Tier 3 and the Regulatory Wave

Reasons why the oil and natural gas industry talks about a regulatory “tsunami” coming down from EPA:

• A newly proposed Tier 3 rule to further lower sulfur content in gasoline – that would have “very small” additional environmental benefit, according to a recent study. At the same time, it could increase the manufacturing cost of gasoline by up to 9 cents per gallon. (More on Tier 3 below.)
• Increases in the federal ethanol mandate under the Renewable Fuel Standard – which could add to the manufacturing cost of gasoline by about 30 percent by 2015, according to a study by NERA Economic Consulting. (Posts on that here, here, here and here.)
• A potential vapor pressure reduction requirement that could increase refinery costs.
• An expected Refinery Sector Rule, new ozone requirements and greenhouse gas controls for refineries.

API’s Bob Greco, group director for downstream and industry operations:

“There is a tsunami of federal regulations coming out of the EPA that could put upward pressure on gasoline prices. EPA’s proposed fuel regulations are the latest example. Consumers care about the price of fuel, and our government should not be adding unnecessary regulations that raise manufacturing costs, especially when there are no proven environmental benefits.  We should not pile on new regulations when existing regulations are working.”

Part of an all-of-the-above approach to energy is a regulatory posture that’s transparent, based on sound analysis, accounts for the cumulative effects of multiple regulations and avoids duplicative, unnecessary layers – all of which contribute to regulatory stability and certainty, fostering energy investment. EPA’s “tsunami” would head in the wrong direction.

Take transparency. In a conference call with reporters, Greco said there’s been little from EPA on its analysis to justify the Tier 3 proposal to continue lowering sulfur levels in gasoline. “I can’t tell you what’s in EPA’s analysis because they haven’t released it yet,” he said. “I’m kind of shooting at a ghost here in talking about EPA’s analysis.”

On the Tier 3 proposal, a study by ENVIRON International Corporation hits at the heart of industry’s concern for EPA’s current path – a new rule that would result in little environmental benefit while imposing significant costs on the manufacture of gasoline. The study says that while large benefits have and will continue to result from the earlier Tier 2 rule cutting the amount of sulfur in gasoline about 90 percent over the past decade, further reducing it under Tier 3 won’t make ozone concentrations that much better. The study:

“... nationwide implementation of more stringent (light-duty vehicle) emissions standards … along with further reductions in gasoline sulfur content would yield only very small additional improvements in 2022 summertime ozone concentrations, even when considering the in-use fleet emissions impact of the lower gasoline sulfur content.”

Greco pointed out that industry invested about $10 billion in environmental mitigation equipment to get that 90 percent sulfur reduction. He said ENVIRON’s analysis shows that taking out the last bit of sulfur in gasoline, requiring massive costs, would not lead to measurable ozone reductions. Ironically, the additional energy needed to refine gasoline to meet the Tier 3 standard would actually increase greenhouse gas emissions from refineries, he said. Greco:

“EPA’s new Tier 3 gasoline proposal is a prime example of what happens when regulators ignore facts and hard science. … On the ozone side, even EPA says that the ozone benefit will be 1 to 1½ parts per billion at best. We’re saying it’s going to be a half-part per billion. … Neither one of these should be portrayed as significant ozone benefits, particularly in contrast to what we’re accomplishing now. We have a Tier 2 requirement that’s still being implemented. Only about 40 percent of the vehicles on the road are meeting that. That will continue to increase. You’re going to continue to see ozone benefits from the 90 percent sulfur reduction. … Let’s take advantage of that benefit before we start tightening the screws to get that last bit of sulfur out for marginal if any benefit.”

The larger issue, again, is the cumulative impact of where EPA appears to be heading. As Greco told reporters, there seems to be a disconnect between the agency’s agenda and Americans’ everyday energy reality:

“While few would dispute the benefits of fact-based, scientifically valid environmental regulations, EPA should always take care to avoid imposing ineffective and excessively costly rules that pose a serious threat to the industry’s ability to produce the fuels that are essential to America’s economy. Because, in aggregate, these unwarranted regulatory burdens are a threat to our nation’s reemergence as a global energy leader and could dampen one of the few economic bright spots in our economy. These regulations will only increase fuel (manufacturing) costs, produce little if any environmental benefit and potentially could cost thousands of Americans good-paying jobs.”