Hearings and Business Meetings
September 6, 2005
Full Committee Hearing - Global Oil Demand/ Gasoline Prices
SD-106 02:30 PM
Bob Slaughter
President, National Petrochemical and Refineries Association
Written Statement of the
National Petrochemical & Refiners Association
delivered by
Bob Slaughter
President, NPRA
before the
Senate Energy & Natural Resources Committee
concerning
The Effect of Hurricane Katrina on Oil and Oil Product Supply
September 6, 2005
Washington, DC
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Mr. Chairman and members of the Committee, thank you for the opportunity
to appear today to discuss the impact of the wide-spread devastation caused
by Hurricane Katrina on transportation fuels markets. While I will focus on
that urgent matter, I will also discuss the many other factors impacting
current transportation fuels markets. My name is Bob Slaughter and I am
President of NPRA, the National Petrochemical & Refiners Association.
NPRA is a national trade association with 450 members, including those
who own or operate virtually all U.S. refining capacity, and most U.S.
petrochemical manufacturers.
Part I. Responding to Hurricane Katrina
In the aftermath of Hurricane Katrina our nation confronts death, injuries
and devastation of staggering proportions. The images of the tragedy
displayed in the last several days on television and other media underscore
the human toll and seeming hopelessness in ways more eloquent and
compelling than could ever be captured in testimony. We share both the
sense of dismay and increased humility felt by all Americans before this
latest reminder of nature’s power to devastate and confound the best efforts
of human beings. NPRA offers our sympathy and prayers to those who have
suffered the loss of loved ones among family members, or their neighbors
and colleagues, as well as to those who have lost much or all of their
personal assets and livelihood in this worst U.S. natural disaster.
Today’s hearing has been called to inquire into the impact of Hurricane
Katrina on the nation’s energy supply. It is appropriate that Congress turn
immediately to such questions because of the huge impact of that storm on
the Gulf Coast, the energy heartland of the United States. This is a time
when national attention is and should be focused on human needs. Many
industry employees and their families have been victims as you will hear.
Nevertheless, NPRA appreciates the committee’s immediate attention to the
issue of energy supply, which was the subject of considerable debate and
attention even before the hurricane disaster occurred. We also appreciate the
opportunity to respond to the committee’s questions in person on this matter
of critical national importance. Because our expertise lies in the area of
refining and petrochemicals, we will focus on those areas, but will try to
provide other available information insofar as is possible.
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Thus, on behalf of our refining and petrochemical industry members we
have attempted to respond to the questions most asked about Hurricane
Katrina’s impact on the industry and energy supply, as follows:
1. How much of the nation’s oil and gas supplies come from this region?
According to the U.S. Energy Information Administration (EIA), the Gulf of
Mexico produces 1.582 million barrels per day (mmb/d) of federal offshore
crude production, which is 28.5% of the U.S. total federal offshore crude
production (5.488 million barrels per day).
Again according to EIA, the region contains 8.068 million barrels per day of
refining capacity, 47.4% of the nation’s total refining capacity (17 million
barrels per day).
The Gulf Coast region receives 6.490 mmb/d of crude oil imports, 60.4% of
the nation’s total crude oil imports (10.753 mmb/d). (23.5% of the
nation’s total comes into ports in Louisiana, Mississippi and Alabama, and
8.5% of the nation’s total crude imports come into the LOOP.)
The Gulf Coast region produces 10.4 billion cubic feet (bcf/d) of natural gas
per day, 19.2% of the nation’s total offshore natural gas production
(54.1 bcf/d).
2. How extensive was the damage?
Crude Oil, Natural Gas Production
According to the U.S. Minerals Management Service (MMS), as of
September 2, 88.53% (1.328 mmb/d) of Gulf crude oil production was
shut-in, and 72.48% (7.248 bcf/d) of Gulf natural gas production was
shut-in. This amounts to 25% of total federal offshore crude production and
14% of the nation’s offshore natural gas production.
Crude Oil Import Facilities
The storm resulted in temporary closure of LOOP, the Louisiana Offshore
Oil Port. More than 10% (900,000 b/d) of the nation’s crude oil imports
enter through LOOP. Roughly 500,000 b/d of crude produced offshore is
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also unloaded at LOOP, which ceased operations on Sunday, August 28 as
the storm approached.
Refineries
The following refineries were directly affected by Hurricane Katrina:
Belle Chasse, Louisiana (ConocoPhillips) 247,000 b/d; shut
Chalmette, Louisiana (ExxonMobil/PDVSA) 190,000 b/d; shut
Convent, Louisiana (Motiva) 235,000 b/d; shut
Garyville, Louisiana (Marathon) 245,000 b/d; shut
Meraux, Louisiana (Murphy) 125,000 b/d; shut
Norco, Louisiana (Motiva) 227,000 b/d; shut
Pascagoula, Mississippi (Chevron) 325,000 b/d; shut
Port Allen, Louisiana (Placid) 48,500 b/d; shut
St. Charles, Louisiana (Valero) 260,000 b/d; shut
Vicksburg, Mississippi (Ergon) 23000; shut
Together, these facilities constitute about 2 mm/b/d, 12% of the nation’s
total refining capacity (17 mmb/d).
In addition, the following refineries were forced to reduce operations
because of the impact of Hurricane Kristina:
Baton Rouge, Louisiana (Exxon Mobil) 488,000 b/d; reduced runs
Krotz Springs, Louisiana (Valero) 85,000 b/d; reduced runs
Memphis, Tennessee (Valero) 180,000; reduced runs
Port Arthur, Texas (Total) 285,000 b/d; reduced runs
Tuscaloosa, Alabama (Hunt Refining Co.), 35,000 b/d; reduced runs
In addition, several Midwestern refineries were affected by shutdown of the
Capline Pipeline, which supplies crude oil from the Gulf region to refineries
in the Midwest (16% of the nation’s refining capacity is in the Midwest).
For example, Marathon’s refineries at Catlettsburg, West Virginia (222,000)
and Robinson, Illinois (192,000) were affected by Capline’s closure, as were
other Midwestern facilities.
In total, we believe that at least 20% of the nation’s refining capacity (3.4
mmb/d) ceased operations or reduced runs at some time due to the direct
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impact of Hurricane Katrina and the loss of crude supplies from pipelines
affected by the storm. This is probably a conservative estimate.
Recent reports indicate that many of these refineries are either up and
running or anticipate start-up as early as this week. But, unfortunately, there
are some refineries representing a significant amount of capacity that will
remain shut for an undetermined period.
The Gulf refineries were first impacted by the need to protect the personal
and family safety of employees, as well as the high likelihood of wind and
flood damage as a result of the hurricane. After the hurricane passed, many
of these facilities remained totally off-line as damages were assessed. In
some instances companies could not physically enter the facilities to conduct
an assessment for several days, and had to first depend on flyovers to study
the plant. Damages included flooding, wind damage, and lack of electricity.
Pipelines
In addition, the widespread damage caused by the storm disrupted the
electricity supply, which affected all industry operations. From a refiner’s
point of view, among the most serious was closure of three pipelines:
The Colonial Pipeline, 5,500 miles of pipeline originating in Houston and
ending in New York Harbor, carries a daily average of 100 million gallons
of gasoline, diesel and other petroleum products from refineries in the Gulf
to customers in the South and Eastern United States.
The Plantation Pipe Line, 3,100 miles of pipeline, performs a similar
function along a slightly different route, delivering a total of 620,000 barrels
(26 million gallons) of refined petroleum products per day to Birmingham,
Alabama; Atlanta, Georgia; Charlotte, North Carolina; and Washington,
D.C., among other cities.
The Capline Pipeline (previously mentioned), which carries 1.1 million b/d
of crude oil to refineries in the Midwest where it is refined to produce
gasoline, diesel and other petroleum products for distribution primarily in
the Midwest.
All three of these pipelines were totally or partially out of service due to
disruption of electricity supplies as a result of Hurricane Katrina. As a
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result, the major supply lines of refined products to the Southern and
Eastern states were unavailable for shipment in whole or in part, during
the initial period after the storm. Midwestern gasoline and diesel
production was affected by lack of supply from the Capline Pipeline.
This led to reduced supplies of gasoline, diesel, and other products in
parts of the country often far removed from the Gulf area.
Petrochemical Facilities
The Gulf region is home to many of America’s petrochemical plants, which
manufacture plastics and other products made from oil and natural gas
feedstocks, and which rely on these energy sources for fuel and electricity
for power. The impact of Hurricane Katrina on these facilities is not
currently known but is potentially quite serious, both in terms of facility
damage due to water or wind damage and temporary closure or reduced
operations due to feedstock shortages, lack of fuel or electricity and
transportation problems.
Petrochemical products serve as the building blocks for many ultimate
products such as computers, medicines and other medical products, plastic
packaging for food, and also automobile components, to name just a few.
Disruption of petrochemical production due to the storm, if it continues,
could affect the economy considerably due to the economic importance of
petrochemical-based products.
Other Facilities
In addition to the major impacts outlined above, company pipelines and
shore facilities and other operations were impacted by the hurricane, but
information on these matters is less readily available to us. Company and
government statements indicate that many of these facilities were not
operating due to lack of electricity or because other related facilities (e.g.
refineries) were down. Some natural gas processing plants were affected but
NPRA does not have more information on this sector of the industry.
3. What is the current state of repairs?
The many different sectors of the energy industry, working around the clock
together with core service providers and with important help from local,
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state and federal government agencies, have made considerable progress in
restoring some of the operations affected by the storm.
