### *** Do Not Cite, Quote, or Release During Review ***



# Economic Impact Analysis

Petroleum Refineries Proposed Amendments to the National Emissions Standards for Hazardous Air Pollutants and New Source Performance Standards

U.S. Environmental Protection Agency Office of Air and Radiation Office of Air Quality Pl anning and Standards Research Triangle Park, NC 27711

February 2014

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

ii CONTACT INFORMATION
This document has been prepared by staff from the Office of Air Quality Planning and Standards, U.S. Environmental Protection Agency and RTI International. Questions related to this document should be addressed to Alexande r Macpherson, U.S. Environmental Protection Agency, Office of Air Quality Planning and Stan dards, C445-B, Research Triangle Park, North Carolina 27711 (email: macpherson.alex@epa.gov ).

ACKNOWLEDGEMENTS

In addition to EPA staff from the Office of Air Quality Planning and Standards, personnel from RTI International contributed sign ificant data and analys is to this document under contract number EP-D-06-003.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

iii TABLE OF CONTENTS

T ABLE OF C ONTENTS .................................................................................................................... III L IST OF T ABLES .............................................................................................................................. V L IST OF F IGURES ........................................................................................................................... VI 1 E XECUTIVE S UMMARY ........................................................................................................ 1-1

1.1 B ACKGROUND

.............................................................................................................................. ................ 1-1 1.2 R ESULTS

.............................................................................................................................. ........................ 1-1 1.3 O RGANIZATION OF THIS R EPORT .................................................................................................................. 1-2 2 I NDUSTRY P ROFILE ............................................................................................................. 2-1

2.1 I NTRODUCTION

.............................................................................................................................. .............. 2-1 2.2 T HE S UPPLY S IDE

.............................................................................................................................. ........... 2-1 2.2.1 Production Process, I nputs, and Outputs ....................................................................................... .... 2-1 2.2.1.1 The Productio n Process ........................................................................................................ .... 2-2 2.2.1.2 Supporting Op erations ......................................................................................................... ..... 2-5 2.2.1.3 Inputs ........................................................................................................................ ................ 2-7 2.2.1.4 Types of Produ ct Outp uts ...................................................................................................... ... 2-8 2.2.2 Emissions and Controls in Petroleum Refining ................................................................................. 2-9 2.2.2.1 Gaseous and VOC Emissions ................................................................................................... 2 -9 2.2.2.2 Wastewater and Other Wastes ................................................................................................ 2- 10 2.2.3 Costs of Pr oductio n ........................................................................................................... ............... 2-10 2.3 T HE D EMAND S IDE

.............................................................................................................................. ...... 2-14 2.3.1 Product Charac teris tics ....................................................................................................... ............. 2-14 2.3.2 Uses and Consumers ............................................................................................................ ............ 2-14 2.3.3 Substitution Possibilities in Consumption ..................................................................................... .. 2-16 2.4 I NDUSTRY O RGANIZATION ......................................................................................................................... 2-16 2.4.1 Market Structure .............................................................................................................. ................ 2-16 2.4.1.1 Barriers to Entry ............................................................................................................. ........ 2-17 2.4.1.2 Measures of Industry Concentra tion ...................................................................................... 2-18 2.4.1.3 Product Diffe rentia tion ....................................................................................................... .... 2-19 2.4.1.4 Competition among Firms in the Petr oleum Refining Industry ............................................. 2-20 2.4.2 Characteristics of U.S. Petroleum Refineries and Petroleum Refining Companies ......................... 2-20 2.4.2.1 Geographic Distribution of U.S. Petroleum Refineries .......................................................... 2-20 2.4.2.2 Capacity U tilizatio n .......................................................................................................... ...... 2-20 2.4.2.3 Characteristics of Small Businesses Owni ng U.S. Petroleum Refineries ............................... 2-23 2.5 M ARKETS

.............................................................................................................................. ..................... 2-29 2.5.1 U.S. Petroleum Consumption .................................................................................................... ...... 2-29 2.5.2 U.S. Petroleu m Produc tion

..................................................................................................... ......... 2-35 2.5.3 Internationa l Trade ........................................................................................................... ................ 2-36 2.5.4 Market Pr ices ................................................................................................................. .................. 2-38 2.5.5 Profitability of Petr oleum Refineries ......................................................................................... ...... 2-40 2.5.6 Industry Trends ............................................................................................................... ................. 2-42 2.6 R EFERENCES

.............................................................................................................................. ................ 2-44 3 E MISSIONS AND E NGINEERING C OSTS ................................................................................ 3-1

3.1 I NTRODUCTION

.............................................................................................................................. .............. 3-1 3.2 S UMMARY OF P ROPOSED R ULE A MENDMENTS ............................................................................................ 3-2 3.2.1 Storage Vessels ............................................................................................................... ................... 3-2 3.2.2 Delayed Coki ng Units .......................................................................................................... .............. 3-5 3.2.3 Fenceline M onitori ng .......................................................................................................... ............... 3-8 3.2.4 Relief Valve Monito ring

....................................................................................................... ........... 3-10

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

iv 3.2.5 Flare Mon itoring

.............................................................................................................. ................ 3-12 3.2.6 FCCU Te sti ng .................................................................................................................. ................ 3-16 3.3 S UMMARY OF C OSTS OF P ROPOSED R ULE A MENDMENTS .......................................................................... 3-17 4 E CONOMIC I MPACT A NALYSIS AND D ISTRIBUTIONAL A SSESSMENTS ............................... 4-1

4.1 I NTRODUCTION

.............................................................................................................................. .............. 4-1 4.2 M ARKET A NALYSIS

.............................................................................................................................. ....... 4-1 4.2.1 Market Analys is Meth ods ....................................................................................................... ........... 4-1 4.2.2 Model Ba selin e ................................................................................................................ .................. 4-4 4.2.3 Model Parameters .............................................................................................................. ................ 4-5 4.2.4 Entering Estimated Annualized Engineering Compliance Costs into Economic Model ................... 4-6 4.2.5 Model Re sults ................................................................................................................. ................... 4-7 4.2.6 Limitations ................................................................................................................... ...................... 4-9 4.3 D ISCUSSION OF E MPLOYMENT I MPACTS ...................................................................................................... 4-9 4.3.1 Theory ........................................................................................................................ ...................... 4-10 4.3.2 Current State of Knowledge Based on the Peer-Reviewed Literature ............................................. 4-15 4.3.2.1 Regulated Sector ................................................................................................................... 4-16 4.3.2.2 Environmental Protection Sector ........................................................................................ 4-17 4.3.2.3 Labor Supply Impacts ......................................................................................................... 4-17 4.3.3 Macroeconomic Net Empl oyment Effects ....................................................................................... 4- 18 4.3.4 Conclusions.................................................................................................................... .................. 4-19 4.4 S MALL B USINESS I MPACTS A NALYSIS ....................................................................................................... 4-19 4.4.1 Small Entity Economic Impact Measures ........................................................................................ 4-20 4.4.2 Small Entity Economic Impact Analysis ......................................................................................... 4-21 4.5 R EFERENCES

.............................................................................................................................. ................ 4-25

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

v LIST OF TABLES

Table 2-1 Types and Characteristics of Raw Material s used in Petroleu m Refineries ....................................... 2-8 Table 2-2 Refinery Produc t Categories ................................................................................................... ........... 2-8 Table 2-3 Labor, Material, and Capital Expenditures fo r Petroleum Refineries (NAICS 32 4110) ................. 2-12 Table 2-4 Costs of Materials Used in Pe troleum Refining Industry ................................................................ 2-13 Table 2-5 Major Refinery Products ....................................................................................................... ........... 2-15 Table 2-6 Market Concentration Measures of the Petr oleum Refining Industry : 1985 to 2007 ...................... 2-19 Table 2-7 Number of Petroleum Re fineries, by State ...................................................................................... 2-22 Table 2-8 Full Production Capacity Utilization Ra tes for Petroleum Refineries ............................................. 2-23 Table 2-9 Characteristics of Small Businesses in the Petroleum Refini ng Industry ........................................ 2-30 Table 2-10 Total Petroleum Products Supplied (m illions of barrel s per year) ................................................... 2-35 Table 2-11 U.S. Refinery and Blender Net Productio n (millions of barrels per year) ....................................... 2-35 Table 2-12 Value of Product Shipment s of the Petroleum Re fining Indust ry .................................................... 2-37 Table 2-13 Imports of Major Petroleum Products (m illions of barrels per year) ............................................... 2-37 Table 2-14 Exports of Major Petroleum Products (m illions of barrels per year) ............................................... 2-38 Table 2-15 Average Price of Major Petroleum Products So ld to End Users (cents per gallon) ......................... 2-39 Table 2-16 Producer Price Index Industry Data: 1995 to 2010 .......................................................................... 2-4 0 Table 2-17 Mean Ratios of Profit before Taxes as a Percentage of Net Sales for Petroleum Refiners, Sorted by Value of Assets ............................................................................................................... .................. 2-41 Table 2-18 Net Profit Margins for Publicly Owned, Small Petroleum Re finers: 20 10 ...................................... 2-42 Table 2-19 Forecasted Average Price of Major Petroleum Products Sold to End Users in 2009 Currency (cents per gallon) 2-43 Table 2-20 Total Petroleum Products Supplied (m illions of barrel s per year) ................................................... 2-43 Table 2-21 Full Production Capacity Utilization Ra tes for Petroleum Refineries ............................................. 2-44 Table 3-1 Nationwide Emissions Reduction and Cost Impacts of Control Options for Storage Vessels at Petroleum Re fineries .......................................................................................................... ................ 3-5 Table 3-2 Nationwide VOC Impact s for Dealyed Coking Unit Control Options. .............................................. 3-6 Table 3-3 Nationwide HAP Impact s for Delayed Coking Unit Control Options ............................................... 3-8 Table 3-4 Nationwide Costs (in 2009$) for Fenceline Monitoring at Pe troleum Refineries ............................ 3-10 Table 3-5 Nationwide Co sts for Equipment Leaks ( 2009$) ................................................................. ............ 3-12 Table 3-6 Summary of Capital and Annuali zed Costs for Flare Control Alternatives (2010$) ........................ 3-15 Table 3-7 Detailed Costs of Flare Monitoring Requ irements (2010$) ...................................................... ....... 3-15 Table 3-8 Emissions Sources, Points, and Controls Included in Regulatory Options ...................................... 3-18 Table 4-1 Baseline Petroleum Produc t Market Da ta, 20 16 ................................................................................ 4 -5 Table 4-2 Estimates of Price Elasticity of Demand and Supply 1 ....................................................................... 4-5 Table 4-3 Estimated Annualized Engineering Compliance Costs by Petroleum Pr oduct Modeled .................. 4-7 Table 4-4 Summary of Petroleum Produ ct Market Impacts ............................................................................... 4-8 Table 4-5 Impact Levels of Proposed NESHAP Amendments on Small Firms .............................................. 4-22 Table 4-6 Summary of Sales Test Ratios for Firms Affect ed by Proposed NESHAP Amendments ............... 4-24

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

vi LIST OF FIGURES
Figure 2-1 Outline of the Refi ning Process ............................................................................................... .......... 2-3 Figure 2-2 Desalting Pr ocess ............................................................................................................. .................. 2-3 Figure 2-3 Atmospheric Dis tillation Pr ocess .............................................................................................. ......... 2-4 Figure 2-4 Vacuum Distilla tion Process ................................................................................................... ........... 2-5 Figure 2-5 Petroleum Refinery Expenditures ............................................................................................... ..... 2-10 Figure 2-6 Employment Distribution of Companies Owni ng Petroleum Refineri es (N=61) ............................ 2-24 Figure 2-7 Average Revenue of Companies Owning Petrol eum Refineries by Employment (N=61) .............. 2-25 Figure 2-8 Revenue Distribution of Large Companies Ow ning Petroleum Refineries (N=25) ......................... 2-26 Figure 2-9 Revenue Distribution of Small Companies Ow ning Petroleum Refine ries (N=36) ......................... 2-27 Figure 2-10 Total Petroleum Products Supplied (m illions of barrel s per year) ................................................... 2-34

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

1-1 1 EXECUTIVE SUMMARY

1.1 Background
As part of the regulatory process, EPA is required to perform economic analysis. EPA estimates the proposed NESHAP and NSPS amendments will have annualized cost of impacts of less than $100 million, so the Agency has prepared an Economic Impact Analysis (EIA). This EIA includes an analysis of economic impact an alysis anticipated from the proposed NESHAP and NSPS amendments. We also provide a small bus iness impacts analysis w ithin this EIA. We assume an analysis year of 2016.

1.2 Results
For the proposed rule, the ke y results of the EIA follow:

 Engineering Cost Analysis: Total annualized engineering co sts measure the costs incurred by affected industries annually. The annualized engineering costs for the proposed regulatory alternative are estimated to be $42.4 million. 1 As discussed in S ection 3, the annualized engineering costs include $4.5 million associat ed with proposed requirements for storage vessels, delayed coking units, and fugitive emi ssions monitoring. The proposed requirements would also result in $36.3 million in annual co sts for flare monitoring, $1.4 million in annual costs to monitor relief device releases, a nd $213,000 in annual costs to conduct performance tests for the FCCU at existing sources.

 Market Analysis: The proposed option is predicted to i nduce minimal change in the average national price of refined petroleum product. Pro duct prices are predicted to increase less than 0.0001% on average, while production levels d ecrease less than 0.0001% on average, as a result of the proposed option.

 Small Entity Analyses: Based on data collected through the April 2011 ICR, EPA performed a cost-to-sales screen ing analysis for impacts for 28 affected small refineries. The cost-to-sales ratio was below 1 percent for all af fected small firms. As such, we determined that proposed options will not have a significan t economic impact on a substantial number of small entities (SISNOSE).

 Employment Impacts Analysis: We provide a qualitative fr amework for considering the potential influence of environmental regulati on on employment in the U.S. economy, and we discuss the limited empirical literature availa ble. The discussion focuses on both short- and long-term employment impact s on regulated industries.

1 Note that this estimate does not reflect any corrective action taken in response to the fenceline monitoring program. Any corrective actions associated with fenceline monito ring will result in additional emissions reductions and additional costs.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

1-2 1.3 Organization of this Report
The remainder of this report details the me thodology and the results of the EIA. Section 2 presents the industry profile of petroleum refi ning industry. Section 3 describes the emissions and engineering cost analysis. Section 4 pr esents market, employment impact, and small business impact analyses.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-1 2 INDUSTRY PROFILE

2.1 Introduction This industry profile of the petroleum refi ning industry provides information that will support this and subsequent regu latory impact analyses (RIAs) and economic impact analyses (EIAs) that will assess the im pacts of these standards.
At its core, the petroleum refining industry comprises establishments primarily engaged in refining crude petroleum into finished petroleum products. Examples of these petroleum products include gasoline, kero sene, asphalt, lubricants, a nd solvents, among others.
Firms engaged in petroleum refining are ca tegorized under the Nort h American Industry Classification System (NAICS) code 324110. In 2010, 148 establishments owned by 64 parent companies were refining petroleum in the con tinental United States. In 2009, the petroleum refining industry shipped products valued at ove r $436 billion (U.S. Census Bureau, Sector 31: 2009 and 2008).
This industry profile report is organized as follows. Section 2.2 provides a detailed description of the inputs, outputs, and proce sses involved in petroleum refining. Section 2.3 describes the applications and users of finish ed petroleum products. Section 2.4 discusses the organization of the industry and provides faci lity- and company-level data. In addition, small businesses are reported separately for use in ev aluating the impact on small business to meet the requirements of the Small Business Regulat ory Enforcement and Fairness Act (SBREFA). Section 2.5 contains market-level data on pri ces and quantities and discusses trends and projections for the industry.

2.2 The Supply Side Estimating the economic impacts of any re gulation on the petroleum refining industry requires a good understanding of how finished petroleum products are produced (the “supply side” of finished petroleum pr oduct markets). This section desc ribes the production process used to manufacture these products as well as the inputs, outputs, and by-products involved. The section concludes with a desc ription of costs involved w ith the production process.

2.2.1 Production Process, Inputs, and Outputs Petroleum pumped directly out of the ground, kn own as crude oil, is a complex mixture of hydrocarbons (chemical compounds that consis t solely of hydrogen a nd carbon) and various impurities such as salt. To manufacture the variet y of petroleum products recognized in everyday

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-2 life, this mixture must be refined and processed over several stages. This section describes the typical stages involved in this pro cess as well as the inputs and outputs.

2.2.1.1 The Production Process The process of refining crude oi l into useful petroleum products can be separated into two phases and a number of supporting operations. These phases are descri bed in detail in the following section. In the first phase, crude oil is desalted and then separated into its various hydrocarbon components (known as “fractions”). These fractions include gasoline, kerosene, naphtha, and other products (EPA, 1995).
In the second phase, the distilled fractions ar e converted into petroleum products (such as gasoline and kerosene) using three different types of downstream processes: combining, breaking, and reshaping (EPA, 1995). An outline of the refining process is presented in Figure 2- 1.
Desalting. Before separation into fractions, crud e oil is treated to remove salts, suspended solids, and other impurities that c ould clog or corrode the downstream equipment. This process, known as “desalting,” is typically d one by first heating the crude oil, mixing it with process water, and depositing it into a gravity se ttler tank. Gradually, the sa lts present in the oil will be dissolved into the process water (EPA, 1995). After this takes place, the process water is separated from the oil by adding demulsifier chem icals (a process known as chemical separation) and/or by applying an electric fiel d to concentrate the suspended water globules at the bottom of the settler tank (a proces s known as electrostatic se paration). The effluent water is then removed from the tank and sent to the refinery wastewater treatment fa cilities (EPA, 1995). This process is illustrated in Figure 2-2.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-3 Figure 2-1 Outline of the Refining Process Source: U.S. Department of Labor, Occupational Safety and Health Administration (OSHA). 2003. OSHA

Technical Manual, Section IV: Chapter 2, Petroleum Refining Processes. TED 01-00-015. Washington, DC: U.S. DOL. Available at <http://www.osha.gov/dts/osta/otm/otm_iv/otm_iv_2.html>. As obtained on October 23, 2006.

Figure 2-2 Desalting Process Source: U.S. Department of Labor, Occupational Safety and Health Administration (OSHA). 2003. OSHA

Technical Manual, Section IV: Chapter 2, Petroleum Refining Processes. TED 01-00-015. Washington, DC: U.S. DOL. Available at <http://www.osha.gov/dts/osta/otm/otm_iv/otm_iv_2.html>. As obtained on October 23, 2006.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-4 Atmospheric Distillation. The desalted crude oil is then heated in a furnace to 750°F and fed into a vertical distillation column at atmo spheric pressure. After entering the tower, the lighter fractions flash into vapor and travel up the tower. This leav es only the heaviest fractions (which have a much higher boiling point) at th e bottom of the tower. These fractions include heavy fuel oil and asphalt residue (EPA, 1995).
As the hot vapor rises, its temperature is gr adually reduced. Lighter fractions condense onto trays located at successively higher portions of the tower. For example, motor gasoline will condense at higher portion of the tower than kerose ne because it condenses at lower temperatures. This process is illustrated in Figure 2-3. As thes e fractions condense, they will be drawn off their respective trays and potentially se nt downstream for further pro cessing (OSHA, 2003; EPA, 1995).

Figure 2-3 Atmospheric Distillation Process Source: U.S. Department of Labor, Occupational Safety and Health Administration (OSHA). 2003. OSHA

Technical Manual, Section IV: Chapter 2, Petroleum Refining Processes. TED 01-00-015. Washington, DC: U.S. DOL. Available at <http://www.osha.gov/dts/osta/otm/otm_iv/otm_iv_2.html>. As obtained on October 23, 2006.

Vacuum Distillation. The atmospheric distillation to wer cannot distill the heaviest fractions (those at the bottom of the tower) w ithout cracking under requis ite heat and pressure. So these fractions are separated using a process called vacuum distillation. This process takes place in one or more vacuum distillation towers and is similar to the atmospheric distillation process, except very low pressures are used to increase volatilization and separation. A typical first-phase vacuum tower may produce gas oils or lubricating-oil base stocks (EPA, 1995). This process is illustrated in Figure 2-4.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-5 Figure 2-4 Vacuum Distillation Process Source: U.S. Department of Labor, Occupational Safety and Health Administration (OSHA). 2003. OSHA

Technical Manual, Section IV: Chapter 2, Petroleum Refining Processes. TED 01-00-015. Washington, DC: U.S. DOL. Available at <http://www.osha.gov/dts/osta/otm/otm_iv/otm_iv_2.html>. As obtained on October 23, 2006.
Downstream Processing. To produce the petroleum products desired by the market place, most fractions must be further refined afte r distillation or “downstream” processes. These downstream processes change the molecular stru cture of the hydrocarbon molecules by breaking them into smaller molecules, joining them to form larger molecules, or shaping them into higher quality molecules (EPA, 1995).
Downstream processes include thermal cr acking, coking, catalytic cracking, catalytic hydrocracking, hydrotreating, alkylation, isomeri zation, polymerization, catalytic reforming, solvent extraction, merox, dewaxing, propane de asphalting and other operations (EPA, 1995).

2.2.1.2 Supporting Operations In addition to the processes described above, there are other refinery operations that do not directly involve the production of hydrocarbon fu els, but serve in a su pporting role. Some of the major supporting operations ar e described in this section.

Wastewater Treatment. Petroleum refining operations pr oduce a variety of wastewaters including process water (w ater used in process operations li ke desalting), cooling water (water used for cooling that does not come into direct contact with the oil), and surface water runoff (resulting from spills to the surf ace or leaks in the equipment that have collected in drains).

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-6 Wastewater typically contai ns a variety of contamin ants (such as hydrocarbons, suspended solids, phenols, ammonia, sulfides, an d other compounds) and must be treated before it is recycled back into refini ng operations or discharged. Petrol eum refineries typically utilize two stages of wastewater treatment. In primary wastewater treatments, oil and solids present in the wastewater are removed. After this is comple ted, wastewater can be di scharged to a publicly owned treatment facility or under go secondary treatment before being discharged directly to surface water. In secondary treatment, microorgani sms are used to dissolve oil and other organic pollutants that are pres ent in the wastewater (EPA, 1995; OSHA, 2003).
Gas Treatment and Sulfur Recovery. Petroleum refinery operati ons such as coking and catalytic cracking emit gases with a high concen tration of hydrogen sulfide mixed with light refinery fuel gases (such as methane and ethane). Sulfur must be removed from these gases in order to comply with the Clean Air Act’s SO x emission limits and to recover saleable elemental sulfur.
Sulfur is recovered by first separating the fu el gases from the hydrogen sulfide gas. Once this is done, elemental sulfur is removed from the hydrogen sulfide gas using a recovery system known as the Claus Process. In this process, hydrogen sulfide is burned under controlled conditions producing sulfur dioxide. A bauxite catalyst is then us ed to react w ith the sulfur dioxide and the unburned hydrogen sulfide to pr oduce elemental sulfur. However, the Claus process only removes 90% of the hydrogen sulfide present in the gas stre am, so other processes must be used to recover the remaining sulfur (EPA, 1995).

Additive Production. A variety of chemicals are a dded to petroleum products to improve their quality or add speci al characteristics. For example, ethers have been added to gasoline to increase octane levels an d reduce CO emissions since the 1970s.
Heat Exchangers, Coolers, and Process Heaters. Petroleum refineri es require very high temperatures to perform ma ny of their refining processes. To achieve these temperatures, refineries use fired heaters fueled by refinery or natural gas, distil late, and residual oils. This heat is managed through heat exchangers, which are compos ed of bundles of pipes, tubes, plate coils, and other equipment that surround heating or cool ing water, steam, or oil. Heat exchangers facilitate the indirect transfer of heat as needed (OSHA, 2003).
Pressure Release and Flare Systems. As liquids and gases e xpand and contract through the refining process, pressure must be activel y managed to avoid accid ent. Pressure-relief systems enable the safe handling of liquids a nd gases that are releas ed by pressure-relieving

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-7 devices and blow-downs. According to the OSHA Technical Manual, “pressure relief is an automatic, planned release when operating pressure reaches a predetermined level. A blow-down normally refers to the intentional release of ma terial, such as blow-downs from process unit startups, furnace blow-downs, shutdowns , and emergencies” (OSHA, 2003).
Blending. Blending is the final operation in petrol eum refining. It is the physical mixture of a number of different liquid hydrocarbons to produce final petroleu m products that have desired characteristics. For example, additives such as ethers can be blended with motor gasoline to boost performance and reduce emissions. Produc ts can be blended in-line through a manifold system, or batch blended in tanks and vessels (OSHA, 2003).

2.2.1.3 Inputs The inputs in the production pro cess of petroleum products incl ude general inputs such as labor, capital, and water. 2 The inputs specific to this industr y are crude oil and the variety of chemicals used in producing petroleum products. Th ese two specific inputs are discussed below.

Crude Oil. Crude oils are complex, heterogeneou s mixtures and contain many different hydrocarbon compounds that vary in appearance a nd composition from one oil field to another. An “average” crude oil contains about 84% ca rbon; 14% hydrogen; and less than 2% sulfur, nitrogen, oxygen, metals, and salts (OSHA, 2003). The proportions of crude oil elements vary over a narrow limit: the proportion of carbon rang es from 83 to 87 percent; hydrogen ranges from 10 to 14 percent; nitrogen ranges from 0.1 to 2 percent; oxygen ranges from 0.5 to 1.5 percent; and sulfur ranges from 0.5 to 6 percent (Speight 2006).
In 2010, the petroleum refining industry used 5.4 billion barrels of crude oil in the production of finished petrol eum products (EIA 2010). 3

Common Refinery Chemicals. In addition to crude oil, a variety of chemicals are used in the production of petroleum products. The sp ecific chemicals used will depend on specific characteristics of the product in question. Tabl e 2-1 lists the most common chemicals used by petroleum refineries, their character istics, and their applications.

2 Crude oil processing requires large volumes of water, a large portion of which is continually recycled. The amount of water used by a refinery can vary significantly, depending on process configuration, refinery complexity, capability for recycle, degree of sewer segregation, and local rainfall. In 1992, the average amount of water used in refineries was estimated between 65 and 90 gallons per barrel of crude oil processed (OGJ 1992a).

