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# EBEH 1

EVALUATIO NO F TH E LEADTIM E T O COMPL Y WIT H

GASOLIN E VOLATILIT Y AND DIESE L FUE L REGULATION S

Ma y5 , 198 8



### b y
Sobotk a & Co. , Inc

. 250 1 M Street , N.W

. Washington , D.C

. 2003 7P. 3

REPOR T
Evaluatio no f th e Leadtim e t o Compl y wit h Gasolin e Volatilit y

andDiese l Fue l Regulation s Ma y 5 , 198 8

Thi s repor t evaluate s th e time tha t th e petroleum refinin g industr y

wil l requir e t o reconfigur e it s productio nfacilitie s t o mee t ne w specification s fo r gasolin e RVP an

don-highwa y

diese l fue l sulfu r an daromatic s content . EP A ha s propose do r i s studyin g regulation s tha t woul drequire :

° th e summertim e (fiv e month ) volatilit y o f gasolin e t o be reduce d t o 7.0 , 7.8 , and9. 0 RVP inclas s A , B , an dC areas , respectively ;

° th e sulfu r conten t o f highwa y diese l fue l t o be reduce dt o 0.0 5 percen t b

y weight ; an

d

0 th e volum e o f aromatic s inhighwa y diese l fue l t o b

e no mor e tha n 2 0 percen t b

y weight .
Thi s repor t wil l conside r thes e potentia l requirement s incumulativ e order : first , th e gasolin e RVP requirement ; second , th e RVP an dth e diese l fue l sulfu r requirements ; an dfinally , thes e tw o requirement s plu s diese l fue l aromatic s conten t requirement .

SUMMARYO F FINDING S

Th e tim e require dt o pla nan dconstruc t facilitie s neede dt o reduc e gasolin e RVP i s abou t thre e years . I f th e regulation s wer e promulgate di nth e summe r o f 1989 , requirin g complianc e b y th e summe r o f 199 2 woul dallow refin er s les s tha nthre e year s t o pla nan dconstruc t neede dfacilities . Complianc e withi nsuc ha tim e fram e ma y be possible . However , a neffectiv e dat e fo r th e potentia l RVP requirement s a s o f th e summe r o f 199 3 woul dmor e readil y ensur e tha t refiner s woul dhav e a sufficien t amoun t o f time t o comply .P. 4

Th e leadtim e neede db y refiner s t o construc t facilitie s necessar y t o compl y wit hpotentia l on-highwa y diese l fue l sulfu r specification s depend s o nth e amoun t o f capita l outlay s tha t wil l b e required . I f refiner s ar e no t abl e t o segregat e fuels , al l distillat e woul dhav e t o b e desu l fun " zed . A

n upper-boun destimat e fo r capita l outlays , assumin g nonsegregatio no f fuels , o f $3. 3 billio ni s provide di nth e Nationa l Petroleum Refiner s Associatio n (NPRA ) 198 6 survey . I f thi s estimat e o f require dcapita l outlay s i s accur ate , th e petroleum

refinin g industr y

woul dnee dabou t thre e year s t o con struc t th e diese l sulfu r relate dfacilities . Th e industr y als o woul dhav e difficult y

i nsupportin g bot hRVP relate danddiese l fue l sulfu r relate d constructio na t th e same time . Thi s suggest s tha t th e regulation s shoul d provid e fo r th e sequentia l schedulin g o f wor k t o mee t th e potentia l RVP an d diese l sulfu r conten t requirements . Th e leadtime s allowe dfo r eac hregula tio nthe nwoul dbe additive , implyin g tha t th e potentia l diese l fue l sulfu r requirement s coul dbecom e effectiv e inth e fal l o f 1995 . Thi s i s a conserv ativ e estimat e o f th e require dleadtime . However , i f refiner s ca nsegregat e fuels , capita l outlay s woul dbe significantl y lower , possibl y

inth e rang e o f fro m $ 1 t o $ 2 billion , dependin g onwhic hstudy i s relie dupo nfo r a n estimat e o f capita l cost s an dth e degre e t o whic hfuel s ar e segregated . Assumin g tha t th e diese l fue l sulfu r regulatio nnow unde r study

wa s promul gate di nmid-1990 , th e refinin g industr y ma y b e abl e t o mee t th e potentia l sulfu r conten t requiremen t b y 199 4 o r eve na s earl y a s lat e 1993 .

W e wer e unabl e t o develo pa nestimat e o f a tim e perio dfo r regulator y plannin g purpose s tha t woul dbe sufficien t t o allow th e constructio no f facilitie s neede dt o compl y wit ha naromatic s conten t limitatio nindiese l fue l becaus e o f question s abou t th e commercia l availablilit y o f technolog y tha t coul dreduc e th e aromatic s conten t o f diese l fue l t o th e leve l bein g considere db

y EPA . Th e NPR

A indicate s tha t mos t refiner s woul dprefe r t o us e a hydrodearomatizatio nproces s t o lowe r th e aromatic s conten t o f diese l fuel . Thi s technolog y

i s no t currentl y

i nus e i nth e Unite dState s and , accordin g t o th e NPRA , additiona l researc handdevelopmen t wor k woul dnee dt o b e under take nbefor e i t coul db e commercialized . I f capita l outlay s ar e a s larg e a s th e $6. 6 billio nestimate di nth e NPR A survey , 5 o r 6 year s woul dbeP. 5

require d t o construc t neede d facilities , onc e th e technolog yi s demonstrated

. Capita l cost s ma

ybe muc

h lower , however , i f fuel s ca n b e segregated

.
Th e petroleu m industry' s physica l an d financia l abilit yt o compl ywit h th e regulation s considere d i n thi s repor t ma yb e affecte d b

ysevera l factors

. Thes e are :

° A larg e fractio n o f th e industry' s plant s i s i n non-attainmen t areas
. Potentia l prohibition s o rlimitation s o n refiner yconstructio n i n suc h area s becaus e o f emission s increase s tha t coul d trigge rNe w Sourc e Revie w coul d affec t th e industry' s abilit yt o construc t facilitie s neede d t o reduc e gasolin e RV P a s wel l as diese l fue l sulfu ran d aromat
ic s content

. Limite d informatio n suggest s tha t increase s i n emission s fro m th e ne

w RV P an d diese l fue l sulfu rrelate d facilitie s coul d b e kep t unde rth e 4 0 to n pe ryea rincreas e i n emission s limi t fo rne w sources , bu t w

e hav e no t investigate d thi s issu e i n detail

.

° On-highwa ydiese l fue l tha t meet s th e contemplate d limitations , espec iall yaromatic s content , ca n be made abroa d les s expensivel ytha n i n th e U.S.

. I f importe d material s ar e a likel yreplacemen t fo rsome domesti c materials , th e industr yma yno t (nee d to ) inves t fund s i n th e domesti c manufactur e o f lo w sulfur/lo w aromatic s conten t diese l fuel

. Thi s possibilit yi s investigate d i n a separat e report

. Althoug h thi s ma yincreas e th e availabilit yo f lo w sulfu rdiese l fuel , th e replace
men t o f domesti c material s b yimport s woul d potentiall yhav e a larg e advers e financia l impac t o n th e domesti c refinin g industry

. Th e increase d cos t o f on-highwa ydiese l fue l als o coul d reduc e marke t demand , furthe rreducin g require d capita l expenditures

.

° Ther e i s uncertaint yabou t th e exten t t o whic h on-highwa ydiese l fue l ca n be segregate d fro m othe rdistillates

. (Alternatively , diese l fuel , bot h on - an d off-highway , migh t b e segregate d fro m hom e heatin g oi l dependin g o n th e natur e o f th e fina l regulatio n an d th e enforcemen tP. 6



### -4-

mechanism s available. ) Th e surve y b y th e NPR A contend s tha t segrega tio ni s no t practicable . However , i t probabl y i s no t cost-effectiv e t o desulfuriz e o r t o desulfuriz e anddearomatiz e th e entir e distillat e strea m t o mee t potentia l EP A requirement s applicabl e t o onl y abou t 40 %
o f tha t stream , especiall y i f i t woul dresul t i na nincreas e o f im ports , a reductio ni ndomesti c refiner y outpu t o f distillates , anda consequen t reductio ni nrefiner y earnings . I f on-highwa y (o r all ) diese l fue l ca nb e segregate di nth e distributio nsystem s fro m othe r distillate s andi f i t i s possibl e t o segregat e feedstock s fo r th e manufactur e o f variou s distillates , th e difficult y andcos t o f meetin g EPA' s requirement s woul db e les s tha ni s no w estimate db

y industry . I f so , schedulin g o f th e regulation s couldthe nallo w fo r som e overla p i nconstructio nandth e diese l sulfu r regulation s coul dbecom e effec tiv e i nth e rang e o f from lat e 199 3 t o mi d1994 .