The magnitude of the impact outlined above clearly dictates caution in any
assessment of when the energy production, refining, distribution and related
facilities will be back in service and industry conditions will return to
normal. Clearly, our national energy infrastructure has suffered a setback
from which it will take some time to emerge completely.
Crude Oil, Natural Gas
According to the MMS as of Saturday, September 3, 78.98% of Gulf of
Mexico crude oil offshore production remained shut-in, an improvement of
10% over Friday. Shut-in Gulf natural gas production stood at 57.80% of
total Gulf gas marketed production, an improvement of 21% over Friday’s
figure. The number of manned offshore platforms that are evacuated
declined by 25% over the same period. Thus, important but limited progress
has been made both in restoring the flow of crude and natural gas necessary
for refiners to manufacture gasoline, diesel, jet fuel and other petroleum
products and to meet the needs of petrochemical manufacturers. In addition,
it is reported that LOOP is operating at 75% of capacity.
These figures still leave significant amounts of offshore Gulf crude oil and
natural gas shut-in, and oil and gas volumes not produced in the past several
days are large. During the period 8/26-9/3 9.8 million barrels were shut-in,
totaling 1.8% of yearly crude oil production in the Gulf. During the same
period 53.2 billion cubic feet of natural gas were shut-in, roughly 1.45% of
annual gas marketed production from offshore.
There are indications of progress as well regarding refineries. Marathon
announced this weekend that, barring unforeseen problems, all seven of its
refineries would be operating at capacity on Monday. This includes the
Midwestern refineries impacted by the Capline Pipeline closure as well as
the Garyville, Louisiana refinery impacted directly by the hurricane. Valero
has announced that its St Charles refinery will probably return to operation
in the next two weeks. Shell has stated that the Convent refinery may be
restarted Sunday and the Norco refinery midweek. Those refineries will be
returned to full production gradually and safely as soon as start-ups take
place. Assessments of physical damage to the Chalmette and Meraux
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refineries last week helped ascertain the extent of damage was limited; no
start-up date has been set.
The Colonial Pipe Line expected to return to 86% capacity service by the
end of the Labor Day weekend. Plantation Pipe Line has returned to 100%
operation as has the Capline crude oil pipeline. This means that major
pipeline links to the Midwest, South and East have been gradually restored.
Serious problems remain, however, due to the significant loss of product and
crude volumes which would have been shipped on these lines last week.
In addition, it remains unclear when many, if not most, of the refineries
impacted directly by Hurricane Katrina in the Gulf can return to service.
Problems with wind and water damage, electricity supply and other
infrastructure remain to be addressed despite the best efforts of facility
owners and operators. Thus, although some of the affected refineries may
restart and return to capacity or near-capacity levels this week, there are
indications that several facilities may be out of service for a longer period.
The industry is committed to operation of these facilities as soon as possible,
but employee safety and overall safe start-up and operation concerns are
paramount. Significant flooding and damage still affects some facilities.
However, some refiners with operating facilities have indicated that they
will be able to ramp-up production from currently reduced levels at
refineries near the affected areas which should have a positive impact on
product supplies.
4. What else is industry doing to improve the situation?
As indicated above, the industry has moved with considerable speed to
restart the nation’s energy infrastructure so severely damaged by Hurricane
Katrina. Even more important than assessing and repairing physical damage
however, was the need to locate and assist employees, many of whom
experienced significant personal losses of family or friends in the tragedy as
well as loss of or severe damage to their homes. (All industry companies
throughout this region have been deeply involved in locating and providing
for the needs of their employees at the same time they were attempting to
assess and respond to facility damages and restore energy production).
Many companies are offering varying types of assistance to personnel and
their families who were impacted by the hurricane. These include interest
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free loans; temporary living supplements for housing and food; pay
continuation while facilities are closed; transportation assistance; paid time
off; medical and prescription drug assistance; temporary housing, including
trailers, tents, and other available housing.
The oil, gas and petrochemical industries have already contributed millions
of dollars to the American Red Cross and other relief agencies involved in
assisting all residents of the affected communities. They are also matching
employee contributions. Companies are also supplying in-kind assistance,
often including fuel, for relief efforts as well. The industry will doubtless
maintain its deep commitment to help end the suffering in the affected
communities and to begin planning for the future.
5. What has the federal government done to address these emergency
conditions?
Federal authorities have taken several decisive actions to help relieve the
many energy-related problems left in the wake of Hurricane Katrina.
SPR Release
The Administration has released 9 million barrels of crude oil from the
Strategic Petroleum Reserve (SPR) to assist refiners who are short crude
supplies as a result of hurricane damage. The recipients will use this crude
to manufacture more gasoline, diesel, jet fuel and home heating oil to be
supplied to consumers across the nation. This is a dynamic process, and
additional volumes may be needed as more refineries restart.
The current situation is precisely the type of event meant to trigger SPR
release. It demonstrates the importance of careful SPR management.
Waivers to Increase Fuel Flexibility
EPA has provided temporary fuel waivers that will make it easier to provide
fuels to affected areas. This action pertains to both gasoline and diesel
specifications, and will help alleviate some of the supply problems in these
areas by increasing the available supply of both domestic production and
imports. Affected states participated in the EPA’s decision process on this
action.
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Jones Act Waiver
DOT has temporarily lifted Jones Act requirements to allow non-U.S. flag
vessels to transport much needed refined products from one U.S port to
another.
IEA (International Energy Agency) Exchange
The Secretary of Energy has announced that the IEA will make available 60
million barrels of petroleum. This will provide relief in the form of refined
products (gasoline, diesel, jet fuel, home heating oil) which are much needed
due to disrupted supplies from several refineries. These products should
begin to reach the U.S in one to two weeks. The agreement with the IEA
also requires the U.S. to release an additional 30 million barrels of SPR
crude.
Industry appreciates these actions, which were taken by the Administration
with bipartisan support from the Congress. They will be very helpful in
dealing with the serious supply problems that have resulted from Hurricane
Katrina.
6. What is the impact on fuel supply? When will the situation return to
normal?
As indicated above, Hurricane Katrina’s direct hit on the energy heartland of
America resulted in significant damage to offshore energy production in the
Gulf, to facilities that are critically important to imported oil supplies, to
refineries in the affected states and beyond, and to pipelines that serve as the
major providers of refined products and crude to large parts of the East,
South and Midwest.
All segments of the industry are working together in an intensive effort to
repair as much of the damage as is possible at this time in order to increase
the flow of crude oil to refineries and refined products to consumers
throughout the country. Safety considerations and the immediate needs of
the industry’s workforce are of course taken into account at all times.
Industry and government are working together to provide available supplies
of product to areas that are experiencing supply concerns. The fuel and Jones
Act waivers mentioned above will be of immediate and near-term assistance.
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Increased product imports through the IEA should also help when they
arrive. Refiners who have the ability to do so will attempt to increase
production to help meet the needs of the affected areas. The release of oil
from the SPR will be helpful in supplying them with some of the crude
needed to make these products.
Despite this hopeful news, our nation faces a disruption of the fuel supply
system that should not be understated. The hurricane temporarily affected
more than 90% of the Gulf’s oil production and 80% of its gas production.
It effectively removed 10% of the nation’s gasoline supply by its impact on
U.S. refining capacity located near the Gulf. It also impacted refineries
hundreds of miles away that lost access to crude oil supplies. Although
important progress has been made through the efforts of government and
industry, and with some help from abroad, full recovery will take time. Hard
work and cooperation throughout this difficult period will certainly help
speed the return to normal conditions. The direct and indirect impact of the
hurricane on energy demand, which cannot yet be determined, will also be a
major factor during this period.
7. Should we continue to rely on free market forces during this period?
Absolutely. Continued reliance on market forces provides appropriate
market signals to help balance supply and demand even during difficult
times. President Reagan eliminated price controls on oil products
immediately upon taking office in 1981. He was outspoken about the
inefficiencies and added costs to consumers as a result of America’s ten-year
experiment with energy price controls.
The energy price and allocation controls of the 1970s resulted in supply
shortages in the form of long gas lines. Studies have shown that, although
intended to reduce costs, they actually resulted in increased costs and greater
inconvenience for consumers. The benefits of market pricing became clear
soon after their elimination. The U.S. Federal Trade Commission stated in
an extensive study published this June that “Gasoline supply, demand and
competition produced relatively low and stable annual average real U.S
gasoline prices from 1984 until 2004, despite substantial increases in U.S.
gasoline consumption” and “...For most of the past 20 years, real annual
average retail gasoline process in the U.S., including taxes, have been lower
than at any time since 1919.” Price caps and other forms of price regulation
are no more effective in the 21st century than they turned out to be in the
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1970s. Interference in market forces always creates inefficiencies in the
marketplace and extra costs for consumers.
The same holds true for “windfall profit taxes.” The U.S. had a “windfall
profit tax” on crude oil from 1980 until 1988. That tax, which was actually
an ad valorem tax imposed on crude oil, discouraged crude oil production in
the United States and resulted in other market distortions. It was repealed in
1988.
Calls for re-imposition of a windfall profits tax on refiners reflect a
misunderstanding of refining industry economics. In the ten-year period
1993-2002, average return on investment in the refining industry was only
about 5.5%. This is less than half of the S&P industrials average return of
12.7% for the same period. Refining industry profits as a percentage of
operating capital are not excessive. In dollars, they seem large due to the
massive scale needed to compete in a large, capital-intensive industry. For
example, a new medium scale refinery (100,000 to 200,000 b/d) would cost
$2 to $3 billion. In short, company revenues can be in the billions, but so,
too are the costs of operations.
