The petroleum industry is a vital component of the United States
economy. Over forty percent of U.S. energy consumed is processed and
transported by this industry. It provides jobs for hundreds of
thousands of people and contributes over $19 billion in "value added"
to the domestic economy.

New environmental regulations are under consideration that could
affect the petroleum industry's contributions to the economy. Some of
the regulations being considered may be more stringent than is
warranted by sound science or necessary to protect human health or the
environment. Some of them have been the focus of considerable public
debate. These regulations, taken in combination with other pending
requirements, will have serious affects on the petroleum industry, the
economy, and the nation–reducing investment in capacity and new
technologies, making domestic refiners less competitive in the global
marketplace, increasing imports of refined products by up to 500,000
barrels per day, increasing consumer prices for products such as
gasoline and heating oil, and reducing industry employment.

Petroleum industry expenditures in the U.S. to comply with existing
environmental regulations totaled $9.6 billion in 1995. Refining
accounts for 59% of this total–over $5.7 billion. Refineries have to
comply both with controls on the refinery itself and requirements to
produce cleaner fuels (reformulated gasoline and lower sulfur diesel
fuel). A second phase of reformulated fuels requirements takes effect
in 2000, which will lead to further plant modifications for
compliance. The transportation and marketing sectors account for
another 23% of total environmental compliance expenditures. The
remainder of total costs are expenditures by the exploration and
production sector, corporate expenditures, and research and
development costs.

Several requirements have been finalized over the past few years that
will add to these compliance expenditures. Some of the major new
requirements provided several years for compliance. Refiners will be
making the necessary adjustments to comply with maximum achievable
control technology (MACT) requirements for many emission sources in
the refinery through 1998 and beyond. Companies have begun performing
the analyses required by the risk management program rule and most
have submitted applications for obtaining their operating permits
under Title V of the Clean Air Act. Companies in the transportation
and marketing sector are still working to make the changes required by
MACT standards for marine terminals and gasoline distribution and
requirements for underground storage tanks. These regulations will
push up the level of current environmental expenditures by the
industry.

The addition of compliance requirements does not stop there. Several
new requirements are under consideration that will add substantially
to compliance costs for the industry. Although the list of possible
future requirements is long (see Appendices C and D), this analysis
focused on the following:

Refining
- Listing of certain refinery waste streams as hazardous
- MACT controls for process vents not covered by the earlier regulation
- MACT controls for combustion sources, including heaters and boilers
- State implementation of guidance for limiting short-term SO2 exposures
- Revision of federal air quality standards for ozone
- Revision of federal air quality standards for particulate matter
- Installation of release prevention barriers on above ground storage tanks.
Transportation
- Additional spill prevention measures on liquids pipelines
- Installation of release prevention barriers on above ground storage tanks.
Marketing
- Reporting under Toxics Release Inventory for bulk terminals
- Installation of release prevention barriers on above ground storage tanks.

Because many of these initiatives have not yet reached the proposed
rule stage, it was necessary to make assumptions about the likely
requirements or a range of possible requirements. In all cases, this
analysis has tried to avoid a "worst case" characterization of the
future. This means that the costs estimated are a realistic assessment
of future costs of compliance, and that costs could be higher if any
of these estimated requirements is more stringent than assumed herein.
Costs were estimated by determining the changes that would likely be
required for compliance, then applying an engineering-based costing
approach to determine the costs of making the necessary modifications.

Taken cumulatively, these new regulations could impose an additional
$4 billion to $7 billion (annualized) in costs on the petroleum
industry. In the near term, the industry could face considerable
constraints on capital availability, as it attempts to make available
the $9 billion to $24 billion in up front investment that would be
required for compliance.

For the refining industry, total cumulative compliance costs could
exceed $8.5 billion annually if these new environmental regulations
are implemented as anticipated (see figure). This does not include the
expenditures that will be necessary to comply with the second phase of
reformulated fuels requirements, or the possible costs attributable to
other future requirements not covered by this analysis. The eight new
requirements considered in this analysis could add from $1 billion to
$2.6 billion in costs on an annualized basis. These are substantial
costs that will affect the economics of this important sector of the
U.S. economy.

The additional compliance costs will have both direct effects
(increasing the cost of refining and reducing margins) and indirect
effects. Since environmental investments compete with discretionary
technology upgrades and capacity additions, the funds available for
discretionary investments will be reduced. This means that remaining
investments will need to meet a higher hurdle rate to receive funding.
This result, combined with the lower margins that will result from the
added compliance costs, will eliminate much needed investment in new
or upgraded capacity beyond debottlenecking. This will leave domestic
refiners stretched to meet domestic demand, raising import dependency
by as much as 500,000 barrels per day. The high level of compliance
costs may lead less profitable refineries to shut down, resulting in
job loss for their workers, suppliers and contractors. Governments at
all levels would also lose tax revenues. Reduced domestic investment
in upgrading technologies will affect crude oil and refined product
prices. Lighter crude oils and lighter products (such as gasoline and
heating oil) will begin to demand a premium, while prices will fall
for heavier, higher sulfur crude oils. This will have repercussions
throughout world crude and product markets, as well as higher prices
for domestic consumers.

Environmental regulations have the potential for serious impacts on
the petroleum industry, and by extension, the domestic economy. If
these regulations are truly necessary to protect human health and the
environment, then few would argue that those tradeoffs should not be
made. But when regulations are more stringent than necessary, the
economic impacts are unjustified. If some of the regulations analyzed
are not truly essential to environmental and health protection, then
our domestic petroleum industry is being disadvantaged unnecessarily.
The types of impacts examined in this analysis–growing import
dependency, rising consumer prices, job loss–are not easily recovered
if it is later determined that the regulations were more stringent
than necessary. If investments in the domestic petroleum industry are
delayed or eliminated, U.S. refiners will be at a disadvantage in
world markets. U.S. consumers will ultimately pay the price for these
decisions.

The question facing the nation is how to balance costs and benefits so
that we are doing what is necessary to protect human health and the
environment, without overly burdening companies with costly
requirements that do not produce commensurate benefits. This can be
accomplished by changing our regulatory development process to include
the following elements:

Use of sound science in establishing requirements
Substitution of risk-based for "list based" and "technology-based" regulatory approaches
Consideration of alternatives to command and control regulations
Use of cost-benefit analysis in developing standards.

Revamping our regulatory development structure is important. As
science and technology have improved, the nation needs to reconsider
regulatory frameworks developed decades ago before environmental
awareness was heightened. Regulations need to be developed with
today's realities in mind. If we do not take action to make
regulations more flexible and risk based, U.S. companies will become
less competitive in the global marketplace and costs will be reflected
in higher consumer prices. These are trade-offs that must be evaluated
if the petroleum industry is to continue its vital contributions to
the nation.