3 A barrel is a unit of volume that is equal to 42 U.S. gallons.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-8 Table 2-1 Types and Characteristic s of Raw Materials used in Petroleum Refineries Type Description Crude Oil Heterogeneous mixture of different hydrocarbon compounds. Oxygenates Substances which, when added to ga soline, increase the amount of oxygen in that gasoline blend. Ethanol, ethyl tertiary butyl ether (ETBE), and methanol are common oxygenates. Caustics Caustics are added to desalting water to neutralize acids and reduce corrosion. They are also added to desalted crude in order to reduce the amount of corrosive chlorides in the tower overheads. They are used in some refinery treating processes to remove contaminants from hydrocarbon streams. Leaded Gasoline Additives Tetraethyl lead (TEL) and te tramethyl lead (TML) are additives formerly used to improve gasoline octane ratings but are no longer in common use except in aviation gasoline. Sulfuric Acid and Hydrofluoric Acid Sulfuric acid and hydrofluoric acid are us ed primarily as catalysts in alkylation processes. Sulfuric acid is also used in some treatment processes. Source: U.S. Department of Labor, Occupational Safety and Health Administration (OSHA). 2003. OSHA

Technical Manual, Section IV: Chapter 2, Petroleum Refining Processes. TED 01-00-015. Washington, DC: U.S. DOL. Available at <http://www.osha.gov/dts/osta/otm/otm_iv/otm_iv_2.html>. As obtained on October 23, 2006.

In 2010, the petroleum refining industry used 971 million barrels of natural gas liquids and other liquids in the production of fi nished petroleum products (EIA 2010).

2.2.1.4 Types of Product Outputs The petroleum refining industry produces a numbe r of products that fa ll into one of three categories: fuels, finished nonfuel products, and feedstock for the petrochemical industry. Table 2-2 briefly describes these produc t categories. A more detailed discussion of petroleum fuel products can be found in Section 2.3.

Table 2-2 Refinery Product Categories Product Category Description Fuels Finished Petroleum produ cts that are capable of rel easing energy. These products power equipment such as automobiles, jets, and ships. Typical petroleum fuel products include gasoline, jet fuel, and residual fuel oil. Finished nonfuel products Petroleum products that are not used for powering machines or equipment. These products typically include asphalt, lubric ants (such as motor oil and industrial greases), and solvents (such as benzene, toluene, and xylene). Feedstock

Sulfur Many products derived from crude oil refining, such as ethylene, propylene, butylene, and isobutylene, are primarily intended for use as petrochemical feedstock in the production of plastics, synthetic fibers, synthetic rubbers, and other products. Commercial uses are primarily in fertilizers , because of the relatively high requirement of plants for it, and in the manufacture of sulfuric acid , a primary industrial chemical. Source: U.S. Department of Labor, Occupational Safety and Health Administration (OSHA). 2003. OSHA

Technical Manual, Section IV: Chapter 2, Petroleum Refining Processes. TED 01-00-015. Washington, DC: U.S. DOL. Available at <http://www.osha.gov/dts/osta/otm/otm_iv/otm_iv_2.html>. As obtained on October 23, 2006.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-9 2.2.2 Emissions and Controls in Petroleum Refining Petroleum refining results in emissions of h azardous air pollutants (HAPs), criteria air pollutants (CAPs), and other pollutants. The HAPs include metals and toxic organic compounds; the CAPs include carbon monoxide (CO), sulfur oxides (SO x ), nitrogen oxides (NO x ), particulates, and volatile organic compounds ( VOCs); and the other po llutants include spent acids, gaseous pollutants, ammonia (NH 3 ), and hydrogen sulfide (H 2 S).

2.2.2.1 Gaseous and VOC Emissions As previously mentioned, CO, SO x , NO x , NH 3 , and H 2 S emissions are produced along with petroleum products. Sources of these emissi ons from refineries include fugitive emissions of the volatile constituents in crude oil and its fractions, emissions from the burning of fuels in process heaters, and emissions from the various refinery processes themselves. Fugitive emissions occur as a result of leaks throughout the refinery and can be reduced by purchasing leak-resistant equipment and maintaining an ong oing leak detection and repair program (EPA, 1995).
The numerous process heaters used in refineries to heat process streams or to generate steam (boilers) for heating or other uses can be potential sources of SO x , NO x , CO, and hydrocarbons emissions. Emissions are low when process heaters are operating properly and using clean fuels such as refinery fuel gas, fuel oil, or natural gas. However, if combustion is not complete, or the heaters are fueled using fuel pitch or residuals, emissions can be significant (EPA, 1995).
The majority of gas streams exiting each re finery process contain varying amounts of refinery fuel gas, H 2 S, and NH 3 . These streams are directed to the gas treatment and sulfur recovery units described in the pr evious section. Here, refinery fu el gas and sulfur are recovered using a variety of processes. These processes create emissions of their own, which normally contain H 2 S, SO x , and NO x gases (EPA, 1995). For additional de tails on refinery fuel, or waste, gas composition, see Table 12 of the January 25, 2012 Impact Estimates for Fuel Gas Combustion Device and Flare Regulatory Options for Amendments to the Petroleum Refinery NSPS available in the docket.

Emissions can also be created by the periodic regeneration of catalysts that are used in downstream processes. These proce sses generate streams that may contain relatively high levels of CO, particulate, and VOC emissions. Howeve r, these emissions are treated before being discharged to the atmosphere. First, the emissi ons are processed through a CO boiler to burn CO

### *** Draft – Do Not Cite, Quote, or Release During Review ***

2-10 and any VOC, and then through an electrostatic precipitator or cyclone separator to remove particulates (EPA, 1995).

2.2.2.2 Wastewater and Other Wastes Petroleum refining operations produce a variet y of wastewaters including process water (water used in process operations like desalting) , cooling water (water used for cooling that does not come into direct contact with the oil), and surface water runoff (resulting from spills to the surface or leaks in the equipment that have coll ected in drains). This wastewater typically contains a variety of contaminants (such as hydrocarbons, suspended solids, phenols, NH 3 , sulfides, and other compounds) and is treated in on-si te facilities before being recycled back into the production process or discharged.
Other wastes include forms of sludges, spent process catalysts, filter clay, and incinerator ash. These wastes are controlled through a variety of methods incl uding incineration, land filling, and neutralization, among othe r treatment methods (EPA, 1995).

2.2.3 Costs of Production Between 1995 and 2009, expenditures on input mate rials accounted for the largest cost to petroleum refineries—amounting to 95% of total expenses (Figure 2-5). These material costs included the cost of all raw materi als, containers, scrap, and supp lies used in produc tion or repair during the year, as well as the cost of all electricity and fuel consumed.

Average Percentage (1995–2009)

Figure 2-5 Petroleum Refinery Expenditures

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-11 Sources: U.S. Department of Commerce, Bureau of th e Census. 2007. 2006 Annual Survey of Manufactures. Obtained through American Fact Finder Database <http://factfinder.census.gov/home/saff/main.html?_lang=en>. U.S. Department of Commerce, Bureau of the Census. 2006. 2005 Annual Survey of Manufacture s. M05(AS)-1. Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/2006pubs/ U.S. Department of Commerce, Bureau of the Census. 2003a. 2001 Annual Survey of Manufacture s. M01(AS)-1. Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/2003pubs/ U.S. Department of Commerce, Bureau of the Census. 2001. 1999 Annual Survey of Manufacture s. M99(AS)-1 (RV). Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/2001pubs/ U.S. Department of Commerce, Bureau of the Census. 1998. 1996 Annual Survey of Manufacture s. M96(AS)-1 (RV). Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/3/98pubs/ U.S. Department of Commerce, Bureau of the Census. 1997. 1995 Annual Survey of Manufacture s. M95(AS)-1. Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/2/manmin/ U.S. Census Bureau, American FactFinder; “S ector 31: Annual Survey of Manufactures: General Statistics: Statistics for Industry Groups and Industries: 2009 and 2008 “ Release Date: 12/3/10; (Data accessed on 10/10/11). [S ource for 2008 and 2009 numbers] http://factfinder.census.gov/servlet/IBQTa ble?_bm=y&-NAICSASM= 324110&-ds_name= AM0931GS101&-ib_type=NAICSASM&-_industry=324110&-_lang=en U.S. Census Bureau, American FactFinder; “S ector 31: Manufacturing: Industry Series: Detailed Statistics by Industry for the United Stat es: 2007” Release Date 10/30/09; (Data accessed on 10/11/11). [Source for 2007 numbers] http://factfinder.census.gov/servlet/IBQTable?_bm=y&- geo_id=01000US&-ds_name=EC0731I1&-NAICS2007=324110&-_lang=en

Labor and capital accounted for the remaini ng expenses faced by petroleum refiners. Capital expenditures include permanent additions a nd alterations to facilities and machinery and equipment used for expanding plant capacity or replacing existing machinery. A detailed breakdown of how much petroleum refiners sp ent on each of these factors of production over this 15-year period is provided in Table 2-3. A more exhaustive assessment of the costs of materials used in petroleum refi ning is provided in Table 2-4.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-12 Table 2-3 Labor, Material, and Capital Ex penditures for Petroleum Refineries (NAICS 324110) Payroll ($millions) Materials ($millions) Total Capital ($millions) Year Reported 2005 Reported 2005 Reported 2005 1995 3,791 4,603 112,532 136,633 5,937 7,209 1996 3,738 4,435 132,880 157,658 5,265 6,247 1997 3,885 4,595 127,555 150,865 4,244 5,020 1998 3,695 4,415 92,212 110,187 4,169 4,982 1999 3,983 4,682 114,131 134,146 3,943 4,635 2000 3,992 4,509 180,568 203,967 4,685 5,292 2001 4,233 4,743 158,733 177,838 6,817 7,638 2002 4,386 4,947 166,368 187,646 5,152 5,811 2003 4,752 5,227 185,369 203,893 6,828 7,510 2004 5,340 5,635 251,467 265,369 6,601 6,966 2005 5,796 5,796 345,207 345,207 10,525 10,525 2006 5,984 5,751 396,980 381,546 11,175 10,741 2007 6,357 5,885 470,946 435,965 17,105 15,834 2008 6,313 5,415 649,784 557,380 17,660 15,148 2009 6,400 5,776 398,679 359,790 16,824 15,183 Note: Adjusted for inflation using the producer price index industry for total manufacturing industries (Table 5-6). Sources: U.S. Department of Commerce, Bureau of the Census. 2007. 2006 Annual Survey of Manufactures.

Obtained through American Fact Finder Database <http ://factfinder.census.gov/home/saff/main.html?_lang=en>. U.S. Department of Commerce, Bureau of the Census. 2006. 2005 Annual Survey of Manufacture s. M05(AS)-1. Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/2006pubs/ am0531gs1.pdf>. As obtained on October 23, 2007. U.S. Department of Commerce, Bureau of the Census. 2003a. 2001 Annual Survey of Manufacture s. M01(AS)-1. Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/2003pubs/ m01as-1.pdf>. As obtained on October 23, 2006. U.S. Department of Commerce, Bureau of the Census. 2001. 1999 Annual Survey of Manufacture s. M99(AS)-1 (RV). Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/2001pubs/ m99-as1.pdf>. As obtained on October 23, 2006. U.S. Department of Commerce, Bureau of the Census. 1998. 1996 Annual Survey of Manufacture s. M96(AS)-1 (RV). Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/3/98pubs/ m96-as1.pdf>. As obtained on October 23, 2006. U.S. Department of Commerce, Bureau of the Census. 1997. 1995 Annual Survey of Manufacture s. M95(AS)-1. Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/2/manmin/ asm/m95as1.pdf>. As obtained on October 23, 2006. U.S. Census Bureau, American FactFinder; “Sector 31 : Annual Survey of Manufactures: General Statistics: Statistics for Industry Groups and In dustries: 2009 and 2008 “ Release Date: 12/3/10; (Data accessed on 10/10/11). [Source for 2008 and 2009 numbers] http://factfinder.census.gov/servlet/IBQTable?_bm=y&- NAICSASM=324110&-ds_name=AM0931GS101&-ib_type=NAICSASM&-_industry=324110&-_lang=en U.S. Census Bureau, American FactFinder; “Sector 31 : Manufacturing: Industry Series: Detailed Statistics by Industry for the United States: 2007” Release Date 10/30/09; (Data accessed on 10 /11/11). [Source for 2007 numbers] http://factfinder.census.gov/servlet/IBQTable ?_bm=y&-geo_id=01000U S&-ds_name=EC0731I1&- NAICS2007=324110&-_lang=en

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-13 Table 2-4 Costs of Materials Used in Petroleum Refining Industry 2007 2002

Material Delivered Cost ($10 3 ) Percentage of Material Costs Delivered Cost ($10 3 ) Percentage of Material Costs Petroleum Refineries NAICS 324110 Total materials 440,165,193 100.00% 157,415,200 100.00% Domestic crude petroleum, including lease

condensate 133,567,383 30.3% 63,157,497 40.1%
Foreign crude petroleu m, including lease

condensate 219,780,279 49.9% 69,102,574 43.9%
Foreign unfinished oils (received from

foreign countries for further processing) D 2,297,967 1.5%
Ethane (C2) (80% purity or more) — D Propane (C3) (80% purity or more) — 118,257 0.1% Butane (C4) (80% purity or more) 7,253,910 1.7% 1,925,738 1.2% Gas mixtures (C2, C3, C4) — 1,843,708 1.2% Isopentane and natural gasoline 5,117,182 1.2% 810,530 0.5% Other natural gas liquids, including plant

condensate 3,356,718 0.8% 455,442 0.3%
Toluene and xylene (100% basis) 1,801,972 0.4% 159,563 0.1% Additives (including antioxidants,

antiknock compounds, and inhibitors) D 40,842 0.0%
Other additives (including soaps and

detergents) — 709 0.0%
Animal and vegetable oils — D Chemical catalytic preparations D D Fats and oils, all types, purchased 87,038 0.0% — — Sodium hydroxide (caustic soda) (100%

NaOH) 209,918 0.1% 129,324 0.1%
Sulfuric acid, excluding spent (100%

H 2 SO 4 ) 67,458 0.0% 189,912 0.1%
Metal containers D 9,450 0.0% Plastics containers D D Paper and paperboard containers 1,819 0.0% D Cost of materials r eceived from petroleum

refineries and lube manufacturers 20,951,741 4.8% 8,980,758 5.7%
All other materials and components, parts,

containers, and supplies 24,839,320 5.6% 5,722,580 3.6%
Materials, ingredients, containers, and

supplies 4,745,614 1.1% 576,175 0.4%

Sources: U.S. Department of Commer ce, Bureau of the Census. 2004. 2002 Economic Census, Industry Series— Shipbuilding and Repair . Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/ec02/ec0231i324110. pdf>. As obtained on October 23, 2006. U.S. Census Bureau, American FactFinder; “Sect or 31: Manufacturing: Industry Series: Materials

Consumed by Kind for the United States: 2007” Re lease Date 10/30/09; (Data accessed on 10/11/11). [ Source for 2007 numbers] <http://factfinder.census. gov/servlet/IBQTable?_bm=y&-ds_name=EC0731I3&- NAICS2007=324110&-ib_type=NAICS2007&-geo_id=&-_industry=324110&-_lang=en&- fds_name=EC0700A1>

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-14 2.3 The Demand Side Estimating the economic impact the regulat ion will have on the petroleum refining industry also requires characteri zing various aspects of the demand for finished petroleum products. This section describes th e characteristics of finished pe troleum products, their uses and consumers, and possible substitutes.

2.3.1 Product Characteristics Petroleum refining firms produce a variety of di fferent products. The characteristics these products possess largely depend on their intended use. For example, the gasoline fueling our automobiles has different characteristics than the oil lubricating the car’s engine. However, as discussed in Section 2.1.4, finish ed petroleum products can be categorized into three broad groups based on their inte nded uses (EIA, 1999a):

 fuels —petroleum products that are capable of releasing energy such as motor gasoline

 nonfuel products —petroleum products that are not used for powering machines or equipment such as solvents and lubricating oils

 petrochemical feedstocks —petroleum products that are used as a raw material in the production of plastics, synthe tic rubber, and other goods A list of selected products from each of these groups is presented in Table 2-5 along with a description of each product’s char acteristics and primary uses.

2.3.2 Uses and Consumers Finished petroleum products are rarely consumed as final goods. Instead, they are used as primary inputs in the creation of a vast number of other goods and services. For example, goods created from petroleum products in clude fertilizers, pesticides, pa ints, thinners, cleaning fluids, refrigerants, and synthetic fibers (EPA, 1995). Sim ilarly, fuels made from petroleum are used to run vehicles and industrial machinery and generate heat and electrical power. As a result, the demand for many finished petrol eum products is derived from the demand for the goods and services they are used to create.
The principal end users of petroleum products can be separated into five sectors:

 Residential sector—private homes and residences

 Industrial sector—manufactur ing, construction, mining, agri cultural, and forestry establishments

 Transportation sector—private and pub lic vehicles that move people and commodities such as automobiles, ships, and aircraft

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-15  Commercial sector—nonmanufacturing or nontransportation business establishments such as hotels, restaurants, retail stores , religious and nonprofit organizations, as well federal, state, and local government institutions

 Electric utility sector—priva tely and publicly owned esta blishments that generate, transmit, distribute, or se ll electricity (primarily) to the public; nonutility power producers are not included in this sector

Table 2-5 Major Refinery Products Product Description Fuels Gasoline A blend of refined hydrocarbons, motor gasoline ranks first in usage among petroleum products. It is primarily used to fuel automobiles and lightweight trucks as well as boats, recreational vehicles, lawn mowers, and other equipment. Other forms of gasoline include Aviation gasoline, which is used to power small planes. Kerosene Kerosene is a refined middle-distillate petroleum product that finds considerable use as a jet fuel. Kerosene is also used in wate r heaters, as a cooking fuel, and in lamps. Liquefied petroleum gas (LPG) LPG consists principally of propane (C 3 H 8 ) and butane (C 4 H 10 ). It is primarily used as a fuel in domestic heating, cooking, and farming operations. Distillate fuel oil Distillate fuel oil includes diesel oil, heating oils, and industrial oils. It is used to power diesel engines in buses, trucks, trains, automobiles, as well as other machinery. Residual fuels Residual fuels are the fuels distilled from the heavier oils that remain after atmospheric distillation; they find their primary use generating electricity in electric utilities. However, residual fuels can also be used as fuel for ships, industrial boiler fuel, and commercial heating fuel. Petroleum coke Coke is a high carbon residue that is the final product of thermal decomposition in the condensation process in cracking. Coke can be used as a low-ash solid fuel for power plants. Finished Nonfuel Products Coke In addition to use as a fuel, petroleum coke can be used a raw material for many carbon and graphite products such as furnace electrodes and liners. Asphalt Asphalt, used for roads and roofing mate rials, must be inert to most chemicals and weather conditions. Lubricants Lubricants are the result of a special re fining process that produce lubricating oil base stocks, which are mixed with various additives. Petroleum lubricating products include spindle oil, cylinder oil, motor oil, and industrial greases. Solvents A solvent is a fluid that dissolves a solid, liquid, or gas into a solution. Petroleum based solvents, such as Benzyme, are used to manufacture detergent and synthetic fibers. Other solvents include toluene and xylene. Feedstock Ethylene Ethylene is the simplest alkene and has the chemical formula C 2 H 4 . It is the most produced organic compound in the world and it is used in the production of many products. For example, one of ethylene’s derivatives is ethylene oxide, which is a primary raw material in the production of detergents. Propylene Propylene is an organic compoun d with the chemical formula C 3 H 6 . It is primarily used the production of polypropylene, which is used in the production of food packaging, ropes, and textiles. Sources: U.S. Department of Labor, Occupational Safety and Health Administration (OSHA). 2003. OSHA

Technical Manual, Section IV: Chapter 2, Petroleum Refining Processes. TED 01-00-015. Washington, DC: U.S. DOL. Available at <http://www.osha.gov/dts/osta/otm/otm_iv/otm_iv_2.html>. As obtained on October 23, 2006. U.S. Department of Energy, Energy Information Administration (EIA). 1999.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-16 Of these end users, the transportation sector consumes the largest share of petroleum products, accounting for 67% of total consump tion in 2005 (EIA, 2006a). In fact, petroleum products like motor gasoline, distillate fuel, and jet fuel provide virtually all of the energy consumed in the transportation sector (EIA, 1999a).
Of the three petroleum product categories, end-users primarily consume fuel. Fuel products account for 9 out of 10 barrels of petrol eum used in the United States (EIA, 1999a). In 2005, motor gasoline alone accounted for 49% of de mand for finished petroleum products (EIA, 2006a).

2.3.3 Substitution Possibilities in Consumption A major influence on the demand for finished petroleum products is the availability of substitutes. In some sectors, like the transpor tation sector, it is currently difficult to switch quickly from one fuel to another without costly and irreversible equipm ent changes, but other sectors can switch relatively qui ckly and easily (EIA, 1999a).
For example, equipment at large manufacturing plants often can use either residual fuel oil or natural gas. Often coal and natural gas can be easily substituted for residual fuel oil at electricity utilities. As a result, we would expect demand in these industries to be more sensitive to price (in the short run) th an in others (EIA, 1999a).
However, over time, demand for petroleum products could become more elastic. For example, automobile users could purchase more fu el-efficient vehicles or relocate to areas that would allow them to make fewer trips. Technolog ical advances could al so create new products that compete with petroleum products that curren tly have no substitutes. An example of such a technological advance would be the invention of ethanol (an alcohol pr oduced from biomass), which can substitute for gasoline in spark-ignition motor vehicles (EIA, 1999a).

2.4 Industry Organization This section examines the organization of th e U.S. petroleum refining industry, including market structure, firm characteristics, plant location, and capacity util ization. Understanding the industry’s organization helps determine how it wi ll be affected by new emissions standards.

2.4.1 Market Structure

Market structure characterizes the leve l and type of competition among petroleum refining companies and determines their power to influence market prices for their products. For example, if an industry is perfectly competitiv e, then individual producers cannot raise their

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-17 prices above the marginal cost of production without lo sing market share to their competitors. Understanding pricing behavior in the petroleum refining indust ry is crucial for performing subsequent EIAs.
According to basic microeconomic theor y, perfectly competitive industries are characterized by unrestricted entry and exit of firm s, large numbers of firms, and undifferentiated (homogenous) products being sol d. Conversely, imperfectly comp etitive industries or markets are characterized by barriers to entry and exit, a smaller number of firms, and differentiated products (resulting from either differences in pr oduct attributes or brand name recognition of products). This section considers whether the pe troleum refining industry is competitive, based on these three factors.

2.4.1.1 Barriers to Entry Firms wanting to enter the petroleum refi ning industry may face at least two major barriers to entry. First, according to a 2004 Federal Trade Commission staff study, there are significant economies of scale in petroleum refine ry operations. This means that costs per unit fall as a refinery produces more finished petrol eum products. As a result, new firms that must produce at relatively low levels will face higher av erage costs than firms that are established and produce at higher levels, which will make it more difficult for these new firms to compete (Nicholson, 2005). This is known as a technical barrier to entry.
Second, legal barriers could also make it di fficult for new firms to enter the petroleum refining industry. The most common example of a legal barrier to entry is patents—intellectual property rights, granted by the gove rnment, that give exclusive m onopoly to an inventor over his invention for a limited time period. In the pe troleum refining industry, firms rely heavily on process patents to appropriate re turns from their innovations. As a result, firms seeking to enter the petroleum refining industry must develop pro cesses that respect the novelty requirements of these patents, which could poten tially make entry more difficult for new firms (Langinier, 2004). A second example of a legal barrier would be envi ronmental regulations that apply only to new entrants or new pollution sources. Such regulatio ns would raise the operating costs of new firms without affecting the operating costs of existing ones. As a result, new firms may be less competitive.
Although neither of these barrie rs is impossible for new entr ants to overcome, they can make it more difficult for new firms to enter the market for manufactured petroleum products. As a result, existing petroleum refiners could potentia lly raise their prices above competitive levels with less worry about new firms entering the market to compete away their customers with lower

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-18 prices. It was not possible during this analysis to quantify how si gnificant these barriers would be for new entrants or what effect they would have on market prices. However, existing firms would still face competition from each other. In an unconcentrated industry, competition among existing firms would work to keep prices at competitive levels.

2.4.1.2 Measures of Industry Concentration Economists often use a variety of measures to assess the concentration of a given industry. Common measures include four-fir m concentration ratios (CR4), eight-firm concentration ratios (CR8), and Herfindahl -Hirschmann indexes (HHI). The CR4s and CR8s measure the percentage of sales accounted for by the top four and eight firms in the industry. The HHIs are the sums of the squared market shares of firms in the industry. These measures of industry concentrated are reporte d for the petroleum refining i ndustry (NAICS 324110) in Table 2-6 for selected years between 1985 and 2007.

Between 1990 and 2000, the HHI rose from 437 to 611, which indicates an increase in market concentration over time. This increase is partially due to merger activity during this time period. Between 1990 and 2000, over 2,600 mergers o ccurred across the petroleum industry; 13% of these mergers occurred in the industry’ s refining and marketing segments (GAO, 2007). From 2000 to 2007 the HHI rose again.
Unfortunately, there is no objective criterion for determining market structure based on the values of these concentration ratios. Howe ver, accepted criteria have been established for determining market structure based on the HHIs for use in horizontal merger analyses (U.S. Department of Justice and the Federal Trade Commission, 1992). Accordin g to these criteria, industries with HHIs below 1,000 are considered unconcentrated (i.e., more competitive); industries with HHIs between 1,000 and 1,800 are c onsidered moderately concentrated (i.e., moderately competitive); and indus tries with higher HHIs are cons idered heavily concentrated. Based on this criterion, the petrol eum refining industry continues to be unconcentrated even in recent years.
A more rigorous examination of market c oncentration was conducted in a 2004 Federal Trade Commission (FTC) staff study. This study exp licitly accounted for the fact that a refinery in one geographic region may not exert competitiv e pressure on a refinery in another region if transportation costs are high. This was done by comparing HHIs across Petroleum Administration for Defense Districts (PADDs). PADDs separate the United States into five geographic regions or districts. They were initially created duri ng World War II to help manage

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-19 the allocation of fuels during wart ime. However, they have remained in use as a convenient way of organizing petroleum ma rket information (FTC, 2004).

