U.S. EPA now showing strong inclination toward 'designate-and-track' for distillate fuels

Diesel Fuel News, Oct 27, 2003 by Jack Peckham

U.S. EPA's latest public docket postings on proposals to "designate and track" which distillates are for highway or non-road users indicate a remarkable evolution of thinking.

Only months ago, EPA expressed great reservation that "designate and track" could be practical since it might have required massive auditing at thousands of distribution terminals (see Diesel Fuel News 9/2/03, p1; 3/17/03, p1).

But now, the agency seems to have come to the realization that "designate and track"--or some version of it--was inevitable anyway, because of standard practices for shipping multiple distillates via pipelines and terminals.

Meetings with refiners, pipeline operators, terminal operators and marketers this fall have now led EPA to post a "preliminary working draft of a possible designate and track concept" on its public docket for the non-road diesel rule. EPA now plans follow-up meetings with state air pollution regulators and environmental advocacy groups, to discuss how this concept could work (see: http://cascade.epa.gov/RightSite/getcontent/Tem Dfile.pdf? DMW OBJECTID=090007d4801da1 c2&DMW FORMAT=pdf).

The latest draft says the goal is to ensure that any 500-ppm sulfur diesel fuel that is "designated as non-highway at the refinery gate is dyed and not shifted to 500-ppm highway," which would avoid EPA's mandatory 80% ULSD/20% 500-ppm sulfur highway diesel during the 2006-2010 phase-in.

Aside from recognizing inevitable "sulfur contamination" downgrades of some low-sulfur fuel to higher-sulfur grades during transport from refineries to terminals, this concept would "make sure the usage of 500-ppm [fuel] in the highway market is no greater than the volume designated as 500-ppm highway at the refinery gate."

While it's uncertain as yet what states and "green" groups will say in response, one industry source told us it's possible that they'll demand that EPA impose a 15-ppm sulfur limit on locomotive/marine distillate in 2010 in exchange for agreeing-to the more flexible "designate and track," rather than the "baseline" scheme that EPA originally proposed.

"Baseline" would force refiners and marketers to predict the relative volume of highway and non-road distillate demand years in advance, thus snagging fast response to demand changes from weather, construction seasons and economic downturns. "Baseline" could cause regional distillate supply/price crises that could be avoided with a smarter, more market-oriented "designate and track" rule.

Among the highlights of the draft "designate and concept" paper:

--"Using the designate and track provisions for heating oil and high-sulfur NRLM [non-road locomotive and marine fuel] from 2007-2010 can allow for the elimination of the yellow marker for heating oil upstream of the terminal." This would be a huge relief to the airlines and military who urgently need to avoid "bleeding" of yellow-dye into jet fuel moving next to heating oil pipeline shipments.

--"Beginning June 1, 2007, all refiners and importers are required to designate any volume (batches or portions of batches) of >500-ppm diesel fuel they produce as either high-sulfur NRLM diesel fuel (can also be sold as heating oil) OR heating oil (can only be sold as heating oil. These fuels would be fungible in the distribution system (a new advantage since the marker is now added downstream.)"

--"Refiners required under highway rule flexibilities to produce 100% 15-ppm highway fuel would be allowed to ship a small volume [e.g. <5%] of 500-ppm highway fuel, but would have to justify that the volume is only due to line-wash and could not sell 500-ppm highway fuel from their refinery rack."

--"The total volume of 15-ppm and 500ppm highway fuel cannot increase during distribution," despite inevitable sulfur cross-contamination that will occur in pipelines and terminals. So, "the volume of heating oil cannot go down."

--If a refiner or marketer "dyes fuel per IRS requirements and/or pays highway diesel taxes, [then] they can always redesignate (and dye) fuel designated as highway as NRLM. They can also redesignate fuel designated as NRLM as highway as long as they maintain a positive 'balance' at the end of each quarterly compliance period."

--The concept also would allow EPA to scrap the anti-downgrading limitation on 500-ppm sulfur NRLM, substituting instead "tracking of downgrade to 500-ppm highway versus downgrade to 500-ppm NRLM."

--Distillate fuels >500-ppm sulfur "must have visible evidence of dye at the refinery gate," to separate these from both highway and non-road low-sulfur fuels.

--"Beginning June 1, 2006, all refiners and importers are required to designate any volume (batches or portions of batches) of undyed 500-ppm diesel fuel they ship as either highway diesel fuel (can also be sold as NRLM or heating oil) OR NRLM diesel fuel (can only be sold as NRLM or heating oil. These two 500-ppm fuels would be fungible in the distribution system," until terminal dyeing separates the highway from non-road fuels.

--"15-ppm #1D/Kero/Jet would be designated as highway diesel at the refinery gate--counting toward 15-ppm volume under the 80/20 [mandate] in the highway rule" and "not subject to anti-downgrade limitations--thus it can also be blended into 500-ppm highway diesel fuel with no restriction. 500-ppm kero/jet/#1D for blending into 500-ppm highway, 500-ppm NRLM, or high sulfur NRLM would be allowed to be designated as kero/jet at the refinery and left out of the tracking system; it could be blended into 500-ppm highway and NRLM downstream as long as the entity still maintains its positive 'balance' (i.e., shifts some highway 500 to NRLM fuel to offset kero addition); expected to be small volume as most kero for winter blending will be 15-ppm."