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OAR Box 1852 

Prepped by Keeia Richards 

Document Number: 

16) ll-A-16 

Docket Number: 

A-86-03 

Printed 11/19/2008 2:38:53 PM Sheet 16 of 101 
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EBEH 1 

EVALUATION OF THE LEADTIME TO COMPLY WITH 

GASOLINE VOLATILITY AND DIESEL FUEL REGULATIONS 

May 5, 1988 

by 

Sobotka & Co., Inc. 

2501 M Street, N.W. 

Washington, D.C. 20037 
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REPOR T 

Evaluation of the Leadtime to Comply with 

Gasoline Volatility and Diesel Fuel Regulations 

May 5, 1988 

This report evaluates the time that the petroleum refining industry will 

require to reconfigure its production facilities to meet new specifications 

for gasoline RVP and on-highway diesel fuel sulfur and aromatics content. EPA 

has proposed or is studying regulations that would require: 

° the summertime (five month) volatility of gasoline to be reduced 

to 7.0, 7.8, and 9.0 RVP in class A, B, and C areas, respectively; 

° the sulfur content of highway diesel fuel to be reduced to 0.05 

percent by weight; and 

0 the volume of aromatics in highway diesel fuel to be no more than 

20 percent by weight. 

This report will consider these potential requirements in cumulative order: 

first, the gasoline RVP requirement; second, the RVP and the diesel fuel 

sulfur requirements; and finally, these two requirements plus diesel fuel 

aromatics content requirement. 

SUMMARY OF FINDINGS 

The time required to plan and construct facilities needed to reduce 

gasoline RVP is about three years. If the regulations were promulgated in the 

summer of 1989, requiring compliance by the summer of 1992 would allow refiners less than three years to plan and construct needed facilities. Compliance 

within such a time frame may be possible. However, an effective date for the 

potential RVP requirements as of the summer of 1993 would more readily ensure 

that refiners would have a sufficient amount of time to comply. 
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The leadtime needed by refiners to construct facilities necessary to 

comply with potential on-highway diesel fuel sulfur specifications depends 

on the amount of capital outlays that will be required. If refiners are not 

able to segregate fuels, all distillate would have to be desul fun" zed. An 

upper-bound estimate for capital outlays, assuming nonsegregation of fuels, 

of $3.3 billion is provided in the National Petroleum Refiners Association 

(NPRA) 1986 survey. If this estimate of required capital outlays is accurate, the petroleum refining industry would need about three years to construct the diesel sulfur related facilities. The industry also would have 

difficulty in supporting both RVP related and diesel fuel sulfur related 

construction at the same time. This suggests that the regulations should 

provide for the sequential scheduling of work to meet the potential RVP and 

diesel sulfur content requirements. The leadtimes allowed for each regulation then would be additive, implying that the potential diesel fuel sulfur 

requirements could become effective in the fall of 1995. This is a conservative estimate of the required leadtime. However, if refiners can segregate 

fuels, capital outlays would be significantly lower, possibly in the range 

of from $1 to $2 billion, depending on which study is relied upon for an 

estimate of capital costs and the degree to which fuels are segregated. 

Assuming that the diesel fuel sulfur regulation now under study was promulgated in mid-1990, the refining industry may be able to meet the potential 

sulfur content requirement by 1994 or even as early as late 1993. 

We were unable to develop an estimate of a time period for regulatory 

planning purposes that would be sufficient to allow the construction of 

facilities needed to comply with an aromatics content limitation in diesel 

fuel because of questions about the commercial availablility of technology 

that could reduce the aromatics content of diesel fuel to the level being 

considered by EPA. The NPRA indicates that most refiners would prefer to use 

a hydrodearomatization process to lower the aromatics content of diesel fuel. 

This technology is not currently in use in the United States and, according 

to the NPRA, additional research and development work would need to be undertaken before it could be commercialized. If capital outlays are as large 

as the $6.6 billion estimated in the NPRA survey, 5 or 6 years would be 
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required to construct needed facilities , once the technology is demonstrated. 

Capital costs may be much lower, however, i f fuels can be segregated. 

The petroleum industry's physical and financial abilit y to comply with 

the regulations considered in this report may be affected by several factors . 

These are: 

° A large fraction of the industry's plants is in non-attainment areas. 

Potential prohibitions or limitations on refinery construction in such 

areas because of emissions increases that could trigger New Source 

Review could affect the industry's abilit y to construct facilitie s 

needed to reduce gasoline RVP as well as diesel fuel sulfur and aromatics content. Limited information suggests that increases in emissions 

from the new RVP and diesel fuel sulfur related facilitie s could be 

kept under the 40 ton per year increase in emissions limi t for new 

sources, but we have not investigated thi s issue in detail . 

° On-highway diesel fuel that meets the contemplated limitations , especiall y aromatics content, can be made abroad less expensively than in 

the U.S.. I f imported materials are a likel y replacement for some 

domestic materials, the industry may not (need to) invest funds in the 

domestic manufacture of low sulfur/low aromatics content diesel fuel . 

This possibilit y is investigated in a separate report. Although thi s 

may increase the availabilit y of low sulfur diesel fuel , the replacement of domestic materials by imports would potentially have a large 

adverse financial impact on the domestic refining industry. The 

increased cost of on-highway diesel fuel also could reduce market 

demand, further reducing required capital expenditures. 

° There is uncertainty about the extent to which on-highway diesel fuel 

can be segregated from other distillates . (Alternatively, diesel 

fuel , both on- and off-highway, might be segregated from home heating 

oi l depending on the nature of the final regulation and the enforcement 
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mechanisms available.) The survey by the NPRA contends that segregation is not practicable. However, it probably is not cost-effective 

to desulfurize or to desulfurize and dearomatize the entire distillate 

stream to meet potential EPA requirements applicable to only about 40% 

of that stream, especially if it would result in an increase of imports, a reduction in domestic refinery output of distillates, and a 

consequent reduction in refinery earnings. If on-highway (or all) 

diesel fuel can be segregated in the distribution systems from other 

distillates and if it is possible to segregate feedstocks for the 

manufacture of various distillates, the difficulty and cost of meeting 

EPA's requirements would be less than is now estimated by industry. 

