Hearings and Business Meetings

SD-366 Energy Committee Hearing Room 10:00 AM

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 and Natural Resources Committee
concerning
H.R. 5254, The Refinery Permit Process Schedule Act
July 13, 2006
Washington, DC
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Chairman Domenici, Senator Bingaman and other members of the Committee, NPRA, the
National Petrochemical & Refiners Association, thanks you for the opportunity to appear today
to express our support for HR. 5254, the Refinery Permit Process Schedule Act. I am Bob
Slaughter, NPRA’s President. The Association’s members include virtually all U.S. refiners and
petrochemical manufacturers. As you know, H.R 5254 passed the House of Representatives on
June 7, 2006, by a bipartisan vote of 238-179 and has been referred to this committee. NPRA
believes that this committee should approve the bill, which takes a modest but still significant
step towards increased domestic refining capacity.
NPRA also appreciates the bipartisan efforts of the Committee to enact S. 2253, legislation that
instructs the Department of the Interior to sell oil and gas leases in Lease Area 181. Lying 100
miles off the Florida coast and comprising 2.9 million acres, this area is anticipated to provide
the addition of much-needed domestic petroleum and natural gas production. The nation’s
refiners and petrochemical producers rely on predictable supplies of oil and gas to carry out their
operations, and increased supplies of domestic energy will help provide natural has for use in
refineries as fuel and in petrochemical plants as feedstock. NPRA believes the Committee has
approved a sensible approach to offshore leasing that will increase domestic supplies of oil and
gas for the benefit of all the nation’s consumers.
A Recap of Recent Events
During the past few years the refining industry has been the focus of much greater attention than
ever before from federal, state and local policymakers, as well as the media and general public.
Most of the public seems to be aware of the fact that our nation’s demand for refined petroleum
products has grown considerably as a result of the widespread economic expansion that has
characterized our economy for more than a decade. The fact that the nation’s ability to meet this
increased demand from domestic resources has declined is also well appreciated. Many
congressional hearings have heard testimony from various stakeholders discussing the reasons
for the resulting tight supply/demand balance in fuels market. Those who testified have also
recommended various policy changes that might address public concerns about refined product
supplies and prices.
At the same time, a multitude of state and federal investigations have exhaustively reviewed
gasoline market activities, either in whole or in part, to ascertain whether any relevant price and
supply concerns can be attributed to illegal industry practices. They have found no such
behavior. The results of these studies have been controversial, and policymakers have mostly
taken sides according to their preexisting views of the petroleum industry. Policymakers’ views
about the wisdom of continued reliance on market mechanisms to assure sufficient energy
supplies have greatly affected their reaction to the investigative findings.
Today marks the twelfth time that NPRA has appeared at congressional hearings regarding fuels
market in the past year and one-half. We have also participated in many media and third-party
discussions of the nation’s energy problems. Based on that experience, I would like to share on
behalf of the association a few observations about fuels issues. They seem highly relevant to
your consideration of H.R. 5254.
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Market Forces At Work
First, the overwhelming number of federal and state investigations into gasoline market activities
at various times and in various places over the past few years have reached the same conclusion:
adverse market conditions result from situations beyond industry’s control. Most often, price
movements and supply concerns have been attributed to (1) the impact of the international oil
market on crude supply and prices, (2) refinery equipment or pipeline outages, or (3) acts of
nature such as last year’s two destructive hurricanes. Sometimes one factor has been identified,
often several. But these studies and investigations have unanimously found that industry
engaged in no illegal activity. Exceptions are extremely rare and usually involve isolated
behavior by individuals at the retail level.
Industry Faces Many Challenges
Second, thorough consideration of the role of the refining industry in these hearings and
investigations has led to a general understanding that the industry has greatly exerted itself to
manufacture vast quantities of refined products such as gasoline and diesel for the domestic
market while facing many challenges. What are these challenges? For example, strong
economic growth in this country over the past decade and one-half has led to significantly
increased demand for transportation fuels and continues to do so. At the same time, the industry
faced a need for massive capital investment to meet environmental regulations requiring
emission reductions at our facilities. The industry also had to launch the equivalent of a modern
Manhattan Project to redesign the entire fuel slate, resulting in significantly cleaner fuels with
sharply reduced emissions.
Many tens of billions of dollars have been invested in the U.S. refining industry in the past two
decades to meet increased demand and achieve these important environmental objectives.
Especially in the decade of the 1990s, massive investments were made despite the fact that the
expected return on investment was only 5 to 6% at best, with even less or no return on many
environmental expenditures to meet environmental requirements. New environmental
specifications also result in reduced volumes of products and higher refining and crude costs.
