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Federal Document Clearing House
Congressional Testimony
June 15, 2000, Thursday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 5160 words
HEADLINE:
TESTIMONY June 15, 2000 JERRY THOMPSON SENIOR VICE PRESIDENT CITGO PETROLEUM
COMPANY SENATE environment & public works clean air,
wetlands, private property, and nuclear safety DIESEL FUEL SULFUR REGULATIONS
BODY:
STATEMENT OF JERRY THOMPSON SENIOR VICE
PRESIDENT DEVELOPMENT & TECHNOLOGICAL EXCELLENCE CITGO PETROLEUM COMPANY
TULSA, OKLAHOMA ON BEHALF OF THE NATIONAL PETROCHEMICAL & REFINERS
ASSOCIATION CONCERNING EPA'S PROPOSED HIGHWAY DIESEL FUEL
SULFUR REGULATIONS JUNE 15, 2000 Overview The National
Petrochemical & Refiners Association (NPRA) represents almost all of the
refining industry including large, independent and small refiners as well as
petrochemical producers. NPRA supports a 90% reduction in the
sulfur content of highway diesel fuel to a 50 ppm
sulfur cap. In contrast, we are deeply concerned about the
impact EPA's new diesel sulfur program will have on the
industry's ability to provide a steady and reliable source of diesel fuel to its
customers. NPRA does not believe that it is possible to consistently maintain
needed supplies of highway diesel within the 15 pprn sulfur cap
level sought by EPA. Although refineries may be able to produce some amount of
this diesel, many would be forced by its high costs to limit or forego
participation in the highway diesel market. This would reduce supplies well
below those available under a more realistic sulfur cap. In
addition, with the current logistics infrastructure, it will be extremely
difficult to deliver highway diesel with a 15 ppm sulfur cap to
consumers and maintain the integrity of the sulfur level of the
product. This highway diesel must share a distribution system with other
products that have significantly higher sulfur levels. At the
EPA's proposed sulfur levels, a significant amount of highway
diesel will have to be downgraded to a higher sulfur product
due to product contamination in the pipeline. The diesel plan announced on May
17th by the EPA is extreme, a blueprint for fuel shortages and future supply
problems, and will pose severe economic impacts. It threatens to leave American
consumers a legacy of scarce and costly energy supplies. Role of Diesel in U.S.
Economy The trucking industry, America's motoring public, farm communities,
commercial vehicle operators and others must all be assured a consistent and
reliable source of supply. These vital industries may be severely impacted by
reduced supplies and increased costs resulting from this rulemaking, and the
consequent effect on the economy will be widespread. Vehicles powered by heavy
duty diesel are an essential element in the commercial distribution of goods and
services in the United States. The EPA regulators must assess the decisions they
are making and weigh the risks which new, costly and unrealistic standards could
have on the country's ability to move goods and services. A reliable source of
diesel supply for these customers could be threatened if the EPA proposal
becomes final. Refiners Offered A Reasonable Plan to Reduce
Sulfur The refining industry agrees that the
sulfur levels in diesel must be reduced, but the program must
be reasonable. The industry proposed a plan to EPA that would lower the current
limit of 500 ppm. of sulfur in diesel fuel to a limit of 50 ppm
-- a 90% reduction. This is a very significant step. It will enable diesel
engines to meet the particulate matter standards sought by EPA and also achieve
significant NOx reductions. Our plan can yield a 90% reduction in particulate
matter and a 75% reduction in NOx emissions from new heavy-duty diesel engines.
Industry's plan is still expensive -- we estimate it will cost the industry
roughly $4 billion to implement. But, unlike EPA's extreme and much more costly
proposal, the level of sulfur reduction proposed by industry is
attainable and sustainable. Most refiners would choose to make the investments
needed to meet a 50 ppm sulfur limit. Most refineries will be
able to comply with this 90% reduction by making capital investments to upgrade
existing facilities or by building new capacity. The industry has shared this
proposal with regulators. NPRA and its members have had protracted discussions
with EPA and have tried to suggest reasonable ways to reduce diesel emissions.
