Copyright 2000 eMediaMillWorks, Inc.
(f/k/a Federal
Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
July 13, 2000, Thursday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 4054 words
HEADLINE:
TESTIMONY July 13, 2000 BOB SLAUGHTER GENERAL COUNSEL NATIONAL PETROCHEMICAL
& REFINERS ASSOCIATION SENATE ENERGY & NATURAL
RESOURCES GASOLINE SUPPLY PROBLEMS
BODY:
JULY 13,
2000 STATEMENT OF BOBSLAUGHTER GENERAL COUNSEL NATIONAL PETROCHEMICAL &
REFINERS ASSOCIATION BEFORE THE SENATE ENERGY AND NATURAL RESOURCES COMMITTEE
CONCERNING U.S. GASOLINE SUPPLY ISSUES & THEIR RELATIONSHIP
TO REGIONAL PRICE PROBLEMS Overview The National Petrochemical & Refiners
Association (NPRA) represents virtually all of the refining industry, including
large, independent and small refiners as well as petrochemical producers. Our
members are in the business of manufacturing petrochemicals and refined
petroleum products needed to transport America's goods and services. We
understand your concern about the price and supply problems that are occurring
in the Midwest and we will provide the Committee with the best information we
have on the situation at this time. We also will discuss the broader
implications of the seemingly divergent goals of current US energy and
environmental policy. There is a disturbing lack of coordination between our
energy and environmental policy objectives. The pursuit of a number of
individual environmental programs in a "piecemeal" fashion has stretched the US
fuel refining and distribution system to its limit -- resulting in greater
potential for tighter supplies and increased market volatility. The current
experience in the Midwest may only be an omen for the future. As the Energy
Information Administration (EIA) stated recently: "Today, the U.S. refinery
system has little excess capacity, and the growth in the number of distinct
gasoline types that must be delivered to different locations
increases the potential for temporary supply disruptions and increased
volatility." And EIA has already begun expressing concerns about supplies and
cost of heating oil and natural gas for next winter. NPRA believes it is
possible to enjoy reliable and affordable fuel supplies while preserving, and
improving upon, our environmental progress. However, this can only be achieved
if energy and environmental policyrnaking is integrated and if the costs and
benefits of new regulatory requirements are carefully weighed in the context of
the impact on energy supplies. This is particularly important now, given the
host of new fuel requirements that EPA is poised to impose in the next 5-7
years, including reductions in gasoline sulfur content,
reductions in on- road diesel sulfur, potential phasing out of
the use of certain oxygenates like MTBE and decisions on the role of renewables
such as ethanol. In short, the regulatory "blizzard" is in danger of creating
"avalanche" conditions. Absent a comprehensive and integrated approach, energy
policy will be just the de facto result of - low inventories; and - reduced
blending flexibility due to a patented RFG process (known as the Unocal patent).
And, as PHUNC's new study, "Gasoline IO 1: A Politically
Explosive Topic" states: "None of the individual problems contributing the
national, and especially local, gasoline price run-ups were
major in and of themselves. However, they came together in the context of a
tight global oil market. This condition may persist for some time ... The
regulatory system currently in place adds significantly to national and local
vulnerabilities." Emphasis added CRS reports that "it can be roughly estimated
that 25 cents of the regional (Chicago, Milwaukee) price increase is due to
transportation difficulties and another 25 cents, roughly estimated, could be
due to the unique RFG situation in Chicago and Milwaukee .... The fact that RFG
prices are above conventional gas suggest that the difference is due to the
supply of RFG uniquely." CRS also reports that recent court decisions in the
Unocal patent case are also causing uncertainty for many refiners and blenders,
especially those producing special gasoline blendstock for
ethanol RFG. Unocal researchers developed a patent for several distinct blends
of gasoline based on the special gasoline
requirements for California. Several refiners challenged the Unocal patent and
its application to reformulated gasoline; however, two courts
have upheld the validity of the company's patents. The court decisions imposed
infringement penalties and would permit Unocal to collect royalties from other
companies using their RFG patent. This decision is causing refiners uncertainty,
as they decide whether to license the patent or develop blends outside the
patent. According the PIRINC report, the uncertainty associated with this
litigation may be causing U.S. fuel blenders to forgo production of between
200,000 and 300,000 barrels of RFG daily. It is expected that litigating
refiners will ask the U.S. Supreme Court to review the case. The Reformulated
Gasoline Program has Contributed to Market Volatility Vice