Table 2-6 Market Concentration Measures of the Petroleum Refining Industry: 1985 to 2007
Measure 1985 1990 1996 2000 2001 2002 2003 2007

Herfindahl-Hirschmann Index (HHI) 493 437 412 611 686 743 728 807

Four-firm concentration ratio (CR4) 34.4 31.4 27.3 40.2 42.5 45.4 44.4 47.5 Eight-firm concentration ratio (CR8) 54.6 52.2 48.4 61.6 67.2 70.0 69.4 73.1

Sources: Federal Trade Commission (FTC). 2004. “The Petroleum Industry: Mergers, Structural Change, and

Antitrust Enforcement.” Available at <http://www.ftc.gov/opa/2004/08/oilme rgersrpt.shtm>. As obtained on February 6, 2007. U.S. Census Bureau, American FactFinder; “Sector 31 : Manufacturing: Subject Series: Concentration Ratios:

Share of Value of Shipments Accounted for by the 4, 8, 20, and 50 Largest Companies for Industries: 2007 “ Release Date 1/7/2011; (Data accesse d on 10/12/11) [Source for 2007 numbers]<http://factfinder.census.gov/servle t/IBQTable?_bm=y&-ds_name=EC0731SR12&- NAICS2007=324110&-ib_type=NAICS2007&-NAICS2007sector=*6&-industrySel=324110&-geo_id=&- _industry=324110&-_lang=en>
This study concluded that these geographi c markets were not highly concentrated. PADDs I, II, and III (East Coast, Midwest, and Gulf Coast) were sufficiently connected that they exerted a competitive influence on each other. The HHI for these combined regions was 789 in 2003, indicating a low concentration level. Conc entration in PADD IV (Rocky Mountains) was also low in 2003, with an HHI of 944. PADD V gr adually grew more concentrated in the 1990s after a series of significant refinery mergers. By 2003, the region’s HHI was 1,246, indicating a growth to a moderate level of concentration (FTC, 2004).

2.4.1.3 Product Differentiation Another way firms can influence market pr ices for their product is through product differentiation. By differentiating one’s product and using marketi ng to establish brand loyalty, manufacturers can raise their prices above margin al cost without losing market share to their competitors.

While we saw in Section 2.3 that there are a wide variety of petr oleum products with many different uses, individual petroleum pr oducts are by nature quite homogenous. For example, there is little difference between premium motor gasoline produced at different refineries (Mathtech, 1997). As a result, the ro le of product differentia tion is probably quite small for many finished petroleum products. Howeve r, there are examples of relatively small

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-20 refining businesses producing spec ialty products for small niche markets. As a result, there may be some instances where product differentiat ion is important for price determination.

2.4.1.4 Competition among Firms in the Petroleum Refining Industry Overall, the petroleum industr y is characterized as produci ng largely generic products for sale in relatively unconcentrated markets. A lthough it is not possible to quantify how much barriers to entry and other fact ors will affect competition among firms, it seems unlikely that individual petroleum refiners w ould be able to significantly infl uence market prices given the current structure of the market.

2.4.2 Characteristics of U.S. Petroleum Refine ries and Petroleum Refining Companies A petroleum refinery is a facility where labo r and capital are used to convert material inputs (such as crude oil and other materials) in to finished petroleum products. Companies that own these facilities are legal bus iness entities that conduct transact ions and make decisions that affect the facility. The terms “facility,” “establ ishment,” and “refinery” are synonymous in this report and refer to the physical location where products are manufactured. Likewise, the terms “company” and “firm” are used interchangeably to refer to the legal business entity that owns one or more facilities. This section presents in formation on refineries, such as their location and capacity utilization, as well as financial data for the companies that own these refineries.

2.4.2.1 Geographic Distribution of U.S. Petroleum Refineries There are approximately 148 petroleum refineri es operating in the United States, spread across 32 states. The number of petroleum refineries located in each of these states is listed in Table 2-7. This table illustrate s that a significant portion of pe troleum refineries are located along the Gulf of Mexico region. The leading petrol eum refining states are Texas, Louisiana, and California.

2.4.2.2 Capacity Utilization Capacity utilization indicates how well current refineries meet demand. One measure of capacity utilization is cap acity utilization rates. A capacity utilization rate is the ratio of actual production volumes to full-capacity production vo lumes. For example, if an industry is producing as much output as possible without adding new floor space for equipment, the capacity utilization rate would be 100 percent. On the othe r hand, if under the same constraints the industry were only producing 75 percent of its maximum po ssible output, the capacity utilization rate would be 75 percen t. On an industry-basis, capacity utilization is highly variable from year to year depending on economic condi tions. It is also variable on a company-by-

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-21 company basis depending not only on economic conditions, but also on a company’s strategic position in its particular industry. While some pl ants may have idle production lines or empty floor space, others need a dditional space or capacity.
Table 2-8 lists the capacity ut ilization rates for petroleum refineries from 2000 to 2010. It is interesting to note the dec lines in capacity utilization fr om 2007 to 2008 and again from 2008 to 2009. These declines seem counter intuitive becau se there does not appear to be evidence that demand for petroleum products is dropping. To unders tand this better, it is important to realize that the capacity utilization ratio in the petrol eum industry represents the utilization of the atmospheric crude oil distillation units. This ra tio is calculated for the petroleum industry by dividing the gross input to atmo spheric crude oil distillation un its (all inputs involved in atmospheric crude oil distillation, such as crud e oil) by the industry’s operational capacity.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-22 Table 2-7 Number of Petroleum Refineries, by State State Number of Petroleum Refineries Alabama 3 Alaska 6 Arkansas 2 California 20 Colorado 2 Delaware 1 Georgia 1 Hawaii 2 Illinois 4 Indiana 2 Kansas 3 Kentucky 2 Louisiana 19 Michigan 1 Minnesota 2 Mississippi 3 Montana 4 Nevada 1 New Jersey 5 New Mexico 3 North Dakota 1 Ohio 4 Oklahoma 6 Pennsylvania 5 Tennessee 1 Texas 26 Utah 5 Virginia 1 Washington 5 West Virginia 1 Wisconsin 1 Wyoming 6 Total 148 Source: U.S. Energy Information Administration (EIA), Form EIA-820, “Annual Refinery Report. Table 1. Number and Capacity of Operable Petroleum Refineries by PA D District and State as of January 1, 2011” Release Date: June 24, 2011; (Data accessed on 10/12/11). [Source for 2011 numbers.] http://www.eia.gov/petroleum/refinerycapacity/

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-23 Table 2-8 Full Production Capacity Utilizat ion Rates for Petroleum Refineries

Year Petroleum Refineries Capacity Utilization Rates (NAICS 324110) Gross Input to Atmospheric Crude Oil Distillation Units (1,000s of barrels per day) Operational Capacity (1,000s of barrels per day) 2000 92.6 15,299 16,525 2001 92.6 15,352 16,582 2002 90.7 15,180 16,744 2003 92.6 15,508 16,748 2004 93.0 15,783 16,974 2005 90.6 15,578 17,196 2006 89.7 15,602 17,385 2007 88.5 15,450 17,450 2008 85.3 15,027 17,607 2009 82.9 14,659 17,678 2010 86.4 15,177 17,575 Sources: U.S. Department of Energy, Energy Information Administration (EIA). 2007a. “Refinery Utilization and

Capacity.” Available at <http://tonto.eia.doe.gov/dnav/pet/ pet_pnp_unc_dcu_nus_m.htm>. As obtained on January, 2007. U.S. Energy Information Admini stration (EIA), “Refinery Utilizati on and Capacity.” Available at http://www.eia.gov/dnav/pet/pet_p np_unc_dcu_nus_a.htm; Release da te: 7/28/11; (Data accessed on 10/11/11). [Source for 2007-2010 numbers]
From 2007 to 2008 operational capacity increa sed from 17,450,000 barrels per calendar day to 17,607,000 barrels per calendar day at th e same time gross inputs fell from 15,450,000 barrels per calendar day to 15,027,000 barrels per calendar day resulting in a 3.6 percent decrease in utilization. Similarly, from 2008 to 2009 operational capacity increased from 17,607,000 barrels per calendar day to 17,678,000 barrels per calenda r day at the same time gross inputs fell from 15,027,000 barrels per calendar day to 14,659,000 barrels per calendar day resulting in a 2.8 percent decrease in u tilization.

2.4.2.3 Characteristics of Small Businesse s Owning U.S. Petroleum Refineries Under Small Business Administration (SBA) regul ations, a small refiner is defined as a refinery with no more than 1,500 employees. 4 For this analysis we applied the small refiner definition of a refinery with no more than 1,500 employees. For additional information on the Agency’s application of the definition for sma ll refiner, see the June 24, 2008 Federal Register Notice for 40 CFR Part 60, Standards of Perf ormance for Petroleum Refineries (Volume 73, Number 122, page 35858).
As of January 2011, there were 148 petroleum refineries operating in the continental United States and US territories with a cumulative capacity of processing over 17 million barrels of crude per calendar day (EIA, 2011a). We identif ied 64 parent companies owning refineries in

4 See Table in 13 CFR 121.201, NAICS code 324110.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-24 the United States and were able to collect employm ent and sales data for 61 (95%) of them. We were not able to collect employment and sale s data for Ten By Inc., PBF Holdings LLC, and Northern Tier Energy LLC, representing 2.36% of refining capacity.
The distribution of employment across compan ies is illustrated in Figure 2-6. As this figure shows, 36 companies (59% of the 61 tota l) employ fewer than 1,500 workers and would be considered small businesses. These firms earned an average of $1.36 billion of revenue per year, while firms employing more than 1,500 employees earned an average of $82.5 billion of revenue per year (Figure 2-7). Distributions of the number of large and small firms earning different levels of revenue are pr esented in Figures 2-8 and 2-9.

Figure 2-6 Employment Distribution of Compan ies Owning Petroleum Refineries (N=61) Sources: Employment Data from Petroleum Refinery Emissions Information Collection, where available, Component 1, OMB Control No. 2060-0657. Hoovers 2011 Online Data, accessed through University of South Carolina’s Moore School of Business Library. Hoovers 2011 Online Data reflects either actual data for 2010/2011 reported by companies, estimated data for 2011, or occasionally 2009 values. Million Dollar Database online, 2011, accessed through University of South Ca rolina’s Moore School of Business Library. Million Dollar Online Data reflects e ither actual data for 2011 reported by companies or estimated data for 2011. Ward’s Business Directory of Pu blic and Private Companies, 2011, accessed at James Branch Cabell Library (Virginia Commonwealth University). Ward’s Business Directory compiles financial data from several sources such as annual reports, company webs ites, and phone interviews. If financial data from private companies is unavailable, Ward’s staff estimates the information. Copyright 2011 Harte-Hanks Market Intelligence, Inc., All Rights Reserved. CI Technology Database, September 2011. 14 firms

6 firms 9 firms

4 firms 3 firms 25 firms

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

<100 100

‐ 250 250

‐ 500 500

‐ 1,000 1,000

‐ 1,500 >1,500Shareoffirms(%)

Number of Employees

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-25 Reference USA, accessed thru Je fferson Madison Regi onal Library, Charlottesville, Virginia. Copyright 2011 Experian Inform ation Solutions, Inc., Experian Business Reports accessed through LexisNexis at James Branch Cabell Library (Virginia Commonwealth University). Experian Business Reports reflects the most recent data reported by a company, which may be 2010 or 2011. Global Duns Market Identifiers, accessed through Le xisNexis at University of Virginia’s Alderman Library.

Figure 2-7 Average Revenue of Companies Owning Petroleum Refineries by Employment (N=61) Sources: Employment Data from Petroleum Refinery Emissions Information Collection, where available, Component 1, OMB Control No. 2060-0657. Hoovers 2011 Online Data, accessed through University of South Carolina’s Moore School of Business Library. Hoovers 2011 Online Data reflects either actual data for 2010/2011 reported by companies, estimated data for 2011, or occasionally 2009 values. Million Dollar Database online, 2011, accessed through University of South Ca rolina’s Moore School of Business Library. Million Dollar Online Data reflects e ither actual data for 2011 reported by companies or estimated data for 2011. Ward’s Business Directory of Pu blic and Private Companies, 2011, accessed at James Branch Cabell Library (Virginia Commonwealth University). Ward’s Business Directory compiles financial data from several sources such as annual reports, company webs ites, and phone interviews. If financial data from private companies is unavailable, Ward’s staff estimates the information. Copyright 2011 Harte-Hanks Market Intelligence, Inc., All Rights Reserved. CI Technology Database, September 2011. Reference USA, accessed thru Je fferson Madison Regi onal Library, Charlottesville, Virginia. Copyright 2011 Experian Inform ation Solutions, Inc., Experian Business Reports accessed through LexisNexis at James Branch Cabell Library (Virginia Commonwealth University). Experian Business Reports reflects the most recent data reported by a company, which may be 2010 or 2011. 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000

<100 100

‐ 250 250

‐ 500 500

‐ 1,000 1,000

‐ 1,500 >1,500 Average revenue ($ millions)

Number of Employees

### *** Draft – Do Not Cite, Quote, or Release During Review ***

2-26 Global Duns Market Identifiers, accessed through Le xisNexis at University of Virginia’s Alderman Library.

Figure 2-8 Revenue Distribution of Large Companies Owning Petroleum Refineries (N=25) Sources: Employment Data from Petroleum Refinery Emissions Information Collection, where available, Component 1, OMB Control No. 2060-0657. Hoovers 2011 Online Data, accessed through University of South Carolina’s Moore School of Business Library. Hoovers 2011 Online Data reflects either actual data for 2010/2011 reported by companies, estimated data for 2011, or occasionally 2009 values. Million Dollar Database online, 201 1, accessed through Univer sity of South Carolina’s Moore School of Business Library. Million Dollar Online Data reflects e ither actual data for 2011 reported by companies or estimated data for 2011. Ward’s Business Directory of Pu blic and Private Companies, 2011, accessed at James Branch Cabell Library (Virginia Commonwealth University). Ward’s Business Directory compiles financial data from several sources such as annual reports, company webs ites, and phone interviews. If financial data from private companies is unavailable, Ward’s staff estimates the information. Copyright 2011 Harte-Hanks Market Intelligence, Inc., All Rights Reserved. CI Technology Database, September 2011. Reference USA, accessed thru Je fferson Madi son Regional Library, Charlottesville, Virginia. Copyright 2011 Experian Information Solutions, Inc., Experian Business Reports accessed through LexisNexis at James Branch Cabell Library (Virgi nia Commonwealth University). Experian Business Reports reflects the most recent data reported by a company, which may be 2010 or 2011. Global Duns Market Identifiers, accessed through Le xisNexis at University of Virginia’s Alderman Library. 1 firm 1 firm 23 firms

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

<5 5

‐ 10 10

‐ 50 50

‐ 100 100

‐ 500 500

‐ 1,000 >1,000

Revenue ($milllions)

### *** Draft – Do Not Cite, Quote, or Release During Review ***

2-27 Figure 2-9 Revenue Distribution of Small Comp anies Owning Petroleum Refineries (N=36) Sources: Employment Data from Petroleum Refinery Emissions Information Collection, where available, Component 1, OMB Control No. 2060-0657. Hoovers 2011 Online Data, accessed through University of South Carolina’s Moore School of Business Library. Hoovers 2011 Online Data reflects either actual data for 2010/2011 reported by companies, estimated data for 2011, or occasionally 2009 values. Million Dollar Database online, 2011, accessed through University of South Caro lina’s Moore School of Business Library. Million Dollar Online Data reflects e ither actual data for 2011 reported by companies or estimated data for 2011. Ward’s Business Directory of Pu blic and Private Companies, 2011, accessed at James Branch Cabell Library (Virginia Commonwealth University). Ward’s Business Directory compiles financial data from several sources such as annual reports, company webs ites, and phone interviews. If financial data from private companies is unavailable, Ward’s staff estimates the information. Copyright 2011 Harte-Hanks Market Intelligence, Inc., All Rights Reserved. CI Technology Database, September 2011. Reference USA, accessed thru Je fferson Madi son Regional Library, Charlottesville, Virginia. Copyright 2011 Experian Information Solutions, Inc., Experian Business Reports accessed through LexisNexis at James Branch Cabell Library (Virgi nia Commonwealth University). Experian Business Reports reflects the most recent data reported by a company, which may be 2010 or 2011. Global Duns Market Identifiers, accessed through Le xisNexis at University of Virginia’s Alderman Library.

Employment, crude capacity, and location inform ation are provided in Table 2-9 for each refinery owned by a parent company employing 1,500 employees or less. Similar information can be found for all 64 companies owning petroleum refineries in Appendix A. 5 firms

1 firm 8 firms

2 firms 7 firms

4 firms 9 firms

0% 5% 10% 15% 20% 25% 30%

<5 5

‐ 10 10

‐ 50 50

‐ 100 100

‐ 500 500

‐ 1,000 >1,000

Revenue ($millions)

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-28 In Section 2.4.2.1, we discussed how petroleu m refining operations are characterized by economies of scale—that the cost per unit falls as a refinery produces more finished petroleum products. This means that smaller petroleum refi ners face higher per unit costs than larger refining operations because they produce fewer petroleum products. As a result, some smaller firms have sought to overcome their compe titive disadvantage by locating close to productconsuming areas to lower transportation cost s and serving niche pr oduct markets (FTC, 2004).
A good example of a firm locating close to prospective customers is Countrymark Cooperative, Inc., which was started in the 1930s for the express purpose of providing farmers in Indiana with a consistent supply of fuels, lu bricants, and other products. A good example of a firm producing niche products is Calumet Specia lty Product Partners. The firm produces both basic fuels like gasoline, diesel fuel and jet fuel and specialty products like lubricating oils, solvents, waxes, and other petroleum products. Ho wever, the firm’s special ty products unit is its largest unit (Hoovers, 2011 online).
However, recent developments are making thes e factors less important for success in the industry. For example, the entry of new product pi pelines is eroding the locational advantage of smaller refineries (FTC, 2004). Th is trend can possibly be illust rated by the fact that most refineries owned by small businesses tend to be lo cated in relatively rural areas (see Table 2-9). The median population density of counties occupied by small refine ries is 103 people per square mile. This could suggest that refineries do not rely on the population surrounding them to support their refining operations.
Capacity information for the refineries owned by small businesses also suggests that fewer small businesses are focusing on developing specialty products or serving local customers as major parts of their business plan. For exampl e, in 2006 29 small refineries had a collective crude refining capacity of 778,920 barrels per calendar day or 857,155 barrels per stream day (EIA, 2006c). Approximately 21% of this total capacity was devoted to producing specialty products or more locally focused products such as aromatics, asphalt, l ubricants, and petroleum coke. The remaining 79% was used to produce ga soline, kerosene, diesel fuel, and liquefied petroleum gases. Similarly, in 2011, approximately 20% of small businesses’ total capacity was dedicated to producing specialty products and 80 % was dedicated to producing fuel products. As discussed in Section 2.4.1.3, fuel products tend to be quite homogenous (gasoline from one refinery is not very different fr om gasoline from another refinery ), and they are also normally transported by pipeline.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-29 2.5 Markets This section provides data on the volume of petroleum products produced and consumed in the United States, the quantit y of products imported and expor ted, and the average prices of major petroleum products. The section concludes with a discussion of future trends for the petroleum refining industry.

2.5.1 U.S. Petroleum Consumption Figure 2-10 illustrates the amount of petr oleum products supplied between 2000 and 2010 (measured in millions of barrels of oil). These data represent the approximate consumption of petroleum products because it measures the disappearance of these products from primary sources (i.e., refineries, natu ral gas processing plants, blendi ng plants, pipelines, and bulk terminals).*** Draft – Do Not Cite, Quote, or Release During Review ***

2-30Table2-9 Characteristics of Small Businesses in the Petroleum Refining IndustryParent CompanyParentCompanyTypeCumulativeCrudeCapacity(bbl/cd)ParentCompanyEmployment(#)Facility NameFacilityCityFacility StateFacility CountyFacilityCountyPopulationDensity (2000)FacilityCountyPopulationDensity (2010)AGE Refining, Inc. Private 14,021 124 AGE RefiningInc San Antonio TX Bexar County 1,117 1,383American Refining Group,Inc.Private 10,000 323AmericanRefining GroupIncBradford PA McKean County 47 44Calcasieu Refining Company Private 78,000 92CalcasieuRefining Co.LakeCharlesLA Calcasieu Parish 171 181Calumet ShreveportLubricants and Waxes, LLCPublic 57,000 654CalumetShreveport LLCShreveport LA Caddo Parish 286 290Calumet Lubricants Company,L.P.Public 13,020 654CalumetLubricants Co LPCottonValleyLA Caddo Parish 286 290Calumet Lubricants Company,L.P.Public 8,300 654CalumetLubricants Co LPPrinceton LA Caddo Parish 286 290CHS, Inc. Public 59,600 287Cenex HarvestStatesLaurel MTYellowstoneCounty49 56Calumet (Montana RefiningCompany)Public 10,000 170Montana RefiningCo.Great Falls MT Cascade County 30 30CVR Energy, Inc. Public 115,700 371CoffeyvilleResources LLCCoffeyville KSMontgomeryCounty56 55Countrymark Cooperative Private 26,500 425CountrymarkCooperative, Inc.Mt. Vernon IN Posey County 66 63Cross Oil Refining &Marketing, Inc.Private 7,500 110Martin MidstreamPartners LPSmackover AR Union County 44 40Deerfield Refining andProduction Corp.Private 2,000 27Foreland RefiningCo.Ely NVWhite PineCounty1 1Frontier Refining andMarketingPrivate 47,000 723Frontier RefiningIncCheyenne WY Laramie County 30 34Frontier Oil Corp. Private 138,000 723Frontier ElDorado RefiningCoEl Dorado KS Butler County 42 46(continued)*** Draft – Do Not Cite, Quote, or Release During Review ***

2-31Table 2-9. Characteristics of Small Businesses inthe Petroleum Refining Industry (continued)Parent CompanyParentCompanyTypeCumulativeCrudeCapacity(bbl/cd)ParentCompanyEmployment(#)Facility NameFacilityCityFacility StateFacility CountyFacilityCountyPopulationDensity (2000)FacilityCountyPopulationDensity (2010)CVR Refining (WynnewoodRefining Co.)Private 70,000 260WynnewoodRefining Co.Wynnewood OK Garvin County 34 34Goodway Refining, LLC Private 4,100 17GoodwayRefining LLCAtmore ALEscambiaCounty41 41Wood Cross RefiningCompany, LLCPublic 25,050 1,321Holly Refining &Marketing CoWoodsCrossUT Davis County 785 1,026Holly Frontier Refinery Public 105,000 1,321Navajo RefiningCo.Artesia NM Eddy County 12 13Holly Refining & Marketing– Tulsa, LLC - East PlantPublic 70,300 1,321Holly Refining &Marketing CoTulsa East OK Tulsa County 988 1,058Holly Refining & Marketing– Tulsa, LLC - West PlantPublic 85,000 1,321Holly Refining &Marketing CoTulsa West OK Tulsa County 988 1,058Hunt Refining Co. Private 36,000346 Hunt Refining Co. Tuscaloosa ALTuscaloosaCounty125 147Hunt Southland Refining Co. Private 11,000 1,100Hunt SouthlandRefining CoSandersville MS Lamar County 79 112Kern Oil & Refining Co. Private 26,000 105Kern Oil &Refining Co.Bakersfield CA Kern County 81 103Lion Oil Co. Private 75,000 350 Lion Oil Co. El Dorado AR Union County 44 40National CooperativeRefinery AssociationPublic 85,500 612NationalCooperativeRefineryAssociationMcPherson KSMcPhersonCounty33 33Pasadena Refining SystemsInc.Private100,000348Pasadena RefiningSystems Inc.PasadenaTX Harris County 1967 2,402Petro Star Inc. Private 19,700 400Petro Star Inc. North Pole AKFairbanks NorthStar11 13Petro Star Inc. Private 55,000 400 Petro StarInc. Valdez AK Valdez Cordova 0.3 0(continued)*** Draft – Do Not Cite, Quote, or Release During Review ***

2-32Table 2-9. Characteristics of Small Businesses inthe Petroleum Refining Industry (continued)Parent CompanyParentCompanyTypeCumulativeCrudeCapacity(bbl/cd)ParentCompanyEmployment(#)Facility NameFacilityCityFacilityStateFacilityCountyFacilityCountyPopulationDensity (2000)FacilityCountyPopulationDensity (2010)Placid Refining Private 57,000 207Placid RefiningInc.Port Allen LAWest BatonRouge Parish113 124Kenneth Faite (San Joaquin) Private 15,000 108San JoaquinRefining Co., Inc.Bakersfield CA Kern County 81 103Santa Maria RefiningCompanyPrivate 9,500 47 Greka Energy Santa Maria CASanta BarbaraCounty146 155Somerset Oil Inc. Private 5,500 11Somerset EnergyRefinery LLCSomerset KY Pulaski County 85 96US Oil & Refining Co. Private 38,800 182US Oil & RefiningCo.Tacoma WA Pierce County 417 476Ventura Refining &Transmission, LLCPrivate 12,000 37Ventura Refining& TransmissionLLCThomas OK Custer County 27 28Western Refining Company,LPPublic 122,000 636Western RefiningCompany LPEl Paso TX El Paso County 671 791Western Refining, Inc. Public 66,300 636Western RefiningYorktown IncYorktown VA York County 533 625Western Refining, Inc. Public 16,800 636Western RefiningSouthwest IncBloomfield NMSan JuanCounty21 24Western Refining, Inc. Public 21,100 636Western RefiningSouthwest IncGallup NMMcKinleyCounty14 13World Oil Marketing Co. Private 8,500 65Lunday-ThagardCo.South Gate CALos AngelesCounty2,344 2,420Wyoming Refining Co. Private 14,000 96WyomingRefining CoNew Castle WY Weston County 3 3Total1,614,091 8,454103Sources: U.S. Census Bureau, American Fact Finder, “2010 Census Summary File 1 Population, Housing Units, Area & Density: 2010-County – Census Tract100% Data 2010 Census” (Data accessed on10/21/2011); http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?ftp=tableHoovers 2011 Online Data, accessed through University of South Carolina’s Moore School of Business Library. Hoovers 2011 Online Data reflectseither actual data for 2010/2011 reported by companies, estimated data for 2011, or occasionally 2009 values.*** Draft – Do Not Cite, Quote, or Release During Review ***

2-33Million Dollar Database online, 2011, accessed through University of South Carolina’s Moore School ofBusiness Library. Million Dollar Online Datareflects either actual data for 2011 reportedby companies or estimated data for 2011.Ward’s Business Directory of Public andPrivate Companies, 2011, accessed at JamesBranch Cabell Library (Virginia Commonwealth University).Ward’s Business Directory compiles financial data from several sources such as annual reports, company websites, and phone interviews. If financialdata from private companies is unavailable,Ward’s staff estimates the information.Copyright 2011 Harte-Hanks Market Intelligence, Inc., All Rights Reserved. CI Technology Database, September 2011.Reference USA, accessed thru Jefferson Madison Regional Library, Charlottesville, Virginia.Copyright 2011 Experian Information Solutions, Inc., Experian Business Reports accessed through LexisNexis at James Branch Cabell Library(Virginia Commonwealth University). Experian Business Reports reflects the most recent data reported by a company, which may be2010 or 2011.Global Duns Market Identifiers, accessed through LexisNexis at University of Virginia’s Alderman Library.Employment Data from Petroleum Refinery Emissions Information Collection, where available, Component 1, OMB Control No. 2060-0657.Energy Information Administration (EIA), Form EIA 820, “Annual Refinery Report,” Table 3. Capacity of Operable Petroleum Refineries by State andIndividual Refinery as of January 1, 2011 <http://www.eia.gov/petroleum/refinerycapacity/>

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-34 Between 2000 and 2004, U.S. consumption of petroleum products increased by 5%. Consumption leveled off by 2007 and dropped by 9% between 2007 and 2009 (Figure 2-10). This reduced growth was primarily the result of less jet fuel, residual fuel , distillate fuel, and other products being consumed in recent years. Consumption of all petroleum products, except for motor gasoline, increased between 2009 and 2010, but the total consumption of petroleum products did not reach 2000-2004 levels. The cu mulative decrease in consumption over the 11 year period is 3% (Table 2-10).

