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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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Mandating the impossible: The EPA and cellulosic ethanol

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January 3, 2012 | Posted by Ken Cohen

Here’s a New Year’s resolution worth making: Let’s not mandate the impossible.

Unfortunately, the Environmental Protection Agency did just that last week, setting new quotas for 2012 that will require the nation’s refiners to add 8.65 million gallons of cellulosic ethanol to America’s fuel supplies.

The only catch: America doesn’t have the cellulosic ethanol to meet that standard.

Cellulosic ethanol is intended to be an advanced alternative to corn-based ethanol. By deriving it from inedible plant matter such as switchgrass, wood chips, and wheat straw, the hope is that cellulosic ethanol could supplement our transportation fuels in a way that is more efficient and has fewer harmful impacts on the environment and food prices than corn-based ethanol.
In practical terms, cellulosic ethanol still faces significant challenges. The scientific community and American industry have yet to find a way to make the fuel cost competitive.

As the National Research Council stated last month in a lengthy study on biofuels, “Currently, no commercially viable biorefineries exist for converting cellulosic biomass to fuel.”

This technological fact hasn’t stopped the EPA from setting impossible standards in the past. It mandated cellulosic ethanol quotas in 2010 and 2011, which failed abysmally, according to the EPA’s own data. (See chart.) In other words, the EPA’s decision makers should know better by now – and choose a new course of action.

Congress gave the EPA discretionary power to set what is called the Renewable Fuel Standard to take into account the state of investment, innovation, and capabilities of the biofuels sector. When lawmakers passed the Energy Independence and Security Act in 2007, they set lofty goals that many throughout the broader economy knew were impossible to meet.

Congress set a goal of producing 36 billion gallons of renewable fuels by the year 2022. Of that 36 billion gallons, nearly half (16 billion gallons) was supposed to come from yet-to-be-discovered breakthroughs in non-corn based ethanol.

That’s why the EPA was given flexibility. So, who will be paying for the impossible-to-reach EPA standards in 2012? The American economy and the American consumer.

Under the current law, refiners (and, indirectly, consumers) have to pay a fee for failing to blend cellulosic ethanol into existing fuel supplies. Meanwhile, because there is no alternative but to pay the fee, it has quietly turned into a revenue-raising device that contributes nothing to energy, growth, or jobs.

What should EPA and Washington do? It’s easy. Stop picking winners and losers in the marketplace – and let industry compete and do what we do best, which is to invest and innovate to bring real and affordable energy to consumers in a safe, secure, and environmentally responsible way.

As the president of the National Petrochemical & Refiners Association said, “Instead of imposing an unreasonable biofuels mandate, which would raise energy costs and impact fuel supplies, government should allow consumer choice and the free market to determine the mix of energy sources to best meet our nation’s needs.”

Rather than mandating the impossible, lawmakers and regulators should instead resolve to let markets work.

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