If so, scheduling of the regulations could then allow for some overlap 

in construction and the diesel sulfur regulations could become effective in the range of from late 1993 to mid 1994. 

0 A banking and trading system, similar to that used for lead in gasoline, could bring about earlier reductions in RVP and diesel fuel 

sulfur content and very likely would reduce further the time needed to 

comply with the potential RVP and diesel fuel sulfur requirements. 

RECENT PERFORMANCE OF THE PETROLEUM INDUSTRY 

Before discussing the factors that will influence the amount of time 

needed by refiners to meet the regulatory requirements that have been proposed or are under study by EPA, it is useful to review briefly the performance of the petroleum industry and the refining segment of the industry. 

Table 1 shows the total capital and exploration outlays of the domestic 

petroleum industry and the capital outlays for the refining segment of the 

industry (adjusted to 1987 dollars). The petroleum industry's annual rate 

of capital expenditures is huge: almost $30 billion of capital will be 

invested in 1988 on domestic projects. Slightly less than two thirds of 

that amount will be for exploration and production. More than $8 billion 

will be invested on "downstream" functions that include refining, petrochemicals, marketing, and transportation, of which about $2.6 billion will be for 
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refining. In addition, foreign investments in 1988 by 35 U.S. petroleum 

companies (essentially all large U.S. domiciled petroleum firms) will be 

somewhat over $10 billion of which slightly over $500 million will be investments in U.S. owned refineries abroad. 

The industry's total capital outlays and capital outlays for refining 

peaked in 1981 - 1982 at about $67 and $4 billion, respectively. Investment 

in the refining segment of the industry increased by about $1.8 billion from 

1980 to 1981. During that period there was a general expansion and upgrading 

of the petroleum refining industry. Investments were spread over the three 

general components of refinery operations: distillation (separation of products 

by boiling point); thermo, catalytic, and hydro cracking (product upgrading 

using high pressure and sometimes high temperature); and reforming, platforming, and isomerization (changing the molecular structure and increasing 

octane). 

Rates of investment in petroleum refineries at current levels do not 

significantly expand industry capacity to process additional crude oil into 

petroleum products. Nor are they investments that will result in a major 

change in the industry's ability to alter its yields of products. The current 

annual rate of investment is the equivalent of roughly $200 per barrel of 

daily industry output and somewhat less per barrel of industry capacity. New 

capacity to turn out an industry average yield of products from average crude 

oils, none of which is currently under construction or planned, would cost 25 

to 50 times as much per barrel of input or output as is being currently 

invested. This makes it clear that the current rate of investment does 

little more than replace capacity as it wears out so that the industry can 

continue to operate at current levels and provides a modest level of funding 

for projects required to keep the industry in compliance with current environmental, as well as other requirements. The types of investments now under way 

are not reported to include a major effort to install equipment to reduce 

volatility, increase octane, or desulfurize motor fuels. 

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The petroleum refining industry, although huge by itself, is an integral 

but small part of the petroleum industry. All major and many independant 

refiners are integrated from crude oil production (and exploration) through 

crude oil and oil product transportation (by various modes) to the retail 

marketing of refinery products. And many firms, including all "majors", have 

substantial chemical (mostly organic) manufacturing as well as distribution 

operations. These refiners account for the bulk of the domestic production 

of gasoline and distillate. There are, however, a number of firms, none 

large, that operate purely or principally in refining. These firms would 

tend to have the greatest difficulty in raising the capital required by 

environmental regulations. In view of the integrated nature of firms in the 

petroleum industry that account for the bulk of production; the basic determinant of the availability of capital to the refining segment to meet environmental regulations rests with the availability of capital to the entire 

petroleum industry. 

The profitability of the refining portion of the industry also has 

improved in recent years. During the three years following the termination 

of oil price controls in 1981 a great many plants were closed and the 

industry's percent utilization dropped to about two thirds of its theoretical 

capacity. This happened because the costs of raw materials rose more than 

revenues from final products sales. Since then, partly as a result of 

increasing demands for petroleum products and a reduction in crude oil prices, 

and partly due to the permanent closure of many plants, utilization rates 

have again recovered to near normal levels. 

The trade press no longer contains reports of lack of refining profitability. Indeed the recent, although rather small, upturn in the rate of 

capital expenditures on refineries, from about $2.1 to $2.6 billion per year 

suggests that,on average, the industry is now adequately profitable and 

probably has the cash flow (or implied borrowing) power adequate to undertake 

significant refinery investments. 
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There probably are significant exceptions to this general rule. Some 

refineries may have an uncertain future because the market for their products 

is uncertain or because the owning firm is undergoing restructuring. A 

number of refineries, typically small ones that secure a large fraction of 

their sales in the military jet fuel market, may be adversely affected by the 

potential conversion of the military from naptha type jet fuel to commercial 

type jet fuel. They sell military jet fuel, a naphtha type material that is 

similar to low octane gasoline. This material, as now sold, has no commercial 

market as a final product. It requires further processing in order to become 

commerical gasoline. These refineries will have to either close, invest 

substantial capital to convert to the gasoline market, or sell naphtha to 

other refineries for reforming into gasoline if the military market is 

eliminated. 

