Comments of Clint W. Ensign,
Vice President, Government Relations
Sinclair Oil Corporation
On the issue of Tier 2 / Gasoline Sulfur Standards
Before the Subcommittee on Clean Air, Wetlands, Private Property and Nuclear Safety
of the Committee on Environment and Public Works
United States Senate
May 18, 1999

Mr. Chairman and distinguished committee members, my name is Clint Ensign. I am Vice President of Government Relations for Sinclair Oil Corporation. I am honored to share some initial views and perspectives on the U.S. Environmental Protection Agency's Proposed Tier 2 Motor Vehicle Emission Standards and Gasoline Sulfur Control Requirements.

Sinclair is family owned company that operates three refineries, two in Wyoming and one in Oklahoma. Two of these refineries were closed by other companies before being purchased and reopened by Sinclair. As a manufacturer of fuels, I am proud to say that Sinclair routinely produces cleaner products than required by state and federal regulation.

All of our refineries are considered "small" by provisions established by Congress in the Clean Air Amendments of 1990 (CAAA). Regrettably, none of our refineries are considered small by standards EPA is using in this rulemaking. Therefore, we are not eligible for small refinery help in the proposal.

Environmentally, the air improvements that automakers and refiners can achieve through Tier 2 vehicle and fuel changes are impressive, especially in major urban cities. My company and the refining industry support large reductions in gasoline sulfur. We have made specific recommendations to EPA on how best to accomplish this task quickly across America.

But in reviewing EPA's gasoline sulfur proposal, we are surprised by how harsh it treats U.S. refiners. We are concerned the agency has overreached in many areas, particularly in the transition phase to low sulfur gasoline. The proposal's small refinery provisions are narrowly construed and were disappointing. Overall, the proposed gasoline sulfur regulation represents the largest and most costly government requirement in the history of our company. If made final as proposed, it directly threatens the future of our Casper, Wyoming refinery.

We respect EPA's authority to set standards at any desired level. But they cannot compel private investment. Recent history demonstrates that many refineries withdrew rather than invest in fuel desulfurization. With little or no surplus refining capacity available in industry today, the success of gasoline sulfur regulation depends on the ability of EPA to convince every refiner to invest in virtually every refinery nationwide. We do not believe the gasoline sulfur proposal accomplishes this important objective.

While Sinclair disagrees with many fundamental aspects of the gasoline sulfur proposal, I wish to make plain that I have been extended the opportunity to present our views to EPA on several occasions. I have appreciated meeting with senior agency officials on this issue.

Let me discuss several specific concerns we have with the proposal.

As a major stakeholder in developing gasoline sulfur standards, the basic views of the U.S. Refining industry were not incorporated in the proposed regulation.

In February 1998, the entire U.S. petroleum refining industry voluntarily proposed that EPA set new gasoline sulfur standards. We recommended large cuts in sulfur limits; a 70% reduction in the East and 55% in the West. Average sulfur levels in the national gasoline pool would fall by half in 2004. The largest sulfur cuts were targeted in the East. Our proposal recognized regional uniqueness and was designed to be consistent with congressionally established Tier 2 principles of need, feasibility, and cost-effectiveness.

In studying vehicle emissions data, we believed that Phase 11 pending emission standards for light duty vehicles and trucks as stated in the Clean Air Act could be achieved with these recommended sulfur reductions.

As a second step, many refiners offered to make gasoline meeting California's severe sulfur standard --- a 30 ppm average with an 80 ppm cap --- by 2010. Other refiners promised further cuts based on the outcome of technical studies as well as air quality need.

Our proposal gave a huge jump-start to the regulatory process. It essentially provided EPA with unanimous consent from our industry to impose regulation at this level. In the absence of gasoline sulfur workshops, feasibility studies, and the like, this represented a remarkable offer to EPA.~\1\ And since large and small refiners supported the plan, the agency did not need to worry about possible plant closings, fuel supply concerns, small business compliance, and other large challenges that accompany major regulation of this kind.

\1\ EPA has held one public workshop on gasoline sulfur control (May 1998). No other forum has been provided for refiners to meet directly with automakers to address gasoline sulfur issues.

Our initial gasoline sulfur proposal raised many questions. We listened closely to the concerns and made many modifications.

