Hearings and Business Meetings

SD-366 Energy Committee Hearing Room 10:00 AM

Glenn McGinnis

CEO, Arizona Clean Fuels Yuma

 New Refinery Project Permitting Considerations and Issues

 Presented to

The U.S. Senate Committee on Energy & Natural Resources

 

By

 

Arizona Clean Fuels Yuma LLC

 

June 27, 2006

 

The objective of this paper is to briefly highlight the key considerations and issues involved in the corporate, government and public decisions that must be made prior to the implementation of a new oil refinery project in the U.S. and will focus on the process for the development and issuing of Permits. Arizona Clean Fuels Yuma strongly endorses the proposals in the Bill H.R. 5254, specifically:

 

  1. The appointment of a Federal Coordinator who will act as “Project Manager” during the permitting process.
  2. A mandated period of 90 days for establishment of a schedule for the permit development work involving all agencies with the Federal Coordinator ensuring compliance to this schedule.
  3. Analysis of the resources required by both Federal and State Agencies to perform the required development and reviews within the schedule – and the provision of Federal financial support for agencies to meet their schedule obligations.

 

Background

The refining industry has successfully gone through a major effort over the past decade to respond to changes in product fuel quality mandated by Clean Fuels requirements. During this time, the industry has met the growing domestic demand for petroleum products by limited capacity expansions of existing refineries, and by imports. No new major refineries have been built in the U.S. in over thirty years and product imports have reached over 3.5 million barrels per day. Economic growth in other countries has reduced the availability of products to U.S. consumers and increased competition for imports. Major natural disasters, such as Hurricanes Katrina and Rita of late summer 2005, can have a major impact on the domestic supply and distribution of products resulting in both shortages and price increases. Recent petroleum product prices have reached and sustained record highs, driven by a growing world-wide shortfall in petroleum products supply. There are a number of reasons that this shortfall is a major concern for the U.S., most of which have been documented in abundance recently in the press. It is perhaps sufficient to state that shortfalls create economic hardship and slow the economy. It is also a strategic issue for the U.S. as the growth in imports increases the threat of shortages and embargos.

 

One of the major solutions to this growing shortfall is to provide additional domestic refining capacity. The Energy Policy Act of 2005 provided economic incentives for domestic refiners to both expand existing refineries and to develop new refineries. The Bill under consideration by the Senate Committee on Energy and Natural Resources (H.R. 5254) addresses the key issue of permit development and approval which will assist in the advancement of new projects.

 

The problems and impediments preventing the growth and investment for new refining capacity in the U.S. are significant and will be discussed briefly below with particular focus on permitting and the current proposed Bill. Despite this, a new refinery project, the Arizona Clean Fuels Yuma (ACFY) project, has been under development for many years and is currently finalizing engineering design consistent with the final Air Quality Class I Permit issued by the Arizona Department of Environmental Quality in April of 2005. This project will be used below to highlight specific costs and permitting requirements.

 

 

 

New Refinery Construction Considerations

There are four general areas of consideration that drive the feasibility and timing of new refining projects:

 

  1. Overall Project economics driven by product values, feedstock costs, operating costs, and the uncertainties introduced by long lead times for engineering, permitting and construction,
  2. Technology choices driven by crude slate, target product mix, legislated and target product quality requirements (and projected changes) – a lengthy process of project development, engineering and construction,
  3. Public Acceptance – significant reluctance in most areas of the U.S. to allow a new refinery “in my back yard”. Public communication and hearings processes are lengthy and often confrontational,
  4. Permitting processes for environmental permits, access permits, construction permits and zoning, etc. – driven by federal, state, and local legislation and zoning.

 

Refining Economics

Long term historical refining margins in the U.S. have, on average and in general, not been adequate to support new refinery construction. Returns on Capital Employed have been in the 5% to 7% range. Capacity expansions and modifications have been economic due to leverage on base infrastructure and facility investments. Recent refining margins have been significantly above the long term averages with the impacts of the hurricanes of 2005, but especially because of the world-wide competition for refined products. Current and proposed projects in the U.S. and world-wide are expected to increase supply and may reduce refining margins in certain areas in the medium to long term.

 

Refineries are, by their nature, very costly facilities which require long lead times for engineering, permitting and construction. The uncertainties of timing and cost, the major investments in planning and early engineering, and concerns over protracted permitting process and public opposition have deterred most companies from considering new refinery projects.