Figure 2-10 Total Petroleum Products Supplie d (millions of barrels per year) Sources: U.S. Department of Energy. 2011 Energy In formation Administration (EIA). 1996–2011. “Petroleum Supply Annuals, Volume 1.” (Data accessed on February 23, 201 2) [Source for 2000–2010 numbers.] < http://www.eia.gov/dnav/pet/pet_cons_psup_dc_nus_mbbl_a.htm >. 6,400 6,600 6,800 7,000 7,200 7,400 7,600 7,800

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Millions of barrels per year

Year

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-35 Table 2-10 Total Petroleum Products Supplie d (millions of barrels per year)

Year Motor Gasoline Jet Fuel Distillate Fuel Oil Residual Fuel Oil Liquefied Petroleum Gases Other Products Total 2000 3,101 631 1,362 333 816 967 7,211 2001 3,143 604 1,404 296 746 978 7,172 2002 3,229 591 1,378 255 789 969 7,213 2003 3,261 576 1,433 282 757 1,003 7,312 2004 3,333 597 1,485 316 780 1,076 7,588 2005 3,343 613 1,503 336 741 1,057 7,593 2006 3,377 596 1,522 251 749 1,055 7,551 2007 3,389 592 1,532 264 761 1,011 7,548 2008 3,290 563 1,444 228 715 896 7,136 2009 3,284 509 1,325 187 749 799 6,852 2010 3,282 523 1,387 195 793 820 7,001 Sources: Annuals, Volume 1.” Available at <http://www.eia.doe.gov/oil_gas/petroleum/data_publications/ petroleum_supply_annual/psa_volume1/psa_volume1.html>. As obtained on October 31, 2007. U.S. Department of Energy. 2011 Energy Information Administration (EIA). 1996–2011. “Petroleum Supply Annuals, Volume 1.” (Data accessed on Oc tober 11, 2011) [Source for 2007–2010 numbers.] <http://www.eia.gov/dnav/pet/pet_sum_snd_d_nus_mbbl_a_cur.htm>.

2.5.2 U.S. Petroleum Production Table 2-11 reports the number of barrels of major petroleu m products produced in the United States between 2000 and 2010. U.S. producti on of petroleum products at refineries and blenders grew steadily, resulting in a 7% cumu lative increase for the period. However, in 2005 and 2009 production declined by slightly.

Table 2-11 U.S. Refinery and Blender Net Production (millions of barrels per year)

Year Motor Gasoline Jet Fuel Distillate Fuel Oil Residual Fuel Oil Liquefied Petroleum Gases Other Products Total 2000 2,910 588 1,310 255 258 990 6,311 2001 2,928 558 1,349 263 243 968 6,309 2002 2,987 553 1,311 219 245 990 6,305 2003 2,991 543 1,353 241 240 1,014 6,383 2004 3,025 566 1,396 240 236 1,057 6,520 2005 3,036 564 1,443 229 209 1,015 6,497 2006 3,053 541 1,475 232 229 1,032 6,561 2007 3,051 528 1,509 246 239 464 6,568 2008 3,129 546 1,572 227 230 950 6,641 2009 3,207 510 1,478 218 227 1,418 6,527 2010 3,306 517 1,542 213 240 1,747 6,735 Sources: U.S. Department of Energy, Energy Information Administration (EIA). 1996–2007. “Petroleum Supply Annuals, Volume 1.” Available at <http://www.eia.doe.gov/oil_gas/petroleum/data_publications/ petroleum_supply_annual/psa_volume1/psa_volume1.html>. As obtained on October 31, 2007. U.S. Department of Energy. 2011 Energy Information Administration (EIA). 1996–2011. “Petroleum Supply Annuals, Volume 1.” (Data accessed on Oc tober 7, 2011) [Source for 2007–2010 numbers.] <http://www.eia.gov/dnav/pet/pet_pnp_refp_dc_nus_mbbl_a.htm>.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-36 The 2005 decline in production (0.35%) was pos sibly the result of damage inflicted by two hurricanes (Hurricane Katrina and Hurricane R ita) on the U.S. Gulf Coast—the location of many U.S. petroleum refineries (Section 3.4.2). Acco rding to the American Petroleum Institute, approximately 30% of the U.S. re fining industry was shut down as a result of the damage (API, 2006). The 2009 decline in production (1.72%) was probably the result of the global economic crisis. Additional production data are presented in Table 2- 12, which report s the value of shipments of products produced by the petr oleum refining industry between 1997 and 2009.

2.5.3 International Trade

International trade trends are shown in Tables 2-13 and 2-14. Between 1995 and 2006, imports and exports of petroleum products in creased by 123% and 51% respectively. Between 1995 and 2006, while imports of most major petroleum products grew at approximately the same rate, the growth of petroleum product exports was driven largely by residual fuel oil and other petroleum products. More recentl y, between 2008 and 2010 exports of petroleum products such as motor gasoline, jet fuel, distillate fuel oil and liquefied petroleum ga ses have also increased.
Since 2006, industry import and export trends have diverged significantly. Between 2006 and 2010 imports declined by 28%, returning clos e to 2001 levels. In 2010, U.S. net imports were 98 million barrels, accounting for 10% of the country’s imports and around 1% of total petroleum products consumed in that year. Export s grew at an average an nual rate of 12% and in 2010 were 2.4 times the level of exports in 2001.

In 2011, U.S. net imports of crude oil, base d on a four-week averag e, ranged from 8,138 to 9,474 thousand barrels per day. And while 2011 st arted out with the U.S. as a net importer of total petroleum products, from July 2011 through December 2011 the U.S. became a net exporter of total petroleum products. From July to December 2011, based on a f our-week average, the U.S. exported an average of 405,000 barrels per day with a maxi mum of 809,000 barrels per day of total petroleum products (EIA 2012). 5

5 Data for 2011 located on the Energy Information Administration’s website at http://www.eia.gov/dnav/pet/pet_move_wkly_dc_NUS-Z00_mbblpd_4.htm.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-37 Table 2-12 Value of Product Shipments of the Petroleum Refining Industry Year Millions of $Reported Millions of $2005 1997 152,756 180,671 1998 114,439 136,746 1999 140,084 164,651 2000 210,187 237,425 2001 195,898 219,476 2002 186,761 210,647 2003 216,764 238,425 2004 290,280 306,328 2005 419,063 419,063 2006 489,051 470,037 2007 551,997 510,996 2008 682,756 585,664 2009 436,974 394,348 Note: Numbers were adjusted for inflation using produc er price index industry data for Total Manufacturing Industries (Table 2-16). Sources: U.S. Department of Commerce, Bureau of th e Census. 2007. 2006 Annual Survey of Manufactures. Obtained through American Fact Finder Database <http://factfinder.census.gov/home/saff/main.html?_lang=en>. U.S. Department of Commerce, Bureau of the Census. 2003b. 2001 Annual Survey of Manufactures. M01(AS)-2. Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/2003pubs/m01as-2.p df>. As obtained on March 4, 2008. U.S. Department of Commerce, Bureau of the Census, FactFinder. 2011. 2009 Annual Survey of Manufactures. 1996–2011. Obtained through American Fact Finder Database. (Data accessed on October 14, 2011.) [Source for 2007–2009 numbe rs] <http://factfinder.census.gov/servlet/ DatasetMainPageServlet?_lang=en&_ts=336651423017&_ds_name=AM0931GS101&_program=EAS>.

Table 2-13 Imports of Major Petroleum Prod ucts (millions of barrels per year)

Year Motor Gasoline Jet Fuel Distillate Fuel Oil Residual Fuel Oil Liquefied Petroleum Gases Other Products Total 1995 97 35 71 68 53 262 586 1996 123 40 84 91 61 322 721 1997 113 33 83 71 62 345 707 1998 114 45 77 101 71 324 731 1999 139 47 91 86 66 344 774 2000 156 59 108 129 79 343 874 2001 166 54 126 108 75 400 928 2002 182 39 98 91 67 396 872 2003 189 40 122 119 82 397 949 2004 182 47 119 156 96 520 1,119 2005 220 69 120 193 120 587 1,310 2006 173 68 133 128 121 687 1,310 2007 151 79 111 136 90 688 1,255 2008 110 38 78 128 93 700 1,146 2009 82 29 82 121 66 597 977 2010 49 36 83 134 56 584 942 Sources: U.S. Department of Energy , Energy Information Administrati on (EIA).1996–2007. “Petroleum Supply Annuals, Volume 1.” Available at <http://www.eia.doe.gov/oil_gas/petroleum/data_publications/ petroleum_supply_annual/psa_volume1/psa_volume1.html>. As obtained on October 31, 2007.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-38 U.S. Department of Energy. 2011 Energy Information Administration (EIA). 1996–2011. “Petroleum Supply Annuals, Volume 1.” (Data accessed on Oct ober 7, 2011.) [Source for 2007–2010 numbers.] http://www.eia.gov/dnav/pet/pet_move_imp_dc_NUS-Z00_mbbl_a.htm

Table 2-14 Exports of Major Petroleum Prod ucts (millions of barrels per year)

Year Motor Gasoline Jet Fuel Distillate Fuel Oil Residual Fuel Oil Liquefied Petroleum Gases Other Products Total 1995 38 8 67 49 21 128 312 1996 38 17 70 37 19 138 319 1997 50 13 56 44 18 147 327 1998 46 9 45 50 15 139 305 1999 40 11 59 47 18 124 300 2000 53 12 63 51 27 157 362 2001 48 10 44 70 16 159 347 2002 45 3 41 65 24 177 356 2003 46 7 39 72 20 186 370 2004 45 15 40 75 16 183 374 2005 49 19 51 92 19 183 414 2006 52 15 79 103 21 203 472 2007 46 15 98 120 21 213 513 2008 63 22 193 130 25 216 649 2009 71 25 214 152 36 224 723 2010 108 31 239 148 48 270 843 Sources: U.S. Department of Energy, Energy Information Administration (EIA). 1996–2007. “Petroleum Supply Annuals, Volume 1.” Available at <http://www.eia.doe.gov/oil_gas/petroleum/data_publications/ petroleum_supply_annual/psa_volume1/psa_volume1.html>. As obtained on October 31, 2007. U.S. Department of Energy. 2011 Energy Information Administration (EIA). 1996–2011. “Petroleum Supply Annuals, Volume 1.” (Data accessed on Oc tober 7, 2011.) [Source for 2007–2010 numbers] <http://www.eia.gov/dnav/pet/pet_move _exp_dc_NUS-Z00_mbbl_a.htm>.

2.5.4 Market Prices The average nominal prices of major petroleu m products sold to e nd users are provided for selected years in Table 2-15. 6 As these data illustrate, nomin al prices rose substantially between 2005 and 2008. In 2009 there was a drop in prices, resulting in a return to 2005 price levels for most products. In 2010 nominal pr ices increased. During the 2008–2010 period, the most volatile price was jet fuel price: it dec lined by 44% in 2009 and increased by 29% in 2010.

6 Sales to end users are those made directly to the consum er of the product. This includ es bulk consumers, such as agriculture, industry, and utilities, as well as residential and commercial consumers.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-39 Table 2-15 Average Price of Major Petroleum Pr oducts Sold to End Users (cents per gallon) Product 1995 2000 2005 2008 2009 2010 Motor gasoline 76.5 110.6 183 278 189 230 No. 1 distillate fuel 62.0 98.8 183 298 214 271 No. 2 distillate fuel 56.0 93.4 178 314 184 232 Jet fuel 54.0 89.9 174 305 170 220 Residual fuel oil 39.2 60.2 105 196 134 171

Note: Prices do not include taxes. Sources: U.S. Department of Energy, Energy Information Administration (EIA). 2007b. “Refiner Petroleum Product Prices by Sales Type.” Available at <http://tonto.eia.doe.gov/dnav/pet/pet_pri_refoth_dcu_nus_m.htm>. As obtained on January 11, 2008. U.S. Department of Energy. 2011 Energy Information Administration (EIA). 1996–2011. “Petroleum Supply Annuals, Volume 1.” (Data accessed on October 7, 2011.) [Source for 2007–2010 numbers.]<http://www.eia.gov/dnav/pet/pet_pri_refoth_dcu_nus_a.htm>.
The nominal prices domestic petroleum refine rs receive for their products have been volatile, especially compared to prices receiv ed by other U.S. manufacturers. This trend is demonstrated in Table 2-16 by comparing the pr oducer price index (P PI) for the petroleum refining industry against the index for all ma nufacturing industries. Be tween 1995 and 2010, prices received by petroleum refineries for their products rose by 288% , while prices received by all manufacturing firms rose by 41%. In 2009, both pr ice indexes experienced a decline from 2008 levels, however the decrease was 36% for petroleum refineries and 5% for all manufacturing firms.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-40 Table 2-16 Producer Price Index Industry Data: 1995 to 2010 Petroleum Refining (NAICS 32411) Total Manufacturing Industries

Year PPI Annual Percentage Change in PPI PPI Annual Percentage Change in PPI 1995 74.5 3% 124.2 3% 1996 85.3 14% 127.1 2% 1997 83.1

− 3% 127.5 0% 1998 62.3

− 25% 126.2

− 1% 1999 73.6 18% 128.3 2% 2000 111.6 52% 133.5 4% 2001 103.1

− 8% 134.6 1% 2002 96.3

− 7% 133.7

− 1% 2003 121.2 26% 137.1 3% 2004 151.5 25% 142.9 4% 2005 205.3 36% 150.8 6% 2006 241.0 17% 156.9 4% 2007 266.9 11% 162.9 4% 2008 338.3 27% 175.8 8% 2009 217.0

− 36% 167.1

− 5% 2010 289.4 33% 175.4 5%
Sources: U.S. Bureau of Labor Statistics (BLS). 2007. “Pro ducer Price Index Industry Da ta: Customizable Industry Data Tables.” Available at <http://www.bls.g ov/ppi/>. As obtained on October 11, 2007. U.S. Bureau of Labor Statistics (BLS). 2011. “Producer Price Index Industry Data: Customizable Industry Data Tables.” (Data accessed on Oct ober 11, 2011.) [S ource for 2007–2010 numbers]<http://data.bls.gov/cgi-bin/dsrv?pc>.

2.5.5 Profitability of Petroleum Refineries Estimates of the mean profit (before taxes) to net sales ratios for petroleum refiners are reported in Table 2-17 for the 2006–2007 and 2009-2010 fiscal years. These ratios were calculated by Risk Management Associates by di viding net income into revenues for 44 firms for the 2006-2007 fiscal year and 43 firms for th e 2009-2010 fiscal year. They are broken down based on the value of assets owned by the reporting firms.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-41 Table 2-17 Mean Ratios of Profit before Taxes as a Percentage of Net Sales for Petroleum Refiners, Sorted by Value of Assets

Fiscal Year Total Number of Statements 0 to 500,000 500,000 to 2 Million 2 Million to 10 Million 10 Million to 50 Million 50 Million to 100 Million 100 Million to 250 Million All Firms 4/1/2006– 3/31/2007 44 — — 4.6 6.5 — — 6.7

4/1/2009– 3/31/2010 43 — — 5.5 — — — 4.1

Sources: Old Source: Risk Management Association (RMA). 2008. Annual Statement Studies 2007–2008

. Pennsylvania: RMA, Inc. New Source: Risk Management Association (RMA). 2011. Annual Statement Studies 2010–2011

. Pennsylvania: RMA, Inc.
As these ratios demonstrate, firms that report ed a greater value of a ssets also received a greater return on sales. For example, for the 2006–2007 fiscal year, firms with assets valued between $10 and $50 million received a 6.5% average re turn on net sales, while firms with assets valued between $2 and $10 million only received a 4.6% average return. Firms with assets valued between $2 and 10 million received 5.5% average return between 2009 and 2010. The data for other asset size categories is not shown for the fiscal year 2009–2010 because RMA received fewer than 10 financial statements in those categories and RMA does not consider those samples to be representative. The average return on sales for the entire industry was 6.7% during the 2006–2007 fiscal year and declined to 4.1% during the 2009–2010 fiscal year.
Obtaining profitability information specifically for small petroleum refining companies can be difficult as most of these firms are pr ivately owned. However, some of the small, domestic petroleum refining firms identified in Section 3.4.2.3 are publicly owned companies— CVR Energy Inc., Calumet Specialty Products Pa rtners, L.P., Holly Corporation, and Western Refining, Inc. Profit ratios were calculated for these companies using data obtained from their publicly available 2010 income statements. Th ese ratios are presented in Table 2-18.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-42 Table 2-18 Net Profit Margins for Publicly Owned, Small Petroleum Refiners: 2010

Company Net Income ($millions) Total Revenue ($millions) Net Profit Margin (%) Calumet Specialty Products Partners 16.70 2,190.80 0.76% CVR Energy Inc. 14.30 4,079.80 0.35% Holly Corporation 133.10 8,323.00 1.60% Western Refining, Inc.

− 17.05 7,965.10

− 0.21%
Sources: Holly Corporation, EDGAR database Holly Corporation 10K. February 25, 2011. 10K for year ended December 31, 2010. (Data accessed on 10/23/11) [Source for 2010 numbers.] http://files.shareholder.com/downloads/FTO/1 428853845x0xS950123-11-18524/48039/filing.pdf> Western Refining, Thomson Reuters Western Refining, Inc. 10K. March 8, 2011. 10K for year ended December 31, 2010. (Data accessed on 10/23/11) [Source for 2010 numbers.] http://phx.corporateir.net/phoenix.zhtml?c=194293&p=irol-sec> Calumet Specialty Products Partners, Morningstar fo r Calumet Specialty Products Partners 10K. February 22, 2011. 10K for year ended Decem ber 31, 2010. (Data accessed on 10/ 21/11) [Source fo r 2010 numbers.] http://quote.morningstar.com/stock-filing/Annual- Report/2010/12/31/t.aspx?t=XNAS:CLMT&ft=10- K&d=c7dd2813722445ded56c7e3aefebf2ca > CVR Energy Inc., EDGAR database for CVR Energy Inc. 10K. March 7, 2011. 10K for year ended December 31, 2010. (Data accessed on 10/23/11) [Source for 2010 numbers.] <http://www.sec.gov/Archives/edgar/data/137 6139/000095012311022741/y90110e10vk.htm>

2.5.6 Industry Trends The Energy Information Administration’s (EIA’s) 2011 Annual Energy Outlook provides forecasts of average petroleum prices, petrol eum product consumption, and petroleum refining capacity utilization to th e year 2035. Trends in these variable s are affected by many factors that are difficult to predict, such as energy prices, U.S. economic growth, advances in technologies, changes in weather patterns, and future public po licy decisions. As a result, the EIA evaluated a wide variety of cases based on different assump tions of how these factors will behave in the future. This section focuses on the EIA’s “reference case” forecasts, which assume that current policies affecting the energy sector will re main unchanged throughout the projection period (EIA, Form EIA-820).
According to the 2011 Annual Energy Outlook’s reference forecast, world oil prices (defined as the average price of low-sulfur, light cr ude oil) are expected to steadily increase over the next 10 years as the amount of oil demande d by non-OECD and OECD countries increases. Since crude oil is the primary i nput in petroleum refining, an incr ease in its price would likewise represent an increase in production costs of pe troleum refiners. As a result, the prices of petroleum products sold to end users are expected to rise ove r the same period (Table 2-19). Higher prices and tighter fuel efficiency sta ndards (enlarged production of non-oil fuels) will moderate the growth in petroleum products co nsumed by the recovering US economy (Table 2- 20). Between 2011 and 2019, the prices of major petroleum products are expected to rise

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-43 approximately from 32% to 49%, while consumption of all of those products is expected to rise by 7%. In particular the price of the most supplied product, motor gasoline, is projected to rise by 38% and its consumption is projec ted to slightly increase by 2%.

Table 2-19 Forecasted Average Price of Major Petr oleum Products Sold to End Users in 2009 Currency (cents per gallon) Product 2011 2012 2013 2014 2015 2016 2017 2018 2019 Motor gasoline 286.1 291.3 312.3 326.9 342.1 353.6 369.5 382.9 395.5 Jet fuel 233.0 252.2 261.8 270.4 280.3 297.9 314.5 330.8 346.1 Distillate fuel 302.6 289.8 301.9 313.9 326.9 345.8 364.1 382.3 400.4 Residual fuel oil 186.2 183.1 191.3 202.9 213.6 225.9 236.8 249.1 259.9 LPGs 178.9 180.5 186.7 193.6 200.4 208 217 226.2 235.4 Sources: U.S. Department of Energy, Energy Information Administration (EIA). 2007c. “Annual Energy Outlook.” Available at <http://www.eia.doe.gov/oiaf/archive/aeo07/ pdf/0383(2007).pdf>. As obtained on January 21, 2007. U.S. Department of Energy, Energy Information Administration (EIA). 2011. “Annual Energy Outlook.”; (Data accessed on October 11, 2011) [Source for 2011–2019 numbers.] <http://www.eia.gov/forecasts/ aeo/pdf/0383( 2011).pdf>.

Table 2-20 Total Petroleum Products Supplie d (millions of barrels per year)

Year Motor Gasoline Jet Fuel Distillate Fuel Oil Residual Fuel Oil Liquefied Petroleum Gases Other Products Total 2011 3,317 515 1,367 199 768 806 6,972 2012 3,407 554 1,451 219 823 838 7,291 2013 3,424 555 1,501 218 835 866 7,400 2014 3,429 560 1,501 216 843 876 7,425 2015 3,432 564 1,509 217 848 888 7,459 2016 3,438 569 1,524 217 850 891 7,490 2017 3,416 575 1,538 218 850 891 7,487 2018 3,392 580 1,550 218 850 881 7,472 2019 3,371 585 1,563 218 850 876 7,463 Sources: U.S. Department of Energy, Energy Information Administration (EIA). 2007c. “Annual Energy Outlook.” Available at <http://www.eia.doe.gov/oiaf/archive/aeo07/ pdf/0383(2007).pdf>. As obtained on January 21, 2007. U.S. Department of Energy, Energy Information Administration (EIA). 2011. “Annual Energy Outlook.”; (Data accessed on October 11, 2011) [Source for 2016–2019 numbers.] <http://www.eia.gov/forecasts/ aeo/pdf/0383( 2011).pdf>.
Overall, the EIA forecasts that U.S. operati onal capacity will decrea se by a total of 5% between 2011 and 2019 (Table 2-21). The rate of capacity utilizati on is projected to average 86% during this period.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-44 Table 2-21 Full Production Capacity Utilizat ion Rates for Petroleum Refineries

Year Petroleum Refineries Capacity Utilization Rates (NAICS 324110) Gross Input to Atmospheric Crude Oil Distillation Units (1,000s of barrels per day) 7 Operational Capacity (1,000s of barrels per day) 2011 85.0% 14,946 17,583 2012 83.2% 14,672 17,635 2013 84.2% 14,836 17,626 2014 84.7% 14,851 17,524 2015 84.9% 14,847 17,497 2016 85.6% 14,853 17,342 2017 86.5% 14,827 17,142 2018 87.5% 14,778 16,887 2019 88.2% 14,743 16,706 Sources: U.S. Department of Energy, Energy Information Administration (EIA). 2007c. “Annual Energy Outlook.” Available at <http://www.eia.doe.gov/oiaf/archive/aeo07/ pdf/0383(2007).pdf>. As obtained on January 21, 2007. U.S. Department of Energy, Energy Information Administration (EIA). 2011. ”Annual Energy Outlook.”; (Data accessed on February 23, 2012) [Source for 2011– 2019 numbers.] < Capacity utilization -- http://www.eia.gov/oiaf/aeo/tablebrowser/#r elease=AEO2011&subject=0-AEO2011&table=11- AEO2011®ion=0-0&cases=ref2011-d020911a and Domestic Refinery Distillation Capacity -- http://www.eia.gov/forecasts /aeo/excel/ aeotab_11.xls >.

2.6 References American Petroleum Institute (API). 2006. “FYI on Refineries: Operating at Record Levels.” Available at <http://new.api.org/aboutoilgas/sectors/refining/upload/ FYI_Refineries.pdf>. As obtained on October 31, 2006.
Arizona Clean Fuels. 2007. Comp any Home Page. Available at <http://www.arizonacleanfuels.com/>. As obtained on February 5, 2007.
Calumet Specialty Products Partners, Morningsta r for Calumet Specialty Products Partners 10K. February 22, 2011. 10K for year ended December 31, 2010. (Data accessed on 10/21/11)[Source for 2010 numbers.] <http://quote.morningstar.com/stock-filing/AnnualReport/2010/12/31/t.aspx?t=XNAS:CLMT&ft=10- K&d=c7dd2813722445ded56c7e3aefebf2ca>
Calumet Specialty Products Partners. Febr uary 23, 2007. 10K for year ended December 31, 2006. EDGAR Database. Available at <htt p://www.sec.gov/Archives/edgar/data/ 1340122/000095013407003992/h43776e10vk.htm>.
Copyright 2011 Experian Information Solutions , Inc., Experian Business Reports accessed through LexisNexis at James Branch Cabell Library (Vir ginia Commonwealth University).