Automakers strongly opposed our plan. In response, the refining industry made a good faith attempt --- with the help of Administrator Carol Browner --- to meet directly with the autos. Issues important to the rulemaking needed a direct exchange of ideas and data, especially on the critical question of "reversibility." EPA has noted that "vehicles tested exhibited a wide range of reversibility,for reasons that are not fully understood."\2\ We hoped the meetings would help resolve questions on this an other key issues. While automakers have pressed EPA hard to mandate severe gasoline sulfur standards, they refused the offer to meet with us.

\2\ EPA, Proposed Tier 2 Motor Vehicle Emissions Standards and Gasoline Sulfur Control Requirements, pg. 98, emphasis supplied.

In sum, the U.S. refining industry made an unprecedented effort to help EPA develop a major gasoline sulfur regulation. I don't know how our industry could have been more helpful, open, or responsible on this matter.

Despite this background, EPA rejected our recommendations. The agency instead proposed a nationwide 30/80 ppm gasoline sulfur standard beginning in 2004. This is essentially the standard requested by the autos. From a fuel perspective, the proposal is a classic one-size fits all regulation. It falls evenly hard on urban and rural areas alike despite large differences in air quality. After making such a huge outreach to help EPA craft a meaningful and workable gasoline sulfur regulation, we are disappointed that our recommendations were set aside.

Even though regional air strategies are common in America today, a regional gasoline sulfur approach--- supported by many governors -- was rejected by EPA.

Regional strategies have been widely used throughout the country to improve air quality. The Ozone Transport Assessment Group (OTAG) made regional designations and recommendations for "fine-grid" and "course-grid" states. The Ozone Transport Commission, the Grand Canyon Visibility Commission, and the Western Regional Air Partnership are examples of coalitions of states that address regional air problems. Governors are often directly involved in these groups. When EPA and automakers established National Low Emission Vehicle (NLEV) regulations, the East and West were treated differently as to when each would receive NLEVs. In the CAA, areas receive reformulated and conventional gasoline based on air quality need. Precedent exists to support a regional gasoline sulfur approach.

Nine governors representing Rocky Mountain and Central Plains states have written to EPA urging regional gasoline sulfur controls. These governors are from both political parties and represent states that join each other in a large, geographically contiguous block. We were disappointed their collective recommendations were not reflected in some way in the gasoline sulfur proposal. In fact, their views were not even noted in the preamble of the proposal.

Collectively, these governors represent states with excellent compliance with National Ambient Air Quality Standards. With few exceptions, EPA projects these states will meet the new, more protective NAAQS in future years.\3\ In many states in the West, EPA projects nearly total compliance with future ozone NAAQS:

\3\ EPA, Proposed Tier 2 Motor vehicle Emissions Standards and Gasoline Sulfur Control Requirements, April 1999, Appendix C: One-Hour and Eight-Hour County Design Values

"Outside California and the OTAG region, the NAAQS RIA modeling indicated that all areas would attain the I hour standard by 2010. One area (Phoenix, AZ) was projected not at attain the 8-hour standard."\4\

\4\ EPA, Proposed Tier 2 Motor Vehicle Emissions Standards and Gasoline Sulfur Control Requirements, April 1999, pg. 27, emphasis supplied.

Other reasons support a regional standard:

ù Rural states have a small vehicle inventory and emissions are dispersed over large geographic areas. Gasoline sulfur control has little impact on air quality in these states.

ù Rural populations will pay more for sulfur control due to higher per capita gasoline usage rates than the nation at large.\5\

\5\ Highway statistics from the Federal Highway Administration show that populations in Rocky Mountain and Central Plains states have gasoline consumption rates higher than urban states.

ù EPA projects the cost of gasoline sulfur control in PADD IV (WY, ID, MT, CO, and UT) will be nearly twice as high as the nation at large.\6\

\6\ Tier 2/Sulfur Draft Regulatory Impact Analysis---April 1999, Table V-35.

It is also important to note the refining dynamics in the Rocky Mountain region. Unlike all other regions in the United States, PADD IV is almost entirely supplied by small refineries. Every refinery in the region is small. (Few of these refineries are eligible for regulatory help in the proposal.) Historically, small refineries face the largest challenge meeting fuel sulfur standards. In view of this, Sinclair expressed concern to EPA that severe regulation could impact refineries and cause supply problems for consumers. As noted earlier, the gasoline sulfur proposal, if adopted, directly threatens the future of our Casper, Wyoming refinery.

