Diesel Plan Casts Bad Odor

With public hearings concluded and the deadline for written comments past, the next move on the new proposed diesel fuel standard is up to the Environmental Protection Agency (EPA).

While a final rule could be out by year's end, a multitude of petroleum-related interests ? from refiners and petroleum marketers to convenience stores and truckstops ? are lining up urging the federal agency to heed warnings that the modified standards could result in corporate-crushing costs.

These groups estimate that the new rule, as it currently stands, could cost business billons to comply with and could also lead to fuel shortages, higher consumer gas prices and potentially fewer retail diesel outlets.

Under the current EPA proposal, the sulfur content of diesel fuel will be reduced to a maximum of 15 parts per million (ppm) from the current 500ppm. The new standard is slated to take effect in 2006-07. Industry officials have proposed an alternate standard of 50ppm, which they say is more economical.

"It's like a wet towel. It's very easy to squeeze out the bulk of the water; to take it down from 500 to 50ppm is easily doable, but then you have to eke out that last 35ppm. That gets very expensive and very difficult, and the difference in air quality between 50 and 15ppm is negligible," said Julie Rosenbaum, media relations advisor for the National Petrochemical and Refiners Association (NPRA), which represents about 98 percent of the nation's oil refiners.

The figure being tossed around in the refining community is that it will cost an estimated $10 billion to upgrade equipment to produce diesel fuel at 15ppm compared to a $4-billion capital investment needed to meet the lower 50ppm standard. Rosenbaum added, "We also estimate a five-cents-per-gallon increase in the cost of diesel fuel."

While major refiners like Stamford, Conn.-based Tosco Corp. have already moved forward with the necessary modifications, industry experts expect some refiners to totally cut diesel fuel production, which could hinder supply and drive up prices.

The National Association of Convenience Stores (NACS) recently cited concerns about the federal plan's impact on the pipeline distribution system that moves diesel across states. In written submissions to the EPA, NACS said the system would be incapable of complying with the proposed 97-percent reduction since new, low-sulfur product would pick up residual sulfur clinging to the walls of pipelines and bulk storage terminals.

NPRA's Jeff Hazel also said there are technical challenges posed by the change because the pipeline distribution system and tanker trucks that move diesel across the country also moves other fuels.

"Every other product transported in the pipelines will have a higher sulfur content, and cross-contamination or leakage would drive up the sulfur level at the interface [the point where the two fuels mix]," said Hazel, the association's director of lubricants, waxes and maintenance programs. "Refiners would have to look at cutting a larger interface and doing something with the resulting transmix. That will also increase costs [and potentially result in a diminished supply]."

And, of course, those increases will be passed down to truckers, c-store operators, petroleum marketers and, ultimately, the consumer. Take Pilot Corp., which expects to incur the expense of adding another underground storage tank to accommodate the new fuel. Pilot operates 132 travel centers and 46 convenience stores nationwide and sold 1.4 billion gallons of diesel in 1999.

"We have six to eight islands of diesel for the big trucks. We'd have to add another tank in the ground and convert a couple of pumps to the ultra-low diesel, which will cost us about $75,000 per station," said Alan Wright, vice president of supply and distribution for the Knoxville, Tenn.-based Pilot Corp.

Independent gasoline marketers have another worry to add to the mix. "The first thing that happens when there's a shortage is that prices go up. The second thing is that the first people to get cut off by suppliers are the independents," said Tom Osborne, communications director at the Society of Independent Gasoline Marketers of America (SIGMA).

"If there is not enough diesel to go around, and the refiners have their own direct outlets and unbranded companies, they're going to keep supplying these. They'll say that since the independents only buy excess, we don't have any excess to sell," he said. SIGMA members last year served 28,400 stations, which sold 13.4 billion gallons of diesel fuel ? about 30 percent of what is used in the nation.

While operators like Pilot, which sell a high volume of diesel, will undoubtedly take on the expense of building new tanks and converting or adding more pumps to handle the new grade of sulfur, Osborne wonders whether smaller operators will incur the expense or possibly opt out of diesel altogether. Attrition among diesel suppliers would almost certainly cause a price spike, observers had noted.

In addition to worrying about the potentially staggering costs they might incur trying to comply with a new ruling, operators of truckstops and travel plazas are also concerned about a provision that is not technically included in the proposed new EPA standard.

According to Jason Lynn, director of government affairs for the National Association of Truck Stop Operators (NATSO), the EPA is exploring the idea of phasing in the transition to the lower-sulfur fuel. "Phasing it in would force our membership to carry two separate grades of highway diesel fuel," Lynn said. "This would require a tremendous capital outlay, maybe $100,000 per location . . . an investment for only a five-, six- or seven-year period. It's a stranded investment that can't be recovered."

Another cost that could be incurred with the adoption of the 15ppm standard is an increase in the cost.

"The exact additive needed under the new EPA diesel regulation is a little unknown because refiners themselves aren't sure how they are going to meet the new standards. However, some things are clear. As refineries remove sulfur, the resulting diesel is more 'waxy' and less fluid in cold temperatures," explained Chris Jackson, product manager for fuel additives at Trevose, Pa.-based Betz Dearborn.

"It will require increased amounts of cold-flow improvers, and these additives will need to be more effective than ever in modifying the crystallization properties of the diesel. The diesel fuel will also require increased lubricity additives," he said. "In a diesel engine, the fuel pump depends on the fuel itself for lubrication. As a result of the refining process used to remove sulfur compounds, the diesel has less inherent lubricity, and additives are required to restore the lost lubrication characteristics."

This is, of course, an additional cost to the supply chain. In the midst of all these potential extra expenses, when it comes to winterization there is a small upside to a lower-sulfur content, pointed out Jackson. "With lower sulfur, the fuel will have less tendency to discolor and form sediment or gums. Consequently, fewer stability additives will be required in the future."

While the various industry officials offer a laundry list of problems with the proposed federal diesel standards, they are not against cleaner-burning fuel. Many associations ? including SIGMA, NATSO, Petroleum Marketers Association of America (PMAA), NACS and the American Petroleum Institute (API) ? have underscored their support for reducing sulfur. The difference lies in the degree.

"We and the refiners understand that if we don't clean up diesel and gas and make it more environmentally beneficial, there will be alternative fuels that will move in and take their place. The auto industry and EPA are wanting to have more, not fewer, facilities selling diesel," said Osborne. "But we think this proposal is extreme and is going to work in the opposite direction. It's going to reduce the number of outlets offering diesel."

Bottom line, said PMAA Chairman Steve DeLuca, is that the EPA proposal has not undergone what his organization considers the proper cost-benefit analysis, and until that happens, it's difficult to access whether this proposed new standard will truly benefit anyone. JPM