Unfortunately, industry's plan has been rejected and ignored by EPA. Overlapping
Fuel Standards Implementing gasoline and highway diesel
sulfur reduction and MTBE reduction concurrently will tax
resources of the engineering and construction industries, as well as state
permitting agencies. Implementation of a new 50 ppm low sulfur
cap diesel program in a more reasonable timeframe (after gasoline
sulfur reductions) would reduce the peak demands on the engineering and
construction industry or state permitting agencies. EPA's proposed overlap -
with gasoline sulfur reduction phased-in between 2004 and 2007
and extreme highway diesel sulfur reduction completed in 2006 -
jeopardizes both programs. This Subcommittee may recall that the refining
industry is already implementing an $8 billion (6-7 cents per gallon) program to
reduce sulfur in gasoline in the same
timeframe. There are few synergies in the gasoline and diesel
sulfur reduction strategies so there is no justification for
doing both concurrently. EPA S Plan Will Jeopardize Diesel Supplies EPA's plan
will not maintain adequate diesel supplies. NPRA does not believe that it is
possible to produce needed supplies of highway diesel nationwide within the 15
ppm sulfur cap level. Although refiners may be able to produce
some amount of this diesel, many would be forced by its high costs to limit or
forego participation in the highway diesel market. EPA's plan would reduce
supplies well below those available under a more realistic
sulfur cap. While some refiners would invest in the expensive
new equipment necessary to meet the 15 ppm limit, many others may not make the
large investments necessary to produce it, especially at the same time that
sulfur levels in gasoline must be greatly
reduced. Since highway diesel is only about 10 percent of the average refinery's
output, refiners could find other uses or markets for their current diesel
output. More than 30% of the current supply of highway diesel could be lost
until additional investments are made and new desulfurization capacity is built.
This could take as long as four years. Also, some refineries will probably go
out of business. When a refinery closes, we lose its entire output --
gasoline, diesel, jet fuel, home heating oil. With the demand
for petroleum products projected to increase, we cannot afford to lose any
refineries. This is a very strong argument for a more reasonable program. It
will be extremely difficult to deliver highway diesel with a 15 ppm
sulfur cap to consumers and almost impossible to maintain the
integrity of the sulfur level of the product. These products
must be delivered though common carrier pipelines. Recent studies concluded that
it would probably not be feasible for the distribution system to maintain low
sulfur diesel fuel supplies in all areas. Spot outages will
probably occur and there will be reduced flexibility to deal with unusual market
conditions. Technical Decisions Refiners Face Today's highway diesel is produced
from blendstocks containing several thousand ppm sulfur.
Currently, sulfur is reduced by hydrotreating. The typical
existing diesel hydrotreater at a refinery can be modified to produce a product
meeting industry's proposed 50 ppm sulfur limit. Some existing
units that are more constrained than average may not be suitable for
modification to produce this lower sulfur product. The existing
hydrotreater may have a lower than average operating pressure or hydrogen
recycle rate, or the refinery may use a mix of blendstocks that may be harder to
desulfurize. A new hydrotreater would be required at some refineries because
retrofitting an existing hydrotreater alone would not be an option for every
refinery. Even with industry's proposed 50 ppm sulfur cap,
there could be more limited supply impacts if necessary investments are not
made. Most refiners, though, would choose to make the more affordable retrofit
investments needed for a 50 ppm sulfur cap. A diesel
sulfur standard at a 15 ppm sulfur cap would
make modification of a typical, existing unit uneconomical. It would require
such a large increase in reactor volume that a new, high pressure unit would
make more sense. This new hydrotreater would require additional hydrogen
compression and a thick-walled pressure vessel. The worldwide manufacturing
capability for high pressure vessels is limited to a handful of suppliers and
could be a significant constraint on providing adequate supplies of ultra low
sulfur diesel in the proposed timeframe. Thus, a 15 ppm
sulfur limit would require a decision to invest in an expensive
new high pressure desulfurization unit or retrofit an existing unit to process
only the lower sulfur blendstocks. If several refineries choose
the latter option, supplies of highway diesel would decline from current levels.
It would take some time to correct this supply/demand imbalance. Even with
investment in a new hydrotreater, compliance with a 15 ppm
sulfur limit would not be guaranteed at today's highway diesel
production volumes. Currently, vendors do not have commercial experience
treating feeds containing a significant amount of cracked material to meet a 15
ppm sulfur cap. Therefore, the capital-intensive option will
not necessarily satisfy domestic demand because some of the current feedstocks
are very difficult to desulfurize at the greater than 99 percent reduction
levels required by a 15 ppm sulfur limit. In summary, although
it is possible to produce some highway diesel under 15 ppm
sulfur, it is not technically possible to produce 15 ppm
sulfur highway diesel at current volumes on a continuous basis.