As indicated on the attached charts, the industry still faces a “regulatory blizzard” of significant
proportions in this decade as it continues its contribution to environmental progress. NPRA
estimates that the industry will spend at least $21 billion this decade to meet the environmental
requirements on these charts. (Attachments 1 and 2)
Industry Has Added Significant Refining Capacity
Despite these challenges, and very slim returns on investment compared with other industries,
U.S. refiners added significant capacity in the past decade. Between 1996 ands 2005, U.S.
refining capacity increased by 1.4 million barrels per day, the equivalent of adding 10 averagesized
refineries over that period. This capacity was added in the form of capacity expansions at
existing sites, which can be constructed with much greater certainty and in a shorter period of
time than a new grassroots refinery. The latter requires many more years to obtain necessary
regulatory approvals, and investors must be able to count on a much higher rate of return to
offset the regulatory uncertainties and delays that face such a project. The experience of Arizona
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Clean Fuels (ACF) in this regard will be extensively discussed by Glenn McGinnis at this
hearing.
ACF is the only current new refinery project in the United States. NPRA believes that public
policy should help, not hinder, the efforts of any entrepreneur who assumes considerable risk in
seeking to build a new refinery. But it is also necessary to recognize that capacity additions at
existing facilities offer a more predictable method to provide greater supplies of transportation
fuels in a reasonable time frame.
Increased Demand Resulted in Higher Prices
In recent years explosive economic growth in much of the world, particularly Asia, has led to
sharply increased demand for crude oil, resulting in tighter worldwide supply and nearelimination
of excess crude production capacity. This factor, together with geopolitical
uncertainties affecting many producing countries, has resulted in sharply higher crude prices
over the past year.
Because the price of crude is responsible for roughly 55-60% of the cost of making gasoline, the
rise in crude prices has led to significantly higher prices for gasoline as well. This fact,
combined with continuing strong demand for gasoline and other fuels in the United States, has
resulted in a tight U.S. gasoline market and a higher price level for gasoline and diesel than has
been the case in recent years. The U.S. market has also been affected by logistic al difficulties
involved with the replacement of MTBE by ethanol in most reformulated gasoline areas; ethanol
prices that are significantly higher than projected, and in the case of diesel, uncertainties about
the smoothness of the transition to new ultra low sulfur diesel (ULSD) that began June 1.
(Attachment 3)
The domestic refining industry confronting these challenges is one that is still recovering from
the effects of hurricanes Katrina and Rita on the Gulf Coast heartland of our industry. Those
storms adversely affected operation of nearly one-third of the U.S. refining capacity over the past
year. As of January 1 of this year, 800,000 barrels of capacity were still idle due to the impacts
of the hurricanes. Some of the damage remains to be totally repaired, although the industry has
been largely successful through Herculean efforts to return refining operations to normal.
Profits in Perspective
Higher product prices have resulted in significantly increased profits for refiners in 2005 and
2006. Transportation fuel demand is relatively inelastic, meaning that it is difficult for
consumers to reduce demand or find substitutes for those products, even when prices increase.
Studies show that consumers will eventually reduce demand in response to higher prices, but it
takes some time for this response to kick- in. Analysts disagree as to how much, if any, reduction
in demand for transportation fuels we are seeing now or will see as a result of current price
levels. But given the size of the U.S. gasoline market, the most important result is that
transportation fuel demand has remained quite strong and may remain so.
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Higher profits for refiners and other sectors of the petroleum industry have met with a firestorm
of controversy; they do not appear to be a subject of this hearing. Suffice it to say that NPRA
believes that the increased profitability of the refining sector in the past two years will encourage
new domestic capacity additions and help the industry maintain its role as a major contributor to
environmental progress. This will involve highly desirable, but expensive, refinery upgrades and
expected fuel reformulations.
A Consensus of Opinion Supports U.S. Refinery Expansions
Given these events, which have generated considerable controversy and interest among
policymakers and the public, it has been difficult to identify a consensus of opinion on any issue-
-with one significant exception. NPRA believes that there is a widespread consensus that the
U.S. needs more refining capacity, and that public policy should encourage capacity additions.
The remainder of our testimony concentrates on that subject
Increasing U.S. Refining Capacity
The refining industry is respond ing to the current supply situation as well as significantly
improved industry economics during 2005 and 2006. Refining companies have announced plans
to add considerable additional capacity to U.S. refineries in the near future. Secretary of Energy
Bodman recently stated that he expects at least 2 million barrels per day of new capacity to be
added to U.S. refineries. Industry estimates are currently closer to 1.8 million barrels per day,
still a very significant number. This clearly indicates a likely increase in U.S. capacity of
between 8 and 12%, the latter of which would bring total U.S. refining capacity to 18.6 million
b/d. Much of this capacity could be on line by the end of 2010. (NPRA has attached a chart
showing projected capacity increases and a list of announced capacity additions. See Attachment
4.)