0 A bankin g andtradin g system , simila r t o tha t use dfo r lea di ngaso line , couldbrin g abou t earlie r reduction s i nRVP anddiese l fue l sulfu r conten t andver y likel y woul dreduc e furthe r th e tim e neede dt o compl y wit hth e potentia l RVP anddiese l fue l sulfu r requirements .
RECEN T PERFORMANC E O F TH E PETROLEUM INDUSTR Y

Befor e discussin g th e factor s tha t wil l influenc e th e amoun t o f tim e neede db y refiner s t o mee t th e regulator y requirement s tha t hav e bee npro posedo r ar e unde r study b y EPA , i t i s usefu l t o revie w briefl y th e perform anc e o f th e petroleum industr y

andth e refinin g segmen t o f th e industry . Tabl e 1 show s th e tota l capita l andexploratio noutlay s o f th e domesti c petroleum

industr y

andth e capital outlay s fo r th e refinin g segmen t o f th e industr y (adjuste dt o 198 7 dollars) . Th e petroleum industry' s annua l rat e o f capita l expenditure s i s huge : almos t $3 0 billio no f capital wil l b e investe di n198 8 ondomesti c projects . Slightl y les s tha ntw o third s o f tha t amoun t wil l b e fo r exploratio nandproduction . Mor e tha n$ 8 billio n wil l b e investe don"downstream " function s tha t includ e refining , petrochem icals , marketing , andtransportation , o f whic habou t $2. 6 billio nwil l b e fo rP. 7



### -5 -

refining . Inaddition , foreig ninvestment s i n198 8 b y 3 5 U.S . petroleum companie s (essentiall y al l larg e U.S . domicile dpetroleum firms ) wil l be somewha t ove r $1 0 billio no f whic hslightl y ove r $50 0 millio nwil l b e invest ment s i nU.S . owne drefinerie s abroad .
Th e industry' s tota l capita l outlay s an dcapita l outlay s fo r refinin g peake di n198 1 - 198 2 a t about $6 7 and$ 4 billion , respectively . Investmen t i nth e refinin g segmen t o f th e industr y increase db

y about $1. 8 billio nfrom 198 0 t o 1981 . Durin g tha t perio dther e wa s a genera l expansio nandupgradin g o f th e petroleum

refinin g industry . Investment s wer e sprea dove r th e thre e genera l component s o f refiner y operations : distillatio n(separatio no f product s b y boilin g point) ; thermo , catalytic , an dhydr o crackin g (produc t upgradin g usin g hig hpressur e andsometime s hig htemperature) ; an dreforming , platform ing , andisomerizatio n(changin g th e molecula r structur e andincreasin g octane) .

Rate s o f investmen t i npetroleum refinerie s a t curren t level s d o no t significantl y

expan dindustr y

capacit y

t o proces s additiona l crud e oi l int o petroleum

products . No r ar e the y investment s tha t wil l resul t i na majo r chang e i nth e industry' s abilit y t o alte r it s yield s o f products . Th e curren t annua l rat e o f investmen t i s th e equivalen t o f roughl y $20 0 pe r barre l o f dail y industr y

outpu t andsomewha t les s pe r barre l o f industr y capacity . Ne w capacit y t o tur nou t anindustr y averag e yiel do f product s from averag e crud e oils , non e o f whic hi s currentl y unde r constructio no r planned , woul dcos t 2 5 t o 5 0 time s a s muc hpe r barre l o f inpu t o r outpu t a s i s bein g currentl y invested . Thi s make s i t clea r tha t th e curren t rat e o f investmen t doe s littl e mor e tha nreplac e capacit y a s i t wear s ou t s o tha t th e industr y ca n continu e t o operat e a t curren t level s an dprovide s a modes t leve l o f fundin g fo r project s require dt o kee pth e industr y i ncomplianc e wit hcurren t environ mental , a s wel l a s othe r requirements . Th e type s o f investment s now unde r wa y ar e no t reporte dt o includ e a majo r effor t t o instal l equipmen t t o reduc e volatility , increas e octane , o r desulfuriz e moto r fuels . 

# VP. 8



### -6 -

Th e petroleum

refinin g industry , althoug hhug e b y itself , i s a

nintegra l bu t smal l par t o f th e petroleum industry . Al l majo r an dman y independan t refiner s ar e integrate dfrom crud e oi l productio n(an dexploration ) throug h crud e oi l an

doi l produc t transportatio n(b y variou s modes ) t o th e retai l marketin g o f refiner y products . Andman y

firms , includin g al l "majors" , hav e substantia l chemica l (mostl y organic ) manufacturin g a s wel l a s distributio n operations . Thes e refiner s accoun t fo r th e bul k o f th e domesti c productio n o f gasolin e anddistillate . Ther e are , however , a numbe r o f firms , non e large , tha t operat e purel y o r principall y

i nrefining . Thes e firm s woul d ten dt o hav e th e greates t difficult y i nraisin g th e capita l require db y environmenta l regulations . I nvie w o f th e integrate dnatur e o f firm s i nth e petroleum

industr y

tha t accoun t fo r th e bul k o f production ; th e basi c deter minan t o f th e availabilit y o f capita l t o th e refinin g segmen t t o mee t environ menta l regulation s rest s wit hth e availabilit y o f capita l t o th e entir e petroleum

industry .

Th e profitabilit y

o f th e refinin g portio no f th e industr y als o ha s improve di nrecen t years . Durin g th e thre e year s followin g th e terminatio n o f oi l pric e control s i n198 1 a grea t man y plant s wer e close dandth e industry' s percen t utilizatio ndroppe dt o abou t two third s o f it s theoretica l capacity . Thi s happene dbecaus e th e cost s o f raw material s ros e mor e tha n revenue s from

fina l product s sales . Sinc e then , partl y a s a resul t o f increasin g demand s fo r petroleum product s an

da reductio ni ncrud e oi l prices , an dpartl y du e t o th e permanen t closur e o f many plants , utilizatio nrate s hav e agai nrecovere dt o nea r norma l levels .
Th e trad e pres s n o longe r contain s report s o f lac k o f refinin g profi tability . Indee dth e recent , althoug hrathe r small , uptur ni nth e rat e o f capita l expenditure s onrefineries , fro m abou t $2. 1 t o $2. 6 billio npe r yea r suggest s that,o naverage , th e industr y i s now adequatel y

profitabl e and probabl y ha s th e cas hflo w

(o r implie dborrowing ) powe r adequat e t o undertak e significan t refiner y

investments .P. 9



### -7 -

Ther e probabl y

ar e significan t exception s t o thi s genera l rule . Som e refinerie s ma y

hav e a nuncertai nfutur e becaus e th e marke t fo r thei r product s i s uncertai no r becaus e th e ownin g firm i s undergoin g restructuring . A numbe r o f refineries , typicall y smal l one s tha t secur e a larg e fractio no f thei r sale s i nth e militar y je t fue l market , ma y b e adversel y

affecte db

y th e potentia l conversio no f th e militar y from napth a typ e je t fue l t o commercia l typ e je t fuel . The y

sel l militar y

je t fuel , a naphth a typ e materia l tha t i s simila r t o low

octan e gasoline . Thi s material , a s now sold , ha s n o commercia l marke t a s a fina l product . I t require s furthe r processin g i norde r t o becom e commerica l gasoline . Thes e refinerie s wil l hav e t o eithe r close , inves t substantia l capita l t o conver t t o th e gasolin e market , o r sel l naphth a t o othe r refinerie s fo r reformin g int o gasolin e i f th e militar y marke t i s eliminated .