Distribution of Ultra Low Sulfur Highway Diesel is not
Feasible. The distribution system will not be able to provide ultra low
sulfur highway diesel supplies at all times. It will be very
difficult to maintain the integrity of a 15 ppm sulfur cap when
diesel is distributed in pipelines, barges and trucks which also carry
gasoline with a cap of 80 ppm sulfur in 2006
and high (greater than 2,000 ppm) sulfur jet fuel, home heating
oil and off-highway diesel. Spot outages will occur if a product terminal
discovers that the ultra low sulfur diesel is out of compliance
for whatever reason. Nearly all or all of the non-compliant product would have
to be removed (and perhaps the terminal tank cleaned) before new product could
be brought in. In the past, product that was slightly out of compliance could be
blended with complying product; however, at ultra low sulfur
levels, this will not be an option. NPRA supports only one grade of highway
diesel. EPA is considering a phase-in program with two types of highway diesel
available for a few years: current diesel (500 ppm cap) and ultra low
sulfur diesel (I 5 ppm cap). Phase-in would create its own
distribution and enforcement problems with significant potential of misfueling
by new trucks. This alternative would not effectively address NPRA's concerns
about technical producibility and maintaining product quality. The short period
while two products would be in the marketplace guarantees that investments to
distribute and segregate them will be stranded when the temporary program
expires. The market may not be stable and balanced throughout the program as the
existing fleet of trucks tries to chase dwindling supplies of the higher
sulfur, lower cost highway diesel. Lyondel VCITGO Experience
Industry's repeated warnings about this rule are well-founded. Our company,
CITGO, has some relevant real-world experience: in the EPA's proposed rule, our
facilities at the Lyondell-CITGO Refinery (Houston) were referenced as having a
diesel desulfurization technology capable of producing the 15 ppm
sulfur cap diesel fuel. Based on our actual operating
experience with this referenced technology, we find the capital and operating
costs are much higher at the 15 ppm sulfur cap. The ability of
the technology to consistently produce below 15 ppm diesel is problematic. The
feedstocks to this revamped facility are 30 percent straight run stocks from the
crude distillation unit and 70 percent heavy cracked stocks from conversion
units. These heavy cracked stocks are significantly more difficult to treat to
the 15 ppm level. Our operating data shows that to consistently desulfurize to
15 ppm or below, a significant portion of the cracked material must be removed
from the feed, thereby reducing our diesel production by this amount. Our first
cost consideration is the use of capital. The Lyondell- CITGO project to improve
our diesel quality was completed in late 1996 and included the installation of
the world's largest free- standing reactor. We increased catalyst volume in the
unit from 40 thousand pounds to 1.7 million pounds. The capital cost for
conversion of this existing 50,000 BPSD Unit was $86 million dollars. This
includes $69 million dollars for the process unit and $17 million dollars for
supporting facilities. This is much higher than the $30 million revamp cost for
a typical refinery processing light cycle oil as stated by the EPA. Also, a
simple retrofit is not possible on many units because most older, smaller units
do not have sufficient reactor design pressures, the requisite high purity
hydrogen supply, a suitable fractionation system, or other hardware. The second
cost consideration is operating costs. The diesel sulfur level
produced in the unit meets the 15 ppm sulfur cap at initial
conditions at start of run. However, as the desulfurization catalyst ages, the
reactor temperatures must be raised to achieve targeted sulfur
levels. There are limits to raising temperature - equipment and product quality
limits - such as color. These limits establish the cycle life of the catalyst.
At the proposed 15 ppm sulfur cap with 70% heavy cracked diesel
stocks, the cycle life will be greatly reduced from current operation. This
significantly raises the operating cost because of more frequent catalyst
replacement and more frequent shutdowns. This also results in a loss of diesel
production. Under the current mode of operation, the frequency of catalyst
change-out is managed by reducing the cracked stocks in the feed to this unit.