FACTORS AFFECTING REQUIRED LEADTIME 

The general factors that infuence the length of time necessary for 

refiners to comply with regulatory requirements include: 

° The time needed to plan and construct new facilities. This includes 

the time required to budget resources for the project, to acquire 

necessary technical expertise, to determine the types of processes 

that can meet regulatory requirements and that are best suited to the 

particular refinery, to design new facilities so that they can be 

integrated with existing operations, to enter into contractual agreements with engineering and construction companies, to construct the 

facilities, and to test and bring them on line. No resource constraints 

are assumed to exist when evaluating this factor. 

o The extent of capital requirements. This deals not with limitations 

caused by access to capital, but rather to limitations that may occur 

because of large aggregate demands for certain types of engineering 

and construction expertise. Generally, access to sufficient capital 

should not present significant problems to the refining segment of the 
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industry, given the degree of integration within the petroleum industry (though some specific refiners may have difficulties obtaining 

adequate capital). However, the aggregate demands created by regulations for specific types of resources needed to design and construct 

needed facilities may be large relative to the general availability of 

such resoures. This would indicate that the industry would need more 

time to comply than the time it takes to plan and construct facilities 

at a refinery when no resource constraints are assumed to be present. 

0 The types of technologies that must be used. If technologies are well 

known, proven, and commercially available, no additional time would be 

needed beyond that needed to plan and construct facilities and to 

obtain the required technical resources. If technologies have not 

been demonstrated commercially, research and development efforts 

would be needed to demonstrate the suitability of proposed technologies for meeting possible regulatory requirements before refiners 

would embark on planning and construction activties. 

0 The time needed to acquire appropriate construction and operating 

permits. Planning and construction of new facilities could be delayed 

if there are difficulties in obtaining necessary environmental permits, 

We discuss each of these factors for the RVP and diesel fuel requirements under consideration by EPA to develop estimates of required leadtimes. 

LEADTIME REQUIREMENTS FOR GASOLINE VOLATILITY REQUIREMENTS 

This section evaluates the length of time refiners will need to install 

new equipment and reconfigure their operations to meet new RVP specifications, 

EPA is proposing that the summertime (during the 5 months from May through 

September) volatility of gasoline be reduced to 7.0, 7.8, and 9.0 RVP in 

class A, B, and C areas, respectively. This is a reduction of 2.5 RVP for 

Class C areas and represents about a 22 percent reduction in RVP across all 

areas. 
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Estimates of Required Capital Outlays 

Three studies have been undertaken to estimate the cost and capital 

outlays required to meet reductions in summertime RVP: 

0 The Bonner & Moore study developed estimates of the costs and capital 

outlays for three levels of RVP control.* The proposed RVP requirements lie between control levels 2 and 3 and are estimated to require 

capital outlays of about $950 million. 

0 The Sobotka study developed estimates of the costs and capital outlays 

for RVP reductions in increments of 0.5 for class C areas, up to a 

total reduction of 2.0 RVP.2 (Similar reductions in RVP were assumed 

to be made in class A and B areas.) Required capital outlays were 

estimated at about $560 million for a reduction in RVP of 2.0. Based 

on the trend in capital outlays estimated for successive reductions 

in RVP, a 2.5 total reduction in RVP would require capital outlays 

in excess of $800 million. 

0 A recent study by the American Petroleum Institute estimates required 

capital outlays for a 2.5 reduction in RVP at about $1.1 to $1.3 

billion.3 

1 Assessment of Impacts on the Refining and Natural Gas Liquids Industries 

of Summer Gasoline Vapor Contol Pressure, August 24, 1987, prepared for 

EPA by Bonner & Moore Management Science, contract 68-03-3353, WA-83. 

2 Cost and Feasibility of Gasoline Volatility Reductions, April 21, 1986, 

Sobotka & Co., Inc. 

3 U.S. Gasoline Reduction Capabilities and Costs, prepared for the American 

Petroleum Institute, November 1987, R. E. Cunningham, et al. 
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Thus, it appears that there is a consensus among the firms retained by 

EPA and by API regarding the general amount of capital investment required to 

reduce RVP to levels proposed by EPA. For the purposes of this analysis, 

required capital outlays may be assumed to be about $1 billion. 

There is also agreement among the studies regarding the types of projects 

the petroleum refining industry will have to undertake. Such projects include 

facilities for isomerization and alkylation and for butane handling (fractionation, vaporization, loading, and storage). These are the kinds of projects 

that appear to pose no technical hurdles and that incorporate well understood 

and proven technologies. 

A recent market development is the use of MTBE (methyl tertiary butyl 

ether) to enhance gasoline octane. The capacity to produce MTBE in the U.S. 

has increased from about 5,000B/D to about 80,000 B/D today. Currently, MTBE 

is allowed in gasoline up to 2 percent oxygen (about 11 percent by volume). 

If the MTBE content of gasoline were increased (EPA would have to grant 

waivers increasing the allowable limits on MTBE), the octane of gasoline 

could be enhanced and volatility diminished. (The MTBE would replace butane, 

which has a much greater RVP than does MTBE.) This could reduce the capital 

expenditures to meet the proposed RVP specifications estimated in the above 

referenced studies, as none considered the possibility that MTBE use might be 

expanded as a means of meeting the new RVP specifications. Without further 

study, however, the extent of the possible reduction in costs is unclear. 

Therefore, we use the $1 billion estimate in our analyses. 

Evaluation of the Factors Affecting Leadtime 

Planning and Construction 

The period required for planning and installation of the types of facilities needed to reduce RVP is about 3 years, if the process can proceed in an 

orderly manner. Of that period, about one year is required for planning and 

about two years for implementing the projects. This estimate is based on our 

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knowledge of the refining industry and was confirmed in discussions with 

representatives from the industry. For comparison, it took about 3 years to 

fully implement the most recent lead phasedown in gasoline. The capital 

outlays necessary to meet the requirements of lead phasedown regulations were 

estimated by SCI to be about $850 million -- about the same amount of capital 

as for the RVP regulation. 

As in the case of lead use reductions, seasonal considerations are 

involved in the timing of the regulation and its effective date. In the case 

of lead use regulations, the seasonality of gasoline demand made it desirable 

to make the effective dates of lead use reductions after, the summer when 

gasoline use peaks. Because RVP limitations are most restrictive during the 

summer, when gasoline demand also is greatest, it may be desirable to phase 

in new regulations so that the industry has as much time as is practical 

between the effective date of the regulation and the beginning of new limits 

on RVP. 

