Copyright 1999 Federal Document Clearing House, Inc.
Federal Document Clearing House Congressional Testimony
May 18, 1999
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 2234 words
HEADLINE:
TESTIMONY May 18, 1999 J. LOUIS FRANK SENATE ENVIRONMENT AND
PUBLIC WORKS EPA'S PROPOSED SULPHUR STANDARD
BODY:
Testimony of J. Louis Frank President
Marathon Ashland Petroleum LLC Good morning. My name is Corky Frank. I am
President of Marathon Ashland Petroleum LLC. We are the fourth largest U.S.
refiner operating seven refineries with a combined capacity of 935,000 barrels
per day. We operate 85 marketing terminals in the Midwest and Southeast United
States which distribute gasoline, diesel and asphalt and, we
operate over 5,400 retail outlets in 20 states. I also currently serve as
Chairman of the American Petroleum Institute (API)'s Downstream committee, which
establishes policy for the refining, marketing, and transportation segments of
the petroleum industry. I am here today on behalf of my company to talk about
EPA's recently announced Tier 2 proposal, which includes requirements for
dramatic, nationwide reductions in gasoline
sulfur within a very tight time frame. EPA's primary
basis for this proposed rule lies in meeting the National Ambient Air Quality
Standards, which were recently tightened. While it is not the subject of my
comments today, I understand that a court has recently overturned EPA's broad
and aggressive interpretation of the Clean Air Act Amendments of 1990 in
establishing these new standards. The outcome of this case will impact this and
other proposed regulations. Marathon Ashland Petroleum supports reducing
sulfur levels in gasoline. Indeed, for well
over a year, my company, the American Petroleum Institute (API), the National
Petrochemical and Refiners Association (NPRA), and others representing 95
percent of our nation's refining capacity have been proposing a long term
regulatory approach that would involve substantial reductions in
sulfur in our nation's gasoline supply.
(Exhibit 1) We have been meeting with EPA and others in the Administration to
discuss sulfur levels, costs and cost effectiveness, supply and
distribution challenges, and technology. Our goal has been to encourage the
development of a practical and workable program. While our discussions with EPA
have been open, we regret that the Agency has discounted our input, analysis,
conclusions and proposals. The proposal that EPA has recently announced would
rapidly reduce sulfur in gasoline about 90
percent nationwide to levels now required only in California, the state with far
and away the nation's most serious air quality problems. We would be required to
begin marketing this reduced sulfur gasoline beginning in 2004.
This is not consistent with air quality needs, technology, or economics. This
very expensive program EPA has proposed will only be workable if certain
specific changes are made prior to the issuance of the final rule. First, it
imposes a national solution for a problem that is uniquely regional. (Exhibit 2)
A "one size fits all" approach is not appropriate because air quality problems
vary dramatically across the nation. They tend to be more severe in urban areas
on the West Coast and throughout much of the highly populated Northeast. In
these areas, emissions need to be substantially reduced to meet federal air
standards. By contrast, much of the nation's heartland west of the Mississippi
River enjoys air quality that is very good. Except in relatively isolated
locations, air quality meets federal standards. Moreover, in areas where air
quality problems remain, they are generally less serious and can be managed by
more cost effective strategies. A regional approach reducing
sulfur along each coast and more in the East than in the West
would avoid forcing consumers to pay for a costly program that is not needed. A
rancher, for example, in Oklahoma, where air quality is better than federal
standards for all six of the key "criteria" pollutants, should not have to pay
the same higher costs as a stockbroker in New York City, where significant air
quality problems must be addressed. A regional approach would also not impair
air quality as vehicles from the two geographic regions, operating on different
gasolines, travel back and forth. We believe the catalysts in
the automobile converters can reverse the effects of high
sulfur fuels and therefore that catalyst irreversibility is not
a real world problem. API and NPRA have shared with EPA peer-reviewed emissions
research which supports this thesis. Let me now say a word or two about cost:
Our estimate of five cents per gallon of additional consumer cost for the lower
sulfur gasoline EPA is proposing may not seem like a lot of
money to some. I would urge you to think about this in the context of the
average multi-vehicle family, or in the case of a single parent or elderly
couple struggling to cover the costs of health care, housing, food and other
necessities on a limited income. Another way to look at this is that the
annualized cost of this program to consumers nationally is $5.7 billion. The
impact on refiners would also be considerable. On a nationwide basis, the added
costs of EPA's proposal would total more than $7 billion in new investments and
substantially increased operating expense. This would be a daunting challenge
for my industry, which is already struggling to provide a satisfactory return on
investment for its shareholders. Specifically, over this decade, the refining
industry's return on capital has averaged 3 percent while operating at maximum
capacity, and operating margins have been consumed by increasing environmental
mandates. For some refiners, EPA's proposed regulation will be the straw that
breaks the camel's back. Facilities will close and jobs will be lost. Since the
phase-in of identical sulfur lowering requirements in
California's gasoline in 1996, 11 percent of that state's
refineries have shut down. (Exhibit 3) Along these lines I would be remiss if I
did not now note that EPA is also working on proposed diesel regulations. These
regulations are likely to require significant further investment by Marathon
Ashland Petroleum and additional multi-billion dollar investments by my
industry. It is my strong hope that in designing these regulations the Agency
gives more serious consideration to cost effectiveness issues and air quality
needs than it has in designing the gasoline sulfur rules. This
is a very important public policy issue. Closing refineries destroys jobs and
harms local economies. It also has cost implications for consumers. When little
excess capacity is left as is basically the case in California problems in just
a few refineries can adversely affect supplies and prices. California has
experienced this problem as prices have spiked on several occasions and once
just in the past three months, when prices exceeded $1.70 per gallon. Given the
potential costs for solving what for large parts of the nation is not a serious
problem, it is surprising that EPA is recommending pushing vehicle and fuel
technology to such extreme limits. The Agency claims that the benefits of its
proposed program are as much as five times the costs. A closer look reveals that
these numbers are, in fact, too good to be true. EPA's cost estimate is based on
the use of desulfurization technology that is not yet commercially proven and
which refiners may not be able to employ within the time frame allowed by EPA.