7 For each year, the gross input to atmospheric crude oil distillation units is calculated by multiplying the capacity utilization rate by the operational capacity.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-45 Copyright 2011 Harte-Hanks Market Intelligen ce, Inc., All Rights Reserved. CI Technology Database, September 2011.
CVR Energy Inc. 2006. Google Finance. Available at <http://finance.google.com/finance?q=NYSE:CVI>. As obtained on February 28, 2008.
CVR Energy Inc., EDGAR database for CVR Energy Inc. 10K. March 7, 2011. 10K for year ended December 31, 2010. (Data accessed on 10/23/11) [Source for 2010 numbers.] <http://www.sec.gov/Archives/edgar/data/1376139/000095012311022741/y90110e10vk. htm>

Dun & Bradstreet Small Business Solutions. Small Business Database. Available at <http://smallbusiness.dnb.com /default.asp?bhcd2=1107465546>.

Dun & Bradstreet. 2007. 2007 D&B Million Dollar Directory . Pennsylvania: Dun & Bradstreet Inc. Energy Information Administration (EIA), Fo rm EIA-820, “Annual Refinery Report.” Table 3. Capacity of Operable Petroleum Refineries by State and Individual Refinery as of January 1, 2011. (Data accessed on Oct ober 31, 2011.) [Source for 2009–2011 numbers.] <http://www.eia.gov/petroleum/refinerycapacity/>
Federal Trade Commission (FTC). 2004. “The Petrol eum Industry: Mergers, Structural Change, and Antitrust Enforcement.” Availabl e at <http://www.ft c.gov/opa/2004/08/ oilmergersrpt.shtm>. As obtained on February 6, 2007.

Gale Research Inc. 2007. Ward’s Business Direct ory of U.S. Private and Public Companies. Detroit: Gale Research.
General Accounting Office (FTC). 2007. “Energy Markets: Factors That Influence Gasoline Prices.” Available at <http://www.gao.gov/ new.items/d07902t.pdf>. As obtained on February 6, 2007.
Global Duns Market Identifiers, accessed through LexisNexis at University of Virginia’s Alderman Library.
Holly Corporation. March 1, 2007. 10K for year ended December 31, 2006. EDGAR Database. Available at <http://www.sec.gov/Archives/edgar/data/48039/000095013407004555/ d44106e10vk.htm>.
Holly Corporation, EDGAR database for Holly Corporation 10K. February 25, 2011. 10K for year ended December 31, 2010. (Data accesse d on 10/23/11) [Source for 2010 numbers.] <http://files.shareholder.com/downloads/FTO/1428853845x0xS950123-11- 18524/48039/filing.pdf>
Hoovers 2011 Online Data, accessed through Univers ity of South Carolina’s Moore School of Business Library. Hoovers 2011 Online Data reflects either actual data for 2010/2011 reported by companies or estimated data for 2011.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-46 Hoovers. 2007. Free Content, Company Information. Available at <http://www.hoovers.com/free/>. As obtained on April 11, 2007.
Langinier, Corrine. 2004. “Are Patent s Strategic Barriers to Entry?” Journal of Economics and Business 56:349-361. MathTech, Inc. 1997. “Industry Profile for the Pe troleum Refinery NESHAP.” Available at <http://www.epa.gov/ttnecas1/regdata/ IPs/Petroleum%20Refinery%20 (Sulfur%20Recovery%20Units,%20Catalytic% 20Crackin.pdf>. As obtained on October 31, 2006.
Million Dollar Database online, 2011, accessed through University of South Carolina’s Moore School of Business Library. Million Dollar Onli ne Data reflects eith er actual data for 2011 reported by companies or estimated data for 2011.
Nicholson, Walter. 2005. Microeconomic Theory: Basic Principles and Extensions . Mason, OH: South-Western Publishing.
Oil and Gas Journal, September 21, 1992. K.S. Eble and J. Feathers, “Process Water Reuse, Part I.”
Oil and Gas Journal. April 7, 2008. Worldwide Construction Update.
Petroleum Refinery Emissions Information Coll ection Request, Component 1, OMB Control No. 2060-0657
Reference USA, accessed thru Jefferson Madison Regional Library, Charlottesville, Virginia.
Risk Management Association (RMA). 2008. Annual Statement Studies 2007-2008. Pennsylvania: RMA, Inc.
Risk Management Association (RMA). 2011. Annual Statement Studies 2010–2011. Pennsylvania: RMA, Inc.
Reuters. July 19, 2007. “U.S. Refinery Expansion Plans.” Available at <http://uk.reuters.com/ article/oilRpt/idUKN1997 46120070719>. As obtained on February 5, 2007.

Small Business Administration. 2011. Table of Sm all Business Size Standards. Available at < http://www.sba.gov/sites/default/files/Size_St andards_Table.pdf>. As obtained October 2011. Speight, James G. 2006. “The Chemis try and Technology of Petroleum.” 4 th Edition, page 178.
U.S. Bureau of Labor Statistics (BLS), 2011. “Pr oducer Price Index Industry Data: Customizable Industry Data Tables.” (Data access ed on October 11, 2011.) [Source for 2007–2010 numbers]<http://data.bl s.gov/cgi-bin/dsrv?pc>.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-47 U.S. Bureau of Labor Statistics (BLS). 2007. “Pr oducer Price Index Industry Data: Customizable Industry Data Tables.” Available at <http ://www.bls.gov/ppi/>. As obtained on October 11, 2007. U.S. Census Bureau, using American FactFinder; “Sector 31: Annual Survey of Manufacturers: General Statistics: Statistics for Industr y Groups and Industries: 2009 and 2008 “ Release Date: 12/3/10 ; (Data accessed on 10/10/ 11). [Source for 2008 and 2009 numbers] <http://factfinder.census.gov/servlet/ IBQTable?_bm=y&-NAICSASM=324110&- ds_name=AM0931GS101&-ib_type=NAICS ASM&-_industry= 324110&-_lang=en>
U.S. Census Bureau, using American FactFinde r; “Sector 31: Manufacturing: Industry Series: Detailed Statistics by Industr y for the United States: 2007” Release Date 10/30/09; (Data accessed on 10/11/11). [Source for 2007 numbers] <http://factfinder.census.gov/servle t/IBQTable?_bm=y&-geo_id=01000US&- ds_name=EC0731I1&-NAI CS2007=324110&-_lang=en>
U.S. Census Bureau, using American FactFinde r; “Sector 31: Manufacturing: Industry Series: Materials Consumed by Kind for the United States: 2007” Release Date 10/30/09; (Data accessed on 10/11/11). [Source for 2007 number s] <http://factfinder.census.gov/ servlet/IBQTable?_bm=y&-ds_name=EC0731I3&-NAICS2007=324110&- ib_type=NAICS2007&-geo_id=&- _industry=324110&-_lang=en&- fds_name=EC0700A1>
U.S. Census Bureau, using American FactFinde r; “Sector 31: Manufactu ring: Subject Series: Concentration Ratios: Share of Value of Shipments Accounted for by the 4, 8, 20, and 50 Largest Companies for Industries: 2007.” Release Date 1/7/2011; (Data accessed on 10/12/11) [Source for 2007 number s]<http://factfinder.census.gov/ servlet/IBQTable?_bm=y&-ds _name=EC0731SR12&-NAICS2007=324110&- ib_type=NAICS2007&-NAICS2007sector =*6&-industrySel=324110&-geo_id=&- _industry=324110&-_lang=en>
U.S. Department of Commerce, Bureau of th e Census, FactFinder. 2011. 2009 Annual Survey of Manufactures. 1996–2011. Obtained through Amer ican FactFinder Database. (Data accessed on October 14, 2011.) [Source for 2007–2009 numbers] <http://factfinder.census.gov/servlet/Datas etMainPageServlet?_lang=en&_ts=336651423 017&_ds_name=AM0931GS101&_program=EAS>.
U.S. Department of Commerce, Bureau of the Census. 1997. 1995 Annual Survey of Manufacturer s. M95(AS)-1. Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/2/manmin/asm/m95as1.pdf>. As obtained on October 23, 2006.
U.S. Department of Commerce, Bureau of the Census. 1998. 1996 Annual Survey of Manufacturer s. M96(AS)-1 (RV). Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/3/98pubs/m96-as1.pdf>. As obtained on October 23, 2006.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-48 U.S. Department of Commerce, Bureau of the Census. 2000. “Population Density by County: Census 2000 Summary File 1 (SF 1) 100-Per cent Data”. Available through American FactFinder <http://factf inder.census.gov/home/saff/main.html?_lang=en>. As obtained on February 21, 2008.
U.S. Department of Commerce, Bureau of the Census. 2001. 1999 Annual Survey of Manufacturer s. M99(AS)-1 (RV). Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/2001pubs/m99-as1.pdf>. As obtained on October 23, 2006.
U.S. Department of Commerce, Bureau of the Census. 2003a. 2001 Annual Survey of Manufacturer s. M01(AS)-1. Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/2003pubs/m01as-1.pdf>. As obtained on October 23, 2006.
U.S. Department of Commerce, Bureau of the Census. 2003b. 2001 Annual Survey of Manufacturers . M01(AS)-2. Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/2003pubs/m01as-2.pdf. As obtained on March 4, 2008.
U.S. Department of Commerce, Bureau of the Census. 2004. 2002 Economic Census, Industry Series—Petroleum Refineries . Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/ec02/ec0231i 324110.pdf>. As obtained on October 23, 2006.
U.S. Department of Commerce, Bureau of the Census. 2006. 2005 Annual Survey of Manufacturer s. M05(AS)-1. Washington, DC: Government Printing Office. Available at <http://www.census.gov/prod/2005pubs/am043 1gs1.pdf>. As obtained on October 23, 2006.
U.S. Department of Commerce, Bureau of the Census. 2007. 2006 Annual Survey of Manufacturers. Obtained through Am erican Fact Finder Database <http://factfinder.census.gov/home/saff/main.html?_lang=en>.
U.S. Department of Energy, Energy Information Administration (EIA). 2012. “Petroleum & Other Liquids, Weekly Imports & Exports.”
< http://www.eia.gov/dnav/pet/pet_move_wkly_dc_NUS-Z00_mbblpd_4.htm >. U.S. Department of Energy, 2011 Energy Information Administration (EIA). 1996–2011. “Petroleum Supply Annuals, Volume 1.” (Dat a accessed on October 7, 2011) [Source for 2007–2010 numbers.] <http://www.eia.gov/dnav/pet/pet_sum_snd_d_nus_ mbbl_a_cur.htm>.
U.S. Department of Energy, 2011 Energy Information Administration (EIA). 1996–2011. “Petroleum Supply Annuals, Volume 1.” (Dat a accessed on October 7, 2011) [Source for 2007–2010 numbers.] <http://www.eia.gov/dnav/pet/pet_pnp_refp_dc_nus_ mbbl_a.htm>.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-49 U.S. Department of Energy, 2011 Energy Information Administration (EIA). 1996–2011. “Petroleum Supply Annuals, Volume 1.” (Dat a accessed on October 7, 2011.) [Source for2007–2010 numbers.] <http://www.eia.gov/dnav/pet/pet_move_imp_dc_NUSZ00_mbbl_a.htm>
U.S. Department of Energy, 2011 Energy Information Administration (EIA). 1996–2011. “Petroleum Supply Annuals, Volume 1.” (Dat a accessed on October 7, 2011.) [Source for2007–2010 numbers] <http://www.eia.gov/dnav/pet/pet_move_exp_dc_NUSZ00_mbbl_a.htm>.
U.S. Department of Energy, 2011 Energy Information Administration (EIA). 1996–2011. “Petroleum Supply Annuals, Volume 1.” (Dat a accessed on October 7, 2011.) [Source for 2007–2010 numbers.]<http://www.eia.gov/dnav/ pet/pet_pri_refoth_dcu_nus_a.htm>.
U.S. Department of Energy, Energy Informa tion Administration (EIA ). 1996–2007. “Petroleum Supply Annuals, Volume 1.” Availabl e at <http://www.eia.doe.gov/oil_gas/ petroleum/data_publications/petro leum_supply_annual/psa_volume1/psa_ volume1.html>. As obtained on October 31, 2007.
U.S. Department of Energy, Energy Informati on Administration (EIA). 2006a. “A Primer on Gasoline Prices.” Available at <http ://www.eia.doe.gov/bookshelf/brochures/ gasolinepricesprimer/printerversion. pdf>. As obtained on October 31, 2007.
U.S. Department of Energy, Energy Information Administration (EIA). 1999a. “Petroleum: An Energy Profile 1999.” DOE/EIA-0545(99). Avai lable at <http://tonto.eia.doe.gov/ FTPROOT/petroleum/054599.pdf>. As obtained on October 23, 2006.
U.S. Department of Energy, Energy Informa tion Administration (E IA). 2006b. “Refinery Capacity Report 2006.” Available at <h ttp://www.eia.doe.gov/oil_gas/petroleum/ data_publications/refinery_capacity_data/ref capacity.html/>. As obtained on October 23, 2006. U.S. Department of Energy, Energy Informati on Administration (EIA). 2006c. “Petroleum Supply Annual 2005, Volume 1.” Available at <http://www.eia.doe.gov/pub/oil_gas/ petroleum/data_publications/petroleum_s upply_annual/psa_volume1 /historical/2005/psa _volume1_2005.html>. As obt ained on October 31, 2007.
U.S. Department of Energy, Energy Informa tion Administration (EIA ). 2007a. “Refinery Utilization and Capacity.” Available at <http://tonto.eia.doe.gov/dnav/pet/ pet_pnp_unc_dcu_nus_m.htm>. As obtained on January 7, 2008.
U.S. Department of Energy, Energy Informa tion Administration (E IA). 2007b. “Refiner Petroleum Product Prices by Sales Type.” Available at <http://tonto.eia.doe.gov/ dnav/pet/pet_pri_refoth_dcu_nus_m.htm >. As obtained on January 11, 2008.
U.S. Department of Energy, Energy Informati on Administration (EIA). 2007c. “Annual Energy Outlook.” Available at <http://www.eia.doe .gov/oiaf/archive/ae o07/pdf/0383(2007).pdf>. As obtained on January 21, 2007.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

2-50 U.S. Department of Energy, Energy Information Administration (EIA). 2010. “Petroleum Supply Annual 2010, Volume 1.” Available at http://www.eia.gov/petroleum/supply/a nnual/volume1/archive/2010/pdf/table15.pdf

. U.S. Department of Energy, Energy Informa tion Administration (EIA). 2011, “Annual Energy Outlook.” (Data accessed on October 11, 2011) [Source for 2011–2019 numbers.]<http://www.eia.gov/fo recasts/aeo/pdf/0383(2011).pdf>.
U.S. Department of Justice and the Fede ral Trade Commission. 1992. Horizontal Merger Guidelines. Available at <http://www.ftc .gov/bc/docs/horizmer.htm>. As obtained on October 28, 2006.
U.S. Department of Labor, Occupational Sa fety and Health Administration (OSHA). 2003. OSHA Technical Manual, Section IV: Chapte r 2, Petroleum Refining Processes. TED 01- 00-015. Washington, DC: U.S. DOL. Availa ble at <http://www.osha.gov/dts/osta/ otm/otm_iv/otm_iv_2.html>. As obtained on October 23, 2006.
U.S. Energy Information Administration (EIA), 2011a. “Refinery Utilization and Capacity.” Available at http://www.eia.gov/dnav/p et/pet_pnp_unc_dcu_nus_a.htm; Release date: 7/28/11; (Data accessed on 10/11/ 11). [Source for 2007–2010 numbers]
U.S. Energy Information Administration (EIA), Form EIA-820, “Annual Refinery Report. Table 1. Number and Capacity of Op erable Petroleum Refineries by PAD District and State as of January 1, 2011” Release Date: June 24, 2011; (Data accessed on 10/12/11). [Source for 2011 numbers.] <http://www.eia .gov/petroleum/refinerycapacity/>
U.S. Environmental Protection Agency. 1995. “EPA Office of Compliance Sector Notebook Project: Profile of the Petroleum Refi ning Industry.” EPA/310- R-95-013. Washington, DC: U.S. EPA. Available at <http://www.epa.gov/compliance/resources/ publications/assistance/ sectors/notebooks/petrefsn.pdf>. As obtained on October 23, 2006. U.S. Environmental Protection Agency. 2006. “P roposed MHA Nation Clean Fuels Refinery.” Available at <http://www.epa.gov/Region8/co mpliance/nepa/refinerydeis.html>. As obtained on February 6, 2007.
Ward’s Business Directory of Public and Pr ivate Companies, 2011, accessed at James Branch Cabell Library (Virginia Commonwealth University).
Western Refining, Inc. March 8, 2007. 10K for year ended December 31, 2006. EDGAR Database. Available at <http://www. sec.gov/Archives/edgar/data/1339048/000095 013407005096/h44360e10vk.htm>.
Western Refining, Thomson Reuter s Western Refining, Inc. 10K. March 8, 2011. 10K for year ended December 31, 2010. (Data accessed on 10/23/11) [Source for 2010 numbers.] <http://phx.corporate-ir.net/phoe nix.zhtml?c=194293&p=irol-sec>

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-1 3 EMISSIONS AND ENGINEERING COSTS

3.1 Introduction The emissions standards that are the subj ect of the proposed rulemaking include: (1)
National Emission Standards for Hazardous Air Po llutants from Petroleu m Refineries (40 CFR part 63, subpart CC) (Refinery MACT 1); (2) National Emission Standards for Hazardous Air Pollutants for Petroleum Refineries: Catalytic Cracking Units, Catalytic Reforming Units, and Sulfur Recovery Units (40 CFR part 63, subpart UUU) (Refinery MACT 2); (3) Standards of Performance for Petroleum Refineries (40 CFR part 60, subpart J) (Refinery NSPS J); and (4)
Standards of Performance for Petroleum Refineri es for which Construction, Reconstruction, or Modification Commenced After May 14, 2007 (40 CFR part 60, subpart Ja) (Refinery NSPS Ja). The sources or processes affected by amendments to these standards include storage vessels, delayed coking units, and fugitive emissions subject to Refinery MACT 1. The proposed amendments also reflect requirements to ensu re compliance, including flare monitoring and operational requirements, requirements for relief valve monitoring, and PM emissions source performance tests for the fluid catalytic cracki ng units (FCCUs) at existing sources (Refinery MACT 2). In addition, these proposed amen dments address technical corrections and
clarifications raised in a 2008 i ndustry petition for reconsiderati on applicable to Refinery NSPS
Ja. 8 These technical corrections a nd clarifications are addressed in this proposal because they also affect sources subject to the proposed amendments to Refinery MACT 1 and 2.
In this section, we provide an overview of the engineering co st analysis used to estimate the additional private ex penditures industry may make in orde r to comply with the following portions of the proposed rule amendments:

 For storage vessels, require fit ting controls on slotted guidepol es and un-slotted guidepoles, as well as fittings for other openings on a ffected floating roof storage vessels.

 Work practice standards for the delayed coking units (DCU).

 New work practice requirements for fugitive emissions sources, which include establishing a fenceline concentration, conducting fenceline mo nitoring, and requiring corrective actions if

8 The Refinery NSPS J was amended in 2008, following a review of the NSPS. As part of the review, EPA developed separate standards of performance for new process units (NSPS Ja).

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-2 the fenceline monitoring results indicate that benzene concentrations exceed a specific
concentration action level.

 Relief valve monitoring using a system that is capable of identifying and recording the time and duration of each pressure release and of no tifying operators that a pressure release has
occurred.

 Operating and monitoring requirements for refinery flares used as control devices in refinery MACT 1 and 2 to ensure flares are meeting the emissions limits required by the refinery MACT standards. Owners or operators of flar es used as a control device are required to
monitor at least one of the follo wing parameters in the flare vent gas: (1) net heating value; (2) lower flammability limit; and/or (3) total volumetric fraction of combustible components present. For flares using steam- or air-assist, monitoring of steam- and/or air-assist rates is also required to determine compliance with the operating limits.

 PM emissions testing requirements for FCCU s consistent with Refinery NSPS Ja.
For additional discussion of the proposed amendments, see Section IV.A. What actions are we taking pursuant to CAA sec tions 112(d)(2) and 112(d)(3)? of the proposed rule preamble.

3.2 Summary of Proposed Rule Amendments

3.2.1 Storage Vessels Storage vessels, also referred to as storage tanks, are used to st ore liquid and gaseous feedstocks for use in a process, as well as liq uid and gaseous products coming from a process. Most storage vessels are designed for operation at atmospheric or near atmospheric pressures. High-pressure vessels are used to store compressed gases and liquefied gases. In the engineering cost analysis, fitting controls and monitoring options were identified as developments in practices, processes and control technologies for storage vessel s. Emission reduction options identified include: (1) Option 1 -- requiring guidepole controls and other fitting controls for existing external or internal fl oating roof tanks as required in the Generic MACT for storage vessels (40 CFR part 63, subpa rt WW) in 40 CFR 63.1063; (2) Option 2 -- Option 1 plus revising the definition of Group 1 storage vessel to include smaller capacity storage vessels and/or storage vessels cont aining materials with lower vapor pressures; and (3) Option 3 -- Option 2 plus requiring additional monitoring to prevent roof landings, liquid level overfills and

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-3 to identify leaking vents and fittings from tanks. Options 1 and 2 were identified as developments in practices, processes and contro l technologies because th ese options are required
for similar tanks in some chemical manuf acturing MACT standards and are considered technologically feasible for stor age vessels at refineries. Opti on 3 is also an improvement in practices because these monitoring methods have been required fo r refineries by other regulatory agencies.
Based on the engineering cost analysis, Option 2 was considered to be cost effective and is included in the proposal to re vise Refinery MACT 1; the pr oposal will cross-reference the corresponding storage vessels requirements in th e Generic MACT and revise the definition of Group 1 storage vessels. 9 Table 3-1 includes a summary of op tion costs. The annualized cost of capital estimates were determined based on a 7 per cent interest rate. The storage vessel-related capital costs were annualized over 15 years. As the storage vessel controls do not require significant on-going operating and maintenance cost s, the annualized co sts of capital is the primary cost for the storage vessel controls. For further details on the assumptions and methodologies used in this analysis, see the technical memorandum titled Impacts for Control Options for Storage Vessels at Petroleum Refineries, Revised November 14, 2012, in Docket ID Number EPA-HQ-OAR-2010-0682. In addition, negative annualized costs, or recove ry credits, were estimated as part of the storage vessel control option. For storage ve ssels, if a product stor age tank has fewer VOC emissions, then there will be more product remain ing in the tank that can be sold. The product recovery credit is based on the VOC emissions reductions projected to be achieved at each specific refinery. For storage vessels, these emissions reductions are based on the types and number of tanks present at each refinery, the types of controls currently used for each tank, and the average vapor pressure of th e liquid stored. Negative annua lized costs introduce the question of why, if these emissions can be reduced prof itably using environmenta l controls, are more producers not adopting the controls in their own economic self-interest. Assuming financially rational producers, standard economic theory sugge sts that all refineries would incorporate all cost-effective improvements, of which they are aware, without government intervention. This cost analysis is based on the observation that emi ssions reductions that app ear to be profitable,

9 The proposed revised definition will include (1) storage ve ssels with capacities greater than or equal to 20,000 gallons, but less than 40,000 gallons if the maximum true vapor pressure is 1.9 psia or greater and (2) storage tanks greater than 40,000 gallons if the maximum true vapor pressure is 0.75 psia or greater.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-4 on average, in the analysis have not been adopted by a significant segment of the industry. This observation, often termed the “energy paradox”, has been noted to occur in other contexts where consumers and firms appear to undervalue a wide range of investments in energy conservation, even when they pay off over relatively s hort time periods. We discuss some possible explanations for the apparent pa radox in the context of the stor age vessel requirements in this proposal.
First, there may be an opport unity cost associated with th e installation of environmental controls (for purposes of mitigating the emissions of pollutants) that is not reflected in the
control costs. In the event that the environm ental investment displaces other investment in productive capital, the difference between the rate of return on the marginal investment displaced by the mandatory environmental investment is a measure of the oppor tunity cost of the environmental requirement to the regulated entity. However, if firms are not capital constrained, there may not be any displacement of investment, a nd the rate of return on other investments in the industry would not be relevant as a measure of opportunity cost. If firms should face higher borrowing costs as they take on more debt, there may be an additional opportunity cost to the firm. To the extent that any opportunity costs are not added to the control costs, the compliance costs presented above may be underestimated.
A second explanation could be that the average impacts identified in th is analysis are not reflective of the true costs compelled by the regulation relative to the controls installed voluntarily. A third explanation for why there appear to be ne gative cost control technologies that are not generally adopted is imperfect information. If emissi ons from the refining sector are not well understood, firms may und erestimate the potential fi nancial returns to capturing emissions. Finally, the cost from the irreve rsibility associated with implementing these
environmental controls is not refl ected in the engineering cost estim ates above. It is important to recognize the value of flexibility taken away from firms when requiring them to install and use a particular emissions capture t echnology. If a firm has not adopted the technology on its own, then a regulation mandating its use means the firm loses the option to postpone investment in the technology in order to pursue alte rnative investments today, and th e option to suspend use of the technology if it becomes unprofitable in the future. Therefore, the full cost of the regulation to the firm is the engineering cost and the lost optio n value minus the revenues from the sale of the additional recovered product. In the absence of quantitative estim ates of this option, the cost

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-5 estimates for the storage vessel controls may und erestimate the full costs faced by the affected
firms.

