# Presentation: 466851

## Art WieseSenior Economist American Petroleum Institutewiesea@api.orgMarch 27, 2001The views expressed herein do not necessarily reflect those of the American Petroleum Institute or any of its members.

**Industry Perspectives on Diesel Desulfurization**

## Industry Perspectives on Diesel Desulfurization

**National Energy Modeling System/Annual Energy Outlook Conference**
**March 27, 2001**

## Topics

**Brief Summary of On-Highway Diesel Rule**
**Refiner Response**
**Likely Industry Response**
**Revamp vs Grassroots**
**Do EPA Transition Provisions Adequately Address Supply Concerns?**
**Regulatory Avalanche: Cannot Consider ULSD Rule in Isolation**
**Availability of Imports**
**Nonroad**
**Summary**

## New On-Road Diesel Sulfur Regulations

**Share of On-Highway as ULSD in 2006**
**Requires 80% ULSD (15 ppm at pump), PADD Average**
**Timing of ULSD implementation **
**Production at refinery by June 1, 2006**
**Available at terminals by July 15, 2006 **
**Available at retail/wholesale by Sept. 1, 2006**
**100% Industry Compliance by May 31, 2010**

***Applies to Refiners and Importers***

## Transition Provisions

**ULSD temporary compliance option, 2006-2010**
**80% ULSD, Allows 20% of production as 500 ppm**** **
**Intra-PADD averaging, banking and trading (ABT) of sulfur credits allowed, June 2005 - June 2010 **
**Credit received for producing >80% ULSD**
**Credits required to produce >20% 500 ppm**
**Geographic phase-in area (GPA)**
**Extended (to Dec. 31, 2007 or 2008) Tier II gasoline standard for ULSD compliance**
**Small Refiner Hardship Provisions **

## Refiner Response

**Exit from on-road diesel market**
**Revamp existing units **
**Depends upon status of existing technology**
**Cost 50%- 60% of new units for major revamp**
**Lower feed rates, change catalyst in existing units**
**Build new technology units**
**Capital intensive option  **
**Economies of scale important to ROI**

***Response Will Vary Greatly Across Industry: Function of Expected Return, Available Capital, Existing Technology, Location, Size, Alternative Markets...***

## Likely Industry Response in 2006

-                                                       **No. of U.S.      ULSD**
**	****	****	****	****	****           **_**Refineries**_**  **_**Capacity**_**       **
**New “grass-roots” units****	****	****	****40 ****	****     54%**
**Revamp/reduce feed****	****	****	****36 ****	****     46%**
**Withdraw from on-road market****	****	****18 ****	****       0**
**Do not currently make on-road****	****	****51              0**
**Total****	****	****	****                                145****	****    100%**
**Source: Baker and O’Brien (March, 2001)**

## Revamp vs Grassroots: Critical Parameter Impacting Costs, Supply

**CRA/Baker and O’Brien Considered: Location, Status of Existing Technology, Available Alternative Product Markets, Corporate Objectives, Commitment to Diesel Market, Capital Availability, Expected Return **_**for every U.S. Refinery**_**.  Determined 54% of ULSD capacity would be Grassroots.**
**EPA determined 20% of Capacity Grassroots  based on comments at an NPRA Q&A meeting, comments made by vendors and “Considering there are few compelling reasons for going with a grassroots unit”. (p. IV-26 EPA RIA)**

## Do EPA Transition Provision Adequately Address Supply Concerns? 

**Best Case Outcome: Adequate Aggregate Supply in 2006 but Potential Regional Shortfalls as Distributors/Marketers may handle only 15 ppm**
**More Realistic Outcome: **_**Total Supply Reduced in 2006**_** .       **
** ****Some refiners exit on-road market**
** ****Many refiners, defensive investment**
** ****Few refiners, aggressive investment                                                                         ****	**

***Potential Supply Concerns in 2006 and 2010***

## Do EPA Transition Provision Adequately Address Supply Concerns?

**Capital Constraints, Regulatory and Technological Uncertainty Could Hinder Investment in 2006.                                                                                                                                                    • ****Tier 2, MTBE, NSR. Cannot Consider ULSD in Isolation.****                                          •****Will Transition Provisions Work as Expected?  Nonroad? ****•****Refiners have 18-24 Months for Technology Decision                        for 2006 Compliance******** Conventional Proven Technology.  Aggressive Investment now in face of Emerging ****	****	****Lower Cost Technology?       ****	****   ****	**
**Potential Second Bump in 2010 as High Cost 20% Need to Invest or Leave Market at that Time  **

