The National Petrochemical & Refiners Association (NPRA) represents almost all of the refining industry including large, independent and small refiners as well as petrochemical producers. NPRA supports a 90% reduction in the sulfur content of highway diesel fuel to a 50 ppm sulfur cap. In contrast, we are deeply concerned about the impact EPA's new diesel sulfur program will have on the industry's ability to provide a steady and reliable source of diesel fuel to its customers.
NPRA does not believe that it is possible to consistently maintain needed supplies of highway diesel within the 15 ppm sulfur cap level sought by EPA. Although refineries may be able to produce some amount of this diesel, many would be forced by its high costs to limit or forego participation in the highway diesel market. This would reduce supplies well below those available under a more realistic sulfur cap. In addition, with the current logistics infrastructure, it will be extremely difficult to deliver highway diesel with a 15 ppm sulfur cap to consumers and maintain the integrity of the sulfur level of the product. This highway diesel must share a distribution system with other products that have significantly higher sulfur levels. At the EPA's proposed sulfur levels, a significant amount of highway diesel will have to be downgraded to a higher sulfur product due to product contamination in the pipeline.
The diesel plan announced on May 17th by the EPA is extreme, a blueprint for fuel shortages and future supply problems, and will pose severe economic impacts. It threatens to leave American consumers a legacy of scarce and costly energy supplies.
Role of Diesel in U.S. Economy
The trucking industry, America's motoring public, farm communities, commercial vehicle operators and others must all be assured a consistent and reliable source of supply. These vital industries may be severely impacted by reduced supplies and increased costs resulting from this rulemaking, and the consequent effect on the economy will be widespread.
Vehicles powered by heavy duty diesel are an essential element in the commercial distribution of goods and services in the United States. The EPA regulators must assess the decisions they are making and weigh the risks which new, costly and unrealistic standards could have on the country's ability to move goods and services. A reliable source of diesel supply for these customers could be threatened if the EPA proposal becomes final.
Refiners Offered A Reasonable Plan to Reduce Sulfur
The refining industry agrees that the sulfur levels in diesel must be reduced, but the program must be reasonable. The industry proposed a plan to EPA that would lower the current limit of 500 ppm of sulfur in diesel fuel to a limit of 50 ppm -- a 90% reduction. This is a very significant step. It will enable diesel engines to meet the particulate matter standards sought by EPA and also achieve significant NOx reductions. Our plan can yield a 90% reduction in particulate matter and a 75% reduction in NOx emissions from new heavy-duty diesel engines. Industry's plan is still expensive -- we estimate it will cost the industry roughly $4 billion to implement. But, unlike EPA's extreme and much more costly proposal, the level of sulfur reduction proposed by industry is attainable and sustainable. Most refiners would choose to make the investments needed to meet a 50 ppm sulfur limit. Most refineries will be able to comply with this 90% reduction by making capital investments to upgrade existing facilities or by building new capacity.
The industry has shared this proposal with regulators. NPRA and its members have had protracted discussions with EPA and have tried to suggest reasonable ways to reduce diesel emissions. Unfortunately, industry's plan has been rejected and ignored by EPA.
Overlapping Fuel Standards
Implementing gasoline and highway diesel sulfur reduction and MTBE reduction concurrently will tax resources of the engineering and construction industries, as well as state permitting agencies. Implementation of a new 50 ppm low sulfur cap diesel program in a more reasonable timeframe (after gasoline sulfur reductions) would reduce the peak demands on the engineering and construction industry or state permitting agencies. EPA's proposed overlap - with gasoline sulfur reduction phased-in between 2004 and 2007 and extreme highway diesel sulfur reduction completed in 2006 - jeopardizes both programs.
This Subcommittee may recall that the refining industry is already implementing an $8 billion (6-7 cents per gallon) program to reduce sulfur in gasoline in the same timeframe. There are few synergies in the gasoline and diesel sulfur reduction strategies so there is no justification for doing both concurrently.