 

The proposed Arizona Clean Fuels Yuma refinery which will produce about 150,000 barrels per day of gasoline, diesel, and jet fuel products, will cost over $2.5 billion with an additional $600 million required for crude oil and product pipelines. Rapidly growing demand for petroleum products in the southwestern U.S. and limited supply alternatives make this project economic.

 

Technology Choices

The refining industry is not traditionally viewed as “high tech”. However, the need for high quality products and significant flexibility to process wide ranges of crude oils, and the need to implement state-of-the-art environmental controls, has led to the development of very sophisticated processes. There are several process licensors and choices for each type of facility that a refiner needs. Also, due to the high cost of each process facility, extensive studies and comparisons are required to match a refiner’s products and processing objectives.

 

One area where the industry has led in major technology developments is in the “Best Available Control Technology” for emissions as defined in and required by the Clean Air Act. Every refinery modification and new process unit has required the development and application of specific control technology.

 

The development of the Arizona Clean Fuels Yuma project included an extensive analysis of emission sources and inclusion of the Best Available Control Technology. This will be the first refinery where all sources will be addressed at the same time in this manner.

 

 

Public Acceptance

A major hurdle to the construction of a new oil refinery is to overcome the historic negative public perceptions of oil refineries and to obtain public acceptance. Generally, the public has a “not in my back yard” attitude to facilities such as oil refineries. Certainly, refineries of the past have, to some extent, earned this reaction from the public. Modern facilities have overcome the shortcomings of these previous refineries. The refining industry has developed and implemented emissions controls, operating practices, and outreach programs to address the concerns of both government agencies and the public. Certainly these programs and projects have increased costs, but have been viewed by the industry as necessary.

 

Refineries have significant benefit to the public by generation of both direct and indirect jobs and economic activity. Local communities can benefit significantly from the operation of a refinery.

 

A new refinery, such as the Arizona Clean Fuels Yuma project, with the control and monitoring required by current regulations will have minimal impact on the surrounding environment with permitted emissions less than half those of the best current refinery in the U.S. The proposed location in Yuma County, Arizona, is remote from population concentrations. The project has gained support from local and state politicians and business leaders.

 

Permitting Processes

Certainly the most-often noted issue in new refinery construction is that of the extensive permitting that is required. Generally, permits are required from multiple agencies at the federal, state and local levels. Also permits are required not only for the refinery but also for pipeline and utility services to and from the site. The permitting processes are lengthy and costly. Project developers are also not in control of the pace and timing of permit review and issue and this uncertainty can lead to project delays, cost escalation, and uncertainties in financing.

 

The most extensive and important permit is often the “Air Permit” that is usually issued by the relevant state agency  and outlines all requirements for compliance to the Clean Air Act and New Source Performance Standards with emission levels, reporting and Best Available Control Technology requirements. The extensive scope of this permit requires detailed air modeling, technical review of all facilities, and agreement on the Best Available Control Technology. For example, the Arizona Clean Fuels Yuma permit application was submitted to the Arizona Department of Environmental Quality on December 22, 1999, and the Final Permit issued on April 14, 2005 – a time period of over five years. This period was protracted by both the extensive reviews and negotiations for the permit and by a relocation of the project site. The following timeline demonstrates the complexity of both the siting decisions and permit reviews that were involved.

 

 

Timeline of the Arizona refinery project:

 

 

Summer 1998: work began on a Class 1/Title V air permit for a large oil refinery to be located near the community of Mobile, Arizona.  The Arizona Department of Environmental Quality (ADEQ) was advised of the work and negotiations began. 

 

December 23, 1999: Arizona Clean Fuels Yuma submitted the initial air permit application to ADEQ.

 

1999-2002: Negotiations on all the technical details of the application (e.g. Best Available Control Technology, emission modeling basis and requirements, performance monitoring and reporting) occurred between Arizona Clean Fuels Yuma and ADEQ and their consultants.

 

September 4, 2002: ADEQ deemed the application to be “administratively complete.”

 

Summer 2003: ADEQ advised Arizona Clean Fuels Yuma that work on the application and a Draft Permit was nearing completion.

 

Fall/Winter 2003: State of Arizona expanded the ozone non-attainment area for metropolitan Phoenix and included the area of Mobile and the proposed refinery site in the expansion.  As a result of the expansion and new population growth, Arizona Clean Fuels Yuma agreed with ADEQ to relocate the proposed refinery to a new site in Yuma County, Arizona and transfer the bulk of the permit work that was begun in 1999.

