WRITTEN
STATEMENT OF
BOB SLAUGHTER
PRESIDENT
ON BEHALF OF
THE NATIONAL
PETROCHEMICAL & REFINERS ASSOCIATION
BEFORE THE
SENATE
COMMITTEES ON JUDICIARY AND ENVIRONMENT AND PUBLIC WORKS
CONCERNING
NEW SOURCE
REVIEW REFORM
JULY 16, 2002
WASHINGTON, DC
Chairman Jeffords, Chairman Leahy, Senators Smith and Hatch and other Members of the Committees, I am Bob Slaughter, President of the National Petrochemical & Refiners Association (NPRA). NPRA thanks you for asking us to appear before you today on the subject of reform of the New Source Review (NSR) program. NPRA is a national trade association which represents nearly all owners or operators of U.S. refining capacity, as well as petrochemical manufacturers with processes similar to refiners. The petroleum and chemical products made by our members are vital to continued U.S. economic health and national security, and we welcome the opportunity to underscore the importance of NSR reform to maintaining a secure and adequate supply of those products.
NSR Review Has
Been A Public Process
This is our third appearance before the
Senate Environment and Public Works Committee on this subject. On
February 28, 2000, I appeared before a hearing of the Subcommittee on Clean
Air, Wetlands, Private Property and Nuclear Safety to explain many of the
problems that our members were experiencing under the NSR program. On
April 5, 2001, I appeared before the same subcommittee to stress our members’
continued need for NSR reform and our hope that this matter would be reviewed
as part of the Administration’s forthcoming recommendations for changes in
national energy policy. The problems with and concerns about the NSR
program we expressed at those times are already on the record, but we have
included them as an appendix to this statement for ease of access by Committee
members and staff.
In May, 2001, the National Energy Policy
Development Group, in its National Energy Policy report, recommended that “the
Administrator of the Environmental Protection Agency, in consultation with the
Secretary of Energy and other relevant agencies, review New Source Review (NSR)
regulations, including administrative interpretation and implementation, and
report to the President on the impact of the regulations on investment in new
utility and refinery generation capacity, energy efficiency and environmental
protection.” That review was to be concluded by August 15, 2001.
On July 10, 2001, NPRA appeared at one of
the four public hearings held by EPA across the country. The hearings were held to accept comments on
industry experience with the NSR program in general, and specifically on the
EPA paper (published June 22, 2001) providing background and a preliminary
overview of NSR performance and related issues. Some of our member
companies also appeared during these EPA public hearings. We have
attached the statement delivered on behalf of NPRA in Cincinnati as part of the
appendix to this testimony.
On June 27, 2001, NPRA and
representatives of 12 member companies met with the Environmental Protection
Agency Office of Policy, Economics and Innovation. This meeting was held to discuss specific problems with the NSR
program and our suggestions for ways in which the program could be improved in
order to maintain environmental progress while promoting energy efficiency, the
production of cleaner fuels and the installation of improved technology. On July 23, 2001 NPRA sent EPA a written summary
of the points brought forward at that meeting. This material is a part of
EPA’s docket of the review process, but we are attaching a copy as part of the
appendix to today’s testimony.
On June 13, 2002, EPA Administrator
Whitman sent a letter to the President transmitting EPA’s report to the
President and a separate New Source Review Recommendations document summarizing
actions to improve the NSR program. It should be noted that the
Administration took ten months beyond the originally anticipated August 15,
2001 date to receive and review input and to formulate its
recommendations. NPRA issued a press release supporting the
Administration’s decision to move forward with NSR reform; a copy is attached
as part of the appendix.
NSR Reform Is
Necessary
NPRA continues its strong support for
reform of the New Source Review program. Our members need both increased
certainty as to the application of that program and greater flexibility in
meeting its requirements. Considerable uncertainty still exists
about the NSR program, and our members tell us that state regulators who
actually administer most of the program’s requirements have expressed their
concern about its many complexities and shifting interpretations.
Refiners Have A
Heavy Regulatory Agenda
Refiners in particular are in urgent need
of NSR reform. The industry is facing a blizzard of new regulatory
requirements in this decade, all of which are environmental in nature.
The number and compressed timing of these requirements are compellingly
demonstrated on the attached chart which we call the Regulatory Blizzard.
