Copyright 1999 Federal Document Clearing House, Inc.
Federal Document Clearing House Congressional Testimony
July 21, 1999
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 3701 words
HEADLINE:
TESTIMONY July 21, 1999 CLINT W. ENSIGN VICE PRESIDENT HOUSE
SCIENCE ENERGY AND ENVIRONMENT SULPHER IN GASOLINE AND DIESEL
FUEL
BODY:
STATEMENT OF CLINT W. ENSIGN VICE
PRESIDENT, GOVERNMENT RELATIONS SINCLAIR OIL CORPORATION ON THE ISSUE OF TIER 2
/ GASOLINE SULFUR STANDARDS BEFORE THE SUBCOMMITTEE ON ENERGY
AND ENVIRONMENT OF THE COMMITTEE ON SCIENCE UNITED STATES HOUSE OF
REPRESENTATIVES WASHINGTON, D.C. JULY 21, 1999 INTRODUCTION Mr. Chairman and
distinguished committee members, my name is Clint Ensign. I am Vice President of
Government Relations for Sinclair Oil Corporation. I am honored to share
Sinclair s views on the U.S. Environmental Protection Agency s Proposed Tier 2
Motor Vehicle Emission Standards and Gasoline Sulfur Control
Requirements. Sinclair is family owned company that operates three refineries;
two in Wyoming and one in Oklahoma. Two of these refineries were closed by other
companies before being purchased and reopened by Sinclair. All of our refineries
are considered "small" by provisions established by Congress in the Clean Air
Amendments of 1990 (CAAA). Regrettably, none of our refineries are considered
small by standards EPA has proposed. Therefore, we are not eligible for small
refinery help. Overall, the proposed gasoline sulfur regulation
represents the largest and most costly government requirement in the history of
our company. If made final as proposed, it directly threatens the future of our
Casper, Wyoming refinery. While Sinclair disagrees with many fundamental aspects
of the gasoline sulfur proposal, I wish to make plain that I
have been extended the opportunity to present our views to EPA on several
occasions. I have appreciated meeting with senior agency officials on this
issue. I am hopeful we can work together to improve the sulfur
proposal. Let me discuss several specific gasoline sulfur
issues. THE U.S. REFINING INDUSTRY MADE AN UNPRECEDENTED EFFORT TO HELP EPA
DEVELOP A MAJOR GASOLINE SULFUR REGULATION. The air quality
improvements automakers and refiners can achieve with Tier 2 vehicle and fuel
sulfur changes are impressive, especially in major urban
cities. We should move as quickly as we are technically and economically able to
achieve these improvements. That is why my company and the refining industry
support large reductions in gasoline sulfur. More than a year
ago, the refining industry voluntarily proposed that EPA reduce
sulfur limits; a 70% reduction in the East and 55% in the West.