FACTOR S AFFECTIN GREQUIRE D LEADTIM E

Th e genera l factor s tha t infuenc e th e lengt ho f tim e necessar y fo r refiner s t o compl y

wit hregulator y

requirement s include :

° Th e tim e neede dt o pla nandconstruc t ne w facilities . Thi s include s th e tim e require dt o budge t resource s fo r th e project , t o acquir e necessar y

technica l expertise , t o determin e th e type s o f processe s tha t ca nmee t regulator y requirement s andtha t ar e bes t suite dt o th e particula r refinery , t o desig nne w facilitie s s o tha t the y ca nb e integrate dwit hexistin g operations , t o ente r int o contractua l agree ment s wit hengineerin g andconstructio ncompanies , t o construc t th e facilities , andt o tes t an dbrin g the m

o nline . No resourc e constraint s ar e assume dt o exis t whe nevaluatin g thi s factor .

o Th e exten t o f capita l requirements . Thi s deal s no t wit hlimitation s cause db y acces s t o capital , bu t rathe r t o limitation s tha t ma y occu r becaus e o f larg e aggregat e demand s fo r certai ntype s o f engineerin g andconstructio nexpertise . Generally , acces s t o sufficien t capita l shoul dno t presen t significan t problem s t o th e refinin g segmen t o f th eP.1 0



### -8-

industry , give nth e degre e o f integratio nwithi nth e petroleum indus tr y (thoug hsom e specifi c refiner s ma y hav e difficultie s obtainin g adequat e capital) . However , th e aggregat e demand s create db y regula tion s fo r specifi c type s o f resource s neede dt o desig nan dconstruc t neede dfacilitie s ma y b e larg e relativ e t o th e genera l availabilit y o f suc hresoures . Thi s woul dindicat e tha t th e industr y woul dnee dmor e tim e t o compl y

tha nth e tim e i t take s t o pla nandconstruc t facilitie s a t a refiner y

whe nn o resourc e constraint s ar e assume dt o b e present .

0 Th e type s o f technologie s tha t mus t b e used . I f technologie s ar e wel l known , proven , andcommerciall y available , n o additiona l tim e woul db e neede dbeyon dtha t neede dt o pla nandconstruc t facilitie s andt o obtai nth e require dtechnica l resources . I f technologie s hav e no t bee ndemonstrate dcommercially , researc han ddevelopmen t effort s woul db e neede dt o demonstrat e th e suitabilit y o f propose dtechnol ogie s fo r meetin g possibl e regulator y requirement s befor e refiner s woul dembar k onplannin g andconstructio nactivties .

0 Th e tim e neede dt o acquir e appropriat e constructio nan doperatin g permits . Plannin g andconstructio no f new facilitie s coul db e delaye d i f ther e ar e difficultie s i nobtainin g necessar y environmenta l permits ,

We discus s eac ho f thes e factor s fo r th e RVP an ddiese l fue l require ment s unde r consideratio nb y EP A t o develo pestimate s o f require dleadtimes .

LEADTIM E REQUIREMENT S FORGASOLIN E VOLATILIT YREQUIREMENT S

Thi s sectio nevaluate s th e lengt ho f tim e refiner s wil l nee dt o instal l
ne w equipmen t andreconfigur e thei r operation s t o mee t ne w RVP specifications , EP A i s proposin g tha t th e summertim e (durin g th e 5 month s from Ma y throug h September ) volatilit y o f gasolin e b e reduce dt o 7.0 , 7.8 , an d9. 0 RVP i n clas s A , B , an dC areas , respectively . Thi s i s a reductio no f 2. 5 RVP fo r Clas s C area s an

drepresent s abou t a 2 2 percen t reductio ni nRVP acros s al l areas .p.1 1



### •9-

Estimate s o f Require d Capita l Outlay s

Thre e studie s hav e bee nundertake nt o estimat e th e cos t an d capita l outlay s require d t o mee t reduction s i nsummertim e RVP :

0 Th e Bonne r & Moor e study develope d estimate s o f th e cost s an d capita l outlay s fo r thre e level s o f RVP control. * Th e propose d RVP require ment s li e betwee ncontro l level s 2 and 3 and ar e estimate d t o requir e capita l outlay s o f abou t $95 0 million .

0 Th e Sobotk a study develope d estimate s o f th e cost s and capita l outlay s fo r RVP reduction s i nincrement s o f 0. 5 fo r clas s C areas , u p t o a tota l reductio no f 2. 0 RVP. 2 (Simila r reduction s i nRVP wer e assume d t o b e mad e i nclas s A an d B areas. ) Require d capita l outlay s wer e estimate d a t abou t $56 0 millio nfo r a reductio ni nRVP o f 2.0 . Base d
onth e tren d i ncapita l outlay s estimate d fo r successiv e reduction s i nRVP , a 2. 5 tota l reductio ni nRVP woul d requir e capita l outlay s i nexces s o f $80 0 million .

0 A recen t study

b y th e America nPetroleum Institut e estimate s require d capita l outlay s fo r a 2. 5 reductio ni nRVP a t abou t $1. 1 t o $1. 3 billion. 3

1 Assessmen t o f Impact s o nth e Refinin g an

d Natura l Ga s Liquid s Industrie s o f Summe r Gasolin e Vapo r Conto l Pressure , Augus t 24 , 1987 , prepare d fo r EP A b y Bonne r & Moor e Managemen t Science , contrac t 68-03-3353 , WA-83 .

2 Cos t and Feasibilit y o f Gasolin e Volatilit y Reductions , Apri l 21 , 1986 , Sobotk a & Co. , Inc .

3 U.S . Gasolin e Reductio nCapabilitie s an d Costs , prepare d fo r th e America n Petroleum

Institute , Novembe r 1987 , R . E . Cunningham , e t al .•10 -

Thus , i t appear s tha t ther e i s a consensu s amon g th e firm s retaine d b y EP A an d b y AP I regardin g th e genera l amoun t o f capita l investmen t require d t o reduc e RVP t o level s propose d b y EPA . Fo r th e purpose s o f thi s analysis , require d capita l outlay s ma y b e assume d t o b

e abou t $ 1 billion .

Ther e i s als o agreemen t amon g th e studie s regardin g th e type s o f project s th e petroleum

refinin g industr y

wil l hav e t o undertake . Suc hproject s includ e facilitie s fo r isomerizatio nan d alkylatio nan d fo r butan e handlin g (fraction ation , vaporization , loading , an d storage) . Thes e ar e th e kind s o f project s tha t appea r t o pos e n o technica l hurdle s an d tha t incorporat e wel l understoo d
an d prove ntechnologies .

A recen t marke t developmen t i s th e us e o f MTB E (methy l tertiar y buty l ether ) t o enhanc e gasolin e octane . Th e capacit y t o produc e MTB E i nth e U.S . ha s increase d fro m

abou t 5,000B/ D t o abou t 80,00 0 B/ D today . Currently , MTB E i s allowe d i ngasolin e up t o 2 percen t oxyge n(abou t 1 1 percen t b y volume) . I f th e MTB E conten t o f gasolin e wer e increase d (EP A woul d hav e t o gran t waiver s increasin g th e allowabl e limit s o nMTBE) , th e octan e o f gasolin e coul d b e enhance d and volatilit y diminished . (Th e MTB E woul d replac e butane , whic hha s a muc hgreate r RVP tha ndoe s MTBE. ) Thi s coul d reduc e th e capita l expenditure s t o mee t th e propose d RVP specification s estimate d i nth e abov e reference d studies , a s non e considere d th e possibilit y tha t MTB E us e migh t b e expande d a s a mean s o f meetin g th e new RV P specifications . Withou t furthe r study , however , th e exten t o f th e possibl e reductio nincost s i s unclear . Therefore , w e us e th e $ 1 billio nestimat e i nou r analyses .
Evaluatio no f th e Factor s Affectin g Leadtim e

Plannin g an

d Constructio n

Th e perio d require d fo r plannin g and installatio no f th e type s o f facil itie s neede d t o reduc e RV P i s abou t 3 years , i f th e proces s ca nprocee d ina n orderl y manner . O f tha t period , abou t on e yea r i s require d fo r plannin g and abou t tw o year s fo r implementin g th e projects . Thi s estimat e i s base d o nou r



# _ 7P.1 3

•11 -

knowledg e o f th e refinin g industr y an dwa s confirme di ndiscussion s wit h representative s from

th e industry . Fo r comparison , i t too k abou t 3 year s t o full y implemen t th e mos t recen t lea dphasedow ni ngasoline . Th e capita l outlay s necessar y

t o mee t th e requirement s o f lea dphasedownregulation s wer e estimate db

y SC I t o b

e abou t $85 0 millio n- - abou t th e same amoun t o f capita l
a s fo r th e RVP regulation .

A s inth e cas e o f leadus e reductions , seasona l consideration s ar e involve dinth e timin g o f th e regulatio nandit s effectiv e date . I nth e cas e o f lea dus e regulations , th e seasonalit y o f gasolin e deman dmad e i t desirabl e t o mak e th e effectiv e date s o f lea dus e reduction s after , th e summe r whe n gasolin e us e peaks . Becaus e RVP limitation s ar e mos t restrictiv e durin g th e summer , whe ngasolin e deman dals o i s greatest , i t ma y b e desirabl e t o phas e inne w regulation s s o tha t th e industr y ha s a s muc htim e a s i s practica l betwee nth e effectiv e dat e o f th e regulatio nandth e beginnin g o f new limit s onRVP .