Interestingly, 18.6 million b/d was the total U.S. refining capacity in 1981, when 341 refineries
operated here, compared to 148 today. (Attachment 5) Don’t be fooled by the higher 1981
numbers, however. Most of the refineries that have closed since that time were inefficient,
unsophisticated facilities. Many of the small refineries operating in 1981 were unable to produce
any significant supplies of gasoline because they lacked more sophisticated units needed for this
purpose. These facilities continued to operate only so long as the 1970’s crude oil allocation and
price control system was in effect. The U.S. abandoned that program in 1981. The modern
refining industry has undergone extensive renewal since that time, fueled by billions of dollars in
new investment. And the current average refine ry size is roughly 115,000 b/d, compared to an
average refinery size of about 55,000 in 1981.
In addition to new investment in capacity expansions, refining investments also enable other
significant projects. Some of these allow facilities to handle sour and heavy crudes. These
feedstocks are more prevalent than light, sweet crude in today’s market and result in cost savings
that can be reflected in product markets. Other investment in processing units increases the yield
of highly desirable products like gasoline, jet fuel and diesel from each crude barrel.
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The Domestic Refining Industry is Committed to Adding Capacity
The high level of refining investment in the past decade and planned refinery expansion projects
demonstrate the commitment of the U.S. refining industry to serving American consumers.
Given this fact, it is strange that some have accused the refining industry of a lack of
commitment to industry expansion. The truth is that the companies that own U.S. refineries have
spent and will continue to spend many billions of dollars to expand their ability to use those
facilities to provide an adequate supply of transportation fuels to consumers at reasonable,
market-based prices.
Given the demonstrated commitment of the industry to expansion of U.S. facilities and the
consensus that exists regarding the need for increased capacity as soon as possible, the question
remains whether anything can be done to further those objectives. Modest encouragement for
increased expansion and other investme nt, even perhaps in new refineries, is clearly in the
national interest. Additional U.S. capacity, whatever form it takes, increases the supply of
secure, domestically-produced products to the American consumer.
Although product markets are increasingly global in nature, there is a high probability that
domestically-produced gasoline and other fuels will be used in the United States. Currently only
about 2 million of the 20.5 million barrels of product consumed daily in the U.S. comes from
imports. The current points of origin for most of these are the Caribbean, South America and
Western Europe. These are relatively secure sources of supply. In the years to come, however,
many countries around the world will experience higher rates of demand growth for petroleum
products than the United States. This will put considerable pressure on the world market for
petroleum products, leading to a situation similar to that we face in today’s crude market, where
the U.S. faces vigorous competition from China, Ind ia and others for a limited supply of
available crude.
In the future, the U.S. will rely at least partially on imports of gasoline and other refined products
from the Middle East, particularly Saudi Arabia, to meet demand. That country is currently
planning to construct two 400,000 b/d refineries, at least some of the output of which will be sent
to Europe and the United States. Obviously, Saudi Arabia could easily decide to sell its products
elsewhere, since it is also well located to serve Asian markets. This possibility is just one
illustration of why it makes sense to retain a significant amount of refining capacity in the United
States, limiting our need for gasoline and diesel imports. It is probably not necessary or
advisable to meet all U.S. product demand from U.S. refineries. But maintaining U.S. refinery
production adequate to meet between 80-90% of U.S. product demand could prove a challenge in
coming years, depending on the rate of growth in demand for gasoline, diesel and jet fuel.
Action is Needed to Streamline the Permitting Process
Given these considerations, it seems prudent that reasonable action be taken to discourage
unnecessary delays in permitting new capacity additions or refineries. This will both encourage
investment in new capacity and speed its completion. Current uncertainties about the time it
takes to permit and actually construct refinery additions do affect investment decisions.
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Some steps have already been taken to eliminate uncertainties about New Source Review (NSR)
requirements that have had a chilling effect on U.S. refinery investment in the past. EPA’s 2002-
2003 reform package offered significant relief to refining projects with no increase in actual
emissions. Plant-wide applicable limits (bubbling), appropriate treatment of repair and
maintenance projects and adoption of a more realistic test for measuring emissions impacts are
important components of that NSR package.
NSR Reforms Could Help Add Capacity
Unfortunately, the se provisions are still subject to judicial challenge, limiting their positive
impact to date. Concern about NSR interpretation still has an adverse impact on energy supply.
For example, opportunities to increase gasoline supply are lost because the 12-18 month NSR
permitting timeframe is too long to allow companies to take advantage of opportunities that arise
to construct additional product units during turnarounds. A major refinery in a non-attainment
area will have to seek approximately 2-4 major NSR permits a year. These permits are necessary
for preventative maintenance projects such as replacing a tank or a pump, and may take 3 to 9
months to obtain. More significant projects such as process debottlenecking and major unit
upgrades can take 2 years or longer to obtain the necessary permit. Thus, a continuing
commitment to NSR reform is necessary to facilitate and encourage refinery expansions and
other improvements.