Average sulfur levels in the national gasoline
pool would fall by half in 2004. Our proposal recognized unique regional factors
and was consistent with congressionally established Tier 2 principles of need,
feasibility, and cost- effectiveness. In studying vehicle emissions data, we
believed these sulfur reductions would enable the Tier II
vehicle to meet emission standards twice as stringent as Tier 1 standards. Our
proposal gave a huge jump-start to the regulatory process. It provided EPA with
unanimous consent from our industry to impose regulation at this level. In the
absence of gasoline sulfur workshops, feasibility studies, and
the like, this represented a remarkable offer to EPA. And since large and small
refiners supported the plan, the agency did not need to worry about possible
plant closings, fuel supply concerns, small business compliance, and other large
challenges that accompany major regulation of this kind. After making such a
huge outreach to help EPA craft meaningful gasoline sulfur
regulation, we were disappointed that the basic views of the U.S. refining
industry were not incorporated in the proposed regulation. INSUFFICIENT
STAKEHOLDER WORKSHOPS HAVE BEEN HELD ON THE KEY ISSUE OF REVERSIBILITY. To date,
EPA has held only one public workshop on gasoline sulfur
control (May 1998). During that workshop automakers were unable to explain why
certain vehicle models demonstrated a high level of reversibility. The gap of
understanding about reversibility is further underscored in the preamble of the
Tier 2/Sulfur proposal where EPA states that "vehicles tested
exhibited a wide range of reversibility, for reasons that are not fully
understood." EPA also concludes that "there is considerable variation in the
measured levels of sulfur reversibility in the . . . test
data." In view of this, refiners proposed a two step plan. First, the industry
offered to make large reductions in gasoline sulfur in all
regions of the country by 2004 to immediately improve air quality (as noted
earlier). Second, before committing the nation to billions of dollars each year
in severe sulfur control costs, we felt it was in the public
interest to further examine reversibility in an open forum where data could be
peer reviewed. (Refiners also felt additional time was needed to assess the
capability of new desulfurization technologies). Consequently, the refining
industry made a good faith offer --- with the help of Administrator Carol
Browner --- to meet directly with the autos on these matters. While automakers
have pressed EPA hard to mandate severe gasoline sulfur
standards, they refused the offer to meet. The refusal to meet and have data
peer reviewed raises questions about the strength of the autos position on
reversibility. As a matter of process, we believe one public workshop was
insufficient to examine such a complex, key issue. A MAJORITY OF GOVERNORS IN
THE WESTERN HALF OF THE UNITED STATES HAVE EXPRESSED REGIONAL CONCERNS TO EPA
ABOUT NATIONAL GASOLINE SULFUR STANDARDS. No consensus exists
among states for imposing California gasoline sulfur standards
nationwide. Fourteen governors representing a majority of states in the western
interior of the United States have expressed regional concerns to EPA about
severe gasoline sulfur control. These governors are from both
political parties and represent states that join each other in a large,
geographically contiguous block (see Exhibit 1). Collectively, these governors
represent states with excellent compliance with National Ambient Air Quality
Standards. The Tier 2/Sulfur proposal, as well as the
clarification of the proposed rule, does not project any area in the United
States west of Dallas, Texas (x-CA) to be nonattainment with the 1-hour ozone
NAAQS. And while some counties in the West are projected to be nonattainment
with PM10 standards, the primary cause is often forest fires, wind blown dust,
and other natural events. Also, significant gasoline sulfur
reduction, along with the Tier 2 vehicle, would provide cost-effective NAAQS
maintenance control in the West. Some argue that severe gasoline
sulfur control is needed to improve visibility in the West. We believe
the difference in visibility benefits between the gasoline
sulfur proposals of refiners and the agency are limited. And many
western refiners believe that other fuel strategies, such as the reduction of
sulfur content of off-highway distillate, would be a cleaner,
cheaper, smarter visibility approach. From an energy and economic standpoint,
western governors raised several regional concerns with EPA: Many western states
rely in whole, or in part, rely on small refineries for fuel supply. For
example, the Rocky Mountain region (PADD IV) is almost entirely supplied by
