Copyright 1999 Federal Document Clearing House, Inc.
Federal Document Clearing House Congressional Testimony
May 18, 1999
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 4487 words
HEADLINE:
TESTIMONY May 18, 1999 CLINT W. ENSIGN SENATE ENVIRONMENT AND
PUBLIC WORKS EPA'S PROPOSED SULPHUR STANDARD
BODY:
Comments of Clint W. Ensign, Vice President,
Government Relations Sinclair Oil Corporation On the issue of Tier 2 /
Gasoline Sulfur Standards Before the Subcommittee on Clean Air,
Wetlands, Private Property and Nuclear Safety of the Committee on Environment
and Public Works United States Senate May 18, 1999 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 some
initial views and perspectives 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. As a manufacturer of fuels, I am proud to say that Sinclair routinely
produces cleaner products than required by state and federal regulation. 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 is using in this rulemaking. Therefore, we are
not eligible for small refinery help in the proposal. Environmentally, the air
improvements that automakers and refiners can achieve through Tier 2 vehicle and
fuel changes are impressive, especially in major urban cities. My company and
the refining industry support large reductions in gasoline
sulfur. We have made specific recommendations to EPA on how best to
accomplish this task quickly across America. But in reviewing EPA's
gasoline sulfur proposal, we are surprised by how harsh it
treats U.S. refiners. We are concerned the agency has overreached in many areas,
particularly in the transition phase to low sulfur gasoline.
The proposal's small refinery provisions are narrowly construed and were
disappointing. 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. We respect EPA's authority to set standards at any
desired level. But they cannot compel private investment. Recent history
demonstrates that many refineries withdrew rather than invest in fuel
desulfurization. With little or no surplus refining capacity available in
industry today, 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. 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. Let me discuss several specific concerns
we have with the proposal. As a major stakeholder in developing gasoline
sulfur standards, the basic views of the U.S. Refining industry were
not incorporated in the proposed regulation. In February 1998, the entire U.S.
petroleum refining industry voluntarily proposed that EPA set new
gasoline sulfur standards. We recommended large cuts in
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. The largest sulfur cuts were
targeted in the East. Our proposal recognized regional uniqueness and was
designed to be consistent with congressionally established Tier 2 principles of
need, feasibility, and cost-effectiveness. In studying vehicle emissions data,
we believed that Phase 11 pending emission standards for light duty vehicles and
trucks as stated in the Clean Air Act could be achieved with these recommended
sulfur reductions. As a second step, many refiners offered to
make gasoline meeting California's severe
sulfur standard --- a 30 ppm average with an 80 ppm cap --- by
2010. Other refiners promised further cuts based on the outcome of technical
studies as well as air quality need. Our proposal gave a huge jump-start to the
regulatory process. It essentially 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. 1 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. 1 PA has held one public workshop on
gasoline sulfur control (May 1998). No other forum has been
provided for refiners to meet directly with automakers to address
gasoline sulfur issues. Our initial gasoline
sulfur proposal raised many questions. We listened closely to the
concerns and made many modifications. Automakers strongly opposed our plan. In
response, the refining industry made a good faith attempt --- with the help of
Administrator Carol Browner --- to meet directly with the autos. Issues
important to the rulemaking needed a direct exchange of ideas and data,
especially on the critical question of "reversibility." EPA has noted that
"vehicles tested exhibited a wide range of reversibility, for reasons that are
not fully understood." 2 We hoped the meetings would help resolve questions on
this an other key issues. While automakers have pressed EPA hard to mandate
severe gasoline sulfur standards, they refused the offer to
meet with us. 2 PA, Proposed Tier 2 Motor Vehicle Emissions Standards and
Gasoline Sulfur Control Requirements, pg. 98, emphasis
supplied. In sum, the U.S. refining industry made an unprecedented effort to
help EPA develop a major gasoline sulfur
regulation. I don't know how our industry could have been more helpful, open, or
responsible on this matter. Despite this background, EPA rejected our
recommendations. The agency instead proposed a nationwide 30/80 ppm
gasoline sulfur standard beginning in 2004. This is essentially
the standard requested by the autos. From a fuel perspective, the proposal is a
classic one-size fits all regulation. It falls evenly hard on urban and rural
areas alike despite large differences in air quality. After making such a huge
outreach to help EPA craft a meaningful and workable gasoline
sulfur regulation, we are disappointed that our recommendations were
set aside. Even though regional air strategies are common in America today, a
regional gasoline sulfur approach--- supported by many
governors -- was rejected by EPA. Regional strategies have been widely used
throughout the country to improve air quality. The Ozone Transport Assessment
Group (OTAG) made regional designations and recommendations for "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. Governors are often
directly involved in these groups. When EPA and automakers established National
Low Emission Vehicle (NLEV) regulations, the East and West were treated
differently as to when each would receive NLEVs. In the CAA, areas receive
reformulated and conventional gasoline based on air quality
need. Precedent exists to support a regional gasoline sulfur
approach. Nine governors representing Rocky Mountain and Central Plains states
have written to EPA urging regional gasoline sulfur controls.