If the regulation were promulgated in the summer of 1989, requiring that 

the potential limits on RVP be effective in the summer of 1992 would give 

refiners less than three years to plan, construct, and operationalize the 

necessary facilities and to take account of the leadtime to make RVP changes 

at service stations (the average leadtime to make seasonal RVP changes is 

about 5 weeks). It is possible that refiners could comply within this timeframe. However, some portion of the refiners may not be able to meet such a 

deadline. Further, any delay in promulgating the regulation would reduce the 

time refiners would have for compliance. Additionally, capital budgeting in 

the petroleum industry tends to be done on an annual cycle beginning in January. This would delay the allocation of funds within industry to support the 

design and eventual construction of the needed facilities and would further 

reduce the effective amount of time for compliance. Thus, a more conservative approach for ensuring that refiners could comply with the potential RVP 

limits would be to require compliance by the summer of 1993. 
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Capital Requirements 

As discussed above, the capital outlays required by the proposed RVP 

specifications will amount to about $1 billion. One method of determining 

whether this level of expenditures will present problems for the industy in 

terms of raising the required capital or in terms of construction capacity 

is to compare it to the industry's current and historical capital expenditures. 

The capital outlays of about $1 billion required to reduce RVP levels 

are very small relative to total planned outlays by the entire petroleum 

industry for 1988. If incurred over a 2 to 3 year period, the construction 

outlays of about $330 to $500 million per year would be roughly a hundreth of 

total 1988 planned outlays. Clearly, most of the industry should experience 

no difficulties in financing the required projects. 

The required capital expenditures also are a small fraction of planned 

capital outlays of the refining segment of the industry. If spread out over 

a 2 to 3 year period, they are roughly 13 to 19 percent of 1988 planned 

outlays. The refining segment of the industry should be able to support 

increases of capital expenditures of this amount, since the industry in the 

past has been able to substantially increase capital outlays in the space of 

a year. For example, from 1978 to 1979 capital outlays increased by about 

$900 million and from 1980 to 1981 they increased by about $1.8 billion. 

However, as mentioned above, these investments were spread over the three 

general components of refinery operations. The RVP regulation will not 

require a general expansion, but only an expansion of one component — 

reforming, platforming, and isomerization. Therefore, only a portion of 

the skills of refiners' technical departments and of the supplier industries 

will be used. Further, all of the construction will be in a limited area of 

the refinery and probably will necessitate sequential, rather than concurrent, 

scheduling of projects. Nonetheless, there should be sufficient construction 

and engineering capacity for the required projects, since current capital 

outlays by the refining industry are well below historic peaks, and since 

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the potential increase in outlays to meet new RVP specifications are well 

below increases in capital outlays that have been observed in the recent 

past. 

Types of Technologies 

The technologies required to reduce the RVP of gasoline are well known, 

proven technologies. They generally are of the same sort as those installed 

to reduce lead in gasoline because, in both cases, the octane rating of the 

gasoline components must be increased. (When the amount of lead in gasoline 

is reduced octane declines and when the butane content of gasoline is reduced 

to meet the new limits for RVP octane also declines. Butane, which has 

higher than average octane, must be reduced due to its higher than average 

volatility.) The use of MTBE might also be increased as a method of meeting 

the RVP specifications. Thus, the refining industry should not experience 

delays due to unforseen problems with the required technologies. 

Acquisition of Permits 

A problem identified by industry that could delay the orderly planning 

and installation of facilities to reduce RVP is the possible difficulty 

refiners might encounter in obtaining necessary environmental permits. A 

large fraction of refineries are located in ozone non-attainment areas. The 

facilities that have to be built at a typical refinery to reduce gasoline RVP 

(added process units and butane shipping facilities) may generate enough additional VOC emissions (an increase of more than 40 tons per year) to trigger 

New Source Review. However, refiners could avoid this problem through inplant reductions in fugitive emissions from storage tanks, piping, and valves 

that probably will result because a major refinery product (gasoline) will be 

less volatile. Acquisition of necessary environmental permits was not a 

significant problem for refiners during the most recent lead phasedown. 
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We have not explored this issue in depth. We mention the issue because 

industry has raised it as a potential problem that could compromise its ability to comply with EPA's regulatory requirements. If this problem does 

arise, the managements of refineries that are in non-attainment areas will 

not be able to forecast how long the permitting process may take, or indeed, 

if they will be able to secure permits. The detailed planning phase necessary 

to design the facilities needed to meet the RVP limits would be postponed 

until permitting issues were resolved.^ Thus, this analysis has been conducted under the assumption that control of any potential additional emissions 

can be accomplished without running into problems from New Source Review 

requirements. 

Banking and Trading 

In the case of the lead in gasoline regulations the leadtime between the 

regulations and the time of all the newly required capital had to be in 

place was about three years. Some lead use reductions took place on a 

progressive schedule because this was possible on the basis of the industry's installed capacity and because EPA provided incentives for faster 

reductions than required by the lead phasedown. EPA's regulations 

allowed both lead use trading and lead banking. At the time that the new 

rules became effective some refiners had excess capacity to replace lead 

created octane with process created octane. Trading and banking permitted 

EPA to require lead use reduction more quickly than would have been possible 

based purely on the industry's ability to invest capital in the necessary 

refining equipment. It also allowed the industry as a whole to optimize 

its operations while the investment projects were underway and while lead 

use was being reduced by refiners capable of doing that. 

4 Some refiners have expressed concern about possible modifications in the 

Clean Air Act. Revisions could reduce the amount of emissions considered 

"de minimis" for netting out of New Source Review. 
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I t appears that no comparable banking and trading procedure is now under 

consideration for RVP reductions and that the RVP reductions now contemplated 

would be required to take effect at one point in time. A banking and trading 

system potentially could be used to help implement the RVP regulations. 