The Agency's so-called benefit estimates are based on epidemiological data that
have not been released for any external review and on faulty, highly irregular
valuation assumptions. Secret science or science that is not available for
public and Congressional review must not be the basis for federal regulation. My
industry has long recommended that cost effectiveness be one of the primary
considerations when evaluating environmental regulations. Indeed, in the Tier 2
portion of the Clean Air Act Amendments of 1990 Congress directs EPA to use cost
effectiveness to develop the proposed Tier 2 standards. However, the cost of the
Agency's proposed gasoline standards is more than triple the
cost of the vehicle changes. Furthermore, the proposed gasoline
changes are 15 times more costly than EPA's NOx SIP Call proposal for NOx
reductions from utilities and 7 times more costly than Inspection and
Maintenance controls on cars. (Exhibit 4) The timing of EPA's proposal presents
another problem. As proposed, the rule would require petroleum companies to
market this new low sulfur gasoline beginning in 2004. While
Marathon Ashland Petroleum and other companies have experience in retooling
facilities to make fuels cleaner and cleaner and in providing them in the
amounts needed at affordable prices this is a tough deadline, especially in
light of the drastic reductions in sulfur contemplated. My
company is typical of most refiners. We will need to install major new equipment
at most of our facilities to be able to make this new gasoline.
This will entail a lengthy process of obtaining permits, scheduling contractors,
fabricating large, customized vessels and starting and completing construction,
during the same time that European and Canadian refiners will be competing for
these same resources. This raises the specter of potential disruptions in the
marketplace. Equally important, the nearness of the 2004 deadline raises
significant concerns about whether we will be able to use the new, most
cost-effective desulfurization technology. Although this technology holds the
promise of being able to reduce the costs of lowering sulfur
levels by about half, as a practical matter, it is not yet commercially proven.
As chief executive, I face a difficult choice on behalf of my company and my
shareholders: Do I rely on more costly, older but proven technology, or do I
risk investing large sums of money in emerging technology that may not perform
as required. For the industry overall, the difference in capital investment is
dramatic: $7 billion versus $3.5 billion. Each year that the deadline is pushed
back improves the odds that all refiners could meet EPA's requirements,
increases the likelihood that the most effective and cost efficient technology
will be employed, and helps ensure that all refiners continue to adequately
supply their customers. EPA's proposed initial phase- in sulfur
level, which forces immediate major investments, is simply too low. Also,
adjusting the timing will not hurt air quality. EPA projects that air quality
will improve for the next ten years, even without the Tier 2 vehicle or low
sulfur gasoline. Reducing sulfur by over 50
percent, as the oil industry has proposed, will provide significant benefits
beyond this. In many areas the ozone benefits reductions achieved by EPA's
stringent proposal are only 1-2 parts per billion. Phasing these requirements in
over 2 more years would likely have such a small impact that it could not be
accurately measured in most areas. While pre-Tier 2 vehicles would benefit
somewhat from the lower sulfur levels, by the end of 2005, Tier
2 vehicles will make up less than 11% of the fleet. An additional concern with
EPA's proposal is that it treats refiners differently by putting some smaller
refineries on a different implementation schedule than the rest of us. From a
competitive perspective this is neither acceptable nor necessary. We ask that
the EPA give us a fair chance to compete a level playing field. A regional
approach to reducing sulfur would solve the problem EPA is
attempting to address without creating this dilemma. One final concern deals
with EPA's sulfur credit banking and trading program. EPA's
proposed program is intended to provide flexibility to the industry during the
phase-in of the gasoline sulfur requirements. As currently
structured, however, the banking and trading provisions will not likely provide
this flexibility. Under EPA's proposed scheme, early credits are generated only
to the extent a refiner meets the new sulfur levels in advance
of 2004. Due to the logistical limitations inherent in constructing new refinery
process units, the timing is such that many companies will likely be able to
generate only a limited number of these credits. In addition to not achieving
its intended purpose, the establishment of a banking and trading program
introduces other undesirable consequences, such as providing foreign refiners
with a competitive advantage over domestic refiners by allowing them to
manipulate blendstocks sold into the U. S. and play games with their baselines.
The program would also create the potential for cheating by downstream blenders
and suppliers. In conclusion, let me say that through its
sulfur reduction proposal, EPA has set the next round of
gasoline and vehicle improvements in motion for both the
automobile and oil industries. We all support the goal of reducing emissions.
However, certain key elements of the Agency's proposal must be modified in order
to create a low sulfur gasoline program which will succeed and
prosper. As a company, Marathon Ashland Petroleum embraces a strong commitment
to continued environmental progress; as its chief executive, it is my job to
ensure that the requirements of this rule respect the need to balance costs with
benefits. We are proud to participate as a partner in ensuring a clean
environment. We look forward to working together to address these and other
issues provided that good science, common sense and cost effectiveness are the
foundations used to build solutions that are workable. I would be happy now to
answer your questions.
LOAD-DATE: May 19, 1999