small refineries. Every refinery in the region is small. (Few of these
refineries are eligible for regulatory help in the proposal.) Historically,
small refineries face the largest challenge meeting fuel sulfur
standards. Since severe gasoline sulfur standards contributed
to small refinery closures in California, imposing that same level regulation in
areas supplied solely by small refineries raises concern. Rural populations will
pay more for sulfur control due to higher per capita
gasoline usage rates than the nation at large. This is
confirmed by gasoline usage statistics provided by the Federal
Highway Administration. EPA economic estimates project that the cost of
gasoline sulfur control in PADD IV (WY, ID, MT, CO, and UT)
will be nearly twice as high as the nation at large. This is due to the small
processing economies of the refineries in the region. WHILE SOME OPPOSE A
REGIONAL GASOLINE SULFUR PLAN, REGIONAL AIR STRATEGIES ARE
COMMON IN AMERICA TODAY. Regional strategies have been widely used throughout
the country to improve air quality. The Ozone Transport Assessment Group (OTAG)
is comprised of states east of the Rocky Mountains. Within OTAG there are
further regional designations of "fine grid" and "course grid" states. The Ozone
Transport Commission, the Grand Canyon Visibility Commission, and the Western
Regional Air Partnership are examples of coalitions of states that address
regional air problems. The NOx SIP call is a specific regulatory action based on
regional factors. The Clean Air Act requires the use of conventional and
reformulated gasolines in different areas of the country. Even
the implementation of the National Low Emission Vehicle (NLEV) program has a
regional component to it (Northeast states receive NLEVs in 1999, all other
states in 2001). SMALL REFINERY ELIGIBILITY PROVISIONS IN THE
SULFUR PROPOSAL ARE DEFINED TOO NARROWLY. Only 13 or 14 of the
small refineries in the country are extended regulatory relief in the Tier
2/Sulfur proposal. There is widespread recognition, especially
among western governors, that the small refinery provisions of the proposal need
to be expanded. We believe EPA recognizes this fact as well. The proposal uses
small refiner eligibility requirements set forth by the Small Business
Administration. The SBA approach, which includes employee limits, disqualifies
most small refiners. Companies such as Sinclair, Flying J, Giant Industries, and
Cenex --- recognized by Congress in the Clean Air Act as small refineries ---
are excluded from small refinery treatment in the proposed rule. We reject the
position that many small refineries should be excluded from needed regulatory
relief in this rulemaking because they employ too many people. In areas where
all refineries are small and directly compete (such as the Rocky Mountain
region) offering regulatory help to one facility will discourage investment in
another. Sinclair believes that small refineries owned by major oil companies
should be offered help since they share similar size challenges and are
important to the rural markets they serve. The difficulty of small refineries to
justify major investment is desulfurization equipment, is a key issue in this
rulemaking. The Tier 2/Sulfur proposal is inadequate in this
area. We are currently working with a task group of the Western Regional Air
Partnership to make small refinery recommendations to EPA. ADOPTING CALIFORNIA
SULFUR REGULATION MAY MEAN ADOPTING CALIFORNIA FUEL CHALLENGES:
"California Screamin" On April 13, 1999, the front page of USA Today noted that
"Drivers in San Francisco reported paying as much as $1.86 a gallon for unleaded
gasoline and $2 for premium." The next day, the cover story in
the Money section of USA Today contained a photograph of
gasoline pump prices for up to $1.99 per gallon with the
caption, California Screamin." The Wall Street Journal reported that unexpected
problems at two California refineries "cut California production by about 5%. .
.. This decline has sent West Coast wholesale prices soaring by more than 55
cents a gallon. . ." Some argue this situation is unique and temporary. But the
cost of gasoline in California has been such a chronic concern
that Senator Barbara Boxer has asked the Federal Trade Commission to investigate
high fuel prices. Her request was supported by the state legislature. Senator
Boxer stated in her letter to the FTC that "California drivers regularly pay
10-20 cents more per gallon of gasoline than the rest of the
country." At the writing of these comments, the wholesale cost of
gasoline in California on July 14 was $1.10 - 1.11/gallon (San
Francisco). This is twice as high as wholesale costs on the Gulf and Atlantic
