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Federal Document Clearing House
Congressional Testimony
March 9, 2000, Thursday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 4214 words
HEADLINE:
TESTIMONY March 09, 2000 BOB SLAUGHTER GENERAL COUNSEL AND DIRECTOR OF PUBLIC
POLICY NATIONAL PETROCHEMICAL AND REFINERS ASSOCIATION HOUSE
COMMERCE ENERGY AND POWER OIL PRICE FLUCTUATIONS
BODY:
Prepared Statement of Mr. Bob Slaughter General Counsel and Director of
Public Policy National Petrochemical and Refiners Association March 9, 2000 Good
morning. My name is Bob Slaughter. I am General Counsel and Director of Public
Policy for the National Petrochemical & Refiners Association (NPRA). I am
very pleased to be here this morning to address the refining industry's
perspective on the fluctuations in crude oil prices and supplies over the past
12 months. NPRA's membership includes virtually all U.S. refiners, as well as
petrochemical manufacturers using processes similar to refineries. Our members
own and/or operate almost 98 percent of U.S. refining capacity. NPRA includes
not only the larger companies, but also many small and independent companies.
Overview Today Americans have the benefit of a highly competitive refining
industry that welcomes challenges and which produces quality supplies at market
prices. Price fluctuations are driven by many factors that influence supply and
demand in a competitive oil marketplace. The fluctuations which we have seen
lately are the result of many events, some of which have occurred far from our
shores. In addition, our industry is currently confronted by many environmental
challenges from state and federal regulators, which we plan to meet. However,
contrary to popular belief, the refining industry's resources are limited and
the costs of these upcoming regulatory initiatives are high. I would like to
review for you (1) what we see as some of the causes of these recent
fluctuations, (2) NPRA activities with Secretary Richardson and the Department
of Energy, (3) supply and distribution challenges which we see ahead for the
refining industry, and (4) some future steps which we believe may be
appropriate. Causes of Price Fluctuations and Status of Current Crude Oil
Markets Early in 1999, a glut of oil on the world oil market drove the price of
a barrel of oil down sharply. In February 1999, a barrel of crude oil was being
sold for an astonishing $11. This was the result of two major factors, 1)
reduced demand in Asia and to a lesser extent Europe, and 2) increased
production in the Western Hemisphere. However, beginning in April, 1999 the
price for crude oil began a consistent and steady increase, with a barrel of oil
today (March, 2000) selling for around $30. A few events can be identified as
contributing factors to the current price scenario. First, OPEC and several
other exporting nations, in response to the devastatingly low price of crude oil
during the 1998-1999 time frame, began to reduce the supply of oil to the world
market by cutting production. This decrease in production coincided with a
rejuvenation of the sagging Asian and European economies which increased the
demand for crude oil on the world markets. In addition, the U.S. experienced a
colder than normal late winter in 2000, especially in the Northeast, adding a
greater than expected demand for heating oil. The reality of all of these
factors is that the world is now consuming around 2 million barrels more than it
is currently producing. Refineries are Working with the Department of Energy
February 9, 2000 Meeting with Secretary Richardson On February 9, 2000, NPRA
member company representatives and staff met with Secretary Richardson regarding
the current problems with heating oil supplies in New England. Refiners were
encouraged to take all steps possible to increase the supply of heating oil and
diesel fuel to the affected region. It was also suggested that routine
maintenance and turnarounds at refineries be delayed where feasible and safe, in
order to maintain distillate output. Insofar as these activities are consistent
with safety and sound operating practices, some refiners have agreed to consider
rescheduling minor repairs in order to maximize distillate supplies to this
region. However, it must be stressed that these activities will only take place
provided all necessary safety concerns are met. February 16, 2000 Department of
Energy Home Heating Oil Summit On February 16, 2000, NPRA attended the
Department of Energy's Home Heating Oil Summit in Boston, Massachusetts. Both
Secretary Richardson and NPRA told the Boston meeting that the refining industry
is working with DOE and others to respond to the current situation. In addition
to the meeting with the Secretary, several NPRA member company representatives
have provided the DOE with private information in an effort to help the
Secretary and the Department of Energy assess the current situation and the
near- term supply situation as he evaluates various possible responses. Refiners
have also confirmed to the Secretary that efforts to ensure adequate production
of heating oil and diesel fuel have been underway for weeks and are continuing.
