Refiners: EPA makes 'progress' on 'designate and track' for diesel

Diesel Fuel News, Sept 2, 2003 by Jack Peckham

Industry proposals to "designate and track" which barrels of diesel are destined for highway and non-road diesel markets (see Diesel Fuel News 3/17/03, p1) not only could help avoid diesel supply shortages but offer U.S. EPA a relatively easy way to ensure compliance with ultra-low sulfur diesel (ULSD) and non-road diesel rules.

In official comments on EPA's non-road diesel fuels/emissions proposed rule, American Petroleum Institute (API) says it's "encouraged by the recent progress EPA has made on the designate-and-track approach," although such "progress" isn't readily apparent from the skeptical language in EPA's proposed rule.

"If at all possible, EPA should finalize a designate-and-track approach because of the inherently greater refinery production flexibility that this approach offers over the 'baseline' approach," API said.

EPA's problematic "baseline" scheme forces refiners to predict the relative fraction of highway/non-road diesel demand years in advance, thus snagging fast market response to weather, seasonal or economic changes for various distillate fuels. EPA's only alternative to "baseline" would force refiners to dye non-road fuel at refinery gate, but pipeline capacity restrictions on new grades of distillate could block this option.

In contrast, refiners, pipelines, terminals and marketers all say they can live with an electronic paper trail "designate and track" scheme to separate the highway and non-road distillates, then give EPA quarterly or annual reconciliation reports to ensure compliance with EPA's 80% minimum highway ULSD requirement between 2006-2010.

~'Modest' Software Upgrade

"Only modest upgrading of recordkeeping software will be needed to make this approach fully workable," API tells EPA. "Attest engagement" statements as used in the reformulated gasoline (RFG) program could provide another independent check on compliance, while reconciliation of IRS reports on non-taxable non-road fuels could provide another check, API said.

If EPA refuses to allow "designate and track," however, then it should at least allow refiners to adjust their "baselines" for the highly weather-dependent heating oil demand, API and NPRA say. This would cover Nov. 1 to March 31 heating seasons, allowing refiners to respond to demand surges for "seasonal heating oil."

Ironically, under EPA's "baseline" scheme, "it will still be necessary to track volumes of baseline, undyed NRLM [non-road, locomotive & marine] for the purpose of compliance verification," NPRA points out. Hence EPA will be stuck with some paperwork in either case.

Other potential options to EPA's "baseline" restrictions:

--Let refiners aggregate their refineries nationally into any "baseline" distillate output scheme "to optimize the timing of distillate desulfurization investments" while still ensuring adequate supply of both highway and non-road fuels. Short of national aggregation, EPA should at least allow PADD-wide aggregation of non-highway diesel baselines.

--Let refiners adjust "baselines" due to supply contract expirations or new supply contracts.

--Allow annual "baseline" adjustments based on the latest U.S. Energy Information Administration (EIA) highway/non-road demand forecasts.

--Let refiners create a highway diesel "baseline" instead of a non-road baseline, including the 80% mandatory minimum ULSD output, except for unusual "force majeure" instances.

--Abolish the 20% limitation on "downgrading" of ULSD between 2006-2010 as this will slash highway diesel supply while oversupplying home heating oil market, NPRA says. Letting "downgrade" diesel into the other nonroad markets won't hurt EPA's 80% ULSD requirement for the highway market in any case, API points out.

~20% Limit 'Arbitrary'

"The arbitrary selection of 20% could easily force downgraded or contaminated 15-ppm highway diesel out of both the highway and NRLM markets and into heating oil, creating highway and NRLM supply shortages and heating oil gluts," API points out. Terminals with only one tank for highway/non-road diesel could face the ridiculous prospect of building new double-storage tanks during the ULSD phase-in because of the 20% "downgrade" limit, or forcing non-road customers to suffer cashflow penalties via complex excise tax refund schemes, even though all their customers would be getting ULSD.

--Allow 10-15% carryover of excess ULSD production credits to 2007, rather than the current 5% cap, as this could "allow more production and imports of [500-ppm] LSD in 2006" thus helping to avoid diesel shortages, NPRA says.

--Eliminate the 105% cap on transmix processor "baseline" for downgrading, since transmix volumes could soar because of downstream sulfur contamination problems. "Retention of diesel supplies from transmix processors in the transportation fuel pool should be facilitated, not constrained," NPRA says.

"Transmix processors should be held to the 'downstream' sulfur requirement for distillate products and be allowed to sell into whichever market our products meet specification," as Kinder-Morgan Energy Partners (operator of five transmix units) said.