EPA'S Plan Will Jeopardize Diesel Supplies
EPA's plan will not maintain adequate diesel supplies. NPRA does not believe that it is possible to produce needed supplies of highway diesel nationwide within the 15 ppm sulfur cap level. Although refiners may be able to produce some amount of this diesel, many would be forced by its high costs to limit or forego participation in the highway diesel market. EPA's plan would reduce supplies well below those available under a more realistic sulfur cap.
While some refiners would invest in the expensive new equipment necessary to meet the 15 ppm limit, many others may not make the large investments necessary to produce it, especially at the same time that sulfur levels in gasoline must be greatly reduced. Since highway diesel is only about 10 percent of the average refinery's output, refiners could find other uses or markets for their current diesel output. More than 30% of the current supply of highway diesel could be lost until additional investments are made and new desulfurization capacity is built. This could take as long as four years. Also, some refineries will probably go out of business. When a refinery closes, we lose its entire output -- gasoline, diesel, jet fuel, home heating oil. With the demand for petroleum products projected to increase, we cannot afford to lose any refineries. This is a very strong argument for a more reasonable program.
It will be extremely difficult to deliver highway diesel with a 15 ppm sulfur cap to consumers and almost impossible to maintain the integrity of the sulfur level of the product. These products must be delivered though common carrier pipelines. Recent studies concluded that it would probably not be feasible for the distribution system to maintain low sulfur diesel fuel supplies in all areas. Spot outages will probably occur and there will be reduced flexibility to deal with unusual market conditions.
Technical Decisions Refiners Face
Today's highway diesel is produced from blendstocks containing several thousand ppm sulfur. Currently, sulfur is reduced by hydrotreating. The typical existing diesel hydrotreater at a refinery can be modified to produce a product meeting industry's proposed 50 ppm sulfur limit.
Some existing units that are more constrained than average may not be suitable for modification to produce this lower sulfur product. The existing hydrotreater may have a lower than average operating pressure or hydrogen recycle rate, or the refinery may use a mix of blendstocks that may be harder to desulfurize. A new hydrotreater would be required at some refineries because retrofitting an existing hydrotreater alone would not be an option for every refinery. Even with industry's proposed 50 ppm sulfur cap, there could be more limited supply impacts if necessary investments are not made. Most refiners, though, would choose to make the more affordable retrofit investments needed for a 50 ppm sulfur cap.
A diesel sulfur standard at a 15 ppm sulfur cap would make modification of a typical, existing unit uneconomical. It would require such a large increase in reactor volume that a new, high pressure unit would make more sense. This new hydrotreater would require additional hydrogen compression and a thick-walled pressure vessel. The worldwide manufacturing capability for high pressure vessels is limited to a handful of suppliers and could be a significant constraint on providing adequate supplies of ultra low sulfur diesel in the proposed timeframe.
Thus, a 15 ppm sulfur limit would require a decision to invest in an expensive new high pressure desulfurization unit or retrofit an existing unit to process only the lower sulfur blendstocks. If several refineries choose the latter option, supplies of highway diesel would decline from current levels. It would take some time to correct this supply/demand imbalance.
Even with investment in a new hydrotreater, compliance with a 15 ppm sulfur limit would not be guaranteed at today's highway diesel production volumes. Currently, vendors do not have commercial experience treating feeds containing a significant amount of cracked material to meet a 15 ppm sulfur cap. Therefore, the capital-intensive option will not necessarily satisfy domestic demand because some of the current feedstocks are very difficult to desulfurize at the greater than 99 percent reduction levels required by a 15 ppm sulfur limit. In summary, although it is possible to produce some highway diesel under 15 ppm sulfur, it is not technically possible to produce 15 ppm sulfur highway diesel at current volumes on a continuous basis.
Distribution of Ultra Low Sulfur Highway Diesel is not Feasible.
The distribution system will not be able to provide ultra low sulfur highway diesel supplies at all times. It will be very difficult to maintain the integrity of a 15 ppm sulfur cap when diesel is distributed in pipelines, barges and trucks which also carry gasoline with a cap of 80 ppm sulfur in 2006 and high (greater than 2,000 ppm) sulfur jet fuel, home heating oil and off-highway diesel.