Because of competitive considerations we asked our members to deal privately and
directly with the Secretary's office and his distillate supply task force, and
we know that many of our members have done so. We anticipate continued contact
between our members and the Secretary's office on this subject. Supply and
Distribution Challenges Ahead for the Refining Industry The current predicament
again reminds us that the U.S. either deliberately or inadvertently has followed
a national policy which, at times, doesn't pay sufficient attention to the
question of supply. This is most often true in the area of environmental policy.
The U.S. frequently pursues overly expensive environmental restrictions without
looking for equally effective but less costly alternatives. The inevitable
result is situations such as that which we are confronted with in the Northeast.
The refining industry now faces extensive new Clean Air Act regulations that
will take effect in the near future. These include requirements both for control
of refinery emissions, New Source Review (NSR), and for the reformulation of
gasoline to remove sulfur and selected air
toxics . Refiners are also currently making the transition into RFG II as
required by the 1990 Clean Air Act Amendments. It seems certain that in addition
that EPA will require the reformulation of diesel fuel, and it is likely that
Congress or EPA will consider proposals which require the phase-down or even
elimination of MTBE from gasoline. Attached is a chart titled,
Cumulative Regulatory Impacts on Refineries: 2000-2010 , reflecting these
requirements in more detail. This chart reflects the importance of the need for
policymakers to begin working together with industry to balance the
environmental concerns of the country with consumers' need for an adequate
supply of petroleum products. I would like to briefly cite some of the
environmental rulemakings the refining industry faces. New Source Review (NSR)
Under the Clean Air Act Section 111(a)(4) and EPA's regulations, NSR is
triggered by any physical change or change in the method of operation of a
source that increases its emissions by a significant amount. If a
physical/operational change does not itself significantly increase source
emissions, or if the source nets out the change by offsetting emissions
reductions in other places, then, under the law, NSR does not apply. NSR is one
of the most complicated regulatory programs ever created. EPA has recognized
this and initiated the reform process to simplify and rectify the program. EPA's
current approach to NSR applicability makes it extremely difficult for refiners
to determine when NSR permitting and controls are required and leaves refineries
in enforcement jeopardy unless they consider NSR for any and all operational
changes. As a result, the program is an untenable burden on state permitting
authorities and refineries and threatens their ability to implement Congress'
future environmental goals in a timely manner. The end point of EPA's current
position is universal NSR. However, no industrial economy could function if
every change to a factory required a permit before construction could begin.
This will be particulary burdensome for refineries given the operational changes
necessary to comply with the blizzard of new fuel reformulation and stationary
source regulations. EPA recognized that Congress did not intend universal NSR in
its 1996 proposal for NSR reform, however EPA's new approach is achieving just
that. Tier II Regulations EPA's recently concluded rulemaking on the Tier II
gasoline program is an extremely ambitious, high-stakes
approach to reducing sulfur in gasoline. It
requires that refining industry to make unprecedented investments in improving
technology to meet the rule's timing requirements. The final Tier II rule will
require the refining industry to invest as much as $8 billion in order to comply
with a new 30 ppm gasoline sulfur standard effective 2004-6.
Conservative estimates have stated that the cost of gasoline
will rise 5 cents per gallon in response to these costs. This doubles the
refining industry's recent annual environmental expenditures. Expected
requirements to reformulate diesel fuel could increase these costs by as much as
$4 billion, or more, depending on the extent and timing of
sulfur reduction. Diesel Fuel Another prime example is an
upcoming EPA regulation affecting diesel fuel. Truckers and others who are
reliant on diesel supplies have recently protested about disruptions in the
supply and price of the product. At the same time, EPA is preparing to propose a
regulation drastically reducing sulfur levels in diesel fuel.
NPRA is committed to improving the environmental performance of fuels, and we
have endorsed a reasonable reduction in diesel sulfur. However,
all indications are that the EPA proposal goes far beyond anything that could be
called reasonable. EPA is set to propose a severe reduction in the on-highway
diesel fuel sulfur standard from a cap of 500 parts per million
to 15 parts per million. The agency has conducted no analysis of the impact of
this reduction on diesel supply or price or on the viability of the U.S.
refining industry. NPRA has told the agency that a sulfur cap
of 15 ppm will severely impact refiners, resulting in the reduction of U.S.
refining capacity. We think that it will severely reduce the available supply of
diesel, and that heating oil and gasoline supply will also be
affected if marginal refineries close, or elect not to produce on road disels.