Reductions in RVP that refiners are full y capable of making over the next 

several years could be credited against later output. This would allow for 

more immediate improvements in air quality and could reduce industry's compliance costs. I t could also reduce the time necessary to comply with new 

RVP specifications by up to a year. 

Other Issues Affecting Planning by Refineries 

The RVP limitations are a part of a "package" of other fuel quality 

regulations under consideration by EPA or elsewhere in the government which 

would also require modifications in refineries and in the fuels distribution 

system. Limitations on sulfur and on aromatics in diesel fuels , which are 

under study by EPA, and proposals which would require refiners to supply 

gasoline components for blending with alcohols, al l would affect the operation and capital investments of refineries and also distribution system for 

fuels . 

There is relativel y littl e direct relation between the kinds of projects 

that refiners would need to undertake for RVP reductions and for diesel quali t y changes, but there is enough overall capital and construction-related 

demands that join t planning of facilitie s would be desirable. Thus, i t would 

help refiners ' planning for gasoline RVP reductions to know whether they also 

wil l be required to reduce the sulfur content of diesel oil , whether aromatics 

contents wil l have to be reduced, and whether a grade of gasoline specially 

made for blending with alcohols in about a 10:1 ratio wil l be required of 

them. As long as there is significant uncertainty about the near term prospect for such requirements, the planning for RVP reductions wil l tend to be 

more difficul t and refiners could incur some added costs. 

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This is not an entirely theoretical matter, but is rather a practical 

concern that has been the subject of recent comment by refiners concerning 

previous regulations. A few refiners appear to have built C5/C6 isomerization 

capacity to comply with lead phasedown. But the high RVP of product of these 

facilities will make them uneconomic if the contemplated RVP limits are 

imposed. Had these refiners expected RVP limits, they would not have built 

these facilities. 

General Conclusion 

Refiners could comply with the proposed RVP specifications in about 

three years. Difficulties with required technologies are unlikely to slow 

compliance with the regulation. If the regulation is promulgated in the 

summer of 1989, compliance might be possible by the summer of 1992. However, 

a more conservative approach that would ensure that refiners had sufficient 

time to plan and construct the needed facilities and to bring them into 

operation would be to require compliance by the summer of 1993. Banking 

and trading could bring about earlier reductions in RVP and would allow 

compliance by 1992. Some refiners have expressed concerns regarding possible 

difficulties in obtaining required construction and operating permits in 

non-attainment areas. 

LEADTIME REQUIREMENTS FOR GASOLINE VOLATILITY AND HIGHWAY DIESEL FUEL SULFUR 

REQUIREMENTS 

This section evaluates the length of time refiners will need to install 

new equipment and reconfigure their operations to meet both the proposed RVP 

specifications and highway diesel fuel sulfur requirements under consideration 

by EPA. The diesel fuel regulation under study would set a maximum of 0.05 

percent on the sulfur content of highway diesel fuel. We assume for the 

purposes of analysis that such a regulation will be promulgated in mid-1990. 

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Estimates of Required Capital Outlays 

Two studies have been undertaken to estimate the cost and capital outlays 

required to meet the highway diesel fuel specification: 

0

 The NPRA Survey estimated the capital outlays required to meet the 

diesel fuel specification to be about $3.3 billion. 5 The Survey 

reported that refiners considered i t impractical to further segregate 

low sulfur on-highway diesel fuel from home heating fuel and offhighway diesel fuel . Thus, the estimates reflect the cost of desulfurizing al l of the distillat e stream. 

0

 The SCI study estimated the capital outlays required to meet the 

diesel fuel specifications using an aggregate linear programming model 

of the U.S., rather than through a survey.6 Costs were estimated for 

two polar cases: first , the case in which on-highway diesel fuel i s 

segregated from other middle distillates ; and second, the case in 

which there is no segregation of on-highway diesel fuel from other 

distillate s beyond current levels. Capital costs were estimated to be 

about $1 billio n and $2.4 billio n for the segregated and no segregation 

cases, respectively. 

Unlike the estimates of the capital costs of meeting the RVP requirements, there is disagreement among estimates of required capital costs to meet 

a potential sulfur content requirement for on-highway diesel fuel . The NPRA 

survey estimates the capital costs of desulfurizing al l distillat e at almost 

5

 U.S. Refining Industry Capability to Manufacture Ultra Low Sulfur Diesel 

Fuels, NPRA Survey 1986, National Petroleum Refiners Association, 1986. 

6

 Cost and Feasibility of Lowering Diesel Fuel Sulfur and Aromatic Content, 

Sobotka & Co., Inc. November 2, 1987. 

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$1 billion more than the SCI analysis. An even larger difference arises 

from assumptions about the extent to which refiners will segregate fuels. 

The NPRA survey indicated that refiners believe that segregating middle 

distillates beyond current levels is not practical. If it were possible to 

segregate on-highway diesel fuel, then only about 40% of the distillate 

stream would be affected by the new regulation. On the other hand, if it were 

practical only to segregate diesel fuel (on- and off- highway) from home heating fuel, or if EPA's regulation or enforcement mechanism results in this 

type of fuel segregation, then about 60 percent of the distillate stream 

would be affected by the regulation. In both cases, segregation of fuels 

would reduce the capital required for process units and the operating costs 

of refineries. But, it would require added investments in the products 

distribution system.^ 

Given the level of competition in the petroleum industry, there will be 

a strong incentive for refiners to comply with the potential sulfur limit at 

the lowest cost. In many cases this would involve product segregation. For 

example, on the east coast foreign shipments of low sulfur diesel fuel could 

easily be segregated from other distillates. (This is because they can be 

segregated in tank ships and would not have to enter the pipeline distribution system to reach such markets.) This would mean that domestic refiners 

would not be able to pass through the costs of desulfurization to buyers of 

off-highway diesel fuel or of home heating oil. They would either have to 

If product segregation is possible and if the sulfur content of non-highway 

diesel fuel can be increased, then the capital investment requirements of 

refineries can be further reduced. But the extent to which an increase in 

the sulfur content of home heating oil or off-highway diesel fuel is an 

acceptable way of reducing the sulfur content of highway diesel oil is 

questionable. State regulations on the sulfur content of home heating oil 

may also limit this possibility. 
P.21 

•19-

cede a greater portion of the market to imports, or else find a less expensive way (other than desulfurization) of serving that market segment. 

