U.S. refiner postponement of cleaner fuel output comes with costs

*Refinery.

*Refinery.

05 April 2016, New York — U.S. refiners who are delaying compliance with new cleaner gasoline production rules could face soaring costs beginning next year as they scramble to find deadline-extending fuel credits in a tight market, industry experts warn.

Larger U.S. refiners are in the midst of a multi-billion dollar effort to cut smog-producing sulfur levels in the gasoline pool by Jan. 1, but those efforts have been met by objections to what the rules mean for refinery emissions and slowed by the high price of compliance.

U.S. President Barack Obama has made cutting harmful tailpipe emissions a cornerstone of his environmental policy, both domestically and abroad, arguing that higher sulfur levels in gasoline drive up health care costs and lead to thousands of premature deaths each year.

The new federal rules require all but the smallest U.S. refineries to produce gasoline with an average sulfur level of 10 parts per million (ppm), down from the current standard of 30 ppm. Refiners are opting to delay compliance and defer the billions in capital costs over several years, according to regulatory filings.

The U.S. Environmental Protection Agency awards credits to refiners who produce gasoline with sulfur levels below regulated levels, and they can transfer credits from the existing program into the new Tier 3 program. Refiners can dip into their own cache of credits or buy credits from their competitors to offset their production of higher-sulfur gasoline.

Currently, Tier 3 credits are trading at roughly $400, up significantly from two years ago when credits under the existing Tier 2 program were going for as low as $25, according to a refining executive. The high price reflects the belief among industry players that refineries will need to tap their own stockpile of credits, leaving few in the open market.

“People are going to struggle to meet the 10 ppm spec, so there’s really no margin for error. It’s practically zero sulfur,” the executive said. “I don’t think people are going to part with their credits – we’re certainly not – so I think there’s a lot of upside on credits.”

Under the rules, the number of credits a refiner must spend is based on how far they are from meeting the new standards. The higher the sulfur level, the more credits necessary.

Up to 40 of the 108 refineries impacted by the new standards will be forced to purchase additional credits to comply, according to a peer-reviewed analysis by the EPA published in 2014.

The new rules could also complicate business for European and Canadian refiners, who will have to find new markets outside the U.S. for their higher-sulfur gasoline, such as Asia, experts say.

Canadian refineries are very similar to U.S. refineries, which means they will have to make similar upgrades if they want to continue to sell gasoline in the U.S. market.

European refineries are already producing gasoline to a 10-ppm sulfur cap for local markets, but the U.S. currently serves as an outlet for their higher sulfur streams, which will disappear under the new rules.

Costs
U.S. refiners like Phillips 66, Marathon and Tesoro expect to use the credit system to extend compliance up until 2020, according to filings with the U.S. Securities and Exchange Commission and interviews.

PBF Energy expects to have $475 million to $500 million in capital expenditures in 2016, with a significant portion aimed at Tier 3 requirements, according to regulatory filings.

“We have already bought credits so we can delay if we want to,” PBF Energy Chief Executive Officer Tom Nimbley said in a recent interview.

Valero, the largest independent refiner in the U.S., did not respond to requests for comment regarding it’s Tier 3 strategy.

Refinery Emissions
The push for cleaner gasoline has been met by some unexpected resistance in Detroit.

In June of last year, Marathon sought new air permits from state regulators to install a gasoil hydrotreater feed heater and a gasoil hydrotreater reactor at its 140,000 barrel-per-day refinery in an industrial section of Detroit, according to state records. The company said the work is necessary to comply with the new regulations.

The work will result in the production of lower sulfur gasoline, and ultimately cleaner motor vehicle emissions, but it would also generate higher sulfur dioxide and other emissions at the refinery complex, according to state records.

Other companies, such as Flint Hills Resources and Phillips 66, had to secure new air emission permits to meet the fuel standards.

Detroit Mayor Mike Duggan said while Marathon’s plans would benefit larger society, it would come at the expense of Detroit residents who live near the refinery. Dugan has threatened to sue if the state approves the permit.

The mayor’s office declined to comment.

Marathon will slightly alter its plans and is now projecting a “net-zero increase” in sulfur dioxide emissions, said company spokesman Jamal T. Kheiry. The mayor has not said publicly whether he opposes that new plan.

*Jarrett Renshaw; Editing – Chris Reese – Reuters

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