I f th e regulatio nwer e promulgate di nth e summe r o f 1989 , requirin g tha t th e potentia l limit s onRV P be effectiv e inth e summe r o f 199 2 woul dgiv e refiner s les s tha nthre e year s t o plan , construct , an doperationaliz e th e necessar y

facilitie s andt o tak e accoun t o f th e leadtime t o mak e RVP change s a t servic e station s (the averag e leadtim e t o mak e seasona l RVP change s i s abou t 5 weeks) . I t i s possibl e tha t refiner s coul dcompl y withi nthi s time frame . However , some portiono f th e refiner s ma y no t be abl e t o mee t suc ha deadline . Further , an y dela y i npromulgatin g th e regulatio nwoul dreduc e th e tim e refiner s woul dhav e fo r compliance . Additionally , capita l budgetin g i n th e petroleum

industr y

tend s t o be don e o

na nannua l cycl e beginnin g inJanu ary . Thi s woul ddela y th e allocatio no f fund s withi nindustr y t o suppor t th e desig nandeventua l constructio no f th e neede dfacilitie s andwoul dfurthe r reduc e th e effectiv e amoun t o f time fo r compliance . Thus , a mor e conserva tiv e approac hfo r ensurin g tha t refiner s coul dcompl y wit hth e potentia l RVP limit s woul dbe t o requir e complianc e b y th e summe r o f 1993 .-12 -

Capita l Requirement s

A s discusse d above , th e capita l outlay s require d b y th e propose d RVP specification s wil l amoun t t o abou t $ 1 billion . On e metho d o f determinin g whethe r thi s leve l o f expenditure s wil l presen t problem s fo r th e indust y i n term s o f raisin g th e require d capita l o r i nterm s o f constructio ncapacit y i s t o compar e i t t o th e industry' s curren t an d historica l capita l expendi tures .

Th e capita l outlay s o f abou t $ 1 billio nrequire d t o reduc e RVP level s ar e very

smal l relativ e t o tota l planne d outlay s b y th e entir e petroleum industr y

fo r 1988 . I f incurre d ove r a 2 t o 3 yea r period , th e constructio n outlay s o f abou t $33 0 t o $50 0 millio npe r yea r woul d b e roughl y

a hundret ho f tota l 198 8 planne d outlays . Clearly , mos t o f th e industr y shoul d experienc e
n o difficultie s i nfinancin g th e require d projects .

Th e require d capita l expenditure s als o ar e a smal l fractio no f planne d capita l outlay s o f th e refinin g segmen t o f th e industry . I f sprea d ou t ove r a 2 t o 3 yea r period , the y ar e roughl y

1 3 t o 1 9 percen t o f 198 8 planne d outlays . Th e refinin g segmen t o f th e industr y shoul d b

e abl e t o suppor t increase s o f capita l expenditure s o f thi s amount , sinc e th e industr y i nth e pas t ha s bee nabl e t o substantiall y increas e capita l outlay s inth e spac e o f
a year . Fo r example , from 197 8 t o 197 9 capita l outlay s increase d b y abou t $90 0 millio nand fro m 1980 t o 198 1 the y

increase d b

y abou t $1. 8 billion . However , a s mentione d above , thes e investment s wer e sprea d ove r th e thre e genera l component s o f refiner y operations . Th e RVP regulatio nwil l no t requir e a genera l expansion , bu t onl y a nexpansio no f on e componen t — reforming , platforming , and isomerization . Therefore , onl y a portio no f th e skill s o f refiners ' technica l department s an d o f th e supplie r industrie s wil l b e used . Further , al l o f th e constructio nwil l b e i na limite d are a o f th e refiner y

an d probabl y

wil l necessitat e sequential , rathe r tha nconcurrent , schedulin g o f projects . Nonetheless , ther e shoul d be sufficien t constructio n an d engineerin g capacit y fo r th e require d projects , sinc e curren t capita l outlay s b

y th e refinin g industr y ar e wel l belo w

histori c peaks , an d sinc e 

# VP.1 5

-13 -

th e potentia l increas e inoutlay s t o mee t ne w RVP specification s ar e wel l below increase s incapita l outlay s tha t hav e bee nobserve di nth e recen t past .
Type s o f Technologie s

Th e technologie s require dt o reduc e th e RVP o f gasolin e ar e wel l known , prove ntechnologies . The y generall y

ar e o f th e same sor t a s thos e installe d t o reduc e lea di ngasolin e because , i nbot hcases , th e octan e ratin g o f th e gasolin e component s mus t b e increased . (Whe nth e amoun t o f lea di ngasolin e i s reduce doctan e decline s an dwhe nth e butan e conten t o f gasolin e i s reduce d t o mee t th e ne

w limit s fo r RVP octan e als o declines . Butane , whic hha s highe r tha naverag e octane , mus t be reduce ddu e t o it s highe r tha naverag e volatility. ) Th e us e o f MTB E migh t als o b e increase da s a metho do f meetin g th e RVP specifications . Thus , th e refinin g industr y shoul dno t experienc e delay s du e t o unforsee nproblem s wit hth e require dtechnologies . Acquisitio no f Permit s

A proble m identifie db

y industr y

tha t coul ddela y

th e orderl y

plannin g andinstallatio no f facilitie s t o reduc e RV P i s th e possibl e difficult y refiner s migh t encounte r i nobtainin g necessar y environmenta l permits . A larg e fractio no f refinerie s ar e locate di nozon e non-attainmen t areas . Th e facilitie s tha t hav e t o b e buil t a t a typica l refiner y t o reduc e gasolin e RVP (adde dproces s unit s andbutan e shippin g facilities ) ma y generat e enoug haddi tiona l VO C emission s (a nincreas e o f mor e tha n4 0 ton s pe r year ) t o trigge r New Sourc e Review . However , refiner s coul davoi dthi s proble m throug hin plan t reduction s i nfugitiv e emission s from storag e tanks , piping , an dvalve s tha t probabl y

wil l resul t becaus e a majo r refiner y produc t (gasoline ) wil l be les s volatile . Acquisitio no f necessar y environmenta l permit s wa s no t a significan t proble m

fo r refiner s durin g th e mos t recen t lea dphasedown .P.1 6

-14 -

W e hav e no t explore dthis issu e i ndepth . W e mentio nth e issu e becaus e industr y ha s raise di t a s a potentia l proble m tha t coul dcompromis e it s abil it y t o compl y

wit hEPA' s regulator y requirements . I f thi s proble m doe s arise , th e management s o f refinerie s tha t ar e i nnon-attainmen t area s wil l
no t be abl e t o forecas t ho w lon g th e permittin g proces s ma y take , o r indeed , i f the y wil l be abl e t o secur e permits . Th e detaile dplannin g phas e necessar y t o desig nth e facilitie s neede dt o mee t th e RV P limit s woul db e postpone d unti l permittin g issue s wer e resolved. ^ Thus , thi s analysi s ha s bee ncon ducte dunde r th e assumptio ntha t contro l o f an y potentia l additiona l emission s ca nbe accomplishe dwithou t runnin g int o problem s from New Sourc e Revie w requirements .
Bankin g an

dTradin g

Inth e cas e o f th e lea di ngasolin e regulation s th e leadtim e betwee nth e regulation s an dth e tim e o f al l th e newl y require dcapita l ha dt o be i n plac e wa s abou t thre e years . Some lea dus e reduction s too k plac e o na progressiv e schedul e becaus e thi s wa s possibl e o nth e basi s o f th e indus try' s installe dcapacit y an dbecaus e EP A

provide dincentive s fo r faste r reduction s tha nrequire db y th e lea dphasedown . EPA' s regulation s allowe dbot hlea dus e tradin g andlea dbanking . A t th e tim e tha t th e new rule s became effectiv e some refiner s ha dexces s capacit y t o replac e lea d create doctan e wit hproces s create doctane . Tradin g an dbankin g permitte d EP A t o requir e lea dus e reductio nmor e quickl y tha nwoul dhav e bee npossibl e base dpurel y

onth e industry' s abilit y t o inves t capita l i nth e necessar y refinin g equipment . I t als o allowe dth e industr y a s a whol e t o optimiz e it s operation s whil e th e investmen t project s wer e underwa y andwhil e lea d us e wa s bein g reduce db y refiner s capabl e o f doin g that .