Spot outages will occur if a product terminal discovers that the ultra low sulfur diesel is out of compliance for whatever reason. Nearly all or all of the non-compliant product would have to be removed (and perhaps the terminal tank cleaned) before new product could be brought in. In the past, product that was slightly out of compliance could be blended with complying product; however, at ultra low sulfur levels, this will not be an option.
NPRA supports only one grade of highway diesel.
EPA is considering a phase-in program with two types of highway diesel available for a few years: current diesel (500 ppm cap) and ultra low sulfur diesel (15 ppm cap). Phase-in would create its own distribution and enforcement problems with significant potential of misfueling by new trucks. This alternative would not effectively address NPRA's concerns about technical producibility and maintaining product quality. The short period while two products would be in the marketplace guarantees that investments to distribute and segregate them will be stranded when the temporary program expires. The market may not be stable and balanced throughout the program as the existing fleet of trucks tries to chase dwindling supplies of the higher sulfur, lower cost highway diesel.
Lyondell/CITGO Experience Industry's repeated warnings about this rule are well-founded. Our company, CITGO, has some relevant real-world experience: in the EPA's proposed rule, our facilities at the Lyondell-CITGO Refinery (Houston) were referenced as having a diesel desulfurization technology capable of producing the 15 ppm sulfur cap diesel fuel. Based on our actual operating experience with this referenced technology, we find the capital and operating costs are much higher at the 15 ppm sulfur cap. The ability of the technology to consistently produce below 15 ppm diesel is problematic. The feedstocks to this revamped facility are 30 percent straight run stocks from the crude distillation unit and 70 percent heavy cracked stocks from conversion units. These heavy cracked stocks are significantly more difficult to treat to the 15 ppm level. Our operating data shows that to consistently desulfurize to 15 ppm or below, a significant portion of the cracked material must be removed from the feed, thereby reducing our diesel production by this amount.
Our first cost consideration is the use of capital. The Lyondell-CITGO project to improve our diesel quality was completed in late 1996 and included the installation of the world's largest free-standing reactor. We increased catalyst volume in the unit from 40 thousand pounds to 1.7 million pounds. The capital cost for conversion of this existing 50,000 BPSD Unit was $86 million dollars. This includes $69 million dollars for the process unit and $17 million dollars for supporting facilities. This is much higher than the $30 million revamp cost for a typical refinery processing light cycle oil as stated by the EPA . Also, a simple retrofit is not possible on many units because most older, smaller units do not have sufficient reactor design pressures, the requisite high purity hydrogen supply, a suitable fractionation system, or other hardware.
The second cost consideration is operating costs. The diesel sulfur level produced in the unit meets the 15 ppm sulfur cap at initial conditions at start of run. However, as the desulfurization catalyst ages, the reactor temperatures must be raised to achieve targeted sulfur levels. There are limits to raising temperature - equipment and product quality limits - such as color. These limits establish the cycle life of the catalyst.
At the proposed 15 ppm sulfur cap with 70% heavy cracked diesel stocks, the cycle life will be greatly reduced from current operation. This significantly raises the operating cost because of more frequent catalyst replacement and more frequent shutdowns. This also results in a loss of diesel production. Under the current mode of operation, the frequency of catalyst change-out is managed by reducing the cracked stocks in the feed to this unit. More frequent catalyst change-out to meet a 15 ppm sulfur cap raises the cost of diesel production by as much 7 cents/gallon on our existing unit.
What looks simple in theory doesn't always work in practice. I hope that the entire refining industry doesn't have to spend billions of dollars just to prove that our concerns about this rule are valid. This will happen, however, if we ignore the warning signs of an already stressed supply system, and rush to implement a plan based upon little more than wishful thinking. we can't make enough diesel at the 15 ppm level and what we can produce will cost much more than EPA represented.
