Refinery Viability

The Energy Information Administration estimates that demand for petroleum products will increase 25% over the next 20 years. Domestic refinery expansion will be necessary to meet this demand growth as well as offset the production loss resulting from more stringent product quality requirements and possible refinery shutdowns. The U.S. petroleum refining industry has averaged about 4% rate of return throughout the 1990�s. There is every expectation that refiners will continue to be challenged to finance the very high level of investment required over the next several years. This capacity expansion will require increased investment and operating costs in refineries that must ultimately be recovered in the marketplace if they are to be financially viable and provide reliable product supplies.

In the past, refinery efficiency increases have offset the loss in capacity from regulatory-driven changes. However, with all the product specification changes to be implemented over a short period of time, there is concern that near-term efficiency increases will be insufficient to maintain adequate refinery capacity, let alone allow for the expansion required to keep up with growing product demand. Also, in recent history, most refining capital has been devoted to complying with environmental regulatory requirements leaving payout projects such as refinery expansion, a secondary priority. In addition, refinery expansion has been reduced by a regulatory climate which fostered increased uncertainty, delay and increased cost.

Refinery capacity utilization and reliance on product imports may need to increase to unsustainable or unacceptable levels to meet the growing petroleum product demand. The challenge to refiners to supply the marketplace is exacerbated by the increase in the regulatory burden (stationary and mobile source regulations).

Due to increased utilization rates and more stringent product specifications, the overall strain on the refining and distribution systems will increase and flexibility decrease. This will, in turn, increase the risk of market instability.
Without changes in the current regulatory and permitting processes, petroleum product market instability is likely.
The Administration could investigate developing a unified and comprehensive approach looking more broadly at the product supply, national security and economic implications associated with policies and regulations (stationary and mobile sources) affecting the refining industry. These policies and regulations could be progressed after careful consideration and agreement by an Interagency Work Group that any adverse impacts are justified by other greater benefits.

The Administration could consider developing a regulatory policy that ensures that regulations impacting the refining industry are based on sound science and the application of full cost-benefit and risk analyses and should be performance-based. Such a policy could ensure there is certainty in the scope, timing, requirements and interpretation of regulations. This will enable capital improvements to be made with the knowledge that further regulatory changes will not result in wasted investment and will ensure there is not retroactive reinterpretation of regulations that would result in punitive, selective and unpredictable enforcement policies that discourage and unfairly penalize sound compliance efforts (e.g., EPA New Source Review enforcement initiative).

In June 2000, the National Petroleum Council published a study entitled “U.S. Petroleum Refining – Assuring the Adequacy and Affordability of Cleaner Fuels.” This study looked at the current state and competitiveness of the U.S. refining industry and the potential impacts that the current and new regulatory initiatives are expected to have on the long-term viability of the industry. The Administration could recommend that the DOE, in consultation with governmental departments and federal agencies, review the findings and recommendations of the study and recommend adjustments that can be made to federal policies to implement those findings and recommendations.

The issue of refinery viability and capacity expansion should be addressed before new regulations are issued or existing regulations take effect.