These governors are from both political parties and represent states that join
each other in a large, geographically contiguous block. We were disappointed
their collective recommendations were not reflected in some way in the
gasoline sulfur proposal. In fact, their views were not even
noted in the preamble of the proposal. Collectively, these governors represent
states with excellent compliance with National Ambient Air Quality Standards.
With few exceptions, EPA projects these states will meet the new, more
protective NAAQS in future years. 3 In many states in the West, EPA projects
nearly total compliance with future ozone NAAQS: 3 EPA, Proposed Tier 2 Motor
vehicle Emissions Standards and Gasoline Sulfur Control
Requirements, April 1999, Appendix C: One- Hour and Eight-Hour County Design
Values "Outside California and the OTAG region, the NAAQS RIA modeling indicated
that all areas would attain the I hour standard by 2010. One area (Phoenix, AZ)
was projected not at attain the 8- hour standard." 4 4 EPA, Proposed Tier 2
Motor Vehicle Emissions Standards and Gasoline Sulfur Control
Requirements, April 1999, pg. 27, emphasis supplied. Other reasons support a
regional standard: Rural states have a small vehicle inventory and emissions are
dispersed over large geographic areas. Gasoline sulfur control
has little impact on air quality in these states. Rural populations will pay
more for sulfur control due to higher per capita
gasoline usage rates than the nation at large. 5 5 Highway
statistics from the Federal Highway Administration show that populations in
Rocky Mountain and Central Plains states have gasoline
consumption rates higher than urban states. EPA projects 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. 6 6 Tier
2/Sulfur Draft Regulatory Impact Analysis---April 1999, Table
V-35. It is also important to note the refining dynamics in the Rocky Mountain
region. Unlike all other regions in the United States, 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. In view of this, Sinclair expressed concern
to EPA that severe regulation could impact refineries and cause supply problems
for consumers. As noted earlier, the gasoline sulfur proposal,
if adopted, directly threatens the future of our Casper, Wyoming refinery. But
these concerns are dismissed in the proposal. In doing so, EPA references a
study conducted by Math Pro, Inc. --- prepared for the autos --- that suggests
that the potential for small refinery closures in the Rockies is small. This
conclusion is not consistent with our situation or with our understanding of the
region. We are meeting with Math Pro on May 20 to take a detailed look at their
study. But most of all, the various Math Pro studies have led to confusion. Just
a few months ago they completed a PADD IV gasoline sulfur study
for the U.S. refining industry and reached different findings. One company, two
conclusions, in three months. This situation raises questions about the value of
these studies to the gasoline sulfur standard debate. EPA used
a narrow small refinery definition for regulatory relief purposes in the
gasoline sulfur proposal that is more restrictive than the
definition established by Congress in the Clean Air Act. In the gasoline
sulfur proposal, EPA did not use the small refinery definition that
exists in the Clean Air Act. As a brief background, Senator Chafee offered a
small refinery amendment during consideration of the CAAA of 1990 on behalf of a
bipartisan group of 11 senators, including Senator Reid and Senator Baucus.
