The Impact of Environmental Compliance Costs on U.S. Refining Profitability, 1995 - 2001
Click here for the table of contents of this report
Click here for the Html version of this report
Click here for the PDF version of this report (2,811 KB)
Introduction and Summary
Following the sharp decline in profitability during the 1988 to 1995 period, U.S. petroleum refining and marketing operations experienced an upswing in profitability during 1996-2001, along with an increase in capital expenditures. A 1997 Energy Information Administration (EIA) report, The Impact of Environmental Compliance Costs on U.S. Refining Profitability (Note 1) (October 1997), analyzed the sources of the 1988-1995 reduction in profitability, with particular attention to the impacts of the costs of environmental compliance.
This study is a follow-up to the 1997 report and analyzes the sources of increased profitability in U.S. refining/marketing, including the role of the costs of compliance with environmental laws and their implementation. The primary focus is on the 1996 to 2001 period, but the report also presents data for the 1988 to 1995 period of the 1997 study.
The analysis presented in this report utilizes a financial reporting framework and draws on government and industry data sources. The results are for the major energy companies (Note 2) (the "majors") reporting to the EIA's Financial Reporting System (FRS) (described below). For these companies, the results in this report indicate that:
- The upswing in U.S. refining/marketing profitability in the 1995 to 2001 period was mainly due to an increase in the spread between refined product prices and the cost of raw material inputs to refineries (the "gross refining margin") and also due to reductions by the majors in their operating costs relative to the scale of operations.
- Relative to the scale of operations, environmentally related operating costs, including depreciation expenses, declined. The share of environmentally related assets, based on value, in U.S. refining operations also declined.
- The impact of environmental requirements on refining/marketing return on investment (ROI) (Note 3) appeared to remain substantial. Calculations of ROI excluding environmental effects show that actual ROI was 42 percent lower than the ROI excluding the financial effects of environmental compliance, on average, over the period 1996 to 2001. In 1991 to 1995 the comparable reduction in ROI was 69 percent. In 1988 to 1990, prior to the implementation of the Clean Air Act Amendments of 1990, the comparable reduction was 32 percent.
This analysis draws on data from the EIA's FRS. (Note 4) The FRS is an annual survey that collects, through Form EIA-28, financial and associated operating information from U.S.-based major energy producing companies. In 2001 there were 30 such companies, 21 of which owned refineries in the United States. The data are reported on a line-of-business basis, including the U.S. petroleum refining and marketing line of business.
The FRS companies occupy a major part of the U.S. refining industry. For example, in 2001, the FRS companies' share of U.S. refined product output was 85 percent. (Note 5) However, the FRS does not collect financial data on environmental compliance. Instead, the American Petroleum Institute collected U.S. refiners' environmental operating costs and capital expenditures and published aggregate data for the industry, for 1990 through 2001. (Note 6) Operating costs and capital expenditures for the industry for 1988 and 1989 were estimated. (Note 7) Environmental capital expenditures and operating costs are prorated for the FRS companies on the basis of their share of total U.S. crude distillation capacity.
Endnotes
For the full text of the report please refer to The Impact of Environmental Compliance Costs on U.S. Refining Profitability.
A "major energy producing" company must meet at least one of the following criteria: control at least 1 percent of U.S. crude oil production (or reserves), control at least 1 percent of U.S. natural gas production (or reserves), or control at least 1 percent of U.S. crude oil distillation capacity or product sales. See "Selection of FRS Companies" for more discussion of this point.
ROI is net income contributed by the FRS companies' U.S. refining/marketing line of business (excluding unallocated items, mainly interest expense) as a percent of net fixed assets (net property, plant, and equipment plus investments and advances) in U.S. refining and marketing.
The FRS data and associated analyses of financial developments in energy markets are reported annually, most recently in Energy Information Administration, Performance Profiles of Major Energy Producers 2001, DOE/EIA-0206(2001)(Washington, DC, January 2003). (This publication is in pdf format, if you lack Adobe Acrobat Reader and are unable to read pdf format files, please follow the Adobe link following the last endnote to download the free software.)
See Energy Information Administration, Performance Profiles of Major Energy Producers 2001 (PDF-format), DOE/EIA-0206(2001), pp. 4 and 5. Note that data revisions have lowered the FRS share of U.S. refinery capacity in 2001 from 92 percent to 85 percent. (This publication is in pdf format, if you lack Adobe Acrobat Reader and are unable to read pdf format files, please follow the Adobe link following the last endnote to download the free software.)
Data for the 1990 to 1996 period are from American Petroleum Institute, Petroleum Industry Environmental Performance (Washington, DC, May 1997), pp. 47-48 and data for the 1997 to 2001 period are from American Petroleum Institute, U.S. Oil and Natural Gas Industry's Environmental Expenditures (Washington, DC, February 2003), p. 9.
The earlier study utilized environmental cost and expenditure data from U.S. Bureau of the Census, <>Pollution Abatement Costs and Expenditures: 1994, MA200(94)-1(Washington, DC, 1996), pp. 6-7, and earlier editions of the Census report. However, after 1994, Census only published data for 1999. Since the American Petroleum Institute data are continuous over the 1990 to 2001 period, they were utilized for this study. Estimates of costs and expenditures were made by applying the ratio of the American Petroleum Institute series to the corresponding Census series for the 1990 to 1994 overlap period to the Census values for 1988 and 1989.