The FTC June 2005 study cited above had the following comments on
industry profits: “Profits play necessary and important roles in a wellfunctioning
market economy. Recent oil company profits are high but have
varied widely over time, over industry segments and among firms...Profits
also compensate firms for taking risks, such as the risks in the oil industry
that war or terrorism may destroy crude production assets or, that new
environmental requirements may require substantial new refinery capital
investments.”
Many other industries enjoy higher earnings than the oil industry. Among
these are telecommunication services, software, semiconductors, banking,
pharmaceuticals, coal and real estate, to name just a few. Imposition of a
windfall profits tax on the industry would discourage investment at a time
when significant capital commitments to all parts of the industry, including
refining, will be needed.
Tight gasoline market conditions have often led to calls for industry
investigations. More than two dozen federal and state investigations over the
last several decades have found no evidence of wrongdoing or illegal
activity on our industry’s part. For example, after a 9-month FTC
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investigation into the causes of price spikes in local markets in the Midwest
during the spring and summer of 2000, former FTC Chairman Robert
Pitofsky stated, “There were many causes for the extraordinary price spikes
in Midwest markets. Importantly, there is no evidence that the price
increases were a result of conspiracy or any other antitrust violation. Indeed,
most of the causes were beyond the immediate control of the oil companies.”
Similar investigations before and since have reached the same conclusion.
There have been, however, reports of price gouging by unscrupulous
individuals who seek to profit during this time of national emergency and
crisis. Federal and state laws prohibit actions of this kind in emergency
situations like the present. Each alleged situation should be thoroughly
investigated by the appropriate state and federal authorities and prosecuted
when the law has been broken.
Part II. A Short Discussion of Oil and Oil Product Supply Drivers
1. Introduction
This hearing was originally intended to inquire into the factors affecting the
gasoline market. The natural disaster resulting from Hurricane Katrina
required an understandable shift in emphasis to the human needs damages
resulting from that storm and only then to supply impacts. But it is
important to remember that the effect of Hurricane Katrina is an overlay on a
pre-existing condition. That was and is a situation characterized by high
crude prices, strong demand for gasoline, diesel and other petroleum
products, and a challenged energy infrastructure, especially in refining. In
the interest of space and time, NPRA has shortened the following discussion
of these conditions and policy recommendations for improving them. We
urge members of the committee to consider the need for policy changes to
increase the nation’s supply of oil, oil products and natural gas as soon as
possible.
As the nation moves forward in its resolve to address and overcome the
effects of Katrina and the transportation fuels production and distribution
systems regain much-needed pre-storm productivity levels, an underlying
domestic fuel supply problem remains that requires immediate, bold, and
perhaps politically unpopular actions. NPRA believes that policy changes
must be put in place to enhance domestically-produced supplies of oil, oil
products and natural gas. NPRA has consistently urged policy makers in
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Congress and the Administration to support environmentally sound,
economically justifiable policies that encourage the production of an
abundant supply of petroleum and natural gas products for U.S. consumers.
NPRA supports requirements for the orderly production and use of cleanerburning
fuels to address health and environmental concerns, while at the
same time maintaining the flow of adequate and affordable gasoline and
diesel supplies to the consuming public. Since 1970, clean fuels and clean
vehicles have accounted for about 70% of all U.S. emission reductions from
all sources, according to EPA. Over the past 10 years, U.S. refiners have
invested about $47 billion in environmental improvements, much of that to
make cleaner fuels. For example, according to EPA, the new Tier 2 low
sulfur gasoline program, initiated in January 2004, will have the same effect
as removing 164 million cars from the road when fully implemented.
Unfortunately, however, federal environmental policies have often neglected
to consider fully the impact of environmental regulations on fuel supply.
Frankly, policy makers have often taken supply for granted, except in times
of obvious market instability. This attitude must end. A healthy and
growing U.S. economy requires a steady, secure, and predictable supply of
petroleum products.
Unfortunately, there are no silver bullet solutions for balancing supply and
demand. Indeed most of the problems in today’s gasoline market—without
factoring the market disruptions caused by Katrina—result from the high
price of crude oil due to economic recovery abroad together with strong
U.S. demand for gasoline and diesel due to the improving U.S. economy.
2. UNDERSTANDING GASOLINE MARKET FUNDAMENTALS:
HIGH CRUDE PRICES; STRONG GASOLINE DEMAND GROWTH
It is important to recognize the overwhelming factor affecting gasoline
prices: crude oil. In June of this year the U.S. Federal Trade Commission
released a landmark study titled: “Gasoline Price Changes: The Dynamic of
Supply, Demand and Competition.” To quote from the FTC’s findings:
“Worldwide supply, demand, and competition for crude oil are the most
important factors in the national average price of gasoline in the U.S.” and
“The world price of crude oil is the most important factor in the price of
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gasoline. Over the last 20 years, changes in crude oil prices have explained
85 percent of the changes in the price of gasoline in the U.S.”
Crude prices have been steadily increasing since 2004, largely because of
surprising levels of growth in oil demand in countries such as China and
India, and in the United States as well. Actual demand growth for oil and oil
products in these countries in 2004 exceeded the experts’ predictions and has
remained strong this year. As a result, world demand for crude is bumping
up against the worldwide ability to produce crude.
Strong demand for crude has dissipated the cushion of excess available
worldwide oil supply, just as strong U.S. demand for refined products has
eliminated excess refining capacity in the United States. The good news is
that producing countries will probably be able to add crude production
capacity in the years to come. The bad news is that the United States has
thus far shown only limited willingness to face up to its own energy supply
problems.
As shown in Attachment I, gasoline costs closely track the cost of crude oil.
Before hurricane Katrina, gasoline price increases lagged crude oil price
increases on a gallon for gallon basis. This means that refiners did not pass
through all of the increased costs in their raw material, crude oil. Crude oil
accounts for 55-60% of the price of gasoline seen at the service station.
The cost of federal and state taxes adds another 19% to the cost of a finished
gallon of gasoline. Therefore under current conditions, 74-79% of the total
cost of a gallon of gasoline is pre-determined before the crude is delivered to
the refiner for manufacture into gasoline. (See Attachment 2)
Another contributor to gasoline costs is tightness in our nation’s gasoline
markets. While U.S. refiners are producing huge volumes of products,
strong demand has tightened supply. Gasoline demand currently averages
approximately 9 million barrels per day. Domestic refineries produce about
90 percent of U.S. gasoline supply, while about 10 percent is imported.
Thus, strong and increasing demand can only be met by either adding new
domestic refinery capacity or by relying on more foreign gasoline imports.
Unfortunately, the desire for more domestic gasoline production capacity is
often thwarted by other public priorities.
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3. U. S. POLICY SHOULD ENCOURAGE ADDITIONAL DOMESTIC
REFINING CAPACITY.
Domestic refining capacity is a scarce asset. There are currently 148 U.S.
refineries owned by 55 companies in 33 states, with total crude oil
processing capacity at roughly 17 million barrels per day. In 1981, there
were 325 refineries in the U.S. with a capacity of 18.6 million barrels per
day. Thus, while U.S. demand for gasoline has increased over 20% in the
last twenty years, U.S. refining capacity has decreased by 10%. No new
refinery has been built in the United States since 1976, and it will be difficult
to change this situation. This is due to economic, public policy and political
considerations, including siting costs, environmental requirements, a history
of low refining industry profitability and, significantly, “not in my
backyard” (NIMBY) public attitudes.
Nevertheless, existing refineries have been extensively updated to
incorporate the technology needed to produce a large and predictable supply
of clean fuels with significantly improved environmental performance.
Capacity additions have taken place at some facilities as well; several of
these projects implemented over several years can actually increase product
output as much as a new refinery. But this increase in capacity at existing
sites has not kept pace with the growth in U.S. demand for products,
meaning that the nation is increasing its reliance on imports of gasoline and
other petroleum products each year.
Proposed capacity expansions can often become controversial and
contentious at the state and local level, even when necessary to produce
cleaner fuels pursuant to regulatory requirements. We hope that
policymakers will recognize the importance of domestic refining capacity
expansion to the successful implementation of the nation’s environmental
policies, especially clean fuels programs. The Administration’s New
Source Review reform program will also provide one tool to help add and
update capacity.
NPRA wants to recognize a provision in the recently enacted energy
legislation that will help encourage additional refining investment. The
provision allows 50% expensing of the costs associated with expanding a
refinery’s output by more than 5%. The refiner must have a signed contract
for the work by 1/1/08, and the equipment must be put in service by 1/1/12.
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Common sense dictates that it is in our nation’s best interest to manufacture
the lion’s share of the petroleum products required for U.S. consumption in
domestic refineries and petrochemical plants. Nevertheless, we currently
import more than 62% of the crude oil and oil products we consume.
Reduced U.S. refining capacity clearly affects our supply of refined
petroleum products and the flexibility of the supply system, particularly in
times of unforeseen disruption or other stress. Unfortunately, EIA currently
predicts “substantial growth” in refining capacity only in the Middle East,
Central and South America, and the Asia/Pacific region, not in the U.S.
4. THE U.S. REFINING INDUSTRY IS DIVERSE AND COMPETITIVE.
Today’s U.S. refining industry is highly competitive. Some suggest past
mergers are responsible for higher prices. The data do not support such
claims. In fact, companies have become more efficient and continue to
compete fiercely. There are 55 refining companies in the U.S., hundreds of
wholesale and marketing companies, and more than 165,000 retail outlets.
The biggest refiner accounts for only about 13 % of the nation’s total
refining capacity; and the large integrated companies own and operate only
about 10 % of the retail outlets. The Federal Trade Commission (FTC)
thoroughly evaluates every merger proposal, holds industry mergers to the
highest standards of review, and subjects normal industry operations to a
higher level of ongoing scrutiny.