4 Som e refiner s hav e expresse dconcer nabou t possibl e modification s i nth e Clea nAi r Act . Revision s coul dreduc e th e amoun t o f emission s considere d "d e minimis " fo r nettin g ou t o f New Sourc e Review .•15 -

I t appear s tha t n o comparabl e bankin g an d tradin g procedur e i s no w unde r consideratio n fo rRV P reduction s an d tha t th e RV P reduction s no

w contemplate d woul d be require d t o tak e effec t a t on e poin t i n time

. A bankin g an d tradin g syste m potentiall ycoul d b e use d t o hel p implemen t th e RV P regulations

. Reduction s i n RV

P tha t refiner s ar e full ycapabl e o f makin g ove rth e nex t severa l year s coul d b e credite d agains t late routput

. Thi s woul d allo w fo r more immediat e improvement s i n ai rqualit yan d coul d reduc e industry' s com plianc e costs

. I t coul d als o reduc e th e tim e necessar yt o compl ywit h ne w RV P specification s byu p t o a year
.
Othe rIssue s Affectin g Plannin g b yRefinerie s
Th e RV P limitation s ar e a par t o f a "package " o f othe rfue l qualit y regulation s unde rconsideratio n b yEP A o relsewher e i n th e governmen t whic h woul d als o requir e modification s i n refinerie s an d i n th e fuel s distributio n system

. Limitation s o n sulfu ran d o n aromatic s i n diese l fuels , whic h ar e unde rstud ybyEPA , an d proposal s whic h woul d requir e refiner s t o suppl y gasolin e component s fo rblendin g wit h alcohols , al l woul d affec t th e oper atio n an d capita l investment s o f refinerie s an d als o distributio n syste m fo r fuels

.
Ther e i s relativel ylittl e direc t relatio n betwee n th e kind s o f project s tha t refiner s woul d nee d t o undertak e fo rRV P reduction s an d fo rdiese l qual
i t ychanges , bu t ther e i s enoug h overal l capita l an d construction-relate d demand s tha t join t plannin g o f facilitie s woul d b e desirable

. Thus , i t woul d hel p refiners ' plannin g fo rgasolin e RV P reduction s t o kno w whethe rthe yals o wil l be require d t o reduc e th e sulfu rconten t o f diese l oil , whethe raromatic s content s wil l hav e t o b e reduced , an d whethe ra grad e o f gasolin e speciall y made fo rblendin g wit h alcohol s i n abou t a 10: 1 rati o wil l b e require d o f them

. A

s lon g a s ther e i s significan t uncertaint yabou t th e nea rter m pros pec t fo rsuc h requirements , th e plannin g fo rRV P reduction s wil l ten d t o be more difficul t an d refiner s coul d incu rsom e adde d costs

. 

# V•16 -

Thi s i s no t anentirel y theoretica l matter , bu t i s rathe r a practica l concer ntha t ha s bee nth e subjec t o f recen t commen t b y refiner s concernin g previou s regulations . A few refiner s appea r t o hav e buil t C5/C 6 isomerizatio n capacit y t o compl y

wit hlea dphasedown . Bu t th e hig hRV P o f produc t o f thes e facilitie s wil l mak e the m uneconomi c i f th e contemplate dRVP limit s ar e imposed . Ha dthes e refiner s expecte dRVP limits , the y woul dno t hav e buil t thes e facilities .

Genera l Conclusio n
Refiner s coul dcompl y wit hth e propose dRVP specification s inabou t thre e years . Difficultie s wit hrequire dtechnologie s ar e unlikel y t o slo w complianc e wit hth e regulation . I f th e regulatio ni s promulgate di nth e summe r o f 1989 , complianc e migh t b e possibl e b y th e summe r o f 1992 . However , a mor e conservativ e approac htha t woul densur e tha t refiner s ha dsufficien t tim e t o pla nandconstruc t th e neede dfacilitie s andt o brin g the m int o operatio nwoul dbe t o requir e complianc e b y th e summe r o f 1993 . Bankin g andtradin g coul dbrin g abou t earlie r reduction s i nRVP an dwoul dallo w complianc e b

y 1992 . Some refiner s hav e expresse dconcern s regardin g possibl e difficultie s i nobtainin g require dconstructio nan doperatin g permit s i n non-attainmen t areas .

LEADTIM E REQUIREMENT S FORGASOLIN E VOLATILIT YAN D HIGHWA YDIESE L FUE L SULFU R REQUIREMENT S

Thi s sectio nevaluate s th e lengt ho f tim e refiner s wil l nee dt o instal l ne w equipmen t andreconfigur e thei r operation s t o mee t bot hth e propose dRV P specification s an

dhighwa y

diese l fue l sulfu r requirement s unde r consideratio n b y EPA . Th e diese l fue l regulatio nunde r study woul dse t a maximum

o f 0.0 5 percen t o

nth e sulfu r conten t o f highwa y diese l fuel . W e assum e fo r th e purpose s o f analysi s tha t suc ha regulatio nwil l be promulgate di nmid-1990 .


# VP.1 9

•17 -

Estimate s o f Require d Capita l Outlay s
Tw o studie s hav e bee n undertake n t o estimat e th e cos t an d capita l outlay s require d t o mee t th e highwa ydiese l fue l specification :

0 Th e NPR

A Surve yestimate d th e capita l outlay s require d t o mee t th e diese l fue l specificatio n t o be abou t $3. 3 billion. 5 Th e Surve y reporte d tha t refiner s considere d i t impractica l t o furthe rsegregat e lo w sulfu ron-highwa ydiese l fue l fro m home heatin g fue l an d off

highwa ydiese l fuel

. Thus , th e estimate s reflec t th e cos t o f desulfur

izin g al l o f th e distillat e stream

.

0 Th e SC I stud yestimate d th e capita l outlay s require d t o meet th e diese l fue l specification s usin g a n aggregat e linea rprogrammin g mode l o f th e U.S. , rathe rtha n throug h a survey. 6 Cost s wer e estimate d fo r tw o pola rcases : first , th e cas e i n whic h on-highwa ydiese l fue l i s segregate d fro m othe rmiddl e distillates ; an d second , th e cas e i n whic h ther e i s n o segregatio n o f on-highwa ydiese l fue l fro m othe r distillate s beyon d curren t levels

. Capita l cost s wer e estimate d t o be abou t $ 1 billio n an d $2. 4 billio n fo rth e segregate d an d n o segregatio n cases , respectively

.
Unlik e th e estimate s o f th e capita l cost s o f meetin g th e RV P require
ments , ther e i s disagreemen t amon g estimate s o f require d capita l cost s t o mee t a potentia l sulfu rconten t requiremen t fo ron-highwa ydiese l fuel

. Th e NPR A surve yestimate s th e capita l cost s o f desulfurizin g al l distillat e a t almos t

5 U.S

. Refinin g Industr yCapabilit yt o Manufactur e Ultr a Lo w Sulfu rDiese l Fuels , NPR

A Surve y1986 , Nationa l Petroleu m Refiner s Association , 1986

.

6 Cos t an d Feasibilit yo f Lowerin g Diese l Fue l Sulfu ran d Aromati c Content , Sobotk a & Co. , Inc

. Novembe r2 , 1987

. 

# VP.2 0

•18 -

$ 1 billio nmor e tha nth e SC I analysis . A neve nlarge r differenc e arise s fro m assumption s abou t th e exten t t o whic hrefiner s wil l segregat e fuels .
Th e NPR A surve y indicate dtha t refiner s believ e tha t segregatin g middl e distillate s beyon dcurren t level s i s no t practical . I f i t wer e possibl e t o segregat e on-highwa y

diese l fuel , the nonl y abou t 40 % o f th e distillat e strea m woul dbe affecte db

y th e ne w regulation . O nth e othe r hand , i f i t wer e practica l onl y

t o segregat e diese l fue l (on - andoff - highway ) fro m home heat in g fuel , o r i f EPA' s regulatio no r enforcemen t mechanis m result s i nthi s typ e o f fue l segregation , the nabou t 6 0 percen t o f th e distillat e strea m woul db e affecte db

y th e regulation . Inbot hcases , segregatio no f fuel s woul dreduc e th e capita l require dfo r proces s unit s andth e operatin g cost s o f refineries . But , i t woul drequir e adde dinvestment s i nth e product s distributio nsystem. ^