***Potential Supply Concerns in 2006 and 2010***

## Regulatory Avalanche

**Regulatory Avalanche**

## Final Rule (80/20 Phase-In) is an Unjustified Tax on Diesel Consumers 

** “*****Oversupply*****” of ULSD that few need/want**
**Very few new technology trucks in service**
***“******Undersupply”***** of 500 ppm that most want**
**Most will be “forced” to buy ULSD**
**Large Unnecessary Fuel Overcharge to Consumers (billions of dollars over 20 years). Low-volume phase-in would mitigate supply concerns, capture desired environmental benefits and is more cost-effective. **

*** ******A Phase-in ( if chosen) Should be Structured to Match Supply with Demand***

## Import Availability?

_**Europe**_**: Regulatory Uncertainty (50 or 10 ppm and when?) and Poor Returns in Downstream Cause European Refiners to Delay ULSD Investments, Process Clean Streams for Tax Advantage, Incremental Low-Volume Approach.**** **
**Europe’s Current Tax Incentive Incremental Approach Not Likely to Produce Excess ULSD Product for Export.**
_**Canada, Caribbean, S. America, Middle East**_**: Need more study. Should not assume, a priori, that additional imports (over and above historical averages) of ULSD will be available or base public policy on such assumptions.**

## Projected Growth in On-Road Diesel Demand

**Source: EIA “Fuel Oil & Kerosene Sales”, 1999**.

-  **Share of On-Road Diesel Demand Projected to Approach 60% in 2007.**
-  **Non-road includes Farm, Construction, Mining, Military, Electric Utilities... **
** ****API anticipates EPA will seek to Control Farm and Construction Non-road diesel fuel (Part 89, <12%)**

- Total 1999 Distillate Demand = 3.76 MMBPD
- 1999 On-Highway Demand = 2.09 MMBPD 2007 On-Highway Demand = 2.63 MMBPD **3.3%  growth rate through 2007**

## EPA Needs to Clarify the Nonroad Picture Promptly

- Most refiners cannot make optimal (cost-efficient) highway and nonroad diesel investment decisions separately
- Revamp versus new unit
- Number of reactors, reactor size and pressure
- Disposition of LCO
- Could exacerbate E&C and supply concerns
- Consideration must be given to infrastructure and distribution issues. Number of grades of diesel should be kept to minimum.
- Need to be sensitive to impacts on HHO (and related products) availability & price

**What size reactor(s) will I need?**

**Will EPA find the existing nonroad standards feasible?**

**What nonroad fuels may be covered?**

**Will there be a Tier 4?**

***Uncertainty with Respect to Non-Road Could Lead to Delayed and Sub-Optimal Investment***

## Fuel Distribution Impacts Must Be Recognized in Consideration of Nonroad

- Regulations must not disrupt efficient distribution of fuels
- Most pipelines/terminals handle highway diesel fuel (500 ppm) and up to two grades of nonroad diesel fuel (typically 2,000 ppm and/or 5,000 ppm)
- 2007 highway rule combined with a nonroad rule could increase the system to 5 grades
- New highway
- Old highway (during phase-in)
- New nonroad
- Old 2,000 ppm nonroad
- Old 5,000 ppm nonroad

## Summary

- Final On-Highway Rule With Transition Provisions Does not Adequately Address Potential Supply Concerns.
- Alternatives Exist to Final On-Highway Rule that Mitigate Supply Concerns, are More Cost-Effective and Deliver the Desired Environmental Benefits. On What Basis is Final ULSD Rule justified?
- Timely Clarification of Non-Road Rule is Necessary for Cost-Effective  Diesel Desulfurization Investment.
- Non-Road Standards Should be Based Upon Demonstrated Health and Environmental Needs, Sound Science and be Cost-Effective.
- Refining Synergies for Producing ULSD and non-road should be captured.
- Number of Distillate Grades in Distribution System should be kept to Minimum