15 Ppm Sulfur Non-Road Diesel Mandate May Cost 12 Cents/Gallon

Diesel Fuel News, Oct 1, 2001 by Jack Peckham

Washington, DC -- U.S. EPA's 2006 highway ultra-low-sulfur diesel (ULSD) mandate likely will eat up all the lower-cost hydrotreating reactor retrofit opportunities.

That leaves only high-cost, grass-roots hydrotreating for a possible 15 ppm non-road ULSD.

Red flag: A non-road ULSD mandate could come right on top of the 2006 highway ULSD mandate, refiners fear, based on recent hints dropped at EPA's last "non-road diesel work group" advisory committee meeting.

The net result could push costs of non-road ULSD above 12 cents/gallon, possibly affecting both highway and non-highway users, as Marathon-Ashland Petroleum fuels technology manager Michael Leister showed in an analysis presented at the Hart World Fuels Conference here.

Another problem: High refining costs can translate into investment fears, possibly triggering huge diesel fuel shortages and price spikes, until more capacity eventually can be brought on-line.

On the other hand, EPA might suspend its ULSD regulations during such a crisis, thus destroying margins on the very ULSD investments made by those refiners that attempt to comply with EPA's rules.

"Low-cost investments will be used up to meet highway [ULSD] requirements, so remaining high-cost investments for non-road [ULSD] may not be cost-competitive," Leister warned, showing results of his new analysis.

While not officially speaking on behalf of American Petroleum Institute here, Leister is a leading member of API's "diesel work group" and an especially active participant in U.S. EPA's non-road diesel advisory work group discussions.

EPA terminated the non-road advisory group last month and instead promises to publish a "white paper" (see Diesel Fuel News 8/6/2001, p1) outlining possible non-road fuels/emissions regulatory limits, perhaps as early as this month. Public comment on this document would follow.

Meantime, EPA also will convene a diesel fuels/emissions rule "compliance review" advisory panel next summer, part of its routine federal advisory committee act (FACA) process. Impacts of EPA's upcoming non-road diesel fuels/emissions rules on its separate 2006 highway diesel rule are bound to become part of those discussions.

But it's questionable whether EPA will heed refiner warnings of an impending supply disaster from overly-hasty, front-loaded investment for desulfurization of both diesel pools. To date, EPA has dismissed refiner group supply warnings about the upcoming highway 2006 ULSD rule.

Some refiners are starting to suspect that EPA might try to pile a 15 ppm non-road ULSD mandate right on top of, in advance of, or very shortly after the mid-2006 highway ULSD deadline. If so, then that would toss aside API's proposed demand-based, market-supply ULSD approach, along with refiners' favored postponement of any non-road ULSD mandate until at least 2010, as outlined in talks with EPA.

Likewise, some makers of diesel exhaust catalysts are guessing that EPA "seems to be leaning toward" a new rule "requiring all nonroad diesel fuel to achieve a 15 ppm sulfur limit before 2008, with temporary exemptions expected to be provided for small refiners," according to Association for Emissions Control by Catalyst (AECC).

But such an outcome could spell disaster, Leister's new study indicates.

For his study, Leister started with baseline assumptions produced in the now-famous MathPro studies (for Engine Manufacturers Association) on ULSD for both highway and non-road diesel fuels. Mathpro initially analyzed "notional" refiner costs of producing highway diesel fuels of 150, 50, 20 and 2 ppm sulfur, then produced a supplemental study analyzing costs of a 15 ppm sulfur highway ULSD alongside non-road diesel fuels of 3,500, 350 and 15 ppm sulfur (see below).

Problem: The refinery "retrofit" option won't be possible if both highway and non-road must hit 15 ppm ULSD, since U.S. reactor capacity simply doesn't exist today for the currently untreated off-road distillate pool.

Actually, MathPro's "no-retrofit" option for such a situation could indicate that the cost for converting non-road fuel from 3,500 ppm to 15 ppm sulfur would be 10.4 cents/gallon for the "notional" 150,000 b/d refinery, not 7 c/gal., Leister pointed out.

Even worse, many refiners are smaller and less-able to desulfurize diesel than the "notional" refinery, Leister's study shows. His analysis groups refiners by average sizes in the various PAD regions of the U.S., and applies a 0.6 capex "scaling factor."

Even excluding the 24 very small U.S. refineries unlikely to make any ULSD, the average cost for highway/non-road ULSD production among the remaining 128 diesel-producing refineries in the U.S. is likely to be higher than a presumed 10.4 c/gal "notional" average cost, he showed.

If these 128 refiners invested to meet EPA's 15 ppm sulfur targets at volumes expected for both highway and non-road demand -- even without including future demand growth requirements -- then some refiners will have a much higher cost hurdle than others.

Still, some of the smaller, higher-cost refiners might enjoy "niche" protected markets that are distant from lower-cost refiner competition.