Give nth e leve l o f competitio ni nth e petroleum industry , ther e wil l b e a stron g incentiv e fo r refiner s t o compl y wit hth e potentia l sulfu r limi t a t th e lowes t cost . I

nman y case s thi s woul dinvolv e produc t segregation . Fo r example , o

nth e eas t coas t foreig nshipment s o f lo w sulfu r diese l fue l coul d easil y b e segregate dfrom

othe r distillates . (Thi s i s becaus e the y ca nb e segregate di ntan k ship s an dwoul dno t hav e t o ente r th e pipelin e distribu tio nsyste m

t o reac hsuc hmarkets. ) Thi s woul dmea ntha t domesti c refiner s woul dno t b

e abl e t o pas s throug hth e cost s o f desulfurizatio nt o buyer s o f off-highwa y

diese l fue l o r o f home heatin g oil . The y woul deithe r hav e t o

I f produc t segregatio ni s possibl e an di f th e sulfu r conten t o f non-highwa y diese l fue l ca nb

e increased , the nth e capita l investmen t requirement s o f refinerie s canb e furthe r reduced . Bu t th e exten t t o whic ha nincreas e i n th e sulfu r conten t o f home heatin g oi l o r off-highwa y diese l fue l i s a

n acceptabl e wa y

o f reducin g th e sulfu r conten t o f highwa y diese l oi l i s questionable . Stat e regulation s onth e sulfu r conten t o f hom e heatin g oi l ma y als o limi t thi s possibility .P.2 1

•19 -

ced e a greate rportio n o f th e marke t t o imports , o rels e fin d a les s expen siv e wa y(othe rtha n desulfurization ) o f servin g tha t marke t segment

.
Eve n i n area s wher e import s ar e no t currentl ya significan t competitiv e factor , a potentia l 3. 1 cen t pe rgallo n cos t advantag e (a s estimate d b yth e NPRA ) shoul d lea d some refiner s an d pipeline s t o fin d way s o f supplyin g highe rsulfu rconten t (an d lowe rcost ) distillat e t o th e off-highwa yan d home heatin g oi l markets

. Segregatio n a t a 40/6 0 spli t (o ra 60/4 0 spli t i f al l diese l fue l i s segregate d fro m hom e heatin g oil ) ma

yno t occu rbecaus e i n some instance s desulfurizin g al l th e distillat e goin g t o a marke t ma yb e les s expensiv e tha n incurrin g th e cost s neede d t o segregat e fuels

. Bu t i n mos t situations , particularl yi n larg e volum e markets , i t i s likel ytha t fuel s woul d be segregated. 8 (I f th e aromatic s conten t o f on-highwa ydiese l fue l als o i s reduced , the n th e segregatio n o f fuel s become s considerabl ymore attractive , a

s i s discusse d i n th e nex t section. ) Becaus e th e tradeoff s betwee n th e variou s ways o f meetin g on-highwa ydiese l fue l lo w sulfu rspecifi

cation s hav e no t bee n full yinvestigated , w e us e a numbe ro f estimate s o f capita l outlay s t o develo p estimate s o f require d leadtime

.
Evaluatio n o f th e Factor s Affectin g Leadtim e
Plannin g an d Constructio n

Th e perio d require d fo rplannin g an d installatio n o f th e type s o f facil

- itie s neede d t o mee t th e diese l fue l sulfu rspecificatio n als o i s abou t 3

8 I f th e produc t distributio n syste m i s capabl e o f segregatin g diese l fro m home heatin g fuel , smal l an d mediu m refiner s identifie d i n th e NPR A Surve y a s bein g unabl e t o undertak e th e require d investment s (the yaccoun t fo r abou t 17

% o f curren t diese l fue l production ) woul d ten d t o suppl yhome heatin g oi l an d off-highwa ydiese l fue l rathe rtha n on-highwa ydiese l fuel

. Smal l refiner s servin g som e geographi c area s wher e ther e i s a negligibl e hom

e heatin g oi l marke t ma yno t hav e thi s option

.P.2 2

•20 -

years , abou t on e yea r o f whic hi s fo r th e plannin g phase . Thi s estimat e consider s th e tim e neede d t o physicall y instal l th e require d facilitie s
a t a typica l refiner y withou t regar d t o th e industry' s aggregat e deman d fo r technica l an

d constructio nservices .
Sinc e ther e i s littl e physica l overla p inth e type s o f facilitie s buil t t o compl y

wit hth e RV P and diese l sulfu r regulations , ther e i s n o grea t benefi t i nsimultaneou s planning . But , ther e i s likel y t o be som e join t us e o f som e facilitie s suc ha s refiner y fue l system s and ther e ma y b e spac e constraint s i nrefinerie s tha t ma y mak e i t desirabl e t o d o th e plannin g and desig no f bot htype s o f facilitie s a t th e same time . Alternatively , plannin g fo r diese l sulfu r relate d facilitie s coul d b e don e throughou t th e perio d o f constructio no f RV P relate d facilities . Thi s imple s tha t th e differentia l betwee nth e tim e b

y whic hmos t RV

P relate d constructio nwoul d b e complete d
an d th e effectiv e dat e o f th e sulfu r limit s nee d onl y cove r th e perio d require d t o construc t th e latte r facilities . Capita l Requirement s

i . NPR A estimat e assumin g n o fue l segregatio n

Th e capita l requirement s o f th e diese l fue l sulfu r regulatio ncoul d
amoun t t o a s muc ha s $3. 3 billio naccordin g t o th e NPR A survey . Thes e capita l outlay s wil l be concentrate d i nth e reforming , platforming , an d isomerizatio n componen t o f refining , jus t a s ar e RVP relate d capita l outlays , an d wil l requir e a narrowe r rang e o f skill s from technica l department s an d supplie r industrie s tha nwoul d a genera l expansio no f industr y activity . Th e facili tie s als o wil l b e locate d i nth e sam e genera l are a o f th e refiner y a s th e RV P relate d facilities .
Spreadin g thes e estimate d capita l outlay s ove r a 2 yea r constructio n perio d woul d requir e annua l outlay s o f abou t $1. 7 billion . Assumin g tha t constructio nrequire d b y th e RVP an

d diese l fue l sulfu r regulation s wa s schedule d sequentially , capita l expenditure s woul d increas e b y ove r a billio nP.2 3

-21 -

dollar s aroun d199 2 an dtota l capita l outlay s b y th e refinin g industr y ($1. 7 plu s $ 2 t o $2. 6 billion ) woul dbe nea r o r excee dpea k capita l outlay s i n 1981-1982 . I t i s doubtfu l tha t th e industr y woul db

e abl e t o suppor t capita l outlay s o f thi s magnitude . (Overlappin g schedulin g woul drequir e eve ngreate r annua l outlays. )

I f th e capita l outlay s wer e sprea dove r a constructio nperio do f abou t 3 years , annua l expenditure s woul dbe abou t $1. 1 billio npe r yea r ondiese l sulfu r contro l relate dfacilities . Assumin g th e RVP an ddiese l fue l reg ulation s wer e schedule dsequentially , suc ha nexpenditur e rat e woul dprobabl y increas e th e refinin g industry' s rat e o f capita l expenditure s b y abou t 40 %
ove r th e rate s tha t woul dotherwis e prevai l i nth e 1990s . I f n o othe r unusua l refiner y investment s nee dbe mad e i ntha t period , th e resultin g leve l wil l be belo w th e investmen t andcapita l facilitie s constructio nrate s achieve db y th e industr y

earlie r whe nth e industr y wa s bot hexpandin g andupgradin g it s product s (se e Tabl e 1) . I f diese l fue l sulfu r relate dinvestment s follo w closel y behin dth e installatio no f facilitie s t o mee t gasolin e RVP specifi cation s ther e wil l be a lon g foresee nrat e o f increas e inth e constructio no f facilities . Unde r thi s approach , th e plannin g fo r th e diese l fue l sulfu r relate dfacilitie s woul db e undertake nove r th e perio d199 0 t o 199 2 an dth e constructio no f th e facilitie s coul dbegi nb y lat e 199 2 (RV

P relate dcon structio nwoul dbe endin g a t abou t thi s time ) an dcoul db

e complete db

y th e fal l o f 1995 . Thus , aneffectiv e dat e a s o f th e fal l o f 199 5 woul dprovid e refiner s sufficien t tim e t o compl y wit hpotentia l new

diese l fue l sulfu r conten t specifications . Overlappin g th e constructio nschedul e fo r th e RVP an ddiese l fue l require ment s t o shorte nth e complianc e perio dcoul dcreat e problem s fo r th e refinin g industry . Assumin g promugatio no f th e diese l sulfu r regulatio ni nmid-199 0 anda 3 yea r constructio nperiod , capita l outlay s coul db e a s muc ha s $1. 5 billio npe r yea r ($1. 1 billio nplu s abou t $40 0 millio nfo r RV P facilities ) ove r th e perio d1991-1992 . Thi s woul dfollo w a yea r o r two o f expenditure s i nth e $40 0 millio nrang e fo r RVP controls . A nincreas e o f perhap s a billio n dollar s i ncapita l expenditure s rival s increase s i nconstructio nrate s achieve dP.2 4