More frequent catalyst change-out to meet a 15 ppm sulfur cap
raises the cost of diesel production by as much 7 cents/gallon on our existing
unit. What looks simple in theory doesn't always work in practice. I hope that
the entire refining industry doesn't have to spend billions of dollars just to
prove that our concerns about this rule are valid. This will happen, however, if
we ignore the warning signs of an already stressed supply system, and rush to
implement a plan based upon little more than wishful thinking. we can't make
enough diesel at the 15 ppm level and what we can produce will cost much more
than EPA represented. Availability of Aftertreatment Technologies The proposed
heavy-duty diesel engine emissions standards for particulate matter (PM) and
nitrogen oxides (NOx) will require the use of advanced aftertreatment equipment
on new trucks. The PM control technology is more developed than the NOx
technology, and it can meet the proposed 90 percent reduction in the emissions
standard using a diesel fuel that is limited to 50 ppm. sulfur.
The PM standard chosen by EPA appears to be technically feasible with refining
and emissions control technologies that are ready for commercialization. So
EPA's PM standard is achievable using the industry's recommended 50 ppm. fuel.
However, the various NOx control technologies being considered by vehicle
manufacturers are much less developed. EPA's decision to reduce the NOx standard
by 90 percent is likely to focus development efforts on an emerging technology
that is the most delicate of those being considered. EPA's choice of this NOx
standard is purely arbitrary. It is unrealistic and considerably more stringent
than the NOx standard for the same period in Europe and Japan. Even with a
sulfur limit of 15 ppm, this technology may not meet the
durability requirements of the proposed standard. NPRA recommends that EPA set a
more realistic NOx emissions standard, one that would rely on more developed and
more robust emissions control technologies and a technically feasible diesel
fuel with a sulfur limit of 50 ppm. Fuels Transportation
Systems Can Become Severely Stressed The "regulatory blizzard" chart attached to
our testimony shows 14 major regulatory actions which the refining industry will
be required to comply with over the next ten years. The cost of these programs,
which are largely uncoordinated, is astronomical. Gasoline
sulfur reduction, diesel sulfur reduction and MTBE
reduction alone will probably cost the industry a combined total of $20 billion.
During the 1990's the refining industry was also called on to make massive
environmentally-related investments, totaling more than the actual book value of
the entire industry, according to one study. At the same time, the average rate
of return on capital in the industry was just 2%, which is less than banks pay
on a passbook savings account. As a result of this crushing burden on refiners
and fuel distributors, we are starting to see signs of stress in the system.
Increasing stringency of fuel specifications makes them more difficult to
produce and harder to distribute. And the impact of unforeseen situations, such
as a refinery outage, a pipeline malfunction or even the weather, is magnified
under such conditions. We experienced disruptions in the supply of home heating
oil and diesel in the Northeast just last winter. Currently, logistical and
supply problems in the Midwest, especially in the RFG markets of St. Louis,
Chicago and Milwaukee, have resulted in increased gasoline
costs. This situation occurs just as the industry is implementing changes to a
new grade of reformulated gasoline, with more stringent
requirements. These occurrences are usually temporary, but they will probably
occur with increasing frequency as we produce ever-cleaner fuels. Policymakers
can help to reduce the frequency of these situations by insisting that
environmental programs be both reasonable and well-coordinated. The proposed
diesel sulfur regulation fails on both counts. This is another
reason why it should be rejected in favor of a more reasonable and timely
approach, such as the industry has recommended. Conclusions EPA should not adopt
a regulation that puts the nation's energy supply at risk. Fuel and engine
emissions standards must be based on developed technologies and
cost-effectiveness. An adequate supply of 15 ppm sulfur diesel
cannot be assured and distribution of 15 ppm sulfur fuel is
probably also not feasible. There has been no demonstration - technological or
otherwise - that the 15 ppm sulfur level advocated by EPA is
achievable or sustainable across the current diesel pool for most refineries.
NPRA hopes that the entire refining industry does not have to spend billions of
dollars just to prove that our concerns about this rule are valid. This will
happen, however, if we ignore the warning signs of an already stressed supply
system and rush to implement a plan based upon little more than wishful
thinking. EPA argues its extreme proposal is needed to enable heavy- duty
engines to meet stringent NOx standards in the 2007-10 timeframe. Of course,
that NOx standard was arbitrarily selected by EPA. It is considerably lower than
NOx standards for the same period in Europe and Japan, and is probably
unrealistic. Thus, EPA's $10 billion plan for 15 ppm diesel is largely based
upon an arbitrary and unattainable target. NPRA wants to work with other
stakeholders to achieve reasonable, cost-effective reductions in highway diesel
emissions. Our industry wants to maintain the right balance between
environmental goals and energy supply so we can implement fuel and emissions
standards. This way, both the fuel and engine industries can comply with costs
that consumers can afford.
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