But these concerns are dismissed in the proposal. In doing so, EPA references a study conducted by Math Pro, Inc. --- prepared for the autos --- that suggests that the potential for small refinery closures in the Rockies is small. This conclusion is not consistent with our situation or with our understanding of the region. We are meeting with Math Pro on May 20 to take a detailed look at their study.

But most of all, the various Math Pro studies have led to confusion. Just a few months ago they completed a PADD IV gasoline sulfur study for the U.S. refining industry and reached different findings. One company, two conclusions, in three months. This situation raises questions about the value of these studies to the gasoline sulfur standard debate.

EPA used a narrow small refinery definition for regulatory relief purposes in the gasoline sulfur proposal that is more restrictive than the definition established by Congress in the Clean Air Act.

In the gasoline sulfur proposal, EPA did not use the small refinery definition that exists in the Clean Air Act. As a brief background, Senator Chafee offered a small refinery amendment during consideration of the CAAA of 1990 on behalf of a bipartisan group of 11 senators, including Senator Reid and Senator Baucus. Congress established small refinery provision to enable small refineries to earn marketable SO2 allowances to encourage investment in low sulfur diesel equipment. I am pleased to report that the small refining amendment has been a success.

Since the desulfurization of diesel and gasoline share similar small refinery issues, we do not know why EPA's gasoline sulfur proposal contains a more restrictive small refinery eligibility requirement than that set by Congress in 1990. In reality, only a few small refineries in the country are extended regulatory relief in EPA's gasoline sulfur proposal.

In all meetings we have had with EPA officials on gasoline sulfur, Sinclair has expressed small refinery concerns. More than six months ago, we informed EPA there were 53 small refineries in the United States that made gasoline. This number was much larger than the 17 refineries being considered by EPA under the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) review. We noted that rural populations depend on these small facilities for fuel supply. Because of size limitations, the viability of these refineries, as a class, has historically been threatened by severe fuel sulfur regulation. Consequently, we urged EPA to expand the review of small refineries beyond the SBREFA process.

Instead, EPA has proposed using the small refinery eligibility requirements of the Small Business Administration. The SBA approach, which includes employee limits, disqualifies most small refineries. Companies such as Sinclair, Flying J. Giant Industries, and Cenex --- recognized by Congress as small refineries --- are excluded from small refinery treatment in the gasoline sulfur proposal. We reject the position that many small refineries should be excluded from needed regulatory relief in this rulemaking because they employ too many people.

Other small refinery concerns need to be addressed. For example, will refiners who expend great effort and cost to manufacture a 30/80 ppm gasoline sulfur in 2004 allow their fuel to be commingled with high sulfur gasoline of small refineries in pipelines and terminals? Does this situation argue for a broader regional approach in areas where there is a preponderance of small refineries? Does the proposal encourage investment in instances when one small refinery receives regulatory help and other small refinery does not? Should small refineries owned by major oil companies be offered help since they share similar size challenges and are important to the rural markets they serve?

These questions need further review. But it is clear that the SBA small refinery definition is too restrictive and does not accurately reflect small refinery impacts with major gasoline sulfur regulation.

Adopting California gasoline sulfur standards nationwide may mean adopting California fuel challenges: "California Screamin"

Last month, the front page of USA Today noted that "Drivers in San Francisco reported paying as much as $1.86 a gallon for unleaded gasoline and $2 for premium."\7\ The next day, the cover story in the Money section of USA contained a photograph of gasoline pump prices for up to $1.99 per gallon with the caption, California Screamin."\8\ The Wall Street Journal reported that unexpected problems at two California refineries "cut California production by about 5%.... This decline has sent West Coast wholesale prices soaring by more than 55 cents a gallon..."\9\

\7\ USA Today, In just 6 weeks, gas prices up Who, April 13, 1999, front page.

\8\ USA Today, As gas prices zoom up, consumers wonder why", April 14, 1999, Section B. front page.

\9\ The Wall Street Journal, Output Snags In California Lift Fuel Prices, April 2, 1999, pg. A2

Some may argue this situation is unique and temporary. But the cost of gasoline in California has been such a concern that Senator Barbara Boxer has asked the Federal Trade Commission to investigate high fuel prices in the state. Her request was supported by the California state legislature. Senator Boxer stated in her letter to the FTC that "California drivers regularly pay 10-20 cents more per gallon of gasoline than the rest of the country."\10\

\10\ New Fuels & Vehicles Report, FTC Said Investigating Oil Companies For Alleged RFG Price Fixing in California, May 8, 1998.