•22 -

b y th e refinin g industr y i nth e lat e 70 s andearl y 80s . Tota l capita l expendi ture s (th e su

m o f expecte dnorma l capita l outlay s an doutlay s t o mee t RVP an d sulfu r requirements ) als o woul dbe nea r histori c peak s ininvestment . Th e increas e i ncapita l outlay s woul dbe concentrate di non e componen t o f th e industry , rathe r tha nbein g sprea dacros s al l component s a s wa s th e cas e durin g th e industr y

expansio ni n1980-1981 . Thi s suggest s tha t overlappin g constructio nactivitie s coul dstrai nconstructio nandengineerin g resources . Sequentia l schedulin g woul dprobabl y als o resul t ina mor e efficien t us e o f suc hresource s an

dlowe r capita l outlay s fo r refiners , a s biddin g fo r limite d resource s woul dno t b e a s intens e an dth e marke t woul dhav e longe r t o adjus t t o regulator y

induce ddemands .
ii . Alternativ e estimate s o f capita l outlay s

I f refiner s ca nsegregat e lo w sulfu r on-highwa y

diese l fue l fro m

othe r middl e distillates , capita l expenditure s woul db e lowe r tha nestimate db y th e NPR A surve y — the y coul db

e reduce db

y mor e tha nhal f t o abou t $1. 4 billion . I f so , th e constructio nschedule s require db y th e two regulation s probabl y coul doverla pwithou t causin g significan t problems . Plannin g an dconstructio n coul dbe complete di nabou t 3 year s an dth e diese l fue l sulfu r regulation s coul dbecom e effectiv e a s earl y a s th e fal l o f 1993 .

I f th e capita l cost s o f meetin g th e sulfu r conten t requirement s o nal l distillat e ar e significantl y lowe r tha nestimate db y th e NPRA , th e require d leadtim e als o woul dbe shorter , eve ni f fuel s wer e no t segregated . I f th e capita l cost s o f desulfurizin g al l distillat e ar e abou t $2. 4 billion , a s estimate db

y SCI , th e regulation s coul dbecom e effectiv e i nth e fal l o f 1994 . Plannin g coul db

e carrie dou t durin g 199 0 t o 199 2 andconstructio ncoul d begi ni nlat e 199 2 (constructio no f RV P an ddiese l sulfu r relate dfacilitie s woul dno t overlap ) andcoul dbe complete db y lat e 1994 . Wit hproduc t segrega tio n(on-highwa y

diese l from

al l othe r distillate) , capita l cost s coul dbe a s littl e a s $ 1 billio nandth e new sulfu r conten t specificatio nprobabl y coul d b e me t b y mi dt o lat e 1993 . Thi s shoul dbe viewe da s a lower-boun destimat e-23 -

o f require d leadtime . Sequentia l schedulin g stil l woul d probabl y resul t i n lowe r cost s t o industr y becaus e i t woul d sprea d ou t th e deman d fo r limite d constructio nan d engineerin g resources .
Type s o f Technologie s

Th e facilitie s require d t o mee t th e diese l sulfu r conten t requirement s includ e desulfurizatio nand hydrocrackin g facilitie s and hydroge nproductio n
an d sulfu r recover y

facilities . Thes e emplo y wel l know

nan d prove ntechnol ogies . Thus , th e refinin g industr y shoul d no t experienc e delay s du e t o unforsee nproblem s wit hrequire d technologies . Acquisitio no f Permit s

Refiner s hav e suggeste d tha t problem s ma y be encountere d i nobtainin g necessar y

constructio npermit s innon-attainmen t areas . Th e same issu e arise s a s wit hpotentia l RVP regulations : refiner y processin g unit s tha t ar e require d t o reduc e sulfu r conten t wil l generat e additiona l emission s tha t coul d trigge r Ne w

Sourc e Review . Thi s issu e need s t o b e resolve d t o deter min e th e lengt ho f tim e necessar y fo r refiner s t o obtai nth e necessar y permits , sinc e thi s coul d dela y th e plannin g and constructio nschedule s fo r sulfu r remova l facilities .
Bankin g an

d Tradin g

A bankin g and tradin g program woul d lea d t o earlie r reduction s i nth e sulfu r conten t o f diese l fue l an d ver y likel y woul d reduc e th e tim e neede d b y industr y

t o compl y

wit hne

w requirements , perhap s b y a s muc ha s a year .

Genera l Conclusion s

I f require d capita l outlay s ar e nea r th e $3. 3 billio nestimate d b y th e NPR A survey , refiners shoul d be abl e t o construc t th e facilitie s require d t o mee t a diese l fue l sulfu r conten t requiremen t o f 0.0 5 percen t i nabou t 3



# _ 7-24 -

years . Plannin g canbe carrie d ou t concurrentl y wit hth e constructio no f RV P facilities , bu t th e constructio nrequire d b y th e RVP an

d diese l sulfu r regula tion s shoul d b e schedule d t o ru nsequentially . Thi s implie s tha t th e diese l sulfu r requirement s coul d becom e effectiv e inth e fal l o f 1995 , whic hi s abou t 3 year s afte r th e RV P relate d constructio nwoul d b e completed . I f capita l expenditure s ar e significantl y les s tha nestimate d b y th e NPR

A o r i f segrega tio no f onhighwa y

diese l fue l fro

m othe r distillate s i s possible , schedulin g o f th e RV

P an d diese l sulfu r regulation s coul d allo w fo r some constructio n overlap . Th e diese l sulfu r requirement s coul d the nbe me t a s earl y a s lat e 1993 . A

bankin g an

d tradin g program

coul d b

e designe d t o brin g abou t earlie r reduction s inth e sulfu r conten t o f diese l fue l and t o reduc e th e leadtim e require d fo r complianc e b y refiners .

LEADTIM E REQUIREMENT S FO RGASOLIN E VOLATILIT YAND DIESE L FUE L SULFUR AND AROMATIC S REQUIREMENT S

Thi s sectio nevaluate s th e lengt ho f tim e refiner s wil l nee d t o mee t th e entir e se t o f potentia l regulator y requirement s —

RVP specification s and limit s onth e sulfu r an d aromatic s conten t o f highwa y diese l fuel . EP A

i s considerin g a potentia l limi t o f 2 0 percen t o nth e aromatic s conten t o f on-highwa y

diese l fuel .
Estimate s o f Require d Capita l Outlay s

Th e tw o studie s reference d i nth e previou s sectio nals o estimate d th e capita l outla y

necessar y

t o mee t bot hth e propose d sulfu r an d aromatic s conten t fo r highwa y diese l fuel :

° Th e NPR

A Surve y estimate d require d capita l outlay s a t abou t $6. 6 billion . Thi s assume s tha t n o segregatio no f diese l fue l fro m hom e heatin g oi l beyon d curren t level s i s practical . Th e surve y als o indicate d tha t a numbe r o f smal l an d medium

siz e refiners , accountin g fo r abou t 3 6 percen t o f diese l productio ncapacity , woul d be unabl e t o mak e th e require d investments . Th e NPR A contend s tha t refiner s•25

-

generall yunderestimate d thei r likel ycomplianc e cost s whe n respondin g t o the survey . Mor e recen t analysi s performe d b yNPR Aindicate s tha t complianc e cost s woul d b e abou t 7 5 percen t higher. 9

0 Th e Sobotk a stud yestimate d tha t capita l outlay s woul d rang e fro mabou t $1. 3 billion , i f diese l fue l coul d b e segregated , t o abou t $3. 7 billio n i f i t coul d no t b e segregate d fro mothe r distillate. ^
Again , ther e i s wid e disparit yi n th e capita l outlay s estimate d t o b e require d t o mee t the potentia l sulfu r and aromatic s requirements
. Estimate s
o f capita l outlay s var yfro ma lo w o f abou t $1. 3 billion , i f fuel s ar e seg regated , t o i n exces s o f $6. 6 billion
.
Potentia l competitio n fro mforeig n refiner s ma yals o complicat e invest

men t decision s b

ydomesti c refiners
. Refinerie s abroa d typicall yproduc e a considerabl ylarge r fractio n o f thei r diese l oi l (numbe r tw o oil ) fro m straigh t ru n materia l an d produc e a smalle r fractio n fro mcracke d stock s (product s o f conversio n units)
. Thi s i s becaus e residua l oi l produce d i n U.S
. refinerie s i s a smalle r fractio n o f tota l outpu t tha n i t i s i n foreig n refineries
. Straigh t ru n materia l tend s t o b e close r t o th e sulfu r an d aromatic s specification s desire d b yEP Atha n tha t mad e fro mcracke d stocks
. Thi s suggest s tha t refinerie s abroa d ma yb e bette r situate d t o satisf yU.S
. specificatio n fo r highwa ydiese l fue l tha n refinerie s i n th e U.S
. Indeed , a n analysi s b

ySC I o f foreig n refiner s indicate s tha t i n the proces s o f meet

in g the 0.0 5 percen t sulfu r specificatio n the ywoul d als o mee t th e 2 0 percen t aromatic s specification
.