 

April 6, 2004:  Arizona Clean Fuels Yuma agreed with ADEQ to extend its permitting process and that the technical revisions and new data for the Yuma site were complete. The company submitted the Final Permit Application documenting all of the technical basis, air quality monitoring results, and control technology as agreed with ADEQ.

 

September 14, 2004: ADEQ issued a draft permit and began a public hearing and review process. Meetings and Hearings were held in Phoenix, Yuma and Tacna, Arizona during the October to December, 2004 period.

 

April 14, 2005: ADEQ issued the final permit.

 

 

As the above demonstrates, the process of preparing such an extensive permit as that required for a major oil refinery is lengthy. Also there were factors involved with this specific project that extended the time period even further.

 

One of the key issues in the development and finalization of an Air Permit for a major facility is the review of the proposed project emissions, controls, and impacts by other federal and state agencies. For example the EPA, the U.S. Forest Service, the National Park Service, the Bureau of Land Management, and the Arizona State Department of Historical Preservation were consulted by ADEQ. Fortunately many of these federal and state agencies review and comment on the permit and project coincident with the preparation of the Final Air Permit. However, all of these agencies have seen increased demands on their time and reviews don’t always meet the expected timeframes thereby extending the permitting schedule.

 

In the western United States, for example, EPA Region IX encompasses the most dramatic growth seen anywhere in the country.  However, large projects that would support and provide jobs and energy supplies for that growing population can be held up for years by the air permitting process alone.  This Regional EPA office has a limited number of technical staff members who must review and approve the air permits for every project in California, Nevada, Arizona, Hawaii, and Guam.  Similarly, the National Park Service, Bureau of Land Management, and U.S. Forest Service must compete for the services of only a few federal staff members who have the technical expertise and responsibility to review all proposed major source air permits for projects across the entire western half of the country. This coupled with the lack of regulated or recommended timing requirements for permit issue leads to significant delays.

 

Finally, although industry recognizes the statutory requirement for these agencies to ensure compliance with all regulations, there often appears to be more attention paid to the concerns of a small minority of constituents rather than a balanced review.

 

Although the Air Permit is one of the most important permits for any project, there are many other rigorous permits that must be obtained for both refinery and pipeline projects from a multitude of agencies. For example:

·        NEPA Compliance from a controlling agency such as the Bureau of Land Management

·        Land Use Permits from controlling agencies and jurisdictions

·        National Historic Preservation Act Compliance with reviews by the State and related tribes

·        Access permits from Bureau of Land Management, U.S. Army Corps of Engineers, and State Land Commissions as well as private land owners.

·        Military Agency approvals if military facilities involved.

 

A listing of permits required by the Arizona Clean Fuels Yuma refinery and pipeline projects shows about thirty permits required excluding local zoning, access and construction permits. The majority of these permits are not initiated until the Air Permit is issued, since this permit finalizes the basis for the project. The timing of these can be extensive and is estimated to be about eighteen to twenty-four months. Although design engineering can be done in parallel to these permitting activities, no significant construction can begin until they are in place. Construction of a large refinery such as ACFY proposes takes about three years. This sequential process results in long lead times for project development and completion.

 

Specific Observations on H.R. 5254

 

With the above as background, the key observation is that the permitting processes are extensive and involve multiple agencies at various government levels. Several critical issues have been addressed by the proposed bill and Arizona Clean Fuels Yuma strongly endorses the following:

  1. The appointment of a Federal Coordinator who will act as “Project Manager” during the permitting process.
  2. A mandated period of 90 days for establishment of a schedule for the permit development work involving all agencies with the Federal Coordinator ensuring compliance to this schedule.
  3. Analysis of the resources required by both Federal and State Agencies to perform the required development and reviews within the schedule timeframe – and the provision of Federal financial support for agencies to meet their schedule obligations.

 

 

Conclusions

The refining industry in the U.S. has not constructed a new grass roots refinery for over thirty years. Refining economics have generally not supported new refinery costs and the industry has focused on expansions of existing refineries. Major investments in Clean Fuels production and regulatory programs have also absorbed much of the industry capital. The total capital cost of an economically-sized facility of about 150,000 barrels per day is approaching $3 billion.

 

The complexity of the refining processes and technology choices results in lengthy project development times which can be one to two years. Following this project definition, corporate strategic decisions, public reviews, local government discussions, and multi-level permitting process typically take four to five years before a final “go-decision” can be made. Expediting these permit processes by ensuring timely development and review is critical to progressing these final decisions to meet the growing energy needs of the U.S. The proposed Bill, H.R. 5254 will provide a focus on the schedule and resource requirements to ensure timely completion of Federal permits.