Coasts (55 - 57 cents/gallon). While California gasoline is
lower sulfur, lower volatility, and meets CARB reformulated
standards, these factors combined do not account for the cost disparity of 50
cents or more. California gasoline regulations --- which
include the 30/80 ppm sulfur standard --- are the most severe
in the nation. These tough standards are needed to address widespread air
quality problems in that state. But many refiners have fared poorly with such
heavy regulation. The state has lost refineries, refining capacity, and fuel
suppliers. The U.S. Department of Energy reports that since 1990, eight
refineries with capacity of nearly 300,000 barrels per day have been lost in
California. The state s small refinery sector no longer makes
gasoline. The executive director of the Western Independent
Refiners Association in California has stated that when ultra low-sulfur
gasoline regulation passed, "at least a half a dozen California small
refiners made gasoline." Low sulfur standards
and the state s reformulated gasoline have been a success in
improving air quality in California. But years after the introduction of these
severe requirements, refinery closures and the volatility in fuel supply and
cost remain a problem. Even with the large refineries in California, there does
not appear to be enough flexibility in the regulatory framework to handle
upsets. Sinclair believes that imposing severe California fuel
sulfur regulation nationwide could produce some of the same
refinery, supply, and cost impacts in other parts of the nation. THE
GASOLINE SULFUR PROPOSAL IS BASED ON TECHNOLOGIES WHICH ARE NOT
YET COMMERCIALLY PROVEN. Using conventional technology, EPA estimated the 30/80
gasoline sulfur standard would increase manufacturing costs 5.1
to 8 cents per gallon, or $5.6 to 8.8 billion dollars each year nationally. A
regulation this costly would close some refineries, affect supply, raise
consumer concerns, and present cost-effectiveness problems in regulatory
assessments. In this rulemaking, EPA believes these problems will be avoided due
to new, lower cost desulfurization technologies. Agency confidence in the new
processes is so high that the proposal s entire gasoline cost
estimate is premised on the belief that all refineries will invest in these
technologies. While new processes could reduce sulfur
extraction costs, they have not yet been commercially tested or proven. EPA
reported there was not a single refinery with the new desulfurization technology
currently in operation today. Despite this fact, EPA is gambling this new
technology will work and that more than 100 facilities will license this
technology --- relatively trouble free --- in a few short years. We hope the
agency is correct. But the presumption is troubling for several reasons: It is
our experience with packages that we license that the guaranteed yields of the
process are significantly less than the advertised performance. In other words,
when we get to the point of signing a contract with a vendor, the guaranteed
results of the technology are less than advertised. In this instance, where no
operating results are available, what levels of sulfur
reduction can refiners rely on with new gasoline
desulfurization technology? Is it enough for refineries to meet severe 30/80ppm
gasoline sulfur standards? Will additional conventional
technology be needed to ensure that a refinery meets the new requirements? We
believe problems will inevitably occur as new technology is implemented. Pilot
studies under controlled conditions are often not indicative of field operating
parameters. We do not know the actual operational cycle of the new technology,
how it will perform under severe operating conditions, whether it is reliable or
subject to unexpected downtimes, and whether it is adaptable to a wide variety
of processing configurations. Within the past year refiners have become aware of
two new desulfurization technologies, CDTECH and OCTGAIN 220. While a few other
options are beginning to emerge, they are not well known. Before applying for
permits, refiners must choose the desulfurization technology they will use to
meet the new standards. This decision will occur during a period when little
will be known about these new processes. And if all refiners choose the new
technologies as EPA has presumed, we question whether two vendors (perhaps a few
others) can meet the needs of more than 100 refineries in the next few years.
EPA s comment period on the gasoline sulfur proposal will end
before any factual operating results are known about the new technology on which
the proposal rests. This makes comment on the new technology largely a
theoretical, subjective exercise. THE SHORT PHASE-IN PERIOD PROPOSED FOR U.S.