9 Se e recen t comment s byth e NPRAin , "NPR AAdho c Committ e o n Diese l Fue l Comment s o n Diese l Dearomatization. "

1 0 Th e SC I analysi s assume d tha t aromatic s coul d b e remove d usin g solven t extraction
.•26 -

Inaddition , an d a s mentione d above , foreig nrefinerie s shoul d b e abl e t o segregat e thei r shipment s o f highwa y diese l fue l destine d fo r th e U.S . from othe r distillate s sol d int o th e U.S . marke t (primaril y th e eas t coast )
an d i nothe r market s abroad . Thi s implie s tha t domesti c refiner s woul d hav e difficult y

increasin g th e pric e o f home heatin g fue l and off-highwa y diese l fue l t o reflec t th e cos t o f sulfu r an d aromatic s removal , whic hshoul d lea d t o segregatio no f highwa y diese l fue l from

th e balanc e o f th e diesel/hom e heatin g oi l stream . O

nbalance , foreig nrefiner s ma y retai na cos t advantag e i n producin g on-highwa y diese l fue l tha t coul d lea d t o th e importatio no f larg e quantitie s o f tha t material . Thes e possibl e competitiv e effect s wil l creat e uncertaintie s tha t coul d impai r th e domesti c petroleum refinin g industry' s abilit y t o pla nfo r lo

w sulfur/lo w

aromatic s diese l oil . The y also shoul d creat e stron g incentive s fo r refiner s t o segregat e fuel s wher e practicabl e an d ma y reduc e th e tota l amoun t o f capita l investe d i f domesti c refiner s reduc e thei r outpu t o f diese l fuel .
Evaluatio no f th e Factor s Affectin g Leadtim e

Plannin g an

d Constructio n

Th e require d facilitie s coul d b e physicall y installe d i nabou t 2 t o 3 years , again , withou t consideratio no f constraint s impose d b y th e siz e o f aggregat e capita l outlays . However , becaus e o f concern s raise d b y th e NPR

A abou t th e availabilit y o f th e technology , a s discusse d below , th e plannin g phas e mus t be sufficien t t o allo w fo r sufficien t researc han d testing . W e ar e unabl e t o estimat e ho w lon g i t wil l tak e t o demonstrat e th e commercia l acceptabilit y

o f aromatic s remova l technologies . Capita l Requirement s

i . NPR A estimat e assumin g n o fue l segregatio n

Inth e absenc e o f technical , commercial , and regulator y uncertainties , i t i s likel y

tha t th e combinatio no f diese l fue l sulfu r an d aromatic s



# _

7P.2 9

•27 -

regulations , a t aninvestmen t o f abou t $6. 6 billio ndollars , coul db e me t b y U.S . refiner s i f the y wer e provide dwit ha 5 o r 6 yea r perio dove r whic ht o instal l th e require dcapita l equipment . (Thi s implie s adde daggregat e capita l outlay s o f abou t $1. 1 t o $1. 3 billio npe r year. ) Tha t i s t o say , i f th e technolog y

wer e clearl y

know nandi f import s o f competitiv e materia l wer e n o threat , the na 5 o r 6 yea r leadtime afte r th e effectiv e dat e o f gasolin e RVP limitatio nwoul db e sufficien t t o instal l th e require dcapita l equipment , i.e. , complianc e i nlat e 199 7 o r 1998. H
ii . Alternativ e estimate s o f capita l outlay s

I f th e capita l cost s wer e significantly lowe r tha nestimate db y th e NPRA , th e require dleadtime woul dbe shortene d(again , assumin g n o problem s i nimplementin g dearomatizatio ntechnologies) . Fo r instance , i f produc t segregatio nwer e possible , th e NPR A estimat e o f capita l expenditure s woul d declin e b

y abou t hal f t o abou t $3. 3 billion . Complianc e woul dthe nb e possibl e b

y lat e 1995 . Likewise , i f actua l capita l outlay s wer e muc hclose r t o th e SC I estimat e o f $3. 7 billio nfo r th e non-segregate dcase , complianc e woul dals o b e possibl e b y lat e 1995 . And , i f fuel s coul db e segregate dand capita l cost s wer e clos e t o th e SC I estimat e o f $1. 3 billio nfo r th e segrega te dcase , complianc e coul db e possibl e b y lat e 1993 .
Type s o f Technologie s

Th e NPR A contend s tha t there currentl y i s n o genera l agreemen t onth e processe s tha t wil l prov e optima l o r eve npractica l t o mee t stringen t

H There i s a t leas t a theoretica l possibilit y tha t U.S . refiner s may , a t some cost , b e abl e t o increas e th e sulfu r an daromatic s conten t o f hom e heatin g oi l andt o segregat e home heatin g oi l fro m diese l oi l t o minimiz e th e cost s o f sulfu r an

daromatic s reductio ni nhighwa y diesel . At thi s poin t i ntim e i t i s unclea r whethe r increase s i nsulfu r a s wel l a s aromatic s conten t i n non-highwa y

diesel , mostl y

home heatin g oil , woul db e tolerate deithe r commerciall y

o r b y state , loca l o r Federa l EPAs .



# _ 7P.3 0

•28 -

(20% ) diese l fue l aromatic s limits . Additiona l research , a s wel l a s th e constructio nan

dinstallatio no f commercia l siz e unit s specificall y develope d t o proces s th e larg e volume s o f feed s tha t woul db e neede di nU.S . refineries , woul db e a norma l precurso r t o th e wid e sprea dinstallatio no f eithe r extractio nor hydroprocessin g facilities . Also , i t i s no t ye t clea r wha t disposition s o f byproduct s fro m thes e processe s wil l prov e best . Finally , ther e appear s t o be some uncertaint y abou t th e fina l properties , asid e fro m sulfu r an

daromatic s content , o f diese l fue l tha t woul db e produce dusin g sever e hydroprocessing . Some refiner s questio nwhethe r diese l oi l produce d i nthi s wa y

wil l be a satisfactor y fue l fo r highwa y

vehicles . Acquisitio no f Permit s

Du e t o potentia l increase s inVO C emissions , refiner s hav e indicate da concer nove r possibl e difficultie s inobtainin g require dconstructio npermit s i nnon-attainmen t areas . Thi s issu e shoul db e jointl y resolve dfo r RVP relate dfacilitie s anddiese l sulfu r andaromatic s remova l facilities . Ther e i s som e indicatio ntha t applicatio no f emissio ncontro l technologie s woul db e sufficien t t o avoi dtriggerin g Ne w Sourc e Review , bu t thi s issu e ha s no t bee n examine di ndetail .

Genera l Conclusio n
Give nth e uncertaintie s discusse dabove , w e ar e unabl e t o provid e EP A wit ha reasonabl e schedul e fo r th e constructio no f th e combinatio no f sulfu r an daromatic s reductio nfacilitie s fo r diese l oi l i nU.S . refineries . Th e require dleadtime , a t a minimum , woul dbe abou t 5 o r 6 year s afte r RVP con trol s go int o effec t i f require dcapita l outlay s ar e nea r th e NPR A surve y estimat e o f $6. 6 billion . However , becaus e o f potentia l problem s wit hforeig n competition , technologies , an dpermittin g thi s estimat e o f leadtim e canno t b e recommende dfo r regulator y plannin g purposes .P.3 1

TABL E 1

Capita l Expenditure s b yth e Petroleu m Industr y 

### 1972-198 8 (i n constan t 198 7 dollars )
Capita l Expenditure s Yea r

197 2 197 3 197 4 197 5 197 6 197 7 197 8 197 9 198 0 198 1 198 2 198 3 198 4 198 5 198 6 198 7 1988 * Refinin

g Industr

y ($million)

-
$ 37 6 

### 46 6 1,12 8 1,00 2 

### 97 9 76 0 95 5 1,83 5 2,30 9 4,10 5 4,01 8 3,67 4 2,67 8 2,83 9 2,01 9 2,18 0 2,60 5 Tota l

$ 3,91 2 4,66 3 8,25 3 9,42 4 11,74 1 15,32 1 17,98 1 29,67 8 44,35 0 66,35 4 68,35 4 51,91 3 50,23 3 45,34 5 26,54 2 26,59 7 29,72 1

Planne d expenditures
.
Source : Derive d fro mOi l an d Ga s Journa l