Please note that the diesel requirement would take effect at the same time as a
90% reduction in gasoline sulfur. Together these initiatives
could cost the refining industry roughly $12 billion. And, the process and
operating changes are not the same for gasoline and diesel -
synergies do not exist between the two. Reducing diesel fuel
sulfur content to the level under consideration by EPA poses
difficult technical and engineering challenges for the refining industry and
imposes significant capital requirements and operating costs. There are no
obvious solutions or inexpensive means to accomplish this level of reduction,
and the technical capability to achieve very low sulfur levels
is in question for many refineries. Very low diesel sulfur
levels may also lead to other unexpected problems or unintended consequences,
such as reductions in energy content, lubricity degradation, and susceptibility
to contamination problems at the refinery and terminals. As this rulemaking goes
forward, policymakers must be sensitive to diesel supply implications, and the
availability of technologies capable of meeting regulators' objectives. We must
guard against unreasonable requirements which would threaten the viability of
refineries, and cause market disruptions in the flow of critical energy products
to consumers. Urban Air Toxics Yet another example of challenges facing the
refining industry can be found in EPA's plans to regulate air toxics. Section
202 (1) of the Clean Air Act directed EPA to complete a study of toxic air
pollution from mobile sources, including both vehicles and fuels by May 15, 1992
and issue final air toxics regulations by May 1995. The study was to focus on
air toxic emissions that posed the most significant risk to human health. EPA
was delayed in completing the study and issuing air toxics standards. It is now
under court order to propose regulations by April 2000, with a final rule by
December 2000. It is likely EPA will propose stringent new air toxic standards
for both conventional gasoline and reformulated
gasoline (RFG) and EPA will issue these new toxics standards as
part of its Integrated Urban Air Toxics Strategy. It is expected that EPA will
focus on benzene in gasoline and is currently seeking
information and data from industry in order to make a cost effectiveness
determination of possible benzene control options. Secretary Richardson is
Correct not to Tap the Strategic Petroleum Reserve NPRA commends the Secretary
of Energy and the Administration for their continued disinclination to tap the
Strategic Petroleum Reserve (SPR). The SPR is a designed to be available in
major supply emergencies when our national security and economic prosperity are
at stake. It is a strategic asset intended to counteract severe crude oil supply
disruptions such as occurred during the 1970s. Use of the reserve should be
based only on a Presidential finding that implementation of a drawdown plan is
required by a disruption, originally stipulated by the Energy Policy and
Conservation Act of 1975. The concept of using the reserve to influence prices
should be rejected as impractical. Using the SPR to manipulate prices would both
politicize this asset and render it less useful for the purpose for which it was
originally designed. In addition, logistically, by the time the SPR crude oil
was released, transported, refined and delivered to customers, the current
situation and certainly the winter season would be over. Future Steps NPRA and
its members urge federal and state policymakers to review the current situation
and events leading up to it for ways to avoid or at least minimize the
possibility of future price and supply upsets. Unless there is rational,
coordination of pending and future regulations there is a serious threat of
supply disruption and price swings. As was mentioned earlier, this can in part
be accomplished by rethinking the current U.S. policy regarding production of
crucial energy products such as heating oil, diesel and
gasoline. We also support the Administration's attempts to urge
OPEC and other suppliers of crude oil to consider providing additional
allocations of oil to U.S. markets. Renewed international economic growth
coupled with continuing strength of the U.S. economy may warrant increased crude
oil supplies. Consequently, refiners may need access to more crude oil in order
to meet projected strong demand for gasoline during the
upcoming driving season. We also need to guard against a repeat problem with
heating oil supplies if untimely cold snaps occur during the next and subsequent
winters. Finally, as a nation, we must work to promote and develop policies that
focus on continued environmental progress without reducing the supply of
petroleum products needed for a healthy economy. Conclusion In the past decade
the refining industry invested more money in environmental improvements than the
total book value of refining assets. We have been asked to continue significant
environmental investments, and we will do so. We ask, however, that policymakers
pay close attention to the scope and pace of environmental regulations. Trying
to go too far too fast will result in market disruptions which are not in the
best interests of consumers or refiners. We hope that the Congress will assist
us in addressing these concerns. NPRA believes that even with its occasional
(but temporary) shortcomings, market forces remain the best foundation for U.S.
energy policy.
LOAD-DATE: March 15, 2000, Wednesday