Congress established small refinery provision to enable small refineries to earn
marketable SO2 allowances to encourage investment in low sulfur
diesel equipment. I am pleased to report that the small refining amendment has
been a success. Since the desulfurization of diesel and
gasoline share similar small refinery issues, we do not know
why EPA's gasoline sulfur proposal contains a more restrictive
small refinery eligibility requirement than that set by Congress in 1990. In
reality, only a few small refineries in the country are extended regulatory
relief in EPA's gasoline sulfur proposal. In all meetings we
have had with EPA officials on gasoline sulfur, Sinclair has
expressed small refinery concerns. More than six months ago, we informed EPA
there were 53 small refineries in the United States that made
gasoline. This number was much larger than the 17 refineries
being considered by EPA under the Small Business Regulatory Enforcement Fairness
Act of 1996 (SBREFA) review. We noted that rural populations depend on these
small facilities for fuel supply. Because of size limitations, the viability of
these refineries, as a class, has historically been threatened by severe fuel
sulfur regulation. Consequently, we urged EPA to expand the
review of small refineries beyond the SBREFA process. Instead, EPA has proposed
using the small refinery eligibility requirements of the Small Business
Administration. The SBA approach, which includes employee limits, disqualifies
most small refineries. Companies such as Sinclair, Flying J. Giant Industries,
and Cenex --- recognized by Congress as small refineries --- are excluded from
small refinery treatment in the gasoline sulfur proposal. We
reject the position that many small refineries should be excluded from needed
regulatory relief in this rulemaking because they employ too many people. Other
small refinery concerns need to be addressed. For example, will refiners who
expend great effort and cost to manufacture a 30/80 ppm gasoline
sulfur in 2004 allow their fuel to be commingled with high
sulfur gasoline of small refineries in pipelines and terminals?
Does this situation argue for a broader regional approach in areas where there
is a preponderance of small refineries? Does the proposal encourage investment
in instances when one small refinery receives regulatory help and other small
refinery does not? Should small refineries owned by major oil companies be
offered help since they share similar size challenges and are important to the
rural markets they serve? These questions need further review. But it is clear
that the SBA small refinery definition is too restrictive and does not
accurately reflect small refinery impacts with major gasoline
sulfur regulation. Adopting California gasoline sulfur
standards nationwide may mean adopting California fuel challenges: "California
Screamin" Last month, 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." 7 The next day, the cover story
in the Money section of USA contained a photograph of gasoline
pump prices for up to $1.99 per gallon with the caption, California Screamin." 8
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..." 9 7 USA Today,
In just 6 weeks, gas prices up Who, April 13, 1999, front page. 8 USA Today, As
gas prices zoom up, consumers wonder why", April 14, 1999, Section B. front
page. 9 The Wall Street Journal, Output Snags In California Lift Fuel Prices,
April 2, 1999, pg. A2 Some may argue this situation is unique and temporary. But
the cost of gasoline in California has been such a concern that
Senator Barbara Boxer has asked the Federal Trade Commission to investigate high
fuel prices in the state. Her request was supported by the California 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." 10 10 New Fuels & Vehicles Report, FTC Said
Investigating Oil Companies For Alleged RFG Price Fixing in California, May 8,
1998. California gasoline regulations --- which include the
30/80 sulfur standard --- are the most severe in the nation.
These 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. While some may contend that
the rash of small refinery closures resulted from numerous factors, 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." 11 Years after the introduction of 30/80
sulfur standards and reformulated gasoline ---
tight supply and price volatility remain a problem in California. 11 Letter from
Craig A. Moyer, Executive Director and General Counsel for the Western
Independent Refiners Association to Clint W. Ensign, Sinclair Oil Corporation,
June 18, 1998. In Canada, an extensive refinery competitiveness and viability
study was performed to determine impacts of sulfur regulation
on Canadian refineries. The independent study was done by a respected firm with
refining expertise, Purvin & Gertz, Inc. The study concluded that requiring
California sulfur standards in Canada would seriously threaten
3 to 4 of the country's 17 refineries. 12 The assessment was done by refinery
and by region. Here in America, no independent study has been contracted by EPA
on refinery impacts of sulfur regulation. And even though the
United States has nearly 10 times more refineries than Canada, EPA has concluded
"we do not expect refineries to close as a result of the implementation of the
proposed sulfur standards." 13 In view of the stringent time
frames and overall harshness of the gasoline sulfur proposal,
this area needs closer review. 12 Competitiveness and Viability Impact on
Canadian Refining Industry of Reducing Sulfur in Canadian
Gasoline and Diesel, May 1997, Purvin & Gertz, Inc. 13 EPA,
Tier 2 Sulfur Draft Regulatory Impact Analysis-April 1999, pg.