To mention only the most significant of
these programs: refiners must implement a greater than 90% reduction in
gasoline sulfur content outside of California in the 2004-2006 timeframe, at an
estimated cost of $8 billion. By mid-2006 the industry must achieve a 97%
reduction in the sulfur content of 80% of highway diesel fuel, at an additional
cost approaching that of the gasoline sulfur reduction. EPA is currently
considering severe sulfur reductions in the off-road diesel pools, which will
also be quite expensive and, which will be partially implemented in this decade
as well.
Additional and expensive gasoline
specification changes involving the use of MTBE in reformulated gasoline must
be implemented in the same timeframe. At the same time, stationary source
programs such as the MACT hammer and compliance with the new 8-hour ozone
standard will require additional environmentally-related investments at
refineries and petrochemical facilities.
Many industry experts have told us that
they believe that the refining industry faces a total of $20-25 billion in
additional investments before 2010. The vast majority of these
requirements are related to mandatory environmental programs. Other
experts think that the $20-25 billion price tag may be underestimated.
The unfortunate fact is that most, if not
all of these regulatory requirements were imposed in relative isolation and
with little attention paid to their cumulative effect on the domestic refining
industry. In 1999 a study done by the National Petroleum Council (NPC), a
joint government–industry body co-chaired by the then Secretary of Energy, warned
about the impact of these uncoordinated investment requirements on the refining
industry. In its Report, the NPC recommended more reasonable timing and
better sequencing of these requirements to avoid domestic refinery closures and
reduced supply of petroleum products. The NPC’s recommendation has been
largely ignored to date.
NSR Reform Is
Needed To Meet This Regulatory Agenda
Confusion and controversy over NSR
requirements and applicability contribute to the problems facing our
industry. Assuming their ability to secure sufficient investment capital
to meet these regulatory requirements, refiners still face many logistic
challenges in meeting the ambitious goals and deadlines of these new
regulations. Refiners must make infrastructure and process changes to
comply with these regulations. The current NSR program makes it extremely
difficult for refiners to determine just what the legal requirements are as
they do so. This situation illustrates why the unreformed NSR
program hinders our industry’s efforts to produce the cleaner fuels that
consumers want and which are needed for continual environmental progress.
Current disarray in the NSR program has
had an even more direct, negative effect on refiners. Enforcement actions
against the refining industry based upon unanticipated and shifting NSR interpretations
have sought to add significant and uncoordinated new investment requirements to
those already mandated in this decade. Given the magnitude of the tasks
facing the refining industry, and the cost of contesting these claims, some of
our members have decided to settle these enforcement actions rather than to
contest them. Other members are still discussing these matters with agency
personnel.
It is NPRA’s position that the
enforcement activity against refiners is inappropriate and should cease. We believe that the NSR program’s
application and requirements must be clarified and the industry allowed to
proceed with the many challenges it faces in complying with its vast suite of
new regulatory requirements with the help of a reformed NSR. Regulatory
improvements resulting from NSR reform should be made available to those companies
which have already settled at their option. Given the immense job ahead
of the industry it is inconceivable that this would have anything but a
positive effect on the environment.
The U.S.
Refining Industry is Essential, But Faces Challenges
Domestic refining is an essential
industry. It is also a tough business. Refining
is a heavily-regulated, capital-intensive industry that requires huge amounts
of capital to continue its significant environmental progress and to maintain
and expand production capacity. Thus, it is very important to provide clear and efficient means to comply with
environmental regulation. Unnecessary costs mean reduced domestic
production of crucial energy supplies and further reductions in the number of
U.S. refineries.
No new refinery has been built in the
United States since 1976. It is unlikely that any new grassroots refinery
will be built in the U.S. in the foreseeable future. This is due to
the industry’s relatively low return on capital invested (which is in part
attributable to the costs of environmental compliance) and to the NIMBY factor,
which makes it difficult to site new heavy industry facilities.
Petroleum
Product Demand Is Increasing
No new U.S. refineries have been built, but
our demand for petroleum products continues to increase. The Energy
Information Administration (EIA) projects continued growth in demand for
petroleum products at roughly 1.5% per year through 2020. As the number
of U.S. refineries declines, overall U.S. capacity has increased at existing
sites just enough to offset the reduction in capacity. But this is not
enough to keep pace with the growing demand for petroleum products, which must
be met through more product imports. In order to maintain—and hopefully
increase—domestic production of basic fuels, NSR reform is needed to continue
capacity additions and other efficiencies at existing sites. Otherwise,
we will gradually but inexorably become more dependent on imports of key
petroleum products like gasoline, diesel fuel, home heating oil, and jet fuel,
with a significant impact on national security. Currently, the United
States imports large quantities of crude oil, but the useful petroleum products
are largely made in the United States at domestic refineries.