REFINERS RAISES QUESTIONS ABOUT SIMPLE FAIRNESS. Statements often have been made
that the emission controls of the vehicle and the fuel should be viewed as a
single system. But for regulatory purposes, the proposed compliance timelines
for each are quite different. EPA proposes that automakers be given more than
twice the amount of time to phase into Tier 2 regulation than refiners. This
raises questions about simple fairness. Under EPA s proposal more than 98
percent of the refining capacity in the United States must meet the 30 ppm
average sulfur standard by January 1, 2004. This represents an
astonishing 90% reduction from existing sulfur levels in a very
short period. The proposal provides the option for a restricted, but additional
two- year phase-in period if sulfur credits are purchased or
banked. Compare this rigid timetable to the Tier 2 schedule proposed for the
automobile industry. For new passenger cars and light duty trucks Tier 2
standards would phase-in for 4 years beginning in 2004. For heavier vehicles
(e.g., minivans, sport utility vehicles, etc.) that comprise a significant and
increasing portion of new vehicle production, the proposed Tier 2 standards
would be phased in over two years beginning in 2008. The phase-in periods
proposed by EPA for refiners and autos are significantly different. In fairness,
we believe the Tier 2/Sulfur regulation should be phased in
together and equally between the two industries. RECOMMENDATIONS We respect EPA
s authority to set standards at any desired level. But the agency cannot compel
private investment. Recent history demonstrates that many refineries withdrew
rather than invest in desulfurization equipment. With little or no surplus
refining capacity available in industry today, sulfur standards
must be measured to mitigate refining and economic impacts. The success of
gasoline sulfur regulation depends on the ability of EPA to
convince every refiner to invest in virtually every refinery nationwide. We do
not believe the gasoline sulfur proposal accomplishes this
important objective. To encourage refiners to invest in desulfurization
equipment, we recommend the following: There must be a reasonble transition to
low sulfur gasoline. If refiners select conventional
desulfurization technology to meet new standards, a phase-in period is needed
minimize harsh impacts and costs. If new, lower-cost desulfurization technology
is used, time is needed to assess its actual processing performance and for a
few vendors to meet the needs of the industry. In either case, nationwide, more
compliance time is needed than proposed by EPA. While the Clean Air Act should
be "technology forcing," it should not force poor decisions. The actual
capabilities of new desulfurization technologies will be much better known once
new processes are installed at several refineries and after operating cycles are
completed. To help refiners make prudent investment decisions, more compliance
time is needed than proposed by EPA. California has provided a test case of the
air benefits as well as the economic impacts of severe fuel regulation. While
U.S. refiners should significantly reduce sulfur levels in
gasoline, new standards should be phased-in and imposed with
caution. To minimize possible refining, supply, and fuel cost impacts to
consumers, more compliance time is needed than proposed by EPA. EPA noted in the
Tier 2/ Sulfur proposal that the U.S. refining industry s
return on investment has been a dismal three percent since 1992. The inability
to recover capital costs makes it tough for refiners to pay for major new
regulation. To help refiners nationwide digest these extraordinary costs, more
compliance time is needed than proposed by EPA.. The phase-in period of Tier 2/
Sulfur regulation for autos and refiners should be very
similar. In fairness to the refining industry, more compliance time is needed
than proposed by EPA. Sinclair supports the averaging, banking, and trading
(ABT) concept advanced by EPA in the sulfur proposal. Refiners
should be rewarded for making early sulfur reductions. But
refiners should have a greater opportunity to generate and use
sulfur credits. This is needed during the transition period and
to help with refinery turnarounds and upsets. To make the ABT a meaningful
incentive to refineries nationwide, more compliance time is needed than proposed
by EPA. We encourage the Congress to consider tax or other incentives to
encourage investment in desulfurization equipment. For example, in the Clean Air
Act Amendments of 1990, Congress enabled small refineries to earn marketable SO2
allowances that have cash value for removing sulfur from diesel
fuel. While the program sunsets in the year 2000, it has been a success. This is
the kind of incentive that should be expanded to all fuels and extended to all
refiners. If members believe these kinds of incentives cannot be enacted, we
hope the Congress, at a minimum, will encourage the agency to allow more
compliance time than proposed by EPA. Legitimate regional differences (and the
views of governors) need to be reflected in gasoline sulfur
regulation. The proposed eligibility for small refineries to receive help in
meeting severe gasoline sulfur regulation needs to be
broadened. On behalf of Sinclair, I sincerely extend our appreciation for the
opportunity to comment on the important issue of gasoline
sulfur control. I would be pleased to provide additional information or
respond to questions of members or professional staff of the Subcommittee.
LOAD-DATE: July 24, 1999 