Availability of Aftertreatment Technologies
The proposed heavy-duty diesel engine emissions standards for particulate matter (PM) and nitrogen oxides (NOx) will require the use of advanced aftertreatment equipment on new trucks. The PM control technology is more developed than the NOx technology, and it can meet the proposed 90 percent reduction in the emissions standard using a diesel fuel that is limited to 50 ppm sulfur. The PM standard chosen by EPA appears to be technically feasible with refining and emissions control technologies that are ready for commercialization. So EPA's PM standard is achievable using the industry's recommended 50 ppm fuel.
However, the various NOx control technologies being considered by vehicle manufacturers are much less developed. EPA's decision to reduce the NOx standard by 90 percent is likely to focus development efforts on an emerging technology that is the most delicate of those being considered. EPA's choice of this NOx standard is purely arbitrary. It is unrealistic and considerably more stringent than the NOx standard for the same period in Europe and Japan. Even with a sulfur limit of 15 ppm, this technology may not meet the durability requirements of the proposed standard. NPRA recommends that EPA set a more realistic NOx emissions standard, one that would rely on more developed and more robust emissions control technologies and a technically feasible diesel fuel with a sulfur limit of 50 ppm.
Fuels Transportation Systems Can Become Severely Stressed
The "regulatory blizzard" chart attached to our testimony shows 14 major regulatory actions which the refining industry will be required to comply with over the next ten years. The cost of these programs, which are largely uncoordinated, is astronomical. Gasoline sulfur reduction, diesel sulfur reduction and MTBE reduction alone will probably cost the industry a combined total of $20 billion.
During the 1990's the refining industry was also called on to make massive environmentally-related investments, totaling more than the actual book value of the entire industry, according to one study. At the same time, the average rate of return on capital in the industry was just 2%, which is less than banks pay on a passbook savings account.
As a result of this crushing burden on refiners and fuel distributors, we are starting to see signs of stress in the system. Increasing stringency of fuel specifications makes them more difficult to produce and harder to distribute. And the impact of unforeseen situations, such as a refinery outage, a pipeline malfunction or even the weather, is magnified under such conditions.
We experienced disruptions in the supply of home heating oil and diesel in the Northeast just last winter. Currently, logistical and supply problems in the Midwest, especially in the RFG markets of St. Louis, Chicago and Milwaukee, have resulted in increased gasoline costs. This situation occurs just as the industry is implementing changes to a new grade of reformulated gasoline, with more stringent requirements. These occurrences are usually temporary, but they will probably occur with increasing frequency as we produce ever-cleaner fuels. Policymakers can help to reduce the frequency of these situations by insisting that environmental programs be both reasonable and well-coordinated. The proposed diesel sulfur regulation fails on both counts. This is another reason why it should be rejected in favor of a more reasonable and timely approach, such as the industry has recommended.
Conclusions
EPA should not adopt a regulation that puts the nation's energy supply at risk. Fuel and engine emissions standards must be based on developed technologies and cost-effectiveness. An adequate supply of 15 ppm sulfur diesel cannot be assured and distribution of 15 ppm sulfur fuel is probably also not feasible. There has been no demonstration - technological or otherwise - that the 15 ppm sulfur level advocated by EPA is achievable or sustainable across the current diesel pool for most refineries.
NPRA hopes that the entire refining industry does not have to spend billions of dollars just to prove that our concerns about this rule are valid. This will happen, however, if we ignore the warning signs of an already stressed supply system and rush to implement a plan based upon little more than wishful thinking. EPA argues its extreme proposal is needed to enable heavy-duty engines to meet stringent NOx standards in the 2007-10 timeframe. Of course, that NOx standard was arbitrarily selected by EPA. It is considerably lower than NOx standards for the same period in Europe and Japan, and is probably unrealistic. Thus, EPA's $10 billion plan for 15 ppm diesel is largely based upon an arbitrary and unattainable target.
NPRA wants to work with other stakeholders to achieve reasonable, cost-effective reductions in highway diesel emissions. Our industry wants to maintain the right balance between environmental goals and energy supply so we can implement fuel and emissions standards. This way, both the fuel and engine industries can comply with costs that consumers can afford.