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Biofuel mandates could close more refineries, officials warn

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WASHINGTON, DC, Apr. 27
04/27/2012
By Nick Snow
OGJ Washington Editor

Philadelphia area refinery closures will be only the beginning of shutdowns nationwide if the federal government does not change several key regulations, two oil industry officials warned on Apr. 26. Ethanol mandates in the 2007 Energy Independence and Security Act pose a particular threat, they told the US Senate-House Joint Economic Committee.

“The recent refinery closures that have occurred or are currently pending are the tip of an iceberg,” said Thomas D. O’Malley, chairman of PBF Energy Co. LLC, which operates refineries in Delaware City, Del. (190,000 b/d), Paulsboro, NJ (180,000 b/d), and Toledo, Ohio (170,000 b/d).

“If the fuel substitutions from 2012 to 2022 mandated under [EISA] are maintained, we will lose over that time period an additional 10% minimum of US capacity and the thousands of jobs this important industry provides,” O’Malley said.

Bob Greco, the American Petroleum Institute’s downstream and group director, said refiners face an impending “blend wall” where mandates to blend ethanol into gasoline will soon exceed motorists’ ability to safely use the fuels in existing vehicles.

“Moreover, refiners are also required to blend into the gasoline supply advanced biofuels that do not yet exist, or pay a fee when they cannot meet the mandates,” he noted. “This policy is regulatory absurdity, and effectively amounts to a hidden tax on gasoline manufacturers.”

Tier 3 as well

O’Malley said the US Environmental Protection Agency’s Tier 3 gasoline proposal also will close more US refineries. Refiners, including independents that control 60% of US capacity, will need to spend billions of dollars to lower sulfur content from 30 ppm to 10 ppm, he said.

“Under this plan, the total sulfur removed from PBF’s gasoline production of about 4.5 billion gal/year would less than one eighth of what one 300-Mw coal-fired power plant emits in a year,” O’Malley said.

Greco said EPA has yet to demonstrate any air-quality benefits from adopting Tier 3 limits. He cited an analysis by the Baker & O’Brien consulting firm, which API commissioned, that found that implementing the new requirements could increase refinery greenhouse gas emissions because of the use of energy-intensive hydrotreating equipment to remove sulfur from the gasoline.

“Existing refinery regulations and fuel requirements clearly contribute to a cleaner environment and safer workplace,” Greco said. “Unnecessary, inefficient, and excessively costly requirements hamper our ability to provide and distribute fuels to America, while also employing hundreds of thousands of people and enhancing our national security. We have already seen some refineries close, at least in part due to the cumulative impact of government controls.”

O’Malley said, “Refineries in Pennsylvania closed because they didn’t make money. The federal government took away some of their market and gave it to the agriculture industry. The insanity of cellulosic ethanol will take away another 10-15% and make refiners pay $120 million in indirect taxes. This whole system is a house of cards that’s collapsing. Unfortunately, it’s collapsing on the men and women who work in refineries.”

Market concentration

A third witness, Diana L. Moss, vice-president and director of the American Antitrust Institute, said more refinery closures in the US Northeast could result in a market where three refiners accounted for 93% of capacity changing to one where two refiners represent 86%. More products coming by pipeline from the Gulf Coast could replace much of what is lost from closed plants, but proposals to convert some installations to terminals could raise new ownership concentration questions, she said.

The fourth witness, Michael Greenstone, an environmental economics professor at the Massachusetts Institute of Technology, said the federal government should encourage policies that recognize the health, environmental, and security costs associated with each form of energy. If this isn’t feasible, he said, research suggests that natural gas should be put on the same footing as renewable fuels under any federal standard and subsidies equal to those for electric vehicles should be offered to those using compressed natural gas.

Others submitted written statements. US Rep. Donna M. Christensen (D-VI) noted that Hovensa LLC’s chief executive, when he testified before the Virgin Islands legislature, said low demand and competitive disadvantages, such as having to fire its units with oil instead of gas, led to the decision to close the 500,000-b/d facility. “Our neighbors in Puerto Rico remain concerned about where they will be able to secure jet fuel that was supplied by Hovensa,” Christensen said.

Industry witnesses kept returning to regulatory problems refiners face. “The ethanol and biofuel mandates need to be adjusted to reflect what the vehicle fleet can use,” API’s Greco said. “As it is, even if E15 became widely used, it would extend the blend wall by only 1-2 years.”

EISA and its mandates were a bad idea in 2007, and a worse one now, American Fuel & Petrochemical Manufacturers Pres. Charles T. Drevna said following the hearing. “We’re seeing unintended consequence of rushing something through Congress without considering the impacts,” he told OGJ. “Keep corn on people’s tables, and gasoline in their vehicles’ tanks.”

Contact Nick Snow at nicks@pennwell.com.

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USA: Total Close to Sign Sabine Pass LNG Deal

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French oil and natural gas major Total is close to signing a firm long-term sales agreement with Cheniere Energy to lift 3.5 million tonnes per annum (mtpa) of LNG from its Sabine Pass liquefaction project, according to sources close to the deal.

The structure of the deal is understood to be virtually identical to Cheniere’s 20-year sales and purchase agreement signed with BG Group last week, the first firm offtake deal signed by the project. Under that agreement BG will pay the US developer a fixed take-or-pay fee of $2.25/MMBtu to cover the procurement, liquefaction and loading costs at the Sabine Pass plus an interruptible 115% of US Henry Hub natural gas futures fetching fee paid to Cheniere to provide free on board (FOB) cargoes.

Total is also understood to be taking the commercial export agreement one step further by assuming an ownership stake in Cheniere’s Sabine Pass Liquefaction company. Specific terms of the equity stake were undisclosed.

Bringing an equity partner into the project has been seen as crucial for Cheniere if it is to secure its financial future and reduce its $3.14bn debt, which includes $2.2bn specifically related Sabine Pass.

While credit rating agency Standard & Poors (S&P) called Cheniere’s deal with BG a “significant milestone” in its efforts to generate future cash flows, it has reaffirmed its CCC+ junk-status rating with a negative outlook.

Assuming its current liquidity does not materially improve, Cheniere will not be able to make its 2012 maturity payments,” S&P said in a report released on Monday.

The company must generate significantly more liquidity to avoid further credit deterioration or default. We believe its options include further asset sales and terminal use agreements (TUAs), incremental LNG marketing activity, equity offerings, and debt restructuring.”

Closing in on sales threshold

A firm 3.5mtpa sales commitment from Total would bring Cheniere to the 7mtpa threshold, a figure that chief executive Charif Souki told ICIS Heren last week was the target for moving forward with the first phase of the liquefaction project.

Phase One at Sabine Pass is planned for two liquefaction trains of 4.5mtpa capacity each, with Cheniere indicating that it will retain and market the remaining 2mtpa.

Cheniere and Total both declined to comment when contacted to confirm the deal.

Total is already an import capacity holder at Sabine Pass where it has 1 billion cubic feet/day – 0.2 million cubic metres/day – of regasification capacity as part of 20-year terminal utilization agreement.

The agreement with Cheniere follows Total’s declaration last week that the company has been studying the possibility of exporting US gas but provided no additional details.

Total secured a firm upstream US unconventional gas presence in December 2009 when it purchased 25% of Chesapeake Energy’s portfolio in the Barnett Shale Basin in Texas.

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