Table 3-1 Nationwide Emissions Reduction and Cost Impacts of Control Options for Storage Vessels at Petroleum Refineries

Control Option Total Capital Investment

(million 2009$) Total Annualized

Costs w/o Recovery

Credits (million

$/yr) Recovery Credits (million

$/yr) Total Annualized Costs w/ VOC Recovery Credits (million $/yr) Emissions Reductions, VOC (tpy) Emissions Reductions, HAP (tpy) Overall Cost Effectiveness

with VOC Recovery Credit

($/ton HAP) 1 11.9 1.8 (6.6) (4.8) 11,800 720 (6,690) 2 -- Proposed Option 18.5 3.1 (8.2) (5.1) 14,600 910 (5,530)

3 36.4 9.6 (9.1) 0.56 16,000 1,000 560

3.2.2 Delayed Coking Units DCUs use thermal cracking to upgrade heavy feedstocks and to pr oduce petroleum coke. Unlike most other refinery operations, which are continuous, DCUs are operated in a semi-batch system. Most DCUs consist of a large process heater, two or more coki ng drums, and a single product distillation column. Botto ms from the distillation column are heated to near cracking temperatures and the heavy oil is fed to one of the coking drums. As the cracking reactions occur, coke is produced in the drum and begins to fill the drum with sponge-like solid coke material. When one coking drum is filled, the feed is diverted to the second coke drum. The full coke drum is purged and cooled by adding steam and water to the ve ssel. The initial water added to the vessel quickly turns to steam, and the steam helps to cool and purge organics in the coke matrix. After the coke drum is sufficiently cool ed and filled with water in sufficient volumes to cover the coke, the drum is opened, the water dr ained, and the coke is removed from the vessel using high pressure water. Once the coke is cut out of the drum, th e drum is closed, and prepared to go back on-line. A typical coke drum cycle is typi cally 28 to 36 hours from start of
feed to start of feed.
During the reaction process, the DCU is a clos ed system. When the coke drum is taken off line, the initial steaming pro cess gas is also recovered thr ough the unit’s product distillation column. As the cooling cycle continues, the pr oduced steam is sent to a blowdown system to recover the liquids. Refinery MACT 1 standa rds (40 CFR part 63, subpart CC) define the

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-6 releases to the blowdown system as the dela yed coker vent and these emissions must be controlled following the requirements for miscella neous process vents. Near the end of the cooling process, a vent is opened on the drum to allow the remaining steam and vapors to be released directly to the atmos phere prior to draining, deheading, and decoking (coke cutting) the
coke from the drum. Emissions from DCU o ccur during this depressuring (commonly referred to as the steam vent) and subsequent decoking steps.
Establishing a lower pressure set point at which a DCU ow ner or operator can switch from venting to an enclosed blowdown system to venting to the atmosphere is the primary control technique identified for reducing emissions from delayed coking operations. Essentially, there is a fixed quantity of steam that will be ge nerated as the coke drum and its contents cool. The lower pressure set point will require the DCU to vent to the closed blowdown system longer,
where emissions can be recovered or controlled. This will result in fewer emissions released during the venting, draining and deheading process.
Refinery NSPS Ja establishes a pressure limit of 5 psig prior to allowing the coke drum to be vented to the atmosphere. Based on a revi ew of permit limits and consent decrees, EPA found that coke drum vessel pressure limits have b een established and achieved as low as 2 psig. Based on the 2011 ICR responses, there are 75 operating DCU, indicating that the sixth percentile is represented by the fifth-best performing DCU. EPA researched permits, consent decrees, refinery ICR responses , and other rules addressing DCU depressurizing limits. Out of the 75 DCU, EPA identified at least 27 DCU that either currently opera te or are required to operate by venting to the atmosphere only after th e coke drum vessel pressure has reached 2 psig or less. See Table 2 of the September 12, 2013 Impact Estimates for Delayed Coking Units
memorandum for more details on these DCU. To be in compliance with their permit limits, the best-performing sources must be able to depressuri ze at 2 psig or less at all times. Therefore, the MACT floor for DCU decoking operati ons is to depressure at 2 psig or less prior to venting to the atmosphere for both new and existing sources.
EPA also considered control options beyond th e floor level of 2 psig to determine if
additional emissions reductions c ould be cost effectively achieve d. EPA considered a control option that allowed atmospheric venting only afte r the DCU vessel pressure reached 1 psig or less, since some facilities reported in the 2011 ICR depressurizing to that level prior to venting.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-7 EPA determined that there are several technical difficulties associated with establishing a pressure limit at this lower level. EPA also c onsidered whether there were means to connect the bottom of the coke drum to a large diameter “ hose” so that the drained water and/or the coke cutting slurry could be discharged from the DCU and enter the coke pit in a submerged fill manner. However, EPA could identify no commercia lly available equipment to connect the coke drum to the coke pit. Because these options we re either not technically feasible or equipment was not commercially available, EPA did not estimate costs.
For existing sources, EPA assumed all DCU th at reported a “typical drum pressure prior to venting” of more than 2 ps ig would install and operate a st eam ejector system to reduce the coke drum pressure to 2 psig prior to venting to atmosphere or draining. The operating costs of the steam ejector system are offset, to some extent, by the additional recovered vapors. Vapors from the additional gases routed to the blow down system contain high levels of methane (approximately 70 percent by volume on a dry basis) based on DCU steam vent test data. If these vapors are directed to the closed blowdown system rather than to the atmosphere, the dry gas can generally be recovered in the refinery fuel gas system or light-ends gas plant. This recovered methane is expected to offset natural gas pur chases for the fuel gas system. Also, EPA anticipates that new DCU sources can be built with a closed blowdown system designed to achieve a 2 psig vessel pressure with no significant increase in cap ital or operating costs of the new DCU. There may be a slight increase in capital costs for the low pressu re valve design or for larger diameter piping; however, these design improvements generally lower the operating costs
of the DCU.
The proposal includes appropriate work practic e standards in place of emission limits for the DCU – the work practice standards include a lo wer pressure set point for venting. Costs and
emissions reductions were evaluated on a DCU- specific basis using the data reported by petroleum refineries in the detailed 2011 ICR responses, along with vendor quotes obtained in
2011. The cumulative nationwide costs calculated for the petroleum refining industry for this option are summarized in Table 3-2 and Table 3-3

. Annualized cost of capital estimates were determined based on a 7 percent interest rate . The DCU capital costs were annualized over 15 years. For additional discu ssion, see the technical memorandum titled Impact Estimates for Delayed Coking Units, September 12, 2013, in Docket ID Number EPA-HQ-OAR-2010-0682.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-8 Table 3-2 Nationwide VOC Impacts for De layed Coking Unit Control Options

Control Option Total Capital Investment (million 2009$)
10 Total Annualized

Costs w/o Recovery (million $/yr) Recovery Credits (million

$/yr) Total Annualized

Costs w/ Recovery (million $/ yr) Emissions Reduction, VOC (tpy) Cost Effectiveness ($/ton VOC

reduced) Venting at

2 psig $52.0 $10.2 ($6.20) $3.98 4,250 $940

Table 3-3 Nationwide HAP Impacts for De layed Coking Unit Control Options

Control Option Total Capital Investment (million 2009$) Total Annualized

Costs w/o Recovery (million $/yr) Recovery Credits (million

$/yr) Total Annualized

Costs w/ Recovery (million $/ yr) Emissions Reduction, HAP (tpy) Cost Effectiveness

($/ton HAP

reduced) Venting at

2 psig $52.0 $10.2 ($6.20) $3.98 850 $4,700

3.2.3 Fenceline Monitoring Certain emissions sources, such as fug itive leaks from equipment and wastewater collection and treatment systems, are inherently difficult to quantify with methods currently available. In general, uncertainties in emissions estimates result from:

o Exclusion of nonroutine emissions;

o Omission of sources that are unexpected, not measured, or not considered part of the affected source, such as emissions from pr ocess sewers, wastewater systems, or other fugitive emissions;

o Improper characterization of s ources for emissions models and emissions factors; and

o Inherent uncertainty in emi ssions estimation methodologies.

In 2009, the EPA conducted a year-long diffusive tube monitoring pilot project at the fenceline of Flint Hills West Refinery in Corpus Christi, Texas. The study concluded that the modeled-derived concentrations are significantl y lower than the actual measured values at virtually every point alon g the fenceline. On average, the measured values were a factor of 10

10 The technical memo entitled Impact Estimates for Delayed Coking Units includes the following note of clarification: “Although the control cost estimates for de layed coking units were developed from 2011 vendor quotes, the impacts for other petroleum refinery sources are reported in 2009 dollars to be c onsistent with other cost estima tes developed for other Refinery MACT 1 emission sources. Given the low inflation across this time period, it was assumed that the delayed coking unit costs developed from the 2011 vendor quote could be used without correct ion to estimate the delayed coking units control costs in 2009 dollars.”

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-9 times higher than the modeled values. Alt hough EPA would not expect the values to be identical, such a significant diffe rence is an indicator that emi ssions may, in fact, be far more significant than accepted methodologie s and procedures can predict. Measurement of the concentration of expected pollutants at the fenceline provides an indication of the uncertainty associated with emissions estimates fo r all near ground-level sources, including fugitives. EPA reviewed th e available literature and identified several different methods for measuring fugitive emissi ons around the fenceline of a petroleum refinery. These methods include: (1) passive diffusive tube monitoring networks ; (2) active monitoring station networks; and (3) open path monitoring syst ems. As a result of the year-long fenceline monitoring pilot project at Flint Hills West Refinery in Corpus Christi, EPA found the passive diffusive tube monitoring technology to be capab le of providing cost-eff ective, relatively robust monitoring data. Average annual costs were estimated for a ten-year period (the useful life of the analytical equipment is expected to be ten years, according to the analytical equipment manufacturer representatives) and assumed an annualized cost of capital based on a 7 percent
interest rate. The initial costs include the co st of purchasing and installing the monitoring stations, collecting the samples, a nd performing the analyses for the first year. Initial costs also include the cost of purchasing a gas chroma tograph, a thermal desorption unit with an autosampler, and the diffusive tubes and caps. Analytical equipment cost estimates were developed from vendor quotes, which included both the cost of the analytical equipment and materials, as well as man-hour estimates for pe rforming the analyses. Recurring costs include the cost (man-hours) for collec ting the samples and the cost of analyzing the samples (and any materials consumed).
Table 3-4 presents nationwide cost estimates of applying the different monitoring options to all refineries. To generate the estimates, it was assumed that refine ries with crude refining capacity of less than 125,000 barrels per day would fall into the sm all size (less than 750 acres); refineries with crude refining capacity greater than or equal to 125,000 barrels per day and less than 225,000 barrels per day would fa ll into the medium si ze facility range (gre ater than or equal to 750 and less than 1,500 acres); and refineries w ith crude throughput of grea ter than or equal to 225,000 barrels per day would fall into the large facility size (gr eater than or equal to 1,500 acres). The nationwide costs in cluded for the proposed amendmen ts assume that all facilities

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-10 would use passive diffuse tube monitoring st ations and elect to purchase the equipment necessary to perform the anal ysis in-house. For additiona l discussion, see the technical memorandum titled Fenceline Monitoring Techni cal Support Document, January 17, 2014, in
Docket ID Number EPA-HQ-OAR-2010-0682.

Table 3-4 Nationwide Costs (in 2009$) for Fencelin e Monitoring at Petroleum Refineries

Refinery Area Size Number of Refineries Number of Monitoring

Sites per Refinery Capital Costs for All Refineries ($) Annualized Cost ($/yr)

Option 1 (Proposed Option) - Passive Diffusive Tube Monitoring Station Network Small (< 750 acres) 84 12 7,177,000 3,049,000
Medium ( ≥ 750 and < 1,500 acres) 27 18 2,340,000 1,107,000
Large ( ≥ 1,500 acres) 31 24 2,736,000 1,423,000

Total 142 2,238 12,250,000 5,580,000 Option 2 - Active Monitoring Station Network Small (< 750 acres) 84 12 11,090,000 16,300,000
Medium ( ≥ 750 and < 1,500 acres) 27 18 4,130,000 6,930,000
Large ( ≥ 1,500 acres) 31 24 5,390,000 9,900,000

Total 142 2,238 20,600,000 33,100,000 Option 3 - Open Path Monitoring Network Total 142 568 11 71,000,000 45,600,000

3.2.4 Relief Valve Monitoring Relief valve releases vented directly to the atmosphere are caused by malfunctions, and emissions vented to the atmosphere by relief va lves can contain emissions that are regulated under Refinery MACT 1. Using CAA Section 112( d)(2) and (3), the pr oposal specifies that

11 For the monitoring approach, EPA assumed 4 monitoring stations per refinery – 142 refineries * 4 monitoring stations = 568 total monitoring sites.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-11 relief valves in organic HAP service may not discharge to the atmosphere. The proposed rule provides that a relief valve release, unless ducted to an air pollution control device meeting the process vent limits, is a viola tion of the emissions standard.
EPA analyzed several options for improvement s to the existing leak detection and repair (LDAR) program in Refinery MACT 1, includin g LDAR using EPA Met hod 21 (in 40 CFR part 60, Appendix A-7), LDAR using optical gas im aging, and requiring monitoring of pressure release devices (PRD) for compliance assurance. We assessed several monitoring options, including:

 Option 1 -- leak threshold that required repa ir defined as 500 ppm for valves in G and LL service and 2,000 ppm for pumps in LL service.

 Option 2 -- leak thresholds the same as Op tion 1 but a majority of refineries were assumed to conduct monitoring with an optical gas imaging device.

 Option 3 -- monitoring and repair for connect ors in G and LL service, where the leak threshold that required repa ir was defined as 500 ppm.
EPA also assessed continuous monitoring requirem ents for PRD that would record the time and duration of a release as well as alert oper ators when there is a release. Table 3-5 presents nationwide cost estimates of applying the differe nt monitoring options to all refineries.
To ensure compliance with this amendment, the proposal requires that sources monitor relief valves using a system that is capable of identifying and recording the time and duration of each pressure release and of notifying operators th at a pressure release has occurred. Where a pressure release occurs, it is important to identify and mitigate it as quickly as possible. For purposes of estimating the costs of this requiremen t, it was assumed that operators would install
electronic monitors on each relief valve that vents to the atmo sphere to identify and record the time and duration of each pressure release. Howeve r, the proposal allows owners and operators to use a range of methods to satisfy these requirements, including the use of a parameter monitoring system on the process operating pressure th at is sufficient to indicate that a pressure release has occurred, as well as r ecord the time and duration of that pressure release. Annualized cost of capital estimates were determined base d on a 7 percent interest rate and a 10-year equipment life. Based on cost assumptions, th e nationwide capital cost of installing these

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-12 electronic monitors is $9.54 m illion and the annualized capital cost is $1.36 million per year (2009$). For additional discussion of the proposed relief valve monitoring amendments, see the technical memorandum titled Impacts for Equipm ent Leaks at Petroleum Refineries, December 19, 2013, in Docket ID Numb er EPA-HQ-OAR-2010-0682 and Section IV.A.4.a. Vent Control Bypasses, Relief Valve Discharges of the proposed rule preamble.

Table 3-5 Nationwide Costs for Equipment Leaks (2009$)

Option Incremental Capital Cost (million $) Incremental Annualized Capital Cost (million $/yr) Incremental Annual Expenses (million $/yr) Total Annualized Cost (million $/yr) Option 1 -- Valves G and LL, Pumps LL 1.23 0.176 0.355 0.531 Option 2 – Option 1 w/Optical Gas Imaging Instrument b 5.76 0.821 (4.33) a (3.51) a

Option 3 -- Connectors 52.1 7.40 6.52 13.9 Proposed Option – PRD – G and Liquid 9.54 1.36 NA 1.36

a Parentheses indicate estimated cost savings.
b Costs for Option 2 are estimates of the potential costs of monitoring with an optical gas imaging instrument using an EPA protocol still in development.

3.2.5 Flare Monitoring All of the requirements for flares operating at petroleum refineries are intended to ensure compliance with the Refinery MACT 1 and 2 sta ndards when using a flare as an air pollution control device. Refinery MACT 1 and 2 refe rence the flare requirements in the General
Provisions 12 , which require a flare used as an air po llution control device operate with a pilot flame present at all times. 13 The proposal removes the cross -reference to the General Provisions and includes the requirement that flares opera te with a pilot flame at all times and be continuously monitored for using a thermocouple or any other equivalent device in Refinery

12 General Provisions are the general provisions under 40 CFR Part 63 for National Emissions Standards for Hazardous Pollutants for Source Categories located at: http://www.ecfr.gov/cgi-bin/textidx?SID=4cd63c1d1e17697310ac3328e81aa5d3&tpl=/ecfrbrowse/Title40/40cfr63_main_02.tpl. 13 Pilot flames are proven to improve flare flame stability; even short durations of an extinguished pilot could cause a significant reduction in fl are destruction efficiency.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-13 MACT 1 and 2. The proposal also amends Refi nery MACT 1 and 2 to add a new operational requirement to use automatic relight systems for all flare pilot flames. 14 Because of safety issues with manual relighting, EPA believes that nearly all refinery flar es are currently equipped with an automated device to relight the pilot flame. The proposal also amends Refinery MACT 1 and 2 to add a requirement that a visible emissions test be conducted each day and whenever visible emissions are observed from the flare using an observation period of 5 minutes and EPA Method 22 of 40 CFR part 60, Appendix A-7.

The General Provisions at 40 CFR 63.11(b) specify maximum flare tip velocities based on flare type (non-assisted, steam-assisted, or air- assisted) and the net heating value of the flare vent gas. These maximum flare tip velocities are required to ensure that the flame does not “lift off” the flare, which could cause flame instability and/or potentially resu lt in a portion of the flare gas being released without proper com bustion. In addition to proposing to remove the
cross-reference to the Genera l Provisions, the proposal conso lidates the requirements for maximum flare tip velocity into Refinery MACT 1 and 2 as a single equation, irrespective of flare type. Based on an analysis of the various studies for air-assisted flares, EPA is proposing
that air-assisted flares at refineries use the same equati on that non-assisted and steam-assisted flares currently use to establish the flare tip velocity operating limit.
The current requirements for flares in the Ge neral Provisions specify that the flare vent gas must meet a minimum net heating value of 200 British thermal units per standard cubic foot (Btu/scf) for non-assisted flares and 300 Btu/sc f for air- and steam-assist ed flares. Refinery MACT 1 and 2 reference these requirements, but neither the General Provisions nor Refinery MACT 1 and 2 include specific m onitoring requirements to monitor the net heating value of the vent gas. In addition, recent fl are testing results indicate that this parameter alone does not adequately address instances when the flare ma y be over-assisted. Because approximately 90 percent of all flares at refineries are either steam- or air-assisted, it is critical to ensure the assist
media be accounted for. Recent flare test data have shown that the best way to account for situations of over-assisting is to c onsider the properties of the mixt ure of all gases at the flare tip in the combustion zone when evaluating the abilit y to combust efficiently. The proposal adds definitions of two key terms relevant to refinery flare performance. First, the proposal defines

14 An automatic relight system provides a quicker resp onse time to relighting a snuffed out flare than manual methods and results in improved flare flame stability.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-14 “flare vent gas” to include all waste gas, sw eep gas, purge gas and supplemental gas, but not include pilot gas or assist media. The proposal also defines the “combusti on zone gas” as flare vent gas plus the total steam-assi st media and premix assist air that is supplied to the flare.
EPA expects that the newly proposed requirement s for refinery flares will affect all flares at petroleum refineries. Based on data received as a result of the 2011 ICR, EPA estimates that there are 510 flares operating at petroleum refineries and that 285 of these receive flare vent gas flow on a regular basis. EPA exp ects that refineries will need a flare gas flow monitor and either a gas chromatograph, total hydrocarbon analyzer, or calorimeter (Btu monitor). EPA believes that most flares have already installed a flare gas flow monitor in order to comply with the requirements of Subpart Ja. The engineering cost analysis reflects potent ial supplemental natural gas use and steam savings projections estimated based on the refinery fl are dataset. Steam reduction credits and supplemental natural gas co sts were only assigned to flares electing continuous monitoring; flares us ing the engineering cal culation were assumed to maintain their current steam and natural gas use rates. 15
Industry costs submitted to EPA through consent decrees were used as the primary source
of cost estimation. These costs included all inst allation and ancillary cost s associated with the installation of the monitors (i.e ., analyzer shelters and electri cal connections). Costs were estimated for each flare for a given refinery, c onsidering operational type and current monitoring systems already installed on each individual flare. Costs for any additional monitoring systems
needed were estimated based on installed cost s received from petroleum refineries and, if installed costs were unavailable, costs were es timated based on vendor-purchased equipment.
The baseline emissions estimate and emissions reductions achieved by th e proposed rule were estimated based on current vent gas and steam flow data submitted by industry representatives.
Table 3-6 provides a summary of total capital and annuali zed cost for flare control alternatives.
Table **3-7** provides detailed cost information for the flare monitoring requirements. For additional discussion, see the technical memorandum titled Petroleum Refinery Sector Rule: Flare Impact Estimates, January 16, 2014, in Docket ID Number EPA-HQ-OAR-2010-0682. The specific cost data collected for the flare cost s estimates are provided in Attachment 3 to this

15 As an alternative to continuous monitoring systems, process knowledge, engineering calculations and/or grab samples can be used to determine the composition (or heat content) of the flare gas.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-15 technical memorandum. See Attachment 3 for de tails on the assumptions made for equipment
life and interest rate.

Table 3-6 Summary of Capital and Annualized Costs for Flare Control Alternatives (2010$)

Control Alternative Description Flares Currently Subject to 40 CFR 63.11 All Flares at Major Source Refineries

Total Capital

Investment (million $) Total Annualized Cost (million $/yr) Total Capital Investment (million$) Total Annualized Cost (million $/yr) Option 1 (Proposed Option) – 270 Btu/scf; Engineering Calculations 98 23.4 147 36.3
Option 2 – 270 Btu/scf; Monitors Only 219 66.1 439 92.5

Table 3-7 Detailed Costs of Flare Monitoring Requirements (2010$)

Monitoring Equipment Total Capital Investment

($/flare)* Total Annualized Cost ($/year/flare)* # of Flares Total TCI ($) Total TAC ($/year) Notes 16

Calorimeter $105,000 $30,000 85 $8,925,000 $2,550,000 85 flares (Table 9) Column labeled -- Number of flares needing to install a new heat content monitor, All.

Row labeled -- Total no. of flares.

Steam Flow/Controls $684,000 $124,300 190 $129,960,000 $23,617,000 190 flares ( Table 3) Column labeled -- Number of Routine Flow Flares, All;
Rows -- Steam-Assisted (228) – Air-Assisted (38) = 190

Air Flow/Controls $164,000 $52,000 38 $6,232,000 $1,976,000 38 flares ( Table 3) Column labeled -- Number of Routine Flow Flares, All;

Row labeled -- Air-Assisted (38)
Supplemental Natural Gas $0 $98,660 190 $0 $18,745,400 190 flares ( Table 3) Column labeled -- Number of Routine Flow Flares, All;

16 The tables referenced are located in the technical memo entitled “Petroleum Refinery Sector Rule: Flare Impact Estimates”, January 16, 2014.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-16 Rows -- Steam-Assisted (228) – Air-Assisted (38) = 190

Steam Savings $0 -$73,770 190 $0 -$14,016,300 190 flares ( Table 3) Column labeled -- Number of Routine Flow Flares, All;
Rows -- Steam-Assisted (228) – Air-Assisted (38) = 190

Engineering Cost Calculations $7,000 $13,160 267 $1,869,000 $3,513,720 267 flares (510 flares – 243 flares) Table 3 : Column labeled – Total Number of Flares, All; Row labeled – Total No. of Flares (510)

Table 9 : Column labeled – Number of Routine flares that do not have full FGRS, All

Row labeled – Total No. of Flares (243)
Total N/A N/A N/A $146,986,000 $36,385,900 N/A

* Costs are located in Table 7. Summary of Flare Monitoring Equipment and Material Costs (2010$) in the technical

memo entitled “Petroleum Refinery Sector Rule: Flare Impact Estimates”, January 16, 2014. N/A = Not applicable

3.2.6 FCCU Testing Under Refinery MACT 2, an initial emissi ons source performance demonstration is required to show that the FCCU is compliant w ith the emissions limits selected by the refinery owner or operator. The performance test is a one-time requirement; additional performance tests are only required if the owner or operator elects to establish ne w operating limits, or to modify the FCCU or control system in such a manner that could affect the control sy stem’s performance.
Currently, the Refinery MACT 2 does not in clude periodic performance tests for any FCCU. The lack of any ongoing performance test requirements is inconsistent with developments in practices for ensuring ongoi ng compliance with emission limits. For the proposed amendments, we considered adding an a nnual testing requirement for FCCU subject to Refinery MACT 2. The annual nationwide cost burden would exceed $1 million per year, and only modest improvements in control perf ormance resulting from the performance demonstrations were projected. We then considered requiring FCCU emissions source performance tests once every 5 years (i.e., once per title V permit period). The nationwide annual cost of this additional testing requirement fo r the FCCU is projected to be, on average, $213,000

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-17 per year. Therefore, the proposal includes a requirement for an emissions source performance test once every 5 years for all FCCU subject to Refinery MACT 2.

3.3 Summary of Costs of Proposed Rule Amendments The total capital investment cost of the proposed amendments and enhanced monitoring provisions is estimated at $239 million -- $82.8 million from proposed amendments and $156.6 million from standards to ensure compliance. The annualized costs are estimated to be approximately $42.4 million, which includes an es timated $14.4 million credit for recovery of lost product, some operation and maintenance co sts, and the annualized cost of capital. The total capital investment cost of the proposed amendments associated with proposed requirements for storage vessels, delayed coking units, and fugitive emissions monitoring is estimated at $82.8 million. We es timate annualized costs associated with those proposed requirements to be approximately $4.5 million, wh ich includes the estimated $14.4 million credit for recovery of lost product and the annualized cost of capital. The proposed requirements for storage vessels would result in additional capital costs of $18.5 m illion and a negative annualized cost of $5.1 million per year. The proposed requir ements for DCUs would result in additional capital costs of $52 million and an annualized co st of $4 million per year, and the proposed requirements associated with fenceline monito ring would result in addi tional capital costs of $12.3 million and an annualized cost of $5.6 milli on per year. The proposed amendments will
achieve a nationwide HAP emission reduction of about 1,760 tons/year with a concurrent reduction in VOC emissions of about 18,850 tons/y ear. The top section of Table 3-8 below
summarizes the cost and emissions reduction impacts of these proposed standards and
amendments. In addition, the proposed amendments to include flare monito ring and operational requirements to ensure compliance would result in an additional total nationwide capital cost of $156.6 million and an annualized co st of $37.9 million. The propos ed requirements for relief valve monitoring would result in additional capit al costs of $9.6 million and an annualized cost of $1.36 million per year. The pr oposed requirements for flare monitoring would result in additional capital costs of $147 million and an annualized cost of $36.3 million per year. The proposed requirements also include requirements for PM emissions source performance tests at least once every five years (once per title V pe rmit period) for the FCCUs at existing sources.
The nationwide annual cost of this additional re quirement for all FCCUs is projected to be, on

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

3-18 average, $213,000 per year. We were not able to estimate (i) product recove ry credits associated with the proposed amendments for relief valve monitoring, flare monitoring and source performance testing at the FCCUs, or (ii) emi ssions reductions associated with the proposed amendments for relief valve monitoring and s ource performance testing. As such, these
estimates are not included in Table 3-8 . The proposed operational and monitoring amendments for flares have the potential to reduce excess emissions from fl ares by approximately 3,800 tons per year of HAP and 33,000 tons per year of VOC. The bottom section of Table 3-8 below summarizes the cost impacts of these propos ed standards and amendments.