A Timely Permitting Process is Essential
Considerable discussion and debate has taken place regarding the importance of timely
permitting to the refining industry and whether or not precious time is lost due to bureaucratic
delays during the permitting process. Obtaining permits on a timely basis is essential to the
business of running a refinery, as it is to making improvements or expansions or even building
new facilities. The important point is not to debate whether permitting delays have actually
prevented completion of certain projects. There is obvious room for improvement in the
permitting process, as in many government activities. The time required to obtain a permit
greatly impacts the cost of a project, first when the project is under consideration by the
company and later after the decision to go forward has been made and the permitting process
actually unfolds.
It would be very useful to insert into the permitting process a recognition of the fact that it is in
the national interest to enable refinery expansions and other projects to be implemented on a
reasonably expedited basis. Encouraging an efficient process makes sense, especially when it
can be done without changing any existing environmental requirements and with due respect to
the rights of state and local government, as in H.R. 5254.
In our opinion, H.R. 5254 strikes the appropriate balance between respect for federalism and
encouraging efficiency in handling permitting applications. Under this legislation anyone who
has decided to move forward with a refinery expansion project or even a new refinery project
may decide to take advantage of the federal coordinator’s help--or not to do so, as he or she
chooses. The coordinator merely acts as an expediter, establishing a reasonable and coherent
schedule for handling federal, state and local permitting requirements for that project if asked.
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States and localities cannot be forced to participate if they choose not to do so. The coordinator
cannot force any regulator to decide whether or not a permit should be issued.
The coordinator also maintains a consolidated record to facilitate judicial review of the activities
undertaken pursuant to the agreed-upon schedule. If a complaint pertaining to a particular
schedule is brought in federal district court, the behavior of all parties to the MOU come under
review, including that of the applicant. The court can do no more than establish a new schedule
if it agrees with the complaint after reviewing the consolidated record.
A Final Note – Please Do No Harm
As previously stated, the refining industry is striving to add significant capacity in efforts to meet
the ever- increasing consumer demand for refined products, and this body is contemplating
legislation to perhaps streamline those and similar efforts. It must be noted, however, that any
additional costly and unnecessary burdens placed on the refining industry will negate any
benefits from permit streamlining. More specifically, attempts to either increase the volume of
the renewable fuel standard (RFS) or accelerate the time frames for compliance as enacted in the
Energy Policy Act of 2005 would create more uncertainty in an already volatile marketplace.
Blending 7.5 billion gallons of renewables into the gasoline supply requires considerable
modification of the nation’s supply, transportation and distribution structure. The refining
industry has already committed significant resources and efforts into compliance with the
government mandate, and much more needs to be accomplished in the very near future. Moving
the goal posts and/or shortening the time periods is neither sound policy nor fair.
In addition, requiring inclusion of E-85 pumps throughout the nation’s retail gasoline centers
through legislative mandate as some have suggested is simply bad public policy. The limited
supply of ethanol in today’s market has resulted in rapid and significant escalation of ethanol
prices. See attached chart. When combined with the many logistical and technical concerns of
E-85 that must be addressed before any widespread use is feasible, NPRA urges the Committee
to use extreme caution before requiring such a sweeping policy change.
H.R. 5254 Helps Ensure a Reasonable Permitting Process
To summarize, the process established by this bill appears quite reasonable to us. It may well be
the irreducible minimum that can be done if Congress is to take any action to demonstrate
concern about and support for additions to domestic refining capacity. We note as well that a
portion of the House bill would require the President to designate three closed base sites as
possible locations for new refineries (including one biorefinery). The Local Redevelopment
Agency in question is required to do a feasibility study of having such a refinery on the site, but
the clear intention of the legislation is not to force refineries on areas that do not really want
them.
It is unlikely in any case that a refinery owner would want to locate a facility worth several
billion dollars in an area in which the facility is unwelcome. NPRA does not view this provision
of the bill as troublesome. Rather, it appears merely to emphasize the importance to the nation
of an increased supply of domestically-produced petroleum products. In NPRA’s opinion, the
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House-approved bill requires no one to perform an action that either faces significant opposition
or makes no economic sense.
The nation’s energy security can be advanced by encouraging timeliness in decisions affecting
refinery permits, even at the local level. One NPRA member waited 14 months to obtain city
approval of an ethanol tank that was needed for a new fuels project. The process required 5
public hearings, 3 of which were appeals. And the use of ethanol in this instance was required
by federal law, clearly necessitating the ethanol tank. This is but one situation clearly
demonstrating that polite and respectful encouragement of responsible and timely permitting
could pay important dividends in the form of increased energy supply. Accordingly, NPRA
recommends and hopes that this Committee will approve legislation similar to that recently
passed by the House.
I look forward to answering your questions.