President reiterating the problem asking him to delay the implementation of the
Phase H RFG program until after next summer. Only after the market volatility
set in this June, did EPA issue a proposed rule seeking to address some of these
concerns - an action too late to impact supplies for this summer's driving
season. The Refining Industry Appreciates and Welcomes Congressional and
Administrative Inquiries NPRA and its members will work with the Federal Trade
Commission (FIC) as it proceeds with its inquiry into gasoline
prices in the Midwest. NPRA understands the concerns which have led to the FIC
investigation into the gasoline price increase. It is our
belief that the FTC will find that the situation in the Midwest stems from
existing market forces and the "pile on" of new environmental regulations,
together with shortages caused by external factors such as pipeline breakdowns,
refinery outages, and litigation involving RFG patents as noted by CRS. Our
industry has participated in numerous FIC reviews on previous occasions and
industry has always been exonerated in the findings. We have no reason to expect
a different conclusion in this instance. No More Energy Policy By Default We
strongly urge this committee to consider a more comprehensive review of US
energy needs and the implications of future regulatory requirements on energy
markets. The National Petroleum Council (NPC), a joint industry-government
advisory body, just issued a report explaining why the same or similar
situations that we have encountered recently can be expected to recur if we
persist in pushing the edge of the envelope on environmental improvements while
taking continued energy supplies for granted. The NPC study noted that: "The
timing and size of the necessary refinery and distribution investments to reduce
sulfur in gasoline and diesel, eliminate MTBE,
and make other product specification changes such as reducing toxic emissions
from vehicles are unprecedented in the petroleum industry." Emphasis added And,
the NPC cautioned that "...there will be an increased likelihood of localized
supply disturbances as product quality specifications are tightened,
particularly during the initial implementation of new specifications." The
Regulatory Blizzard The "regulatory blizzard" chart attached to our testimony
shows 12 major regulatory actions which the refining industry will be required
to comply with over the next ten years. Some, like gasoline
sulfur reduction, have passed through the regulatory process and are
being implemented. Others, like diesel fuel reductions, have been proposed by
EPA with the intent to finalize them this year. Others, like MTBE related
regulation, are high- cost and high-impact items which are still taking shape,
but are certain to require substantial investment and have negative supply
effects in the near future. These initiatives are largely uncoordinated and, if
history is any guide, their impact on energy supplies will be downplayed. They
are also very expensive. The gasoline sulfur reduction program
will cost the refining industry $8 billion according to the NPC report. Diesel
sulfur reduction, if done in conformity with EPA's proposal,
will cost around $10 billion. And the cost of responding to NME-related problems
will take the combined total above $20 billion - and this is for just three of
the programs on this chart. And these three programs must be implemented in
roughly the same timeframe. It is important for this Committee and others to
appreciate the upcoming regulatory requirements our industry is facing, and
their likely impact on future supply and pricing. In light of these concerns,
the NPC recommended that any fuel specification changes be sequenced with
minimum overlap to avoid product supply imbalances and the potential for price
volatility. The NPC study also reiterated that four years is the minimum time
for planning, acquiring environmental permits, financing, constructing and
starting up new facilities for fuel changes. Due to these timing concerns, the
NPC warned that "There is a significant risk of inadequate diesel supplies if
EPA's proposal for 15 ppm maximum sulfur on-highway diesel
beginning April 1, 2006 is implemented." And, it is not just refiners who face
challenges. The complexities for the nation's fuel distribution system are
enormous. A recent EIA report found that an eastern U.S. pipeline operator
already handles 38 different grades of gasoline. CITGO
Petroleum, an NPRA member, has prepared the attached chart which illustrates the
10 different grades of gasoline which a The Refining Industry
Is Committed to Providing Cleaner Fuels The refining industry is committed to
providing cleaner, more environmentally acceptable products to consumers. We
have spent billions in recent years to meet environmental requirements. We will
spend as much, or more, in coming years to achieve the same result. We need to
do this because it is right and our customers want and need these products. But
investments of this magnitude will have impacts on the refining industry. Some
facilities will close, other refineries, probably many, will change hands.