California gasoline regulations --- which include the 30/80 sulfur standard --- are the most severe in the nation. These standards are needed to address widespread air quality problems in that state. But many refiners have fared poorly with such heavy regulation. The state has lost refineries, refining capacity, and fuel suppliers. The U.S. Department of Energy reports that since 1990, eight refineries with capacity of nearly 300,000 barrels per day have been lost in California. The state's small refinery sector no longer makes gasoline. While some may contend that the rash of small refinery closures resulted from numerous factors, the executive director of the Western Independent Refiners Association in California has stated that when ultra low-sulfur gasoline regulation passed, "at least a half a dozen California small refiners made gasoline."\11\ Years after the introduction of 30/80 sulfur standards and reformulated gasoline --- tight supply and price volatility remain a problem in California.

\11\ Letter from Craig A. Moyer, Executive Director and General Counsel for the Western Independent Refiners Association to Clint W. Ensign, Sinclair Oil Corporation, June 18, 1998.

In Canada, an extensive refinery competitiveness and viability study was performed to determine impacts of sulfur regulation on Canadian refineries. The independent study was done by a respected firm with refining expertise, Purvin & Gertz, Inc. The study concluded that requiring California sulfur standards in Canada would seriously threaten 3 to 4 of the country's 17 refineries.\12\ The assessment was done by refinery and by region. Here in America, no independent study has been contracted by EPA on refinery impacts of sulfur regulation. And even though the United States has nearly 10 times more refineries than Canada, EPA has concluded "we do not expect refineries to close as a result of the implementation of the proposed sulfur standards."\13\ In view of the stringent time frames and overall harshness of the gasoline sulfur proposal, this area needs closer review.

\12\ Competitiveness and Viability Impact on Canadian Refining Industry of Reducing Sulfur in Canadian Gasoline and Diesel, May 1997, Purvin & Gertz, Inc.

\13\ EPA, Tier 2 Sulfur Draft Regulatory Impact Analysis-April 1999, pg. V-62.

Sinclair has long expressed its concern to EPA that adopting California gasoline sulfur standards nationally could cause other states to experience the same kinds of refinery closure, supply, and price impacts that have occurred in California.

The gasoline sulfur proposal does not address past impacts of fuel sulfur regulation and is instead based on technologies that are not yet commercially proven.

The preamble of the gasoline sulfur proposal does not discuss negative impacts many refineries experienced with recent fuel sulfur regulation. No reference is made to California. The widespread shortages of on-road low sulfur diesel in the West during the fourth quarter of 1993 are not cited. No mention is made that high costs caused some refineries not to invest in low sulfur diesel equipment. In some instances, refineries that compete with each other share desulfurization equipment.

EPA correctly noted in the gasoline sulfur draft RIA that the U.S. refining industry's return on investment has been a dismal three percent since 1992. The inability to recover capital costs during this long period makes it tough for refiners to face major new regulation.

Using conventional technology, EPA estimated the 30/80 gasoline sulfur standard would increase manufacturing costs 5.1 to 8 cents per gallon, or $5.6 to 8.8 billion dollars each year nationally.~\14\ A regulation this costly would close some refineries, affect supply, raise consumer concerns, and present cost-effectiveness problems in regulatory assessments.

\14\ EPA Staff Paper on Gasoline Sulfur Issues, May 1, 1998, pg. v. The cost estimate excludes California. The Federal Highway Administration reports that approximately 110 billion gallons of gasoline are consumed in the United States each year (x-CA).

In this rulemaking, EPA believes these problems will be avoided due to new desulfurization technologies. Agency confidence in the new processes is so high that the proposal's entire gasoline cost estimate is premised on the belief that all refineries will use these technologies. While new processes could reduce sulfur extraction costs, they have not yet been commercially tested or proven. EPA reported there was not a single refinery with the new desulfurization technology currently in operation today. Despite this fact, EPA is gambling this new technology will work and that more than 100 facilities will license this technology --- relatively trouble free --- in a few short years.

We hope the agency is correct. But the presumption is troubling for several reasons:

-- It is our experience with packages that we license that the guaranteed yields of the process are significantly less than the advertised performance. In other words, when we get to the point of signing a contract with a vendor, the guaranteed results of the technology are less than advertised. In this instance, where no track record has been established, what levels of sulfur reduction can refiners confidently count on with new gasoline desulfurization technology? Is it enough for refineries to meet severe 30/80ppm gasoline sulfur standards? Will additional conventional technology be needed to ensure that a refinery meets the new requirements?