Critics of mergers sometimes suggest that industry is able to affect prices
because it has become much more concentrated, with a handful of
companies controlling most of the market. This is untrue. According to data
compiled by the U.S. Department of Commerce and by Public Citizen, in
2003 the four largest U.S. refining companies controlled a little more than
40 % of the nation’s refining capacity. In contrast, the top four companies in
the auto manufacturing, brewing, tobacco, floor coverings and breakfast
cereals industries controlled between 80 % and 90 % of the market.
5. INDUSTRY IS WORKING HARD TO KEEP PACE WITH GROWING
DEMAND FOR FUEL.
Despite the powerful factors that influence gasoline manufacturing, cost and
demand, refiners are addressing current supply challenges and working hard
to supply sufficient volumes of gasoline and other petroleum products to the
public. Refineries have been running at very high levels, producing gasoline
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and distillate. Refiners operated at high utilization rates even before the start
of the summer driving season. To put this in perspective, peak utilization
rates for other manufacturers average about 82 %. At times during summer,
refiners often operate at rates close to 98 %. However, such high rates
cannot be sustained for long periods.
In addition to coping with higher fuel costs and growing demand, refiners
are implementing significant transitions in major gasoline markets.
Nationwide, the amount of sulfur in gasoline will be reduced to an average
of 30 parts per million (ppm) effective January 1, 2006, giving refiners an
additional challenge in both the manufacture and distribution of fuel.
Equally significant, California, New York and Connecticut bans on use of
MTBE are in effect. This is a major change affecting one-sixth of the
nation’s gasoline market. MTBE use as an oxygenate in reformulated
gasoline accounted for as much as 11% of RFG supply at its peak;
substitution of ethanol for MTBE does not replace all of the volume lost by
removing MTBE. (Ethanol’s properties generally cause it to replace only
about 50% of the volume lost when MTBE is removed.) This lost volume
must be supplied by additional gasoline or gasoline blendstocks. Especially
during a period of supply concerns it is in the nation’s interest to be prudent
in taking any action that affects MTBE use. That product still accounts for
1.6% of the nation’s gasoline supply on average, but it provides a larger
portion of gasoline supplies in areas with RFG requirements that are not
subject to an MTBE ban.
Obviously, refiners face a daunting task in completing many changes to
deliver the fuels that consumers and the nation’s economy require. But they
are succeeding. And regardless of recent press stories, we need to remember
that American gasoline and other petroleum product prices have long been
low when compared to the price consumers in other large industrialized
nations pay for those products. The Federal Trade Commission recently
found that “Gasoline supply, demand and competition produced relatively
low and stable annual average real U.S. gasoline prices from 1984 until
2004, despite substantial increases in U.S. gasoline consumption.”
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6. REFINERS FACE A BLIZZARD OF REGULATORY REQUIREMENTS
AFFECTING BOTH FACILITIES AND PRODUCTS.
Refiners currently face the massive task of complying with fourteen new
environmental regulatory programs with significant investment
requirements, all in the same 2006 – 2012 timeframe. (See Attachment 3.)
In addition, many programs start soon. (See Attachment 4.) For the most
part, these regulations are required by the Clean Air Act. Some will require
additional emission reductions at facilities and plants, while others will
require further changes in clean fuel specifications. NPRA estimates that
refiners are in the process of investing about $20 billion to sharply reduce
the sulfur content of gasoline and both highway and off-road diesel.
Refiners will face additional investment requirements to deal with
limitations on ether use, as well as compliance costs for controls on Mobile
Source Air Toxics and other limitations. These costs do not include the
significant additional investments needed to comply with stationary source
regulations that affect refineries.
Other potential environmental regulations on the horizon could force
additional large investment requirements. They are: the challenges posed
by increased ethanol use, possible additional changes in diesel fuel content
involving cetane, and potential proliferation of new fuel specifications
driven by the need for states to comply with the new eight-hour ozone
NAAQS standard. The 8-hour standard could also result in more regulations
affecting facilities such as refiners and petrochemical plants.
These are just some of the pending and potential air quality challenges that
the industry faces. Refineries are also subject to extensive regulations under
the Clean Water Act, Toxic Substances Control Act, Safe Drinking Water
Act, Oil Pollution Act of 1990, Resource Conservation and Recovery Act,
Emergency Planning and Community Right-To-Know (EPCRA),
Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA), and other federal statutes. The industry also complies with
OSHA standards and many state statutes. A complete list of federal
regulations impacting refineries is included with this statement. (See
Attachment 5.)
API estimates that, since 1993, about $89 billion (an average of $9 billion
per year) has been spent by the oil and gas industry to protect the
environment. This amounts to $308 for each person in the United States.
More than half of the $89 billion was spent in the refining sector.
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Obviously, refiners face a daunting task in completing many changes to
deliver the fuels that consumers and the nation’s economy require. But they
are succeeding. And regardless of recent press stories, we need to remember
that American gasoline and other petroleum products have long been low
when compared to the price consumers in other large industrialized nations
pay for those products. The Federal Trade Commission recently found that
“Gasoline supply, demand and competition produced relatively low and
stable annual average real U.S. gasoline prices from 1984 until 2004, despite
substantial increases in U.S. gasoline consumption.”
7. A KEY GOVERNMENT ADVISORY PANEL HAS URGED MORE
SENSITIVITY TO SUPPLY CONCERNS.
The National Petroleum Council (NPC) issued a landmark report on the state
of the refining industry in 2000. Given the limited return on investment in
the industry and the capital requirements of environmental regulations, the
NPC urged policymakers to pay special attention to the timing and
sequencing of any changes in product specifications. Failing such action,
the report cautioned that adverse fuel supply ramifications may result.
Unfortunately, this warning has been widely disregarded. On June 22, 2004
Energy Secretary Abraham asked NPC to update and expand its refining
study and a report was released last December. NPRA again urges
policymakers to take action to implement NPC’s study recommendations in
order to deal with U.S. refining problems.
8. NPRA Recommendations to Add Refining Capacity and Increase
Future Product Supply
• Make increasing the nation’s supply of oil, oil products and natural gas a
number one public policy priority. Now, and for many years in the past,
increasing oil and gas supply has often been a number 2 priority. Thus, oil
and gas supply concerns have been secondary and subjugated to whatever
policy goal was more politically popular at the time. Enactment of the
recent Energy Bill is a first step to making a first priority the supply of
energy sources the nation depends upon.
• Remove barriers to increased supplies of domestic oil and gas resources.
Recent criticism about the concentration of America’s energy infrastructure
in the western Gulf is misplaced. Refineries and other important onshore
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facilities have been welcome in this area but not in many other parts of the
country. Policymakers have also restricted access to much-needed offshore
oil and natural gas supplies in the eastern Gulf and off the shores of
California and the East Coast. These areas must follow the example of
Louisiana and many other states in sharing these energy resources with the
rest of the nation because they are sorely needed.
• Resist tinkering with market forces when the supply/demand balance is
tight. Market interference that may initially be politically popular leads to
market inefficiencies and unnecessary costs. Policymakers must resist
turning the clock backwards to the failed policies of the past. Experience
with price constraints and allocation controls in the 1970s demonstrates
the failure of price regulation, which adversely impacted both fuel supply
and consumer cost.
• Expand the refining tax incentive provision in the Energy Act. Reduce the
depreciation period for refining investments from 10 to seven or five years
in order to remove a current disincentive for refining investment. Allow
expensing under the current language to take place as the investment is made
rather than when the equipment is actually placed in service. Or the
percentage expensed could be increased as per the original legislation
introduced by Senator Hatch.
• Review permitting procedures for new refinery construction and refinery
capacity additions. Seek ways to encourage state authorities to recognize the
national interest in more domestic capacity.
• Keep a close eye on several upcoming regulatory programs that could have
significant impacts on gasoline and diesel supply. They are:
? Design and implementation of the credit trading program for the
ethanol mandate (RFS) contained in the recent Energy Act. This
mechanism is vital to increase the chance that this program can be
implemented next year without additional gasoline supply disruption.
Additional resources are needed within EPA to accomplish this key
task.
? Implementation of the ultra low sulfur diesel highway diesel
regulation. The refining industry has made large investments to meet
the severe reductions in diesel sulfur that take effect next June. We
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remain concerned about the distribution system’s ability to deliver
this material at the required 15 ppm level at retail. If not resolved,
these problems could affect America’s critical diesel supply. Industry
is working with EPA on this issue, but time left to solve this problem is
growing short.
? Phase II of the MSAT (mobile source air toxics) rule for gasoline.
Many refiners are concerned that this new regulation, which we
expect next year, will be overly stringent and impact gasoline supply.
We are working with EPA to help develop a rule that protects the
environment and avoids a reduction in gasoline supply.
? Implementation of the new 8-hour ozone NAAQS standard. The
current implementation schedule determined by EPA has established
ozone attainment deadlines for parts of the country that will be
impossible to meet. EPA has to date not made changes that would
provide realistic attainment dates for the areas. The result is that
areas will be required to place sweeping new controls on both
stationary and mobile sources, in a vain effort to attain the
unattainable. The new lower-sulfur gasoline and ULSD diesel
programs will provide significant reductions to emissions within these
areas once implemented. But they will not come soon enough to be
considered unless the current unrealistic schedule is revised. If not,
the result will be additional fuel and stationary source controls which
will have an adverse impact on fuel supply and could actually reduce
U.S. refining capacity. This issue needs immediate attention.
NPRA’s members are dedicated to working cooperatively with government
at all levels to resolve the current emergency conditions that result from
Hurricane Kristina. But we feel obliged to remind policymakers that action
must also be taken to improve energy policy in order to increase supply and
strengthen the nation’s refining infrastructure. We look forward to
answering the Committee’s questions.