Even in areas where imports are not currently a significant competitive 

factor, a potential 3.1 cent per gallon cost advantage (as estimated by the 

NPRA) should lead some refiners and pipelines to find ways of supplying 

higher sulfur content (and lower cost) distillat e to the off-highway and 

home heating oi l markets. Segregation at a 40/60 spli t (or a 60/40 spli t 

i f al l diesel fuel is segregated from home heating oil) may not occur because 

in some instances desulfurizing al l the distillat e going to a market may be 

less expensive than incurring the costs needed to segregate fuels . But in 

most situations , particularl y in large volume markets, i t is likel y that 

fuels would be segregated.8 (I f the aromatics content of on-highway diesel 

fuel also is reduced, then the segregation of fuels becomes considerably more 

attractive , as is discussed in the next section.) Because the tradeoffs 

between the various ways of meeting on-highway diesel fuel low sulfur specifications have not been full y investigated, we use a number of estimates of 

capital outlays to develop estimates of required leadtime. 

Evaluation of the Factors Affecting Leadtime 

Planning and Construction 

The period required for planning and installatio n of the types of facil -

itie s needed to meet the diesel fuel sulfur specification also is about 3 

8

 I f the product distribution system is capable of segregating diesel from 

home heating fuel , small and medium refiners identified in the NPRA Survey 

as being unable to undertake the required investments (they account for 

about 17% of current diesel fuel production) would tend to supply home 

heating oi l and off-highway diesel fuel rather than on-highway diesel 

fuel . Small refiners serving some geographic areas where there is a 

negligible home heating oi l market may not have thi s option. 
P.22 

•20-

years, about one year of which is for the planning phase. This estimate 

considers the time needed to physically install the required facilities 

at a typical refinery without regard to the industry's aggregate demand for 

technical and construction services. 

Since there is little physical overlap in the types of facilities built 

to comply with the RVP and diesel sulfur regulations, there is no great benefit 

in simultaneous planning. But, there is likely to be some joint use of some 

facilities such as refinery fuel systems and there may be space constraints 

in refineries that may make it desirable to do the planning and design of 

both types of facilities at the same time. Alternatively, planning for 

diesel sulfur related facilities could be done throughout the period of 

construction of RVP related facilities. This imples that the differential 

between the time by which most RVP related construction would be completed 

and the effective date of the sulfur limits need only cover the period 

required to construct the latter facilities. 

Capital Requirements 

i. NPRA estimate assuming no fuel segregation 

The capital requirements of the diesel fuel sulfur regulation could 

amount to as much as $3.3 billion according to the NPRA survey. These capital 

outlays will be concentrated in the reforming, platforming, and isomerization 

component of refining, just as are RVP related capital outlays, and will 

require a narrower range of skills from technical departments and supplier 

industries than would a general expansion of industry activity. The facilities also will be located in the same general area of the refinery as the RVP 

related facilities. 

Spreading these estimated capital outlays over a 2 year construction 

period would require annual outlays of about $1.7 billion. Assuming that 

construction required by the RVP and diesel fuel sulfur regulations was 

scheduled sequentially, capital expenditures would increase by over a billion 
P.23 

-21-

dollars around 1992 and total capital outlays by the refining industry ($1.7 

plus $2 to $2.6 billion) would be near or exceed peak capital outlays in 

1981-1982. It is doubtful that the industry would be able to support capital 

outlays of this magnitude. (Overlapping scheduling would require even greater 

annual outlays.) 

If the capital outlays were spread over a construction period of about 3 

years, annual expenditures would be about $1.1 billion per year on diesel 

sulfur control related facilities. Assuming the RVP and diesel fuel regulations were scheduled sequentially, such an expenditure rate would probably 

increase the refining industry's rate of capital expenditures by about 40% 

over the rates that would otherwise prevail in the 1990s. If no other unusual 

refinery investments need be made in that period, the resulting level will be 

below the investment and capital facilities construction rates achieved by 

the industry earlier when the industry was both expanding and upgrading its 

products (see Table 1) . If diesel fuel sulfur related investments follow 

closely behind the installation of facilities to meet gasoline RVP specifications there will be a long foreseen rate of increase in the construction of 

facilities. Under this approach, the planning for the diesel fuel sulfur 

related facilities would be undertaken over the period 1990 to 1992 and the 

construction of the facilities could begin by late 1992 (RVP related construction would be ending at about this time) and could be completed by the 

fall of 1995. Thus, an effective date as of the fall of 1995 would provide 

refiners sufficient time to comply with potential new diesel fuel sulfur 

content specifications. 

Overlapping the construction schedule for the RVP and diesel fuel requirements to shorten the compliance period could create problems for the refining 

industry. Assuming promugation of the diesel sulfur regulation in mid-1990 

and a 3 year construction period, capital outlays could be as much as $1.5 

billion per year ($1.1 billion plus about $400 million for RVP facilities) 

over the period 1991-1992. This would follow a year or two of expenditures 

in the $400 million range for RVP controls. An increase of perhaps a billion 

dollars in capital expenditures rivals increases in construction rates achieved 
P.24 

•22-

by the refining industry in the late 70s and early 80s. Total capital expenditures (the sum of expected normal capital outlays and outlays to meet RVP and 

sulfur requirements) also would be near historic peaks in investment. The 

increase in capital outlays would be concentrated in one component of the 

industry, rather than being spread across all components as was the case 

during the industry expansion in 1980-1981. This suggests that overlapping 

construction activities could strain construction and engineering resources. 

