway diesel fuel supply. The chart "Highway Diesel Supply Sources in 2001" (derived from EIA data) indicates regional self-sufficiency from local production and dependence on imports and receipts from other regions. PADD I (East Coast) is dependent on supply from distant sources: PADD III (Gulf Coast) refineries and imports. East Coast refineries contribute only about 30 % of PADD I demand for highway diesel fuel. More than half of East Coast supplies are sent from the Gulf Coast. PADD II (Midwest) is dependent on supply from PADDs I and III. PADDs III, IV (Rocky Mountain area) and V (West Coast) are self-sufficient. EIA forecasts increased demand for transportation fuels in all regions. Interestingly, EIA projects that the two areas with the largest expected growth in demand for gasoline and diesel for 2001-2007 are PADDs I and II,2 the two areas that are the least self-sufficient. Refineries in the Gulf Coast are a critical supply source.3 They meet PADD IV needs, contribute half of the East Coast demand, and are a significant supplier to Midwest consumers. PADD-to-PADD movements (as shown in "Highway Diesel Movements in 2001" are significant because petroleum products are moved by pipelines and barges at slow rates (only a few miles an hour) and over long distances. Examples of long distance pipelines moving petroleum products from the Gulf Coast to the East Coast are Colonial Pipeline (1,500 miles) and Plantation Pipe Line (1,100 miles). Explorer Pipeline (1,400 miles) and TEPPCO, LP (1,100 miles) are long distance examples from the Gulf Coast to the Midwest. It can take 1.5 to 2 weeks for petroleum products to travel the entire length of these interstate pipeline systems. Imports can supply petroleum products into many East Coast harbors.4 However, product still may have to travel thousands of miles from foreign refineries. Market economics ensure that, in the long run, supply will match demand. However, when new regulatory fuels requirements are implemented, short-term supply disruptions have typically occurred. Two earlier diesel programs are examples: implementation of the EPA highway diesel requirement for maximum 500 ppm sulfur (low sulfur diesel, LSD) in 1993 led to supply disruptions for several months and the CARB diesel program led to supply disruptions that lasted for more than a year. These supply disruptions have market implications. The FTC report in 2001 on Midwest gasoline supply problems found that given the elasticity of gasoline "…a decrease in supply (or increase in demand) of five percent could explain the 30 to 40 percent increase in the wholesale price of gasoline . . ."5 Diesel fuel's price is inelastic compared to gasoline's, which means that even greater impacts from supply disruptions are possible. In addition, the large capital requirements and the time required to make the refinery modifications to produce ultra low sulfur diesel (ULSD, maximum 15 ppm sulfur) will not allow quick increases in ULSD supply. Given these realities, it is best for all stakeholders in the diesel program to maintain a close balance between supply and demand. Supply in this case refers not just to ULSD production but to total LSD and ULSD production. A significant portion of the non-road diesel (i.e., farm tractors, road construction equipment) market uses LSD today and this volume must continue to be produced to balance overall diesel demand. In addition, since ULSD will have lower energy content, slightly more ULSD must be supplied to provide the same transportation benefits as today's LSD. The U.S. refining industry has alternatives available to mitigate some portion of required investment to meet fuel regulations. Instead of installing new multi-million dollar equipment to desulfurize highway diesel blendstocks (with uncertain returns on this large investment), refiners can produce more of other distillate products, such as off-road diesel, home heating oil or highway diesel for the export market. Given these options and the daunting challenges of the new gasoline, highway and non-road diesel rules, there can be no absolute guarantee of adequate U.S. supplies of highway diesel fuel in the in 2006. And policymakers must know that requirements must be reasonable to encourage investment in fuel production for domestic use rather than export. The NRLM proposed is an example of a more reasoned approach to rulemaking. Unfortunately, the Highway Diesel regulation is not. As a broad public policy guide, we must reinstitute a supply ethic in federal energy policy to provide both national energy security and to maintain U.S. economic growth. Consistent with findings made during the highway diesel sulfur rulemaking, NPRA expects that the Agency's NRLM diesel sulfur reduction proposal could cause some supply shortages of NR diesel fuel and, at best, could mitigate over a one-step approach, but probably not eliminate, expected supply problems with ultra low sulfur highway diesel fuel. NPRA appreciates the opportunity to appear before you today and welcomes any questions. Notes1 Finished gasoline; does not include imported gasoline blendstock components. 2 "Petroleum Outlook: Increased Inter-PADD Movements Expected," J. Shore, April 2003, Slide 11. 3 Note: Do not interpret the arrows on this map literally (e.g., not necessarily all of any chipments of highway diesel from PADD III to PADD II move from Arkansas to Missouri). The arrows indicate average daily movements into and out of a PADD. 4 Examples: New York City; Perth Amboy, NJ; Newark, NJ; Baltimore; Boston; Portland, ME; Portsmouth, NH; and Providence, RI. 5 Federal Trade Commission, "Midwest Gasoline Price Investigation," March 29, 2001, Section II. C. 1. Charts |