-- We believe problems will inevitably occur as new technology is implemented. Pilot studies under controlled conditions are often not indicative of field operating parameters. For example, we do not know the actual operational cycle of the new technology, how it will perform under severe operating conditions, whether it is reliable or subject to unexpected downtimes, and whether it is adaptable to a wide variety of processing configurations. These large uncertainties argue for a reasonable phase in of the technology instead of the rigid timetables proposed by EPA.

-- Within the past year refiners have become aware of two new desulfurization technologies, CDTECH and OCTGAIN 220. While a few other options are beginning to emerge, they are not well known. Before applying for permits, refiners must choose the desulfurization technology they will use to meet the new standards. This decision will occur during a period when little will be known about these new processes. And if refiners all choose the new technologies as EPA has presumed, we question whether two vendors (perhaps a few others) can meet the needs of more than 100 refineries in the next few years.

-- In order for refiners to review new desulfurization technologies, companies must sign strict confidentiality agreements with vendors. We understand the need for companies to protect the technologies they have developed. But will confidentiality agreements restrict open assessments among refiners about these new technologies?

-- From an energy policy prospective, should a major regulation that requires severe, new standards for the nation's gasoline supply be based on commercially unproven technologies? Does the entire nation need the regulation at the same time or should priority be given to certain areas --- as was provided in the NLEV program?

-- EPA's comment period on the gasoline sulfur proposal will end before any factual operating results are known about the new technology on which the proposal rests. This makes comment on the new technology largely a theoretical, subjective exercise.

The short phase-in period proposed to refiners raises questions about simple fairness.

Statements often have been made that the emission controls of the vehicle and the fuel should be viewed as a single system. But for regulatory purposes, the proposed compliance timelines for each are quite different. EPA proposes that automakers be given more than twice the amount of time to phase into Tier 2 regulation than refiners. This raises questions about simple fairness.

Under EPA's proposal more than 97 percent of the refining capacity in the United States must meet the 30 ppm average sulfur standard by January 1, 2004. This represents an astonishing 90% reduction from existing sulfur levels in a very short period. The proposal provides the option for a restricted, but additional two year phase-in period if a refiner makes gasoline sulfur reductions prior to 2004.

Compare this rigid timetable to the Tier 2 schedule proposed for the automobile industry. For new passenger cars and light duty trucks --- which comprise roughly 50% of all new vehicle production --- Tier 2 standards would phase-in for 4 years beginning in 2004. For heavier vehicles (e.g., minivans, sport utility vehicles, etc.) that comprise the remaining half of new vehicle production, the proposed Tier 2 standards would be phased in beginning in 2008, with full compliance in 2009.

The agency states that "the proposal is carefully designed to address the need for refiners to make low sulfur gasoline available at very nearly the same time as auto makers begin selling large numbers of Tier 2 vehicles."~\15\ We disagree. The phase-in periods proposed by EPA for refiners and autos are significantly different. In fairness, we believe the Tier 2/gasoline sulfur regulation should be phased in together and equally between the two industries.

\15\ EPA, Proposed Tier 2 Motor Vehicle Emissions Standards and Gasoline Sulfur Control Requirements, pg. 63-64.

Recommendations

-- There must a reasonble transition to low sulfur gasoline. If refiners select conventional desulfurization technology to meet new standards, a phase-in period is needed minimize harsh impacts and costs. If new, lower-cost desulfurization technology is used, time is needed to assess its actual processing performance and for a few vendors to meet the needs of the industry. In either case, more time is needed than proposed by EPA.

-- The phase in period of Tier 2/ Sulfur regulation for autos and refiners should be very similar.

-- Legitimate regional differences (and the views of rural state governors) need to be reflected in a gasoline sulfur regulation. This can be done with regional sulfur standards as refiners proposed or by implementing a national standard at different times in different regions. Nonattainment and attainment areas do not need the same level of regulation at the same time.

-- The proposed eligibility for small refineries to receive help in meeting severe gasoline sulfur regulation needs to be broadened to more facilities. We hope Congress will consider extending the small diesel refinery S02 allowance program with gasoline sulfur other fuel sulfur regulations. The program has proven to be a success.

On behalf of Sinclair, I sincerely extend our appreciation for the opportunity to comment on the important issue of gasoline sulfur control. I would be pleased to provide additional information or respond to questions of members or professional staff of the Subcommittee.