National Petrochemical & Refiners Association
delivered by
Bob Slaughter
President, NPRA
before the
Senate Energy & Natural Resources Committee
concerning
The Effect of Hurricane Katrina on Oil and Oil Product Supply
September 6, 2005
Washington, DC
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Mr. Chairman and members of the Committee, thank you for the opportunity
to appear today to discuss the impact of the wide-spread devastation caused
by Hurricane Katrina on transportation fuels markets. While I will focus on
that urgent matter, I will also discuss the many other factors impacting
current transportation fuels markets. My name is Bob Slaughter and I am
President of NPRA, the National Petrochemical & Refiners Association.
NPRA is a national trade association with 450 members, including those
who own or operate virtually all U.S. refining capacity, and most U.S.
petrochemical manufacturers.
Part I. Responding to Hurricane Katrina
In the aftermath of Hurricane Katrina our nation confronts death, injuries
and devastation of staggering proportions. The images of the tragedy
displayed in the last several days on television and other media underscore
the human toll and seeming hopelessness in ways more eloquent and
compelling than could ever be captured in testimony. We share both the
sense of dismay and increased humility felt by all Americans before this
latest reminder of nature’s power to devastate and confound the best efforts
of human beings. NPRA offers our sympathy and prayers to those who have
suffered the loss of loved ones among family members, or their neighbors
and colleagues, as well as to those who have lost much or all of their
personal assets and livelihood in this worst U.S. natural disaster.
Today’s hearing has been called to inquire into the impact of Hurricane
Katrina on the nation’s energy supply. It is appropriate that Congress turn
immediately to such questions because of the huge impact of that storm on
the Gulf Coast, the energy heartland of the United States. This is a time
when national attention is and should be focused on human needs. Many
industry employees and their families have been victims as you will hear.
Nevertheless, NPRA appreciates the committee’s immediate attention to the
issue of energy supply, which was the subject of considerable debate and
attention even before the hurricane disaster occurred. We also appreciate the
opportunity to respond to the committee’s questions in person on this matter
of critical national importance. Because our expertise lies in the area of
refining and petrochemicals, we will focus on those areas, but will try to
provide other available information insofar as is possible.
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Thus, on behalf of our refining and petrochemical industry members we
have attempted to respond to the questions most asked about Hurricane
Katrina’s impact on the industry and energy supply, as follows:
1. How much of the nation’s oil and gas supplies come from this region?
According to the U.S. Energy Information Administration (EIA), the Gulf of
Mexico produces 1.582 million barrels per day (mmb/d) of federal offshore
crude production, which is 28.5% of the U.S. total federal offshore crude
production (5.488 million barrels per day).
Again according to EIA, the region contains 8.068 million barrels per day of
refining capacity, 47.4% of the nation’s total refining capacity (17 million
barrels per day).
The Gulf Coast region receives 6.490 mmb/d of crude oil imports, 60.4% of
the nation’s total crude oil imports (10.753 mmb/d). (23.5% of the
nation’s total comes into ports in Louisiana, Mississippi and Alabama, and
8.5% of the nation’s total crude imports come into the LOOP.)
The Gulf Coast region produces 10.4 billion cubic feet (bcf/d) of natural gas
per day, 19.2% of the nation’s total offshore natural gas production
(54.1 bcf/d).
2. How extensive was the damage?
Crude Oil, Natural Gas Production
According to the U.S. Minerals Management Service (MMS), as of
September 2, 88.53% (1.328 mmb/d) of Gulf crude oil production was
shut-in, and 72.48% (7.248 bcf/d) of Gulf natural gas production was
shut-in. This amounts to 25% of total federal offshore crude production and
14% of the nation’s offshore natural gas production.
Crude Oil Import Facilities
The storm resulted in temporary closure of LOOP, the Louisiana Offshore
Oil Port. More than 10% (900,000 b/d) of the nation’s crude oil imports
enter through LOOP. Roughly 500,000 b/d of crude produced offshore is
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also unloaded at LOOP, which ceased operations on Sunday, August 28 as
the storm approached.
Refineries
The following refineries were directly affected by Hurricane Katrina:
Belle Chasse, Louisiana (ConocoPhillips) 247,000 b/d; shut
Chalmette, Louisiana (ExxonMobil/PDVSA) 190,000 b/d; shut
Convent, Louisiana (Motiva) 235,000 b/d; shut
Garyville, Louisiana (Marathon) 245,000 b/d; shut
Meraux, Louisiana (Murphy) 125,000 b/d; shut
Norco, Louisiana (Motiva) 227,000 b/d; shut
Pascagoula, Mississippi (Chevron) 325,000 b/d; shut
Port Allen, Louisiana (Placid) 48,500 b/d; shut
St. Charles, Louisiana (Valero) 260,000 b/d; shut
Vicksburg, Mississippi (Ergon) 23000; shut
Together, these facilities constitute about 2 mm/b/d, 12% of the nation’s
total refining capacity (17 mmb/d).
In addition, the following refineries were forced to reduce operations
because of the impact of Hurricane Kristina:
Baton Rouge, Louisiana (Exxon Mobil) 488,000 b/d; reduced runs
Krotz Springs, Louisiana (Valero) 85,000 b/d; reduced runs
Memphis, Tennessee (Valero) 180,000; reduced runs
Port Arthur, Texas (Total) 285,000 b/d; reduced runs
Tuscaloosa, Alabama (Hunt Refining Co.), 35,000 b/d; reduced runs
In addition, several Midwestern refineries were affected by shutdown of the
Capline Pipeline, which supplies crude oil from the Gulf region to refineries
in the Midwest (16% of the nation’s refining capacity is in the Midwest).
For example, Marathon’s refineries at Catlettsburg, West Virginia (222,000)
and Robinson, Illinois (192,000) were affected by Capline’s closure, as were
other Midwestern facilities.
In total, we believe that at least 20% of the nation’s refining capacity (3.4
mmb/d) ceased operations or reduced runs at some time due to the direct
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impact of Hurricane Katrina and the loss of crude supplies from pipelines
affected by the storm. This is probably a conservative estimate.
Recent reports indicate that many of these refineries are either up and
running or anticipate start-up as early as this week. But, unfortunately, there
are some refineries representing a significant amount of capacity that will
remain shut for an undetermined period.
The Gulf refineries were first impacted by the need to protect the personal
and family safety of employees, as well as the high likelihood of wind and
flood damage as a result of the hurricane. After the hurricane passed, many
of these facilities remained totally off-line as damages were assessed. In
some instances companies could not physically enter the facilities to conduct
an assessment for several days, and had to first depend on flyovers to study
the plant. Damages included flooding, wind damage, and lack of electricity.
Pipelines
In addition, the widespread damage caused by the storm disrupted the
electricity supply, which affected all industry operations. From a refiner’s
point of view, among the most serious was closure of three pipelines:
The Colonial Pipeline, 5,500 miles of pipeline originating in Houston and
ending in New York Harbor, carries a daily average of 100 million gallons
of gasoline, diesel and other petroleum products from refineries in the Gulf
to customers in the South and Eastern United States.
The Plantation Pipe Line, 3,100 miles of pipeline, performs a similar
function along a slightly different route, delivering a total of 620,000 barrels
(26 million gallons) of refined petroleum products per day to Birmingham,
Alabama; Atlanta, Georgia; Charlotte, North Carolina; and Washington,
D.C., among other cities.
The Capline Pipeline (previously mentioned), which carries 1.1 million b/d
of crude oil to refineries in the Midwest where it is refined to produce
gasoline, diesel and other petroleum products for distribution primarily in
the Midwest.
All three of these pipelines were totally or partially out of service due to
disruption of electricity supplies as a result of Hurricane Katrina. As a
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result, the major supply lines of refined products to the Southern and
Eastern states were unavailable for shipment in whole or in part, during
the initial period after the storm. Midwestern gasoline and diesel
production was affected by lack of supply from the Capline Pipeline.
This led to reduced supplies of gasoline, diesel, and other products in
parts of the country often far removed from the Gulf area.
Petrochemical Facilities
The Gulf region is home to many of America’s petrochemical plants, which
manufacture plastics and other products made from oil and natural gas
feedstocks, and which rely on these energy sources for fuel and electricity
for power. The impact of Hurricane Katrina on these facilities is not
currently known but is potentially quite serious, both in terms of facility
damage due to water or wind damage and temporary closure or reduced
operations due to feedstock shortages, lack of fuel or electricity and
transportation problems.
Petrochemical products serve as the building blocks for many ultimate
products such as computers, medicines and other medical products, plastic
packaging for food, and also automobile components, to name just a few.
Disruption of petrochemical production due to the storm, if it continues,
could affect the economy considerably due to the economic importance of
petrochemical-based products.
Other Facilities
In addition to the major impacts outlined above, company pipelines and
shore facilities and other operations were impacted by the hurricane, but
information on these matters is less readily available to us. Company and
government statements indicate that many of these facilities were not
operating due to lack of electricity or because other related facilities (e.g.
refineries) were down. Some natural gas processing plants were affected but
NPRA does not have more information on this sector of the industry.
3. What is the current state of repairs?
The many different sectors of the energy industry, working around the clock
together with core service providers and with important help from local,
7
state and federal government agencies, have made considerable progress in
restoring some of the operations affected by the storm.
The magnitude of the impact outlined above clearly dictates caution in any
assessment of when the energy production, refining, distribution and related
facilities will be back in service and industry conditions will return to
normal. Clearly, our national energy infrastructure has suffered a setback
from which it will take some time to emerge completely.