NSR reform will not remove all the
challenges facing domestic refiners, but it will eliminate unnecessary and
counterproductive costs of unnecessary regulation and uncertainty that can make
the difference between life and death for many facilities.
This is not an idle concern. The
Oil Price Information Service (OPIS) recently reported that at least 15 U.S.
refineries that represent more than 10% of U.S. production may change hands or
be closed down by January 2003. The facilities identified by OPIS are in
every region of the country other than the West Coast, which already suffers
from a sharply reduced refinery population. OPIS adds “It’s the rare unit
these days that is sought after by qualified buyers.”
EIA is projecting that U.S. refineries
capacity will continue under pressure, even with capacity utilization at levels
of 94-95% which is far more than in other industries, where maximum utilization
is considered to be 75-85% of capacity. EIA forecasts: “Imports of light
products are expected to nearly triple by 2020, to 4.5 million barrels per
day. Most of the projected increase is from refiners in the Caribbean
basin and in the Middle East, where refining capacity is expected to expand
significantly.”
Given such warnings, and the impact on
U.S. national security, it is hard to argue that NSR reform should not proceed
expeditiously. And U.S. petrochemical production, also directly linked to
U.S. economic progress and national security, confronts challenges equal in
magnitude to those of the refining industry and could also operate more
efficiently and economically with NSR Reform.
Many Other
Regulatory Programs Control Plant Emissions
Opponents of NSR reform attempt to leave
the impression that the current NSR program is the source of all industry environmental
regulation; this is not the case. The refining industry, for example, is
heavily regulated through many other programs. (A compilation of those
programs is included in the appendix. It was prepared by the American
Petroleum Institute.) NSR, on the other hand, was intended to require the
use of up-to-date emission control technology on new or substantially
rebuilt facilities; and routine maintenance, repair and replacement activities
were specifically exempted from NSR requirements.
NSR reform will also help enable the
refining industry continue its strong record of environmental progress. The
industry has dramatically reduced its direct and indirect emissions since Clean
Air Act regulation began. According to EPA’s figures, between 1980 and 1996
the refining industry reduced its criteria pollutant air emissions by
74%. Congress and the EPA have required the industry to attain additional
dramatic emission reductions in the next few years, largely through rulemaking
activities taken under the authority of the 1990 Clean Air Act amendments.
The refining industry’s contributions to
improved air quality reflect the progress made by the nation as a whole.
On June 26, 2001 the EPA announced that between 1970 and 1999 total emissions
of the Clean Air Act’s six criteria pollutants decreased 31% at a time of
considerable growth in both the economy and population. The agency
attributed the improved air quality to effective implementation of clean air
laws and regulations and improved efficiency of industrial technologies.
Updating and improving the NSR program should be viewed in the context of
improving air quality and considered as a way to maintain its environmental
progress.
NSR Reform Has
Been A Bipartisan Effort
Finally, NSR reform has been urged by a bipartisan
group of Executive Branch and Congressional policymakers over the past several
years. In 1996 during the previous Administration, EPA initiated a
rulemaking to revise NSR, proposing what appear to be the same changes that are
the core of the present Administration’s recommendations. Former EPA Air
Administrator Bob Perciasepe, who served until the end of the previous
Administration, publicly stated his support for NSR changes which are similar
to those recommended by this Administration. A memo expressing Mr.
Perciasepe’s opinions is attached in the appendix. Also, in May 2002 a bipartisan group of U.S. Senators wrote to
the Administration strongly urging NSR reform.
In closing, NPRA urges Congress to continue
its support for this bipartisan effort to modernize and reform the NSR program.
Additional regulatory flexibility in the form of plant wide applicability
limits (PALS), clean-unit treatment, and clarification of the definition of
routine maintenance will help our members improve energy efficiency, produce
cleaner fuels, and install the latest technology. NSR in its current form
impedes, rather than advances, achievement of these goals. We hope that
we can count on continued Congressional support for reforming NSR, so that our
members can meet the growing need for environmentally-sensitive products and procedures
in ways that are both effective and efficient. I look forward to
responding to your questions.