Sequential scheduling would probably also result in a more efficient use of 

such resources and lower capital outlays for refiners, as bidding for limited 

resources would not be as intense and the market would have longer to adjust 

to regulatory induced demands. 

ii. Alternative estimates of capital outlays 

If refiners can segregate low sulfur on-highway diesel fuel from other 

middle distillates, capital expenditures would be lower than estimated by the 

NPRA survey — they could be reduced by more than half to about $1.4 billion. 

If so, the construction schedules required by the two regulations probably 

could overlap without causing significant problems. Planning and construction 

could be completed in about 3 years and the diesel fuel sulfur regulations 

could become effective as early as the fall of 1993. 

If the capital costs of meeting the sulfur content requirements on all 

distillate are significantly lower than estimated by the NPRA, the required 

leadtime also would be shorter, even if fuels were not segregated. If the 

capital costs of desulfurizing all distillate are about $2.4 billion, as 

estimated by SCI, the regulations could become effective in the fall of 1994. 

Planning could be carried out during 1990 to 1992 and construction could 

begin in late 1992 (construction of RVP and diesel sulfur related facilities 

would not overlap) and could be completed by late 1994. With product segregation (on-highway diesel from all other distillate), capital costs could be as 

little as $1 billion and the new sulfur content specification probably could 

be met by mid to late 1993. This should be viewed as a lower-bound estimate 
-23-

of required leadtime. Sequential scheduling still would probably result in 

lower costs to industry because it would spread out the demand for limited 

construction and engineering resources. 

Types of Technologies 

The facilities required to meet the diesel sulfur content requirements 

include desulfurization and hydrocracking facilities and hydrogen production 

and sulfur recovery facilities. These employ well known and proven technologies. Thus, the refining industry should not experience delays due to 

unforseen problems with required technologies. 

Acquisition of Permits 

Refiners have suggested that problems may be encountered in obtaining 

necessary construction permits in non-attainment areas. The same issue 

arises as with potential RVP regulations: refinery processing units that are 

required to reduce sulfur content will generate additional emissions that 

could trigger New Source Review. This issue needs to be resolved to determine the length of time necessary for refiners to obtain the necessary 

permits, since this could delay the planning and construction schedules for 

sulfur removal facilities. 

Banking and Trading 

A banking and trading program would lead to earlier reductions in the 

sulfur content of diesel fuel and very likely would reduce the time needed by 

industry to comply with new requirements, perhaps by as much as a year. 

General Conclusions 

If required capital outlays are near the $3.3 billion estimated by the 

NPRA survey, refiners should be able to construct the facilities required to 

meet a diesel fuel sulfur content requirement of 0.05 percent in about 3 

_7 
-24-

years. Planning can be carried out concurrently with the construction of RVP 

facilities, but the construction required by the RVP and diesel sulfur regulations should be scheduled to run sequentially. This implies that the diesel 

sulfur requirements could become effective in the fall of 1995, which is about 

3 years after the RVP related construction would be completed. If capital 

expenditures are significantly less than estimated by the NPRA or if segregation of onhighway diesel fuel from other distillates is possible, scheduling 

of the RVP and diesel sulfur regulations could allow for some construction 

overlap. The diesel sulfur requirements could then be met as early as late 

1993. A banking and trading program could be designed to bring about earlier 

reductions in the sulfur content of diesel fuel and to reduce the leadtime 

required for compliance by refiners. 

LEADTIME REQUIREMENTS FOR GASOLINE VOLATILITY AND DIESEL FUEL SULFUR 

AND AROMATICS REQUIREMENTS 

This section evaluates the length of time refiners will need to meet the 

entire set of potential regulatory requirements — RVP specifications and 

limits on the sulfur and aromatics content of highway diesel fuel. EPA is 

considering a potential limit of 20 percent on the aromatics content of 

on-highway diesel fuel. 

Estimates of Required Capital Outlays 

The two studies referenced in the previous section also estimated 

the capital outlay necessary to meet both the proposed sulfur and aromatics 

content for highway diesel fuel: 

° The NPRA Survey estimated required capital outlays at about $6.6 

billion. This assumes that no segregation of diesel fuel from home 

heating oil beyond current levels is practical. The survey also 

indicated that a number of small and medium size refiners, accounting 

for about 36 percent of diesel production capacity, would be unable 

to make the required investments. The NPRA contends that refiners 
•25-

generally underestimated their likely compliance costs when responding 

to the survey. More recent analysis performed by NPRA indicates that 

compliance costs would be about 75 percent higher.9 

0 The Sobotka study estimated that capital outlays would range from about 

$1.3 billion, if diesel fuel could be segregated, to about $3.7 billion 

if it could not be segregated from other distillate.^ 

Again, there is wide disparity in the capital outlays estimated to be 

required to meet the potential sulfur and aromatics requirements. Estimates 

of capital outlays vary from a low of about $1.3 billion, if fuels are segregated, to in excess of $6.6 billion. 

Potential competition from foreign refiners may also complicate investment decisions by domestic refiners. Refineries abroad typically produce a 

considerably larger fraction of their diesel oil (number two oil) from 

straight run material and produce a smaller fraction from cracked stocks 

(products of conversion units). This is because residual oil produced in 

U.S. refineries is a smaller fraction of total output than it is in foreign 

refineries. Straight run material tends to be closer to the sulfur and 

aromatics specifications desired by EPA than that made from cracked stocks. 

This suggests that refineries abroad may be better situated to satisfy U.S. 

specification for highway diesel fuel than refineries in the U.S. Indeed, 

an analysis by SCI of foreign refiners indicates that in the process of meeting the 0.05 percent sulfur specification they would also meet the 20 percent 

aromatics specification. 

9 See recent comments by the NPRA in, "NPRA Adhoc Committe on Diesel Fuel 

Comments on Diesel Dearomatization." 