Crude Oil, Natural Gas
According to the MMS as of Saturday, September 3, 78.98% of Gulf of
Mexico crude oil offshore production remained shut-in, an improvement of
10% over Friday. Shut-in Gulf natural gas production stood at 57.80% of
total Gulf gas marketed production, an improvement of 21% over Friday’s
figure. The number of manned offshore platforms that are evacuated
declined by 25% over the same period. Thus, important but limited progress
has been made both in restoring the flow of crude and natural gas necessary
for refiners to manufacture gasoline, diesel, jet fuel and other petroleum
products and to meet the needs of petrochemical manufacturers. In addition,
it is reported that LOOP is operating at 75% of capacity.
These figures still leave significant amounts of offshore Gulf crude oil and
natural gas shut-in, and oil and gas volumes not produced in the past several
days are large. During the period 8/26-9/3 9.8 million barrels were shut-in,
totaling 1.8% of yearly crude oil production in the Gulf. During the same
period 53.2 billion cubic feet of natural gas were shut-in, roughly 1.45% of
annual gas marketed production from offshore.
There are indications of progress as well regarding refineries. Marathon
announced this weekend that, barring unforeseen problems, all seven of its
refineries would be operating at capacity on Monday. This includes the
Midwestern refineries impacted by the Capline Pipeline closure as well as
the Garyville, Louisiana refinery impacted directly by the hurricane. Valero
has announced that its St Charles refinery will probably return to operation
in the next two weeks. Shell has stated that the Convent refinery may be
restarted Sunday and the Norco refinery midweek. Those refineries will be
returned to full production gradually and safely as soon as start-ups take
place. Assessments of physical damage to the Chalmette and Meraux
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refineries last week helped ascertain the extent of damage was limited; no
start-up date has been set.
The Colonial Pipe Line expected to return to 86% capacity service by the
end of the Labor Day weekend. Plantation Pipe Line has returned to 100%
operation as has the Capline crude oil pipeline. This means that major
pipeline links to the Midwest, South and East have been gradually restored.
Serious problems remain, however, due to the significant loss of product and
crude volumes which would have been shipped on these lines last week.
In addition, it remains unclear when many, if not most, of the refineries
impacted directly by Hurricane Katrina in the Gulf can return to service.
Problems with wind and water damage, electricity supply and other
infrastructure remain to be addressed despite the best efforts of facility
owners and operators. Thus, although some of the affected refineries may
restart and return to capacity or near-capacity levels this week, there are
indications that several facilities may be out of service for a longer period.
The industry is committed to operation of these facilities as soon as possible,
but employee safety and overall safe start-up and operation concerns are
paramount. Significant flooding and damage still affects some facilities.
However, some refiners with operating facilities have indicated that they
will be able to ramp-up production from currently reduced levels at
refineries near the affected areas which should have a positive impact on
product supplies.
4. What else is industry doing to improve the situation?
As indicated above, the industry has moved with considerable speed to
restart the nation’s energy infrastructure so severely damaged by Hurricane
Katrina. Even more important than assessing and repairing physical damage
however, was the need to locate and assist employees, many of whom
experienced significant personal losses of family or friends in the tragedy as
well as loss of or severe damage to their homes. (All industry companies
throughout this region have been deeply involved in locating and providing
for the needs of their employees at the same time they were attempting to
assess and respond to facility damages and restore energy production).
Many companies are offering varying types of assistance to personnel and
their families who were impacted by the hurricane. These include interest
9
free loans; temporary living supplements for housing and food; pay
continuation while facilities are closed; transportation assistance; paid time
off; medical and prescription drug assistance; temporary housing, including
trailers, tents, and other available housing.
The oil, gas and petrochemical industries have already contributed millions
of dollars to the American Red Cross and other relief agencies involved in
assisting all residents of the affected communities. They are also matching
employee contributions. Companies are also supplying in-kind assistance,
often including fuel, for relief efforts as well. The industry will doubtless
maintain its deep commitment to help end the suffering in the affected
communities and to begin planning for the future.
5. What has the federal government done to address these emergency
conditions?
Federal authorities have taken several decisive actions to help relieve the
many energy-related problems left in the wake of Hurricane Katrina.
SPR Release
The Administration has released 9 million barrels of crude oil from the
Strategic Petroleum Reserve (SPR) to assist refiners who are short crude
supplies as a result of hurricane damage. The recipients will use this crude
to manufacture more gasoline, diesel, jet fuel and home heating oil to be
supplied to consumers across the nation. This is a dynamic process, and
additional volumes may be needed as more refineries restart.
The current situation is precisely the type of event meant to trigger SPR
release. It demonstrates the importance of careful SPR management.
Waivers to Increase Fuel Flexibility
EPA has provided temporary fuel waivers that will make it easier to provide
fuels to affected areas. This action pertains to both gasoline and diesel
specifications, and will help alleviate some of the supply problems in these
areas by increasing the available supply of both domestic production and
imports. Affected states participated in the EPA’s decision process on this
action.
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Jones Act Waiver
DOT has temporarily lifted Jones Act requirements to allow non-U.S. flag
vessels to transport much needed refined products from one U.S port to
another.
IEA (International Energy Agency) Exchange
The Secretary of Energy has announced that the IEA will make available 60
million barrels of petroleum. This will provide relief in the form of refined
products (gasoline, diesel, jet fuel, home heating oil) which are much needed
due to disrupted supplies from several refineries. These products should
begin to reach the U.S in one to two weeks. The agreement with the IEA
also requires the U.S. to release an additional 30 million barrels of SPR
crude.
Industry appreciates these actions, which were taken by the Administration
with bipartisan support from the Congress. They will be very helpful in
dealing with the serious supply problems that have resulted from Hurricane
Katrina.
6. What is the impact on fuel supply? When will the situation return to
normal?
As indicated above, Hurricane Katrina’s direct hit on the energy heartland of
America resulted in significant damage to offshore energy production in the
Gulf, to facilities that are critically important to imported oil supplies, to
refineries in the affected states and beyond, and to pipelines that serve as the
major providers of refined products and crude to large parts of the East,
South and Midwest.
All segments of the industry are working together in an intensive effort to
repair as much of the damage as is possible at this time in order to increase
the flow of crude oil to refineries and refined products to consumers
throughout the country. Safety considerations and the immediate needs of
the industry’s workforce are of course taken into account at all times.
Industry and government are working together to provide available supplies
of product to areas that are experiencing supply concerns. The fuel and Jones
Act waivers mentioned above will be of immediate and near-term assistance.
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Increased product imports through the IEA should also help when they
arrive. Refiners who have the ability to do so will attempt to increase
production to help meet the needs of the affected areas. The release of oil
from the SPR will be helpful in supplying them with some of the crude
needed to make these products.
Despite this hopeful news, our nation faces a disruption of the fuel supply
system that should not be understated. The hurricane temporarily affected
more than 90% of the Gulf’s oil production and 80% of its gas production.
It effectively removed 10% of the nation’s gasoline supply by its impact on
U.S. refining capacity located near the Gulf. It also impacted refineries
hundreds of miles away that lost access to crude oil supplies. Although
important progress has been made through the efforts of government and
industry, and with some help from abroad, full recovery will take time. Hard
work and cooperation throughout this difficult period will certainly help
speed the return to normal conditions. The direct and indirect impact of the
hurricane on energy demand, which cannot yet be determined, will also be a
major factor during this period.
7. Should we continue to rely on free market forces during this period?
Absolutely. Continued reliance on market forces provides appropriate
market signals to help balance supply and demand even during difficult
times. President Reagan eliminated price controls on oil products
immediately upon taking office in 1981. He was outspoken about the
inefficiencies and added costs to consumers as a result of America’s ten-year
experiment with energy price controls.
The energy price and allocation controls of the 1970s resulted in supply
shortages in the form of long gas lines. Studies have shown that, although
intended to reduce costs, they actually resulted in increased costs and greater
inconvenience for consumers. The benefits of market pricing became clear
soon after their elimination. The U.S. Federal Trade Commission stated in
an extensive study published this June that “Gasoline supply, demand and
competition produced relatively low and stable annual average real U.S
gasoline prices from 1984 until 2004, despite substantial increases in U.S.
gasoline consumption” and “...For most of the past 20 years, real annual
average retail gasoline process in the U.S., including taxes, have been lower
than at any time since 1919.” Price caps and other forms of price regulation
are no more effective in the 21st century than they turned out to be in the
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1970s. Interference in market forces always creates inefficiencies in the
marketplace and extra costs for consumers.
The same holds true for “windfall profit taxes.” The U.S. had a “windfall
profit tax” on crude oil from 1980 until 1988. That tax, which was actually
an ad valorem tax imposed on crude oil, discouraged crude oil production in
the United States and resulted in other market distortions. It was repealed in
1988.
Calls for re-imposition of a windfall profits tax on refiners reflect a
misunderstanding of refining industry economics. In the ten-year period
1993-2002, average return on investment in the refining industry was only
about 5.5%. This is less than half of the S&P industrials average return of
12.7% for the same period. Refining industry profits as a percentage of
operating capital are not excessive. In dollars, they seem large due to the
massive scale needed to compete in a large, capital-intensive industry. For
example, a new medium scale refinery (100,000 to 200,000 b/d) would cost
$2 to $3 billion. In short, company revenues can be in the billions, but so,
too are the costs of operations.
The FTC June 2005 study cited above had the following comments on
industry profits: “Profits play necessary and important roles in a wellfunctioning
market economy. Recent oil company profits are high but have
varied widely over time, over industry segments and among firms...Profits
also compensate firms for taking risks, such as the risks in the oil industry
that war or terrorism may destroy crude production assets or, that new
environmental requirements may require substantial new refinery capital
investments.”