V-62. Sinclair has long expressed its concern to EPA that adopting California
gasoline sulfur standards nationally could cause other states
to experience the same kinds of refinery closure, supply, and price impacts that
have occurred in California. The gasoline sulfur proposal does
not address past impacts of fuel sulfur regulation and is
instead based on technologies that are not yet commercially proven. The preamble
of the gasoline sulfur proposal does not discuss negative
impacts many refineries experienced with recent fuel sulfur
regulation. No reference is made to California. The widespread shortages of
on-road low sulfur diesel in the West during the fourth quarter
of 1993 are not cited. No mention is made that high costs caused some refineries
not to invest in low sulfur diesel equipment. In some
instances, refineries that compete with each other share desulfurization
equipment. EPA correctly noted in the gasoline sulfur draft RIA
that the U.S. refining industry's return on investment has been a dismal three
percent since 1992. The inability to recover capital costs during this long
period makes it tough for refiners to face major new regulation. 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. 14 A regulation
this costly would close some refineries, affect supply, raise consumer concerns,
and present cost-effectiveness problems in regulatory assessments. 14 EPA Staff
Paper on Gasoline Sulfur Issues, May 1, 1998, pg. v. The cost
estimate excludes California. The Federal Highway Administration reports that
approximately 110 billion gallons of gasoline are consumed in
the United States each year (x-CA). In this rulemaking, EPA believes these
problems will be avoided due to new 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 use 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 track record has been established, what levels of
sulfur reduction can refiners confidently count 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. For example, 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.
These large uncertainties argue for a reasonable phase in of the technology
instead of the rigid timetables proposed by EPA. -- 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 refiners all 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. -- In order for refiners to
review new desulfurization technologies, companies must sign strict
confidentiality agreements with vendors. We understand the need for companies to
protect the technologies they have developed. But will confidentiality
agreements restrict open assessments among refiners about these new
technologies? -- From an energy policy prospective, should a major regulation
that requires severe, new standards for the nation's gasoline
supply be based on commercially unproven technologies? Does the entire nation
need the regulation at the same time or should priority be given to certain
areas --- as was provided in the NLEV program? -- 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 to 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 97 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 a refiner
makes gasoline sulfur reductions prior to 2004. Compare this
rigid timetable to the Tier 2 schedule proposed for the automobile industry. For
new passenger cars and light duty trucks --- which comprise roughly 50% of all
new vehicle production --- Tier 2 standards would phase-in for 4 years beginning
in 2004. For heavier vehicles (e.g., minivans, sport utility vehicles, etc.)
that comprise the remaining half of new vehicle production, the proposed Tier 2
standards would be phased in beginning in 2008, with full compliance in 2009.
The agency states that "the proposal is carefully designed to address the need
for refiners to make low sulfur gasoline available at very
nearly the same time as auto makers begin selling large numbers of Tier 2
vehicles." 15 We disagree. The phase-in periods proposed by EPA for refiners and
autos are significantly different. In fairness, we believe the Tier
2/gasoline sulfur regulation should be phased in together and
equally between the two industries. 15 EPA, Proposed Tier 2 Motor Vehicle
Emissions Standards and Gasoline Sulfur Control Requirements,
pg. 63-64. Recommendations -- There must 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, more time is
needed than proposed by EPA. -- The phase in period of Tier 2/
Sulfur regulation for autos and refiners should be very
similar. -- Legitimate regional differences (and the views of rural state
governors) need to be reflected in a gasoline sulfur
regulation. This can be done with regional sulfur standards as
refiners proposed or by implementing a national standard at different times in
different regions. Nonattainment and attainment areas do not need the same level
of regulation at the same time. -- The proposed eligibility for small refineries
to receive help in meeting severe gasoline sulfur regulation
needs to be broadened to more facilities. We hope Congress will consider
extending the small diesel refinery S02 allowance program with gasoline
sulfur other fuel sulfur regulations. The program has
proven to be a success. 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: May 19, 1999