10 The SCI analysis assumed that aromatics could be removed using solvent 

extraction. 
•26-

In addition, and as mentioned above, foreign refineries should be able 

to segregate their shipments of highway diesel fuel destined for the U.S. 

from other distillates sold into the U.S. market (primarily the east coast) 

and in other markets abroad. This implies that domestic refiners would have 

difficulty increasing the price of home heating fuel and off-highway diesel 

fuel to reflect the cost of sulfur and aromatics removal, which should lead to 

segregation of highway diesel fuel from the balance of the diesel/home heating 

oil stream. On balance, foreign refiners may retain a cost advantage in 

producing on-highway diesel fuel that could lead to the importation of large 

quantities of that material. These possible competitive effects will create 

uncertainties that could impair the domestic petroleum refining industry's 

ability to plan for low sulfur/low aromatics diesel oil. They also should 

create strong incentives for refiners to segregate fuels where practicable 

and may reduce the total amount of capital invested if domestic refiners 

reduce their output of diesel fuel. 

Evaluation of the Factors Affecting Leadtime 

Planning and Construction 

The required facilities could be physically installed in about 2 to 3 

years, again, without consideration of constraints imposed by the size of 

aggregate capital outlays. However, because of concerns raised by the NPRA 

about the availability of the technology, as discussed below, the planning 

phase must be sufficient to allow for sufficient research and testing. We 

are unable to estimate how long it will take to demonstrate the commercial 

acceptability of aromatics removal technologies. 

Capital Requirements 

i. NPRA estimate assuming no fuel segregation 

In the absence of technical, commercial, and regulatory uncertainties, 

it is likely that the combination of diesel fuel sulfur and aromatics 

_7 
P.29 

•27-

regulations, at an investment of about $6.6 billion dollars, could be met by 

U.S. refiners if they were provided with a 5 or 6 year period over which to 

install the required capital equipment. (This implies added aggregate capital 

outlays of about $1.1 to $1.3 billion per year.) That is to say, if the 

technology were clearly known and if imports of competitive material were no 

threat, then a 5 or 6 year leadtime after the effective date of gasoline RVP 

limitation would be sufficient to install the required capital equipment, 

i.e., compliance in late 1997 or 1998.H 

ii. Alternative estimates of capital outlays 

If the capital costs were significantly lower than estimated by the 

NPRA, the required leadtime would be shortened (again, assuming no problems 

in implementing dearomatization technologies). For instance, if product 

segregation were possible, the NPRA estimate of capital expenditures would 

decline by about half to about $3.3 billion. Compliance would then be 

possible by late 1995. Likewise, if actual capital outlays were much closer 

to the SCI estimate of $3.7 billion for the non-segregated case, compliance 

would also be possible by late 1995. And, if fuels could be segregated and 

capital costs were close to the SCI estimate of $1.3 billion for the segregated case, compliance could be possible by late 1993. 

Types of Technologies 

The NPRA contends that there currently is no general agreement on the 

processes that will prove optimal or even practical to meet stringent 

H There is at least a theoretical possibility that U.S. refiners may, at some 

cost, be able to increase the sulfur and aromatics content of home heating 

oil and to segregate home heating oil from diesel oil to minimize the costs 

of sulfur and aromatics reduction in highway diesel. At this point in time 

it is unclear whether increases in sulfur as well as aromatics content in 

non-highway diesel, mostly home heating oil, would be tolerated either 

commercially or by state, local or Federal EPAs. 

_7 
P.30 

•28-

(20%) diesel fuel aromatics limits. Additional research, as well as the 

construction and installation of commercial size units specifically developed 

to process the large volumes of feeds that would be needed in U.S. refineries, 

would be a normal precursor to the wide spread installation of either 

extraction or hydroprocessing facilities. Also, it is not yet clear what 

dispositions of byproducts from these processes will prove best. Finally, 

there appears to be some uncertainty about the final properties, aside from 

sulfur and aromatics content, of diesel fuel that would be produced using 

severe hydroprocessing. Some refiners question whether diesel oil produced 

in this way will be a satisfactory fuel for highway vehicles. 

Acquisition of Permits 

Due to potential increases in VOC emissions, refiners have indicated a 

concern over possible difficulties in obtaining required construction permits 

in non-attainment areas. This issue should be jointly resolved for RVP 

related facilities and diesel sulfur and aromatics removal facilities. There 

is some indication that application of emission control technologies would be 

sufficient to avoid triggering New Source Review, but this issue has not been 

examined in detail. 

General Conclusion 

Given the uncertainties discussed above, we are unable to provide EPA 

with a reasonable schedule for the construction of the combination of sulfur 

and aromatics reduction facilities for diesel oil in U.S. refineries. The 

required leadtime, at a minimum, would be about 5 or 6 years after RVP controls go into effect if required capital outlays are near the NPRA survey 

estimate of $6.6 billion. However, because of potential problems with foreign 

competition, technologies, and permitting this estimate of leadtime cannot be 

recommended for regulatory planning purposes. 
P.31 

TABLE 1 

Capital Expenditures by the Petroleum Industry 

1972-1988 

(in constant 1987 dollars) 

Capital Expenditures 

Year 

1972 

1973 

1974 

1975 

1976 

1977 

1978 

1979 

1980 

1981 

1982 

1983 

1984 

1985 

1986 

1987 

1988* 

Refining Industry 

($million)-

$ 376 

466 

1,128 

1,002 

979 

760 

955 

1,835 

2,309 

4,105 

4,018 

3,674 

2,678 

2,839 

2,019 

2,180 

2,605 

Total 

$ 3,912 

4,663 

8,253 

9,424 

11,741 

15,321 

17,981 

29,678 

44,350 

66,354 

68,354 

51,913 

50,233 

45,345 

26,542 

26,597 

29,721 

Planned expenditures. 

Source: Derived from Oil and Gas Journal