Many other industries enjoy higher earnings than the oil industry. Among
these are telecommunication services, software, semiconductors, banking,
pharmaceuticals, coal and real estate, to name just a few. Imposition of a
windfall profits tax on the industry would discourage investment at a time
when significant capital commitments to all parts of the industry, including
refining, will be needed.
Tight gasoline market conditions have often led to calls for industry
investigations. More than two dozen federal and state investigations over the
last several decades have found no evidence of wrongdoing or illegal
activity on our industry’s part. For example, after a 9-month FTC
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investigation into the causes of price spikes in local markets in the Midwest
during the spring and summer of 2000, former FTC Chairman Robert
Pitofsky stated, “There were many causes for the extraordinary price spikes
in Midwest markets. Importantly, there is no evidence that the price
increases were a result of conspiracy or any other antitrust violation. Indeed,
most of the causes were beyond the immediate control of the oil companies.”
Similar investigations before and since have reached the same conclusion.
There have been, however, reports of price gouging by unscrupulous
individuals who seek to profit during this time of national emergency and
crisis. Federal and state laws prohibit actions of this kind in emergency
situations like the present. Each alleged situation should be thoroughly
investigated by the appropriate state and federal authorities and prosecuted
when the law has been broken.
Part II. A Short Discussion of Oil and Oil Product Supply Drivers
1. Introduction
This hearing was originally intended to inquire into the factors affecting the
gasoline market. The natural disaster resulting from Hurricane Katrina
required an understandable shift in emphasis to the human needs damages
resulting from that storm and only then to supply impacts. But it is
important to remember that the effect of Hurricane Katrina is an overlay on a
pre-existing condition. That was and is a situation characterized by high
crude prices, strong demand for gasoline, diesel and other petroleum
products, and a challenged energy infrastructure, especially in refining. In
the interest of space and time, NPRA has shortened the following discussion
of these conditions and policy recommendations for improving them. We
urge members of the committee to consider the need for policy changes to
increase the nation’s supply of oil, oil products and natural gas as soon as
possible.
As the nation moves forward in its resolve to address and overcome the
effects of Katrina and the transportation fuels production and distribution
systems regain much-needed pre-storm productivity levels, an underlying
domestic fuel supply problem remains that requires immediate, bold, and
perhaps politically unpopular actions. NPRA believes that policy changes
must be put in place to enhance domestically-produced supplies of oil, oil
products and natural gas. NPRA has consistently urged policy makers in
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Congress and the Administration to support environmentally sound,
economically justifiable policies that encourage the production of an
abundant supply of petroleum and natural gas products for U.S. consumers.
NPRA supports requirements for the orderly production and use of cleanerburning
fuels to address health and environmental concerns, while at the
same time maintaining the flow of adequate and affordable gasoline and
diesel supplies to the consuming public. Since 1970, clean fuels and clean
vehicles have accounted for about 70% of all U.S. emission reductions from
all sources, according to EPA. Over the past 10 years, U.S. refiners have
invested about $47 billion in environmental improvements, much of that to
make cleaner fuels. For example, according to EPA, the new Tier 2 low
sulfur gasoline program, initiated in January 2004, will have the same effect
as removing 164 million cars from the road when fully implemented.
Unfortunately, however, federal environmental policies have often neglected
to consider fully the impact of environmental regulations on fuel supply.
Frankly, policy makers have often taken supply for granted, except in times
of obvious market instability. This attitude must end. A healthy and
growing U.S. economy requires a steady, secure, and predictable supply of
petroleum products.
Unfortunately, there are no silver bullet solutions for balancing supply and
demand. Indeed most of the problems in today’s gasoline market—without
factoring the market disruptions caused by Katrina—result from the high
price of crude oil due to economic recovery abroad together with strong
U.S. demand for gasoline and diesel due to the improving U.S. economy.
2. UNDERSTANDING GASOLINE MARKET FUNDAMENTALS:
HIGH CRUDE PRICES; STRONG GASOLINE DEMAND GROWTH
It is important to recognize the overwhelming factor affecting gasoline
prices: crude oil. In June of this year the U.S. Federal Trade Commission
released a landmark study titled: “Gasoline Price Changes: The Dynamic of
Supply, Demand and Competition.” To quote from the FTC’s findings:
“Worldwide supply, demand, and competition for crude oil are the most
important factors in the national average price of gasoline in the U.S.” and
“The world price of crude oil is the most important factor in the price of
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gasoline. Over the last 20 years, changes in crude oil prices have explained
85 percent of the changes in the price of gasoline in the U.S.”
Crude prices have been steadily increasing since 2004, largely because of
surprising levels of growth in oil demand in countries such as China and
India, and in the United States as well. Actual demand growth for oil and oil
products in these countries in 2004 exceeded the experts’ predictions and has
remained strong this year. As a result, world demand for crude is bumping
up against the worldwide ability to produce crude.
Strong demand for crude has dissipated the cushion of excess available
worldwide oil supply, just as strong U.S. demand for refined products has
eliminated excess refining capacity in the United States. The good news is
that producing countries will probably be able to add crude production
capacity in the years to come. The bad news is that the United States has
thus far shown only limited willingness to face up to its own energy supply
problems.
As shown in Attachment I, gasoline costs closely track the cost of crude oil.
Before hurricane Katrina, gasoline price increases lagged crude oil price
increases on a gallon for gallon basis. This means that refiners did not pass
through all of the increased costs in their raw material, crude oil. Crude oil
accounts for 55-60% of the price of gasoline seen at the service station.
The cost of federal and state taxes adds another 19% to the cost of a finished
gallon of gasoline. Therefore under current conditions, 74-79% of the total
cost of a gallon of gasoline is pre-determined before the crude is delivered to
the refiner for manufacture into gasoline. (See Attachment 2)
Another contributor to gasoline costs is tightness in our nation’s gasoline
markets. While U.S. refiners are producing huge volumes of products,
strong demand has tightened supply. Gasoline demand currently averages
approximately 9 million barrels per day. Domestic refineries produce about
90 percent of U.S. gasoline supply, while about 10 percent is imported.
Thus, strong and increasing demand can only be met by either adding new
domestic refinery capacity or by relying on more foreign gasoline imports.
Unfortunately, the desire for more domestic gasoline production capacity is
often thwarted by other public priorities.
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3. U. S. POLICY SHOULD ENCOURAGE ADDITIONAL DOMESTIC
REFINING CAPACITY.
Domestic refining capacity is a scarce asset. There are currently 148 U.S.
refineries owned by 55 companies in 33 states, with total crude oil
processing capacity at roughly 17 million barrels per day. In 1981, there
were 325 refineries in the U.S. with a capacity of 18.6 million barrels per
day. Thus, while U.S. demand for gasoline has increased over 20% in the
last twenty years, U.S. refining capacity has decreased by 10%. No new
refinery has been built in the United States since 1976, and it will be difficult
to change this situation. This is due to economic, public policy and political
considerations, including siting costs, environmental requirements, a history
of low refining industry profitability and, significantly, “not in my
backyard” (NIMBY) public attitudes.
Nevertheless, existing refineries have been extensively updated to
incorporate the technology needed to produce a large and predictable supply
of clean fuels with significantly improved environmental performance.
Capacity additions have taken place at some facilities as well; several of
these projects implemented over several years can actually increase product
output as much as a new refinery. But this increase in capacity at existing
sites has not kept pace with the growth in U.S. demand for products,
meaning that the nation is increasing its reliance on imports of gasoline and
other petroleum products each year.
Proposed capacity expansions can often become controversial and
contentious at the state and local level, even when necessary to produce
cleaner fuels pursuant to regulatory requirements. We hope that
policymakers will recognize the importance of domestic refining capacity
expansion to the successful implementation of the nation’s environmental
policies, especially clean fuels programs. The Administration’s New
Source Review reform program will also provide one tool to help add and
update capacity.
NPRA wants to recognize a provision in the recently enacted energy
legislation that will help encourage additional refining investment. The
provision allows 50% expensing of the costs associated with expanding a
refinery’s output by more than 5%. The refiner must have a signed contract
for the work by 1/1/08, and the equipment must be put in service by 1/1/12.
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Common sense dictates that it is in our nation’s best interest to manufacture
the lion’s share of the petroleum products required for U.S. consumption in
domestic refineries and petrochemical plants. Nevertheless, we currently
import more than 62% of the crude oil and oil products we consume.
Reduced U.S. refining capacity clearly affects our supply of refined
petroleum products and the flexibility of the supply system, particularly in
times of unforeseen disruption or other stress. Unfortunately, EIA currently
predicts “substantial growth” in refining capacity only in the Middle East,
Central and South America, and the Asia/Pacific region, not in the U.S.
4. THE U.S. REFINING INDUSTRY IS DIVERSE AND COMPETITIVE.
Today’s U.S. refining industry is highly competitive. Some suggest past
mergers are responsible for higher prices. The data do not support such
claims. In fact, companies have become more efficient and continue to
compete fiercely. There are 55 refining companies in the U.S., hundreds of
wholesale and marketing companies, and more than 165,000 retail outlets.
The biggest refiner accounts for only about 13 % of the nation’s total
refining capacity; and the large integrated companies own and operate only
about 10 % of the retail outlets. The Federal Trade Commission (FTC)
thoroughly evaluates every merger proposal, holds industry mergers to the
highest standards of review, and subjects normal industry operations to a
higher level of ongoing scrutiny.