Table 3-8 Emissions Sources, Points, and Contro ls Included in Regulatory Options

Affected source Total capital investment ($ million) Total annualized cost without

credit ($ million/ year) Product recovery

credit ($ million/ year) Total annualized costs ($ million/ year) VOC emission reductions (tpy) Costeffectiveness ($/ton

VOC) HAP emission reductions (tpy) Costeffectiveness ($/ton HAP) Storage vessels 18.5 3.1 (8.2) (5.1) 14,600 (345) 910 (5,530)
Delayed coking units 52.0 10.2 (6.2) 4.0 4,250 937 850 4,680 Fugitive Emissions (Fenceline Monitoring) 12.3 5.6 --- a 5.6 --- --- --- ---

Subtotal 82.8 18.9 (14.4) 4.5 18,850 241 1,760 2,570

Relief Valve Monitoring 9.6 1.4 --- b
--- --- --- --- --- Flare Monitoring 147.0 36.3 --- c --- --- --- --- --- FCCU Testing --- 0.21 --- d
--- --- --- --- --- Subtotal 156.6 37.9 --- 37.9 --- --- --- ---

Total 239.4 56.8 (14.4) 42.4 18,850 --- 1,760 ---

a Any corrective actions taken in response to the fugitive emissions fenceline monitoring program will result in additional emissions reductions and additional costs and these are not included in the results. b Any corrective actions taken in response to relief valve monitoring may result in additional emissions reductions and additional costs and these are not included in the results.

c Any corrective actions taken in response to flare monitoring may result in additional emissions reductions and additional costs and these costs are not included in the results. d Any corrective actions taken in response to PM emissions source performance tests for the fluid catalytic cracking units may result in additional emissions reductions and additional costs and these are not included in the results.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-1 4 ECONOMIC IMPACT ANALYSIS AND DISTRIBUTIONAL ASSESSMENTS

4.1 Introduction

This section includes th ree sets of analyses:

 Market Analysis

 Employment Impacts

 Small Business Impacts Analysis

4.2 Market Analysis
EPA performed a series of single-market part ial equilibrium analyses of national markets for five major petroleum products to provide a pa rtial measure of the economic consequences of the regulatory options. With th e basic conceptual model described below, we estimated how the regulatory program affects prices and quantities for motor gasoline, jet fuel, distillate fuel oil, residual fuel oil, and liquefied petroleum ga ses which, when aggregated, constitute a large proportion of refinery production in the United St ates. We also conducted an economic welfare analysis that estimates the consumer and producer surplus changes associated with the regulatory program. The welfare analysis identifies how the regulatory costs are distributed across two broad classes of stakeholders, consumers and pr oducers, for the five products under evaluation. Because we do not have data on changes in refine ry utilization rates, th e market analysis does
not address costs associat ed with loss in producer surplus due to potentially lower utilization rates that may result from the proposed standards.

4.2.1 Market Analysis Methods
The national compliance cost estimates are ofte n used to approximate the welfare impacts of the rule. However, in cases where the engi neering costs of compliance are used to estimate welfare impacts, the burden of th e regulation is typically measur ed as falling solely on the affected producers, who experien ce a profit loss exactly equal to th ese cost estimates. Thus, the entire loss is a change in produ cer surplus with no change (by a ssumption) in consumer surplus, because no changes in price and consumption are es timated. This is typically referred to as a “full-cost absorption” scenario in which all factors of producti on are assumed to be fixed and firms are unable to adjust their output levels wh en faced with additional costs. In contrast,

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-2 EPA’s economic analysis builds on the engineeri ng cost analysis and incorporates economic theory related to producer and consumer behavi or to estimate changes in market conditions.

The partial equilibrium models use a common analytic expression to analyze supply and demand in a single market (Berck and Hoffma nn 2002; Fullerton and Metcalf 2002) and follows EPA guidelines for conducting an EIA (U.S. En vironmental Protection Agency 2010). We illustrate our approach for estimating market-level impacts using a simple, single partial equilibrium model. The method involves spec ifying a set of nonlinear supply and demand relationships for the affected market, simplifyi ng the equations by transforming them into a set of linear equations, and then solving the equilib rium system of equations (see Fullerton and Metcalfe (2002) for an example).

First, we consider the formal de finition of the elasticity of supply, q s , with respect to changes in own price, p , where
s 

###  represents the market elasticity of supply:

/ / s s
s dq q dp p   (4.1)

Next, we can use “hat” notation to transform Eq . 1 to proportional changes and rearrange terms:



### ˆ ˆ

s s 

### q p   (4.1a)

where 

### ˆ
s 

### q equals the percentage change in the quantity of market supply, and 

### p ˆ equals the percentage change in market price. As Fullert on and Metcalfe (2002) note, we have taken the elasticity definition and turned it into a linea r behavioral equation fo r the market we are analyzing.

To introduce the direct impact of the regulat ory program, we assume the per-unit cost associated with the regulatory program, c , leads to a proportional shift in the marginal cost of
production 

#   mc . The per-unit costs are estimated by dividing the total estimated annualized
engineering costs accruing to pr oducers within a give n product market by the baseline national production in that market. Under the assumpti on of perfect competition (e.g., price equaling marginal cost), we can approximate this shift at the initial equilibrium point as follows:

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-3 0 0 c c mc mc p   . (4.1b)

The with-regulation supply equa tion can now be written as



### ˆ ˆ ( )
s s 

### q p mc    . (4.1c)

Next, we can specify a demand equation as follows:



### ˆ ˆ

d d 

### q p   (4.2)

where



### ˆ d 

### q = percentage change in the quantity of market demand,

d 

###  = market elasticity of demand, and


### p ˆ = percentage change in market price.
Finally, we specify the market equilibrium conditions in the a ffected market. In response to the exogenous increase in production costs, pr oducer and consumer behaviors are represented in Eq. 4-1a and Eq. 4-2, and the new equilibrium satisfies the condition that the change in supply equals the change in demand:



### ˆ ˆ
s d 

### q q  . (4.3)

We now have three linear e quations and three unknowns ( 

### p ˆ
, 

### ˆ d 

### q , and 

### ˆ
s 

### q ), and we can solve for the proportional price change in terms of the elas ticity parameters (
s 

###  and d 

###  ) and the proportional change in marginal cost:


##  

# 

 

ˆ ˆ

ˆ ˆ

ˆ ˆ

ˆ

ˆ s d

ss d

sd s

sd s

s

s d p mc p

p mc p
p p mc
p mc

p mc  

 
 
 

    

 

 

 



 (4.4)

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-4 Given this solution, we can solve for the proport ional change in market quantity using Eq. 4-2.

The change in consumer surplus in the affected market can be estimated using the following linear approximation method: 

##     1 0.5 cs q p q p       (4.5)

where 1 

### q equals with-regulation quantities produced . As shown, higher market prices and reduced consumption lead to welfare losses for consumers.

For affected supply, the change in producer surplus can be estimate d with the following equation: 

##       

##   1 1 0.5 ps q p q c q p c           . (4.6)

Increased regulatory costs and output declines have a negative effect on producer surplus, because the net price change 

##   p c   is negative. However, these losses are mitigated, to some degree, as a result of higher market prices.

4.2.2 Model Baseline

Standard EIA practice compares and contrasts the state of a market with and without the regulatory policy. EPA selected 2016 as the ba seline year for the analysis and collected petroleum product price and quantity forecast information from the Energy Information
Administration’s 2012 Reference Case Annual En ergy Outlook (U.S. EIA 2011a). Baseline data are reported in Table 4-1. Annual Energy Ou tlook (AEO) reports the quantity of petroleum products produced in terms of barrels, while the price of petroleum products is reported in terms of dollars per gallon. Therefore, to ensure that common units were bei ng used, the number of barrels produced each year was divided by 42, the number of gallons in a barrel.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-5 Table 4-1 Baseline Petroleum Product Market Data, 2016

Motor Gasoline Jet Fuel Distillate Fuel Oil Residual Fuel Oil Liquified Petroleum

Gases Price ($2010/per gallon) 1 3.17 2.73 3.42 2.25 0.96 Quantity (billion gallons/per year) 2 130.61 22.69 66.69 7.82 40.93

1 Source: AEO2012 Reference Case, Petroleum Product Prices (Table 12) 2 Source: AEO2012 Reference Case, Liquid Fuels Supply and Disposition (Table 11)

4.2.3 Model Parameters

Demand elasticity is calculated as the percentage change in the quantity of a product demanded divided by the percentage change in price. An increase in price causes a decrease in the quantity demanded, hence the negative values s een in Table 4-2, which presents the demand elasticities used in this analysis. Demand is considered elastic if demand elasticity exceeds 1.0 in absolute value (i.e., the percen tage change in quantity exceeds the percentage ch ange in price). The quantity demanded, then, is very sensitive to price increases. De mand is considered inelastic if demand elasticity is less than 1.0 in absolute value (i.e., the percentage change in quantity is less than the percenta ge change in price). Inelasti c demand implies that the quantity demanded changes very little in response to price changes. As shown in Table 4-2, we draw demand elasticities from U.S. EPA (1995).

Table 4-2 Estimates of Price Elas ticity of Demand and Supply 1

Motor Gasoline Jet Fuel Distillate Fuel Oil Residual Fuel Oil Liquified Petroleum Gases Demand elasticity -0.69 -0.15 -0.75 -0.68 -0.80 Supply elasticity 1.24 1.24 1.24 1.24 1.24

1 The source for these elasticities is U.S. EPA (1995). The literature review performed fo r this EIA indentified more recent estimates of long-term demand elas ticities for motor gasoline, which are lowe r than the elasticity used in this analysis, but we were unable to identify more recent estimates of the other elasticities.
Supply elasticity is calculated as the percen tage change in quantity supplied divided by the percentage change in price. An upward sloping supply curve has a positive elasticity since price and quantity move in the sa me direction. If the supply curve has elasticity greater than one, then supply is considered elastic, which means a small price increase will lead to a relatively large increase in quantity supplied. A supply curve with elas ticity less than one is considered inelastic, which means an increase in price will ca use little change in quantity supplied. In the

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-6 long-run, when producers have sufficient time to co mpletely adjust their production to a change in price, the price elastic ity of supply is usually greater than one. As shown in Table 4-2, we draw supply elasticities from U.S. EPA (1995).

4.2.4 Entering Estimated Annualized Engineering Compliance Costs into Economic Model

To collect comprehensive, updated inform ation for the proposed rulemaking, EPA conducted a one-time information collection requ est (ICR) through a survey, under the authority of CAA section 114, of all potential ly affected petroleum refineri es. The ICR was comprised of four components, and the info rmation collected through component 1 of the ICR included facility location, products produced, capaci ty, throughput, process and emissions, and employment and sales receipt data for 2010. 17 The throughput quantities provided were the same as those reported to the U.S. EIA on form EIA-810. The ICR in formation was used to analyze and calculate compliance costs by refinery fo r the proposed rulemaking. These annualized engineering compliance costs provid ed the basis for the environmen tal cost inputs for the series of partial equilibrium economic models.

The annualized engineering compliance cost inputs are incorporat ed into the partial equilibrium models on a per barr el refining capacity basis. Se veral steps were required to convert the annualized engineeri ng compliance cost data, by refi nery, into the data format required for the economic analysis. First, for e ach refinery we allocated the compliance costs
across total barrels of refinery production. Because EPA co llected production information for thirty-nine (39) different refinery products and the economic models allow for production input data for five product types, we then mapped the ICR product types to the s horter list of products
used in the economic model. We assumed a unifo rm refinery utilization rate of 86.4%, which is the operable utilization rate for U.S. refineries for 2010. 18

17 Detailed information on the ICR can be located at http s://refineryicr.rti.org/. OM B approved the ICR on March 28, 2011. The OMB Control Number is 2060-0657, and approval expires March 31, 2014.

18 Recent and historical refinery u tilization rate information can be located at U.S. EIA’s website: http://www.eia.gov/dnav/pet/pet_pnp_unc_dcu_nus_a.htm.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-7 Table 4-3 Estimated Annualized Engineering Co mpliance Costs by Petroleum Product Modeled (2010 dollars)

Motor Gasoline Jet Fuel Distillate Fuel Oil Residual Fuel Oil Liquified Petroleum Gases Other All Products
Total Annualized Engineering Compliance Costs $20,136,107 $4,130,446 $12,872,696 $1,893 ,999 $1,514,516 $15,762,038 $56,309,802

Capacity (millions bbls/year) 2,782.51 611.74 1,536.15 227.53 191.97 2,121.04 7,470.94
Capacity (millions gallons/year) 116,865.42 25,693.01 64,518.41 9,55 6.20 8,062.72 89,083.84 313,779.60 Compliance Costs Per Gallon Capacity ($2010) $0.00017 $0.00016 $0.00020 $0. 00020 $0.00019 $0.00018 $0.00018

Using this engineering cost information and total national production of petroleum products, we estimated the annualized complian ce cost per gallon of product produced. These annualized per gallon engineering co mpliance costs are presented in Table 4-3. For this analysis, we included engineering compliance costs that do not reflect the product recovery credits. At the national level, the total annuali zed engineering compliance costs are estimated at less than $0.00018 per gallon, or one one-thousandth of a cent. These per-gallon annualized engineering costs estimates were then entered into the series of partial equilibrium market models to estimate impacts on the respective petroleum product markets.

4.2.5 Model Results
Based on EPA’s partial equilibrium analysis , the costs induced by this regulatory program do not have a significant impact on market-lev el prices or quantities. The results of this analysis are summarized in Table 4-4. As this table shows, pric es for each of the five products rise by less than one one-hundredth of a pe nny, and the quantity of each petroleum product produced declines slightly. Motor gasoline and liquified pe troleum gases face the largest absolute quantity reductions (3.14 million and 3.9 1 million gallons, respectively, or less than 0.0001 percent in both cases).

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-8 Table 4-4 Summary of Petroleum Product Market Impacts

Motor Gasoline Jet Fuel Distillate Fuel Oil Residual Fuel Oil Liquified Petroleum

Gases Change in Price (%) < 0.0001 < 0.0001 < 0.0001 < 0.0001 < 0.0001 Change in Price (2010$) 0.0001 0.0001 0.0001 0.0001 0.0001 Change In Quantity (%) < 0.0001 < 0.0001 < 0.0001 < 0.0001 < 0.0001 Change In Quantity (million gallons per year) -3.14 -0.18 -1.82 -0.30 -3.91

Welfare Impacts Change in consumer surplus ($ millions) -14.46 -3.25 -8.29 -1.00 -4.67 Change in producer surplus ($ millions) -7.87 -0.23 -4.81 -0.35 -2.83 Change in total surplus ($ millions) -22.33 -3.48 -13.10 -1.35 -7.50

As a result of higher prices, consumers of pe troleum products see a de cline in surplus, as shown in Table 4-4. For example, consumer s of motor gasoline are estimated to lose $14.46 million of surplus. In addition, pr oducers also receive a smaller surplus as a result of higher production costs. In the case of motor gasoline, producers lose $7.87 million. Total surplus losses for consumers and producers of motor gasoline are estimated to be $22.33 million. The total annualized loss in surplus for the five markets an alyzed is $47.77 million. In addition to the loss in surplus for consumers and producers of thes e five major petroleum products, an additional $15.7 million in costs will affect markets for pe troleum products that were not explicitly modeled in this analysis. These include markets fo r asphalt, lubricants, road oil, petroleum coke
and others.

As a sensitivity analysis, we used a more recently estimated, lo ng-run elasticity of demand for motor gasoline from Small and Van Dender (2007), which is based on crosssectional, time-series data from the U.S. for th e period of 1966-2001. If we use this elasticity (-0.38), consumers of motor gasoline could lose $17.23 million of surplus, or an additional $2.77 million loss in surplus compared to the estimate above (Small and Van Dender 2007). In addition, producers of motor gasoline could lose $5.1 million of surplus, or reduce their surplus loss by $2.77 million.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-9 4.2.6 Limitations Ultimately, the regulatory program may cause negligible increases in the costs of supplying petroleum products to consumers. The pa rtial equilibrium model used in this EIA is designed to evaluate behavioral responses to this change in co sts within an equilibrium setting within nationally competitive markets. The na tional competitive market assumption is clearly strong because the markets in petroleum products may be regional for some products, as well as some product markets within the refining industr y may be interdependent. Regional price and quantity impacts could be different from the average impacts reporte d if local market structures, production costs, or demand conditions are substa ntially different from those used in this analysis.

4.3 Discussion of Em ployment Impacts Executive Order 13563 directs federal agencies to consider the effect of regulations on job creation and employment. According to the Executive Order, “our regulatory system must protect public health, welfare, safety, and our environment while promoting economic growth, innovation, competitiveness, and job creation. It mu st be based on the best available science” (Executive Order 13563, 2011). Alth ough standard benefit-cost an alyses have not typically included a separate analysis of re gulation-induced employment impacts, 19 during periods of sustained high unemployment, employment impacts are of particular concern and questions may arise about their existence and magnitude. This section provides a conceptual framework for considering the potential influe nce of environmental regulatio n on employment in the U.S. economy and discusses the limited em pirical literature that is available. The section then discusses the potential employme nt impacts in the environmen tal protection sector, e.g. for construction, manufacture, instal lation, and operation of needed pollution control equipment. Section 4.3.1 describes the economic theory used for analyzing regulation-induced employment impacts, discussing how standard neoclassical th eory alone does not point to a definitive net effect of regulation on labor de mand for regulated firms. Section 4.3.2 presents an overview of the peer-reviewed literature rele vant to evaluating the effect of environmental regulation on employment. Section 4.3.3 discusses macroec onomic net employment effects. The EPA is

19 Labor expenses do, however, contribute toward total costs in the EPA’s standard benefit-cost analyses.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-10 currently in the process of s eeking input from an independent expert panel on economy-wide impacts, including employment effects. Fina lly, Section 4.3.4 offers several conclusions.

4.3.1 Theory

The effects of environmenta l regulation on employment are difficult to disentangle from other economic changes and business decisions th at affect employment, over time and across regions and industries. Labor markets respond to regulation in comple x ways. That response depends on the elasticities of demand and suppl y for labor and the degr ee of labor market imperfections (e.g., wage stickiness, long-term unemployment, etc). The unit of measurement (e.g., number of jobs, types of jobs hours worked, or earnings) may affect observability of that response. Net employment impacts are composed of a mix of potential d eclines and gains in different areas of the economy (i.e., the dire ctly regulated sector, upstream and downstream sectors, and the pollution abatement sector) and ov er time. In light of these difficulties, economic theory provides a constructive framework for approaching these asse ssments and for better understanding the inherent complex ities in such assessments. In th is section, we briefly describe theory relevant to the impact of regulation on la bor demand at the regulated firm, in the regulated industry, and in the environmental protection sect or; and highlight the im portance of considering potential effects of regulation on labor supply, a topic addressed furt her in a subsequent section. Neoclassical microeconomic theory describe s how profit-maximizing firms adjust their use of productive inputs in response to changes in their economic conditions. 20 In this framework, labor is one of many inputs to production, along with capital, energy, and materials. In competitive output markets, profit maximi zing firms take prices as given, and choose quantities of inputs and outputs to maximize pr ofit. Factor demand at the firm, then, is determined by input and output prices. 21,22 Berman and Bui (2001) and Morgenstern, Pize r, and Shih (2002) have specifically
tailored one version of the sta ndard neoclassical model to anal yze how environmental regulations
affect labor demand decisions. 23 Environmental regulation is m odeled as effectively requiring

20 See Layard and Walters (1978), a standard micr oeconomic theory textbook, for a discussion. 21 See Hamermesh (1993), Chapter 2, for a derivation of the firm’s labor demand function from cost-minimization. 22 In this framework, labor demand is a function of quantity of output and prices (of both outputs and inputs). 23 Berman and Bui (2001) and Morgenst ern, Pizer, and Shih (2002) use a cost-minimization framework, which is a special case of profit-maximization with fixed output quantities.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-11 certain factors of production, such as pollution ab atement capital investment, that would not be freely chosen by profit maximizing/cost-minimizing firms.
In Berman and Bui’s (2001, p. 274-75) theoretical model, the change in a firm’s labor demand arising from a change in regulation is decomposed into two main components: output
and substitution effects. 24 For the output effect, by affecti ng the marginal cost of production, regulation affects the profit-maximizing quantity of output. The output effect describes how, if labor-intensity of production is held constant, a decrease in output generally leads to a decrease in labor demand. However, as noted by Berman and Bui, although it is often assumed that regulation increases marginal cost, and there by reduces output, it need not be the case. A regulation could induce a firm to upgrade to less polluting, and more efficient equipment that lowers marginal production costs, for example. In such a case, output could theoretically increase. For example, in the proposed refinery amendments, the fitting controls and monitoring equipment for storage vessels were identified as developments in practices, processes and control technologies for storage vessels. The propos ed requirement could result in fewer VOC emissions and more product remaining in the stor age vessel, potentially increasing output.
The substitution effect describes how, hol ding output constant, regulation affects the labor-intensity of production. Although increased environmental regulation generally results in higher utilization of pro duction factors such as pollution cont rol equipment and energy to operate that equipment, the resulting impact on labor demand is ambiguous. For example, equipment inspection requirements, specialized waste handl ing, or pollution technologies that alter the production process may affect the number of wo rkers necessary to produce a unit of output. Berman and Bui (2001) model the substitution effect as the effect of regulation on “quasi-fixed’’ pollution control equipment and expenditures th at are required by the regulation and the corresponding change in labor-int ensity of production. Within the production theory framework, when levels of a given set of inputs are fixe d by external constraint s such as regulatory requirements, rather than allowing the firm to freely choose all inputs under cost-minimization alone, these inputs are described as “quasi-fixed”. For example, materials would be a “quasifixed” factor if there were specific requirement s for landfill liner constr uction, but the footprint

24 The authors also discuss a third componen t, the impact of regulation on factor prices, but conclude that this effect is unlikely to be important for large competitive factor ma rkets, such as labor and cap ital. Morgenstern, Pizer and Shih (2002) use a very similar model, but they break the employment effect into three parts: 1) the demand effect; 2) the cost effect; an d 3) the factor-shift effect.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-12 of the landfill was flexible. Brown and Christen sen (1981) develop a partial static equilibrium model of production with quasi-fixed factors, which Berman and Bui (2001) extend to analyze environmental regulations with technology-based standards. In summary, as the output and substitution effects may be both positive, both negative or some combination, standard neoclassical theory al one does not point to a definitive net effect of regulation on labor demand at regulated firms. Operating within the bounds of standard neoclassical theory, however, rough estimation of net employment effects is possible with empirical study, specific to the regulated firms, wh en data and methods of sufficient detail and quality are available. The availa ble literature illustrates some of the difficulties for empirical estimation: studies sometimes rely on confidentia l plant-level employment data from the U.S. Census Bureau, possibly combined with pollution abatement expenditure data that are too dated to be reliably informative. In addition, the most commonly used empirical methods in the literature do not permit the estimation of net effect s. These studies will be discussed at greater length later in this chapter. The above describes a conceptual framewor k for analyzing potential employment effects at a particular firm, within a regulated industry. It is important to emphasize that employment impacts at a particular firm will not necessari ly represent impacts for the overall industry, therefore the theoretic approach requires some adjustment when applied at the industry level. As stated, the responsiveness of industr y labor demand depends on how the output and
substitution effects interact. 25 At the industry-level, labor dema nd will be more responsive when: (1) the price elasticity of dema nd for the product is high, (2) othe r factors of production can be easily substituted for labor, (3) the supply of other factors is highly elastic, or (4) labor costs are a large share of the to tal costs of production. 26 So, for example, if all firms in the industry are faced with the same compliance costs of regul ation and product demand is inelastic, then industry output may not change much at all, a nd output of individual firm s may only be slightly changed. 27 In this case the output effect may be sma ll, while the substitution effect will still depend on the degree of substitutability or co mplementarity between factors of production. Continuing the example, if new pollution control equipment requires labor to install and operate, labor is more of a complement than a substitute . In this case the substitution effect may be

25 Marshall’s laws of derived demand – see Ehrenberg & Smith, Chapter 4. 26 See Ehrenberg & Smith, p. 108. 27 This discussion draws from Berman and Bui (2001), p. 293.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-13 positive, and if the output effect is small or zero, the total effect may then be positive. As with the potential effects for an indi vidual firm, theory alone is unable to determine the sign or magnitude of industry-level regu latory effects on labor. Determ ining these signs and magnitudes requires additional sector-specific empirical st udy. To conduct such targeted research would require estimates of product demand elastic ity; production factor substitutability; supply elasticity of production factors; and the share of total costs co ntributed by wages, by industry, and perhaps even by facility. For environmental rules, many of th ese data items are not publicly available, would require significant time and re sources in order to access confidential U.S. Census data for research, and also would not be necessary for other components of a typical EIA
or RIA. In addition to changes to labor demand in the regulated industry, net employment impacts encompass changes within the environmental prot ection sector, and, potentially in other related sectors, as well. Environmental regulations ofte n create increased dema nd for pollution control equipment and services needed for compliance. This increased demand may increase revenue and employment in the environmental protectio n industry. At the same time, the regulated industry is purchasing the equipment and these costs may impact labor demand at regulated firms. Therefore, it is important to consider the net effect of compliance actions on employment across multiple sectors or industries. If the U.S. economy is at full employment, ev en a large-scale environmental regulation is unlikely to have a noticeable imp act on aggregate net employment. 28 Instead, labor would primarily be reallocated from one productive use to another (e.g., from producing electricity or steel to producing pollution abatement equipment) . Theory supports the argument that, in the case of full employment, the net national employm ent effects from environmental regulation are likely to be small and transitory (e.g., as workers move from one job to another). 29 On the other hand, if the economy is operating at less than full employment, economic theory does not clearly
indicate the direction or ma gnitude of the net impact of environmental regulation on employment; it could cause either a short- run net increase or short-run net decrease (Schmalansee and Stavins, 2011). An important fundamental research question is how to

28 Full employment is a conceptual target for the economy where everyone who wants to wo rk and is available to do so at prevailing wages is actively employed. 29 Arrow et. al. 1996; see discussion on bottom of p. 8. In practice, distributional impacts on individual workers can be important, as discussed in later paragraphs of this section.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-14 accommodate unemployment as a structural featur e in economic models. This feature may be important in evaluating the impact of large-sc ale regulation on employment (Smith 2012). Affected sectors may experience transitory e ffects as workers change jobs. Some workers may need to retrain or relocate in anticipation of the new requirem ents or require time to search for new jobs, while shortages in some sectors or regions could bid up wages to attract workers. It is important to recognize that these adjustme nt costs can entail local labor disruptions, and although the net change in the nation al workforce is expected to be small, localized reductions in employment can still have negative impacts on in dividuals and communities just as localized increases can have positive impacts.
While the current discussion focuses on labor demand effects, environmental regulation may also affect labor supply. In particular, po llution and other environmental risks may impact labor productivity 30 or employees’ ability to work. While there is an accompanying, and parallel, theoretical approach to examin ing impacts on labor supply, similar to labor demand, it is even more difficult and complex to study labor supply em pirically. There is a small, nascent empirical literature using more detailed la bor and environmental data, a nd quasi-experimental techniques that is starting to find traction on this ques tion. These will be described in Section 4.3.2.3.
To summarize the discussion in this secti on, economic theory provi des a framework for analyzing the impacts of environmental regula tion on employment. The net employment effect incorporates expected employment changes (bot h positive and negative) in the regulated sector, the environmental protection sect or, and other relevant sectors. Using economic theory, labor demand impacts for regulated firms, and also for the regulated industry, can be decomposed into output and substitution effects. With these po tentially competing forces, under standard neoclassical theory estimation of net employment effects is possible with empirical study specific to the regulated firms and firms in the e nvironmental protection sect or and other relevant
sectors when data and methods of sufficient de tail and quality are avai lable. Finally, economic theory suggests that labor supply effects are also possible. In the next section, we discuss the available empirical literature.