Probably none will be built. Refiners have tried to keep up with demand by
making investments in new capacity at existing sites. Meanwhile, EPA is trying
to exact huge penalties from the entire refining industry by retroactively
claiming that the industry failed to obtain permits for the extra capacity
needed to keep up with consumer demand. Our members believe that EPA's claims
are without merit, but this issue has diverted attention and scarce resources
which could be better used to provide consumers with gasoline,
diesel and other products. Experience tells us, and the NPC study confirms, that
refiners will continue to invest to provide petroleum products to consumers. The
magnitude of the investments, as well as their timing, will determine which and
how many refiners choose to stay in the industry. Also, the NPC study tells us
that supply disruptions will occur more frequently as we implement
environmentally- driven fuel specification changes. This means that situations
like the recent one in the Midwest will occur more often. The refining system is
already stretched to the breaking point in producing and distributing a
multitude of products, some seasonal, some not. Conclusions NPRA appreciates the
interest of this Committee, and we want to work with you to find solutions to
these problems. We believe that it is critically important that policyrnakers
begin a review of our nation's energy policy and provide a realistic energy
policy for the U.S. domestic refining industry and other stakeholders. We must
recognize the fact that the refining industry and our nation's entire supply
infrastructure is operating near its limit and will continue to do so for the
foreseeable future. Little flexibility remains to respond to disruptions.
Unfortunately, some disruptions are unavoidable and are certain to occur despite
our best efforts to prevent them. Addendum A 1EPA's Gasoline
Sulfur Program - Last December, EPA released the final Tier 2 rule for
gasoline sulfur. This new rule will require the refining
industry to invest an estimated $8 billion in order to comply with a new 30 ppm
gasoline standard between 2004 and 2006. Conservative estimates
are that gasoline costs will rise 4- 5 cents per gallon as a
result. The refining industry suggested an alternative program to EPA that was
largely ignored. The refining industry's program was phased and sustainable, and
would have protected America's gasoline supplies. However,
EPA's final program will result in a logjam of competition for contractors and
other suppliers, and will clog the EPA regional and state agencies with permit
applications. New technologies for the gasoline sulfur program
are not yet proven, and EPA's new directive may cause refiners to invest in
expensive and less efficient existing technologies. 2.EPA's Diesel
Sulfur Program - On May 17' EPA released a diesel
sulfur reduction plan which calls for refiners to reduce
sulfur levels in diesel by 97 percent (from the current 500 ppm
to a 15 ppm level) beginning in 2006. The refining industry agrees that
sulfur levels must be reduced, but believes that any new
program must be reasonable and sustainable. Refiners offered a plan to EPA that
would lower the current limit of 500 ppm sulfur in diesel to a
limit of 50 ppm - a 90 % reduction. This is a very significant step and will
enable diesel engines to meet the particulate matter standards sought by EPA
while also achieving significant NOx reductions. Industry's plan is still
expensive; it will cost roughly $4 billion to implement but, unlike EPA's
extreme and much more costly proposal, the level of sulfur
reduction proposed by industry is both attainable and sustainable. Most refiners
would choose to make the investments needed to meet a 50 ppm
sulfur limit. We have told EPA that with the current supply
infrastructure, it will be very difficult to maintain and deliver highway diesel
at the 15 ppm level to consumers. The low sulfur product will
be affected by higher sulfur products carried in the same
pipelines, resulting in "off spec" product with greater than 15 ppm
sulfur content. EPA's rule will also be very expensive. The
cost to retrofit existing plants and build new capacity has been ethanol is
required to replace MTBE on a barrel for barrel basis, current ethanol
production would have to quadruple, requiring investment of $ 1 0 billion and
costing an additional $2.5 billion in ethanol subsidies. Considering the
potential negative impacts on octane and volume loss from MTBE elimination, the
scope of diesel sulfur reduction, and gasoline
sulfur reduction, NPRA believes that these programs cannot and should
not be implemented concurrently. We believe that the diesel
sulfur reduction program should be more reasonable than EPA has
proposed and we oppose any ethanol mandate. Implementing such programs in the
time schedules proposed for the next 10 years will most likely result in a
domestic fuels shortfall which will impact prices. This is the clear message of
the NPC report.
LOAD-DATE: July 25, 2000, Tuesday