Critics of mergers sometimes suggest that industry is able to affect prices
because it has become much more concentrated, with a handful of
companies controlling most of the market. This is untrue. According to data
compiled by the U.S. Department of Commerce and by Public Citizen, in
2003 the four largest U.S. refining companies controlled a little more than
40 % of the nation’s refining capacity. In contrast, the top four companies in
the auto manufacturing, brewing, tobacco, floor coverings and breakfast
cereals industries controlled between 80 % and 90 % of the market.
5. INDUSTRY IS WORKING HARD TO KEEP PACE WITH GROWING
DEMAND FOR FUEL.
Despite the powerful factors that influence gasoline manufacturing, cost and
demand, refiners are addressing current supply challenges and working hard
to supply sufficient volumes of gasoline and other petroleum products to the
public. Refineries have been running at very high levels, producing gasoline
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and distillate. Refiners operated at high utilization rates even before the start
of the summer driving season. To put this in perspective, peak utilization
rates for other manufacturers average about 82 %. At times during summer,
refiners often operate at rates close to 98 %. However, such high rates
cannot be sustained for long periods.
In addition to coping with higher fuel costs and growing demand, refiners
are implementing significant transitions in major gasoline markets.
Nationwide, the amount of sulfur in gasoline will be reduced to an average
of 30 parts per million (ppm) effective January 1, 2006, giving refiners an
additional challenge in both the manufacture and distribution of fuel.
Equally significant, California, New York and Connecticut bans on use of
MTBE are in effect. This is a major change affecting one-sixth of the
nation’s gasoline market. MTBE use as an oxygenate in reformulated
gasoline accounted for as much as 11% of RFG supply at its peak;
substitution of ethanol for MTBE does not replace all of the volume lost by
removing MTBE. (Ethanol’s properties generally cause it to replace only
about 50% of the volume lost when MTBE is removed.) This lost volume
must be supplied by additional gasoline or gasoline blendstocks. Especially
during a period of supply concerns it is in the nation’s interest to be prudent
in taking any action that affects MTBE use. That product still accounts for
1.6% of the nation’s gasoline supply on average, but it provides a larger
portion of gasoline supplies in areas with RFG requirements that are not
subject to an MTBE ban.
Obviously, refiners face a daunting task in completing many changes to
deliver the fuels that consumers and the nation’s economy require. But they
are succeeding. And regardless of recent press stories, we need to remember
that American gasoline and other petroleum product prices have long been
low when compared to the price consumers in other large industrialized
nations pay for those products. The Federal Trade Commission recently
found that “Gasoline supply, demand and competition produced relatively
low and stable annual average real U.S. gasoline prices from 1984 until
2004, despite substantial increases in U.S. gasoline consumption.”
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6. REFINERS FACE A BLIZZARD OF REGULATORY REQUIREMENTS
AFFECTING BOTH FACILITIES AND PRODUCTS.
Refiners currently face the massive task of complying with fourteen new
environmental regulatory programs with significant investment
requirements, all in the same 2006 – 2012 timeframe. (See Attachment 3.)
In addition, many programs start soon. (See Attachment 4.) For the most
part, these regulations are required by the Clean Air Act. Some will require
additional emission reductions at facilities and plants, while others will
require further changes in clean fuel specifications. NPRA estimates that
refiners are in the process of investing about $20 billion to sharply reduce
the sulfur content of gasoline and both highway and off-road diesel.
Refiners will face additional investment requirements to deal with
limitations on ether use, as well as compliance costs for controls on Mobile
Source Air Toxics and other limitations. These costs do not include the
significant additional investments needed to comply with stationary source
regulations that affect refineries.
Other potential environmental regulations on the horizon could force
additional large investment requirements. They are: the challenges posed
by increased ethanol use, possible additional changes in diesel fuel content
involving cetane, and potential proliferation of new fuel specifications
driven by the need for states to comply with the new eight-hour ozone
NAAQS standard. The 8-hour standard could also result in more regulations
affecting facilities such as refiners and petrochemical plants.
These are just some of the pending and potential air quality challenges that
the industry faces. Refineries are also subject to extensive regulations under
the Clean Water Act, Toxic Substances Control Act, Safe Drinking Water
Act, Oil Pollution Act of 1990, Resource Conservation and Recovery Act,
Emergency Planning and Community Right-To-Know (EPCRA),
Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA), and other federal statutes. The industry also complies with
OSHA standards and many state statutes. A complete list of federal
regulations impacting refineries is included with this statement. (See
Attachment 5.)
API estimates that, since 1993, about $89 billion (an average of $9 billion
per year) has been spent by the oil and gas industry to protect the
environment. This amounts to $308 for each person in the United States.
More than half of the $89 billion was spent in the refining sector.
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Obviously, refiners face a daunting task in completing many changes to
deliver the fuels that consumers and the nation’s economy require. But they
are succeeding. And regardless of recent press stories, we need to remember
that American gasoline and other petroleum products have long been low
when compared to the price consumers in other large industrialized nations
pay for those products. The Federal Trade Commission recently found that
“Gasoline supply, demand and competition produced relatively low and
stable annual average real U.S. gasoline prices from 1984 until 2004, despite
substantial increases in U.S. gasoline consumption.”
7. A KEY GOVERNMENT ADVISORY PANEL HAS URGED MORE
SENSITIVITY TO SUPPLY CONCERNS.
The National Petroleum Council (NPC) issued a landmark report on the state
of the refining industry in 2000. Given the limited return on investment in
the industry and the capital requirements of environmental regulations, the
NPC urged policymakers to pay special attention to the timing and
sequencing of any changes in product specifications. Failing such action,
the report cautioned that adverse fuel supply ramifications may result.
Unfortunately, this warning has been widely disregarded. On June 22, 2004
Energy Secretary Abraham asked NPC to update and expand its refining
study and a report was released last December. NPRA again urges
policymakers to take action to implement NPC’s study recommendations in
order to deal with U.S. refining problems.
8. NPRA Recommendations to Add Refining Capacity and Increase
Future Product Supply
• Make increasing the nation’s supply of oil, oil products and natural gas a
number one public policy priority. Now, and for many years in the past,
increasing oil and gas supply has often been a number 2 priority. Thus, oil
and gas supply concerns have been secondary and subjugated to whatever
policy goal was more politically popular at the time. Enactment of the
recent Energy Bill is a first step to making a first priority the supply of
energy sources the nation depends upon.
• Remove barriers to increased supplies of domestic oil and gas resources.
Recent criticism about the concentration of America’s energy infrastructure
in the western Gulf is misplaced. Refineries and other important onshore
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facilities have been welcome in this area but not in many other parts of the
country. Policymakers have also restricted access to much-needed offshore
oil and natural gas supplies in the eastern Gulf and off the shores of
California and the East Coast. These areas must follow the example of
Louisiana and many other states in sharing these energy resources with the
rest of the nation because they are sorely needed.
• Resist tinkering with market forces when the supply/demand balance is
tight. Market interference that may initially be politically popular leads to
market inefficiencies and unnecessary costs. Policymakers must resist
turning the clock backwards to the failed policies of the past. Experience
with price constraints and allocation controls in the 1970s demonstrates
the failure of price regulation, which adversely impacted both fuel supply
and consumer cost.
• Expand the refining tax incentive provision in the Energy Act. Reduce the
depreciation period for refining investments from 10 to seven or five years
in order to remove a current disincentive for refining investment. Allow
expensing under the current language to take place as the investment is made
rather than when the equipment is actually placed in service. Or the
percentage expensed could be increased as per the original legislation
introduced by Senator Hatch.
• Review permitting procedures for new refinery construction and refinery
capacity additions. Seek ways to encourage state authorities to recognize the
national interest in more domestic capacity.
• Keep a close eye on several upcoming regulatory programs that could have
significant impacts on gasoline and diesel supply. They are:
? Design and implementation of the credit trading program for the
ethanol mandate (RFS) contained in the recent Energy Act. This
mechanism is vital to increase the chance that this program can be
implemented next year without additional gasoline supply disruption.
Additional resources are needed within EPA to accomplish this key
task.
? Implementation of the ultra low sulfur diesel highway diesel
regulation. The refining industry has made large investments to meet
the severe reductions in diesel sulfur that take effect next June. We
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remain concerned about the distribution system’s ability to deliver
this material at the required 15 ppm level at retail. If not resolved,
these problems could affect America’s critical diesel supply. Industry
is working with EPA on this issue, but time left to solve this problem is
growing short.
? Phase II of the MSAT (mobile source air toxics) rule for gasoline.
Many refiners are concerned that this new regulation, which we
expect next year, will be overly stringent and impact gasoline supply.
We are working with EPA to help develop a rule that protects the
environment and avoids a reduction in gasoline supply.
? Implementation of the new 8-hour ozone NAAQS standard. The
current implementation schedule determined by EPA has established
ozone attainment deadlines for parts of the country that will be
impossible to meet. EPA has to date not made changes that would
provide realistic attainment dates for the areas. The result is that
areas will be required to place sweeping new controls on both
stationary and mobile sources, in a vain effort to attain the
unattainable. The new lower-sulfur gasoline and ULSD diesel
programs will provide significant reductions to emissions within these
areas once implemented. But they will not come soon enough to be
considered unless the current unrealistic schedule is revised. If not,
the result will be additional fuel and stationary source controls which
will have an adverse impact on fuel supply and could actually reduce
U.S. refining capacity. This issue needs immediate attention.
NPRA’s members are dedicated to working cooperatively with government
at all levels to resolve the current emergency conditions that result from
Hurricane Kristina. But we feel obliged to remind policymakers that action
must also be taken to improve energy policy in order to increase supply and
strengthen the nation’s refining infrastructure. We look forward to
answering the Committee’s questions.