30 e.g., Graff Zivin and Neidell (2012).

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-15 4.3.2 Current State of Knowledge Based on the Peer-Reviewed Literature

In the labor economics litera ture there is an extensive body of peer-reviewed empirical work analyzing various aspects of labor dema nd, relying on the above theoretical framework. 31 This work focuses primarily on the effects of em ployment policies, e.g. labor taxes, minimum wage, etc. 32 In contrast, the peer-reviewed empiri cal literature specifically estimating employment effects of environmental regulations is very limited. In this section, we present an overview of the latter. As discussed in the preced ing section on theory, determining the direction of employment effects in regulated industries is challenging because of the complexity of the output and substitution effects. Complying with a new or more stringent regulation may require additional inputs, including labor, and may alter the relative proporti ons of labor and capital used by regulated firms (and firms in other relevant industries) in their pr oduction processes. Several empirical studies, including Berm an and Bui (2001) and Morgenstern et al (2002), suggest that net employment impacts may be zero or slightly positive but small even in the regulated sector. Other res earch suggests that more highly regulated counties may generate fewer jobs than less regulated ones (Greenst one 2002, Walker 2011). Howeve r since these latter studies compare more regulated to less regulated counties they overstate the net national impact of regulation to the extent that regulation causes pl ants to locate in one area of the country rather than another. List et al. (2003) find some evidence that this type of geographic re location may be occurring. Overall, the peer-reviewed literature does not contain evidence that environmental regulation has a large impact on net employment (either negative or pos itive) in the long run across the whole economy. Environmental regulations seem likely to affect the environmental protection sector earlier than the regulated industry. Rules are usua lly announced well in adva nce of their effective dates and then typically provide a period of time for firms to inve st in technologies and process changes to meet the new requirements. When a re gulation is promulgated, the initial response of firms is often to order pollution control equipmen t and services to enable compliance when the regulation becomes effective. This can produce a short-term increase in labor demand for specialized workers within the environmental prot ection sector, particularly workers involved in the design, construction, testi ng, installation, and operation of the new pollution control

31 Again, see Hamermesh (1993) for a detailed treatment. 32 See Ehrenberg & Smith (2000), Chapter 4: “Employment Effects: Empirical Estimates” for a concise overview.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-16 equipment required by the regulation (see Schmal ansee and Stavins, 2011; Bezdek, Wendling, and Diperna, 2008). Estimates of short-term increa ses in demand for specia lized labor within the environmental protection sector have been prepared for severa l EPA regulations in the past, including the Mercury and Ai r Toxics Standards (MATS). 33

4.3.2.1 Regulated Sector
Determining the direction of net employm ent effects of regulation on industry is challenging. Two papers that present a form al theoretic model of the underlying profitmaximizing/cost-minimizing problem of the firm are Berman and Bui (2001) and Morgenstern, Pizer, and Shih (2002) mentioned above. Berman and Bui (2001) developed an innova tive approach to estimate the effect on employment of environmental regulations in Ca lifornia. Their model empirically examines how an increase in local air quality regulation affects manu facturing employment in the South Coast Air Quality Management District (SCAQMD), which incorporat es Los Angeles and its suburbs. During the time frame of their study, 1979 to 1992, the SCAQMD enacted some of the country’s most stringent air quality regulations. Using SCAQMD’s local air qual ity regulations, Berman and Bui identify the effect of environmental re gulations on net employment in the regulated
industries. 34 In particular, they compare changes in em ployment in affected plants to those in other plants in the same 4-digit SIC industr ies but in regions not subject to the local regulations. 35 The authors find that “while regulations do impose large costs, they have a limited effect on employment” (Berman and Bui, 2001, p. 269) . Their conclusion is that local air quality regulation “probably increased la bor demand slightly” but that “t he employment effects of both compliance and increased stringency are fairly precisely estimated zeros, even when exit and dissuaded entry effects are incl uded” (Berman and Bui, 2001, p. 269). 36 In their view, the limited effects likely arose because 1) the regulations applied disproportionately to capital-intensive plants with relatively little em ployment, 2) the plants sold to local markets where competitors

33 U.S. EPA (2011b) 34 Note, like Morgenstern, Pizer, and Shih (2002), this st udy does not estimate the number of jobs created in the environmental protection sector. 35 Berman and Bui include over 40 4-di git SIC industries in their sample. 36 Including the employment effect of exiting plants and plants dissuaded from opening will increase the estimated impact of regulation on employment. This employment ef fect is not included in Morgenstern et. al. (2002)

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-17 were subject to the same regulati ons (so that sales were relative ly unaffected), and 3) abatement inputs served as complements to employment. Morgenstern, Pizer, and Shih (2002) develope d a similar structural approach to Berman and Bui’s, but their empirical application uses pollution abatement expenditures from 1979 to 1991 at the plant-level, including air, water, and solid waste, to estimate net employment effects in four highly regulated sectors ( pulp and paper, plastics, steel, and petroleum refining). Thus, in contrast to Berman and Bui (2001), this st udy identifies employment effects by examining differences in abatement expenditures rather th an geographical differences in stringency. They
conclude that increased abatem ent expenditures generally have not caused a significant change in net employment in those sectors.

4.3.2.2 Environmental Protection Sector
The long-term effects of a regulation on the environmental protection sector, which provides goods and services that help protect the environment to the regulated sector, are difficult to assess. Employment in the industry supplying pollution control equipment or services is likely to increase with the increased dema nd from the regulated industry for increased pollution control. 37 A report by the U.S. International Trad e Commission (2013) shows that domestic environmental services revenues have grow n by 41 percent between 2000 and 2010. According to U.S. Department of Commerce (2010) da ta, by 2008, there were 119,000 environmental technology (ET) firms generating approximately $300 billion in revenues domestically, producing $43.8 billion in exports, and supporting n early 1.7 million jobs in the United States. Air pollution control accounted fo r 18% of the domestic ET mark et and 16% of exports. Small and medium-size companies represent 99% of pr ivate ET firms, producing 20% of total revenue (OEEI, 2010).

4.3.2.3 Labor Supply Impacts
As described above, the small empirical literature on employment effects of environmental regulations focuses primarily on labor demand impacts. However, there is a nascent literature focusing on regulation-induced effects on labor supply, though this literature

37 See Bezdek, Wendling, and Diperna (2008), for example, and U.S. De partment of Commerce (2010).

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-18 remains very limited due to empirical challenges. This new research us es innovative methods and new data, and indicates that there may be observable impact s of environmental regulation on labor supply, even at polluti on levels below mandated regulat ory thresholds. Many researchers have found that work loss days and sick days as well as mortality are reduced when air pollution
is reduced. 38 EPA’s study of the benefits and costs of implementing clean air regulations used these studies to predict how increased labor avai lability would increase the labor supply and improve productivity and the economy. 39 Another literature estim ates how worker productivity improves at the work site when pollution is redu ced. Graff Zivin and Neidell (2013) review the work in this literature, focusing on how h ealth and human capital may be affected by environmental quality, particularly air pollution. In previous research, Graff Zivin and Neidell (2012) use detailed worker-level productivity da ta from 2009 and 2010, paired with local ozone air quality monitoring data for one large California farm growing multiple crops, with a piecerate payment structure. Their qua si-experimental structure identifie s an effect of daily variation in monitored ozone levels on productivity. They find “that ozone levels well below federal air quality standards have a significant impact on pr oductivity: a 10 parts per billion (ppb) decrease in ozone concentrations increases worker produ ctivity by 5.5 percent." (Graff Zivin and Neidell, 2012, p. 3654). Such studies are a compelling start to exploring this new area of research, considering the benefits of im proved air quality on productivit y, alongside the existing literature exploring the labor demand effect s of environmental regulations.

4.3.3 Macroeconomic Net Employment Effects
The preceding sections have outlined the ch allenges associated with estimating net employment effects within the re gulated sector, in the environmen tal protection sector, and labor supply impacts. These challenges make it very difficult to accurately produce net employment estimates for the whole economy that would appr opriately capture the way in which costs, compliance spending, and environmental benef its propagate through the macro-economy. Quantitative estimates are further complicated by the fact that macroeconomic models often have very little sectoral detail and usually assume that the economy is at full employment. The EPA is

38 The Benefits and Costs of the Clean Air Act from 1990 to 2020 Final Report – Rev. A , U.S. Environmental Protection Agency, Office of Air and Radiation, April 2011a. http://www.epa.gov/air/sect812/ feb11/fullreport_rev_a.pdf 39 The Benefits and Costs of the Clean Air Act from 1990 to 2020 Final Report – Rev. A , U.S. Environmental Protection Agency, Office of Air and Radiation, April 2011a. http://www.epa.gov/air/sect812/ feb11/fullreport_rev_a.pdf

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-19 currently in the process of seeking input from an independent expert panel on modeling economy-wide impacts, including employment effects.

4.3.4 Conclusions
In conclusion, deriving estimates of how environmental regulations will impact net employment is a difficult task, requiring consider ation of labor demand in both the regulated and environmental protection sectors. Economic theory predicts that the total effect of an environmental regulation on labor demand in regul ated sectors is not necessarily positive or negative. Peer-reviewed econometric studies that use a structural approach, applicable to overall net effects in the regulated sectors, converge on the finding that such effects, whether positive or negative, have been small and have not aff ected employment in the national economy in a significant way. Effects on labor demand in the envi ronmental protection sector seem likely to be positive. Finally, new evidence suggests that environmental regulation may improve labor supply and productivity.

4.4 Small Business Impacts Analysis

The Regulatory Flexibility Act (RFA) as amended by the Small Business Regulatory Enforcement Fairness Act (SBREFA) generally re quires an agency to prepare a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements under the
Administrative Procedure Act or any other statute, unless the agen cy certifies that the rule will not have a significant economic impact on a substa ntial number of small entities. Small entities include small businesses, small gove rnmental jurisdictions, and sma ll not-for-profit enterprises. The petroleum refining industry (NAICS code 324110) does not include small governmental jurisdictions or small not-for-profit enterprise s. Under Small Business Administration (SBA) regulations, a small refiner is defined as a refinery with no more than 1,500 employees. 40 For this analysis we applied the small refiner definition of a re finery with no more than 1,500 employees. For additional information on the Agen cy’s application of the definition for small

40 See Table in 13 CFR 121.201, NAICS code 324110.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-20 refiner, see the June 24, 2008 Federal Regist er Notice for 40 CFR Part 60, Standards of
Performance for Petroleum Refineries (Volume 73, Number 122, page 35858). 41

4.4.1 Small Entity Economic Impact Measures

The analysis provides EPA with an estimat e of the magnitude of impacts that the proposed standards may have on the ultimate dome stic parent companies that own the small
refineries. This section referenc es the data sources used in the screening analysis and presents the methodology we applied to develop estimates of impacts, the results of the analysis, and
conclusions drawn from the results.

The small business impacts an alysis for the risk and t echnology reviews for existing MACT 1 and MACT 2 standards and for Subpa rt Ja New Source Performance Standards amendments relies upon data collected through the April 2011 Information Collection Request (ICR -- OMB Control No. 2060-0657). Information collected through component 1 of the ICR includes facility location, produc ts produced, capacity, throughput, process and emissions, and employment and sales receipt da ta. EPA performed a screening analysis for impacts on all affected small refineries by comparing compliance co sts to revenues at the pa rent company level.
This is known as the cost-to-revenu e or cost-to-sales ratio, or the “sal es test.” The “sales test” is the impact methodology EPA employs in analyzing small entity impacts as opposed to a “profits test,” in which annualized compliance costs are calcul ated as a share of prof its. The sales test is frequently used because revenues or sales data are commonly available for entities impacted by EPA regulations, and profits data normally made available are ofte n not the true profit earned by firms because of accounting and tax considerations . The use of a “sales test” for estimating small business impacts for a rulemaking is c onsistent with guidance offered by EPA on compliance with the RFA 42 and is consistent with guidance published by the U.S. SBA’s Office

41 Refer to http://www.sba.gov/sites/default/files/Size_Standards_Table.pdf for more information on SBA small business size standards. 42 The RFA compliance guidance to EPA rulewriters regarding the types of small business analysis that should be considered can be found at <http://www.epa.gov/sbrefa/documents/rfaguidance11-00-06.pdf>

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-21 of Advocacy that suggests that cost as a percen tage of total revenues is a metric for evaluating
cost increases on small entities in relation to increases on la rge entities (U.S. SBA, 2010). 43

4.4.2 Small Entity Economic Impact Analysis

As discussed in Section 2 of this EIA, as of January 2011 there were 148 petroleum refineries operating in the continental United Stat es and US territories with a cumulative capacity of processing over 17 million barrels of crude per calendar day (EIA, 2011b). Sixty-four (64) parent companies own these refineries, and we ha ve employment and sales data for 62 (96%) of them. Thirty-five (35) companies (56% of th e 62 firm total) employ fewer than 1,500 workers
and are considered small businesses. These firm s earned an average of $1.36 billion of revenue per year, while firms employing more than 1,500 employees earned an av erage of $82.5 billion of revenue per year. 44

Based on data collected through the Apr il 2011 ICR, EPA performed the sales test analysis for impacts on affected small refineries. Five (5) of the 35 small refiners were removed from the analysis because we determined they were not major sources and would not be subject to the rules, and two (2) of the 35 small refiners were not analyzed because we had no ICR and/or other publically available employment and sa les data. The 5 small refiners removed from the analysis had parent company revenues rangin g from $5 million to $225 million, with average revenues of $64 million. Two of these small refi ners had revenues of less than $10 million, and another small refiner had revenues just over $10 m illion. Of the 2 small refiners that were not analyzed because of missing data, one (1) small refiner shut down in 2007 and the other provided information that they were a specialty chemical company and not a refinery. These seven small
refiners will not be subject to the rule.

43 U.S. SBA, Office of Advocacy. A Guide for Governme nt Agencies, How to Comply with the Regulatory Flexibility Act, Implementing the President’s Small Business Agenda and Executive Order 13272, June 2010. 44 The U.S. Census Bureau’s Statistics of U.S. Businesses include the following relevant definitions: (i) establishment – a single physical location where business is con ducted or where services or industrial operations are performed; (ii) firm – a firm is a business organization consisting of one or more domestic establishments in the same state and industry that were specified under common ownership or control. The firm and the establishment are the same for single-establishment firms. For each multi-esta blishment firm, establishments in the same industry within a state will be counted as one firm; and (iii) enterprise -- an enterprise is a business organization consisting of one or more domestic establishments that were specified under common ownership or control. The enterprise and the establishment are the same for single-establishmen t firms. Each multi-estab lishment company forms one enterprise.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-22 Table 4-5 presents the distribution of estimated co st-to-sales ratios for the small firms in our analysis. We analyzed the estimated cost-to- sales with and without the recovery credit, and in both cases the incremental compliance costs im posed on small refineries are not estimated to create significant impacts on a cost-to-sales ratio ba sis at the firm level.

Table 4-5 Impact Levels of Proposed NE SHAP Amendments on Small Firms

Impact Level N umber of Small Firms in Sample Estimated to be Affected % of Small Firms in Sample Estimated to be Affected Cost-to-Sales Ratio less than 1% 28 100% Cost-to-Sales Ratio 1-3% 0 -- Cost-to-Sales Ratio greater than 3% 0 --

For comparison, we calculated the cost-to-sales ratios for all of the affected refineries to determine whether potential costs would have a more significant imp act on small refineries. As presented in

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-23 Table 4-6, for large firms, without recovery credits the average cost-to-sales ratio is approximately 0.02 percent; the median cost-to-sa les ratio is less than 0.01 percent; and the maximum cost-to-sales ratio is approximately 0.89 percent; with recovery credits these impacts do not substantially change, except the maximum co st-to-sales ratio decreases to approximately 0.44 percent. For small firms, without recovery credits the average cost-to-sales ratio is about 0.07 percent, the median cost-to-sales ratio is 0.0 3 percent, and the maximum cost-to-sales ratio is 0.62 percent; with recovery credits these impacts do not su bstantially change, except the
maximum cost-to-sales ratio decr eases slightly to approximately 0.60 percent. The potential costs do not have a more significant impact on sm all refiners and because no small firms are expected to have cost-to-sales ratios greater than one percent, we determined that the cost impacts for the risk and technology reviews for existing MACT 1 and MACT 2 standards will not have a significant economic impact on a su bstantial number of small entities (SISNOSE).

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-24 Table 4-6 Summary of Sales Test Ratios for Firms Affected by Proposed NESHAP Amendments

Firm Size No. of Known Affected Firms % of Total Known Affected Firms Mean Cost-to-Sales Ratio Median Cost-toSales Ratio Min.Cost-toSales Ratio Max. Costto-Sales

Ratio Small 28 51% 0.07% 0.03% <0.01% 0.62% Large 27 49% 0.02% <0.01% <0.01% 0.89% All 55 100% 0.03% <0.01% <0.01% 0.89%

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-25 4.5 References

Arrow, Kenneth J. , Maureen L. Cropper, Geor ge C. Eads, Robert W. Hahn, Lester B. Lave, Roger G. Noll, Paul R. Portney, Milton Russell , Richard Schmalensee, V. Kerry Smith, and Robert N. Stavins (1996) “Benefit-Cost Anal ysis in Environmental, Health, and Safety Regulation - A Statement of Prin ciples.” American Enterprise Institute, The Annapolis Center, and Resources for the Future; AEI Press. Also available at: http://www.hks.harvard.edu/fs/rstavins/ Papers/Benefit Cost Analysis in Environmental.AEI.1996.pdf (accessed Aug. 5, 2013).
Becker, R. and V. Henderson (2000). “Effects of Air Quality Regulations on Polluting Industries.” Journal of Political Economy 108 (2): 379-421.
Belova, Anna; Gray, Wayne B.; Linn, Joshua; and Richard D. Morgenstern, “Environmental Regulation and Industry Employmen t: A Reassessment” U.S. Bureau of the Census, Census for Economic Studies working paper 13-36, July 2013. http://yosemite.epa.gov/ee/epa/eerm.ns f/vwAN/EE-0572-08.pdf/$file/EE-0572-08.pdf.
Berck, P., Hoffmann, S., 2002. Assessing the Employment Impacts of Environmental and Natural Resource Policy. Environmental and Resource Economics 22(1): 133-156.

Berman, E. and L. T. M. Bui (2001). “Environm ental Regulation and Labor Demand: Evidence from the South Coast Air Basin.” Journal of Public Economics 79 (2): 265-295.
Bezdek, R. H., R. M. Wendling, and P. Di perna (2008). “Environmental Protection, the Economy, and Jobs: National and Regional Analyses.” Journal of Environmental Management 86 (1): 63-79.
Brown, R.S., Christensen, L.R. (1981). “Estimating the elasticities of substitution in a model of partial static equilibrium: An application to U.S. Agriculture 1947 to 1974”, in: Berndt, E.R., Field, B.C. (Eds.), Modeling and Measuring Natural Resource Substitution.
Ehrenberg, Ronald G., and Robert S. Smith ( 2000). Modern Labor Ec onomics: Theory and Public Policy. Addison Wesley Longman, Inc., Chapters 3 & 4.
Executive Order 13563 (January 21, 2011). “Impr oving Regulation and Regulatory Review. Section 1. General Principles of Regulation.” Federal Register 76 (14): 3821-3823.
Fullerton, D., Metcalf, G., 2002. Tax Incidence. In Handbook of Public Economics , eds A. Auerbach, M. Feldstein. Elsevier: Amsterdam.

Graff Zivin, Joshua, and Matthew Neidell ( 2012). “The Impact of Pollution on Worker Productivity.” American Economic Review , 102(7), pp. 3652-73.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-26 Graff Zivin, Joshua, and Matthew Neidell (2013) . “Environment, Health, and Human Capital.” Journal of Economic Literature , September 2013, v. 51, iss. 3, pp. 689-730.
Gray, Wayne B. and Ronald J. Shadbegian (2003). “Plant Vintage, Technology, and Environmental Regulation” Journal of Environmental Economics and Management , 46, 384- 402. Greenstone, M. (2002). “The Impacts of Envi ronmental Regulations on Industrial Activity: Evidence from the 1970 and 1977 Clean Air Act Amen dments and the Census of Manufactures.” Journal of Political Economy 110(6): 1175-1219.
Hamermesh, D. S. (1993). Labor Demand. Princeton University Press, Princeton, NJ. Chapter 2.
Henderson, V. (1996). “Effects of Air Quality Regulation.” The American Economic Review 86 (4): 789-813. 5

K.A. Small and K. Van Dender. 2007. Fuel effici ency and motor vehicle travel: the declining rebound effect, Energy journal 28 (1) 25-51. Available from: http://scholar.googleuserconten t.com/scholar?q=cache:MOfHfc of7BEJ:scholar.google.com/++S mall+Van+Dender,+Fuel+efficiency+and+motor+ vehicle+travel:+the+ declining+rebound+effect +2007+&hl=en&as_sdt=0,34
Layard, P.R.G. and A. A. Walters. (1978). Micr oeconomic Theory. McGraw-Hill, Inc. Chapter 9.
List, J. A., D. L. Millimet, P. G. Fredri ksson, and W. W. McHone (2003). “Effects of Environmental Regulations on Manufacturing Pl ant Births: Evidence from a Propensity Score Matching Estimator.” The Review of Economics and Statistics 85 (4): 944-952.
Marshall, Alfred. (1920). Principles of Ec onomics. Library of Ec onomics and Liberty, http://www.econlib.org/libr ary/Marshall/marP.html

. Morgenstern, R.D. W.A. Pizer, and J. Shih. 2002. "Jobs versus the environment: an industrylevel perspective," Journal of Environmental Economics and Management 43(3):412-436.
Schmalansee, R. and R. Stavins (2011). “A Guide to Economic and Policy Analysis for the Transport Rule.” White Paper. Boston, MA: Exelon Corp.
Smith, Kerry (2012).”Reflections – In Search of Crosswalks between Macroeconomics and Environmental Economics.” Review of Environmental Economics and Policy 6(2), pp 298-317.
U.S. Department of Commerce, International Tr ade Administration (2010, April). Environmental Industries Fact Sheet, using 2008 data from Environmental Business International, Inc. http://web.ita.doc.gov/ete/eteinfo.ns f/068f3801d047f26e85256883006ffa54/4878b7e2fc08ac6d8 5256883006c452c?OpenDocument.

### *** Draft – Do Not Cite, Quot e, or Release During Review ***

4-27 U.S. Small Business Administration (U.S. SBA), Office of Advocacy. 2010. A Guide for Government Agencies, How to Comply with th e Regulatory Flexibility Act, Implementing the President’s Small Business Age nda and Executive Order 13272.
U.S. Energy Information Administ ration, 2011. Annual Energy Outlook 2011. < http://www.eia.gov/forecasts/archive/ aeo11/index.cfm> Accessed on: 2/01/12.

U.S. Energy Information Administration (EIA), 2011b. “Refinery Utilization and Capacity.” <http://www.eia.gov/dnav/pet/pet_pnp_unc_dcu_nus_a.htm>. Release date: 7/28/11. Accessed December 15, 2011.
U.S. Environmental Protection Agency. 1995. Economic Impact Analysis for Petroleum Refineries NESHAP. EPA-452/R- 95-003, Final Report. Washingt on DC: Government Printing Office.
U.S. Environmental Protection Agency (2011a), “T he Benefits and Costs of the Clean Air Act from 1990 to 2020 Final Report – Rev. A “, Office of Air and Radiation. April. http://www.epa.gov/air/sect812/feb11/fullreport_rev_a.pdf
U.S. Environmental Protection Agency (2011b). Regulatory Impact Analysis for the Mercury and Air Toxics Standards (MATS). December. Available on the Internet at http://www.epa.gov/ttn/ecas/re gdata/RIAs/matsriafinal.pdf

.
U.S. International Trade Commi ssion. Environmental and Related Services. Publication No. 4389, Investigation No. 332-533. March, 2013. Available on the Internet at http://www.usitc.gov/p ublications/332/pub4389.pdf

U.S. Small Business Administration. 2011. Table of Small Business Size Standards. Available at < http://www.sba.gov/sites/default/files/Size_Sta ndards_Table.pdf>. As obtained October 2011.
U.S. Department of Labor, Bureau of Labor Stat istics (2012a). Databases, Tables & Calculators by Subject. http://data.bls.gov/timeseries/LNS14000000. Accessed April 16, 2012.
U.S. Department of Labor, Bureau of Labor Statistics (2012b, April 6). “The Employment Situation—March 2012.” News Release. http ://www.bls.gov/news.release/pdf/empsit.pdf. Accessed April 16, 2012.
Walker, Reed. (2011).“Environmental Regulation and Labor Reallocation." American Economic Review: Papers and Proceedings, 101(2).