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A Presentation by Randall Thompson ConocoPhillips Pipe Line to the

Distribution Issues for ULSD and Not so ULSD. A Presentation by Randall Thompson ConocoPhillips Pipe Line to the Western Regional Air Partnership Denver, CO July 16, 2003. Regional Characteristics. PADD 1, East Coast

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A Presentation by Randall Thompson ConocoPhillips Pipe Line to the

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  1. Distribution Issues for ULSD and Not so ULSD A Presentation by Randall Thompson ConocoPhillips Pipe Line to the Western Regional Air Partnership Denver, CO July 16, 2003

  2. Regional Characteristics PADD 1, East Coast • Largest recipient of other region’s supplies; ~60% of all inter-regional product pipeline movements go to EC; 90% of high sulfur distillate movements • Largest concentration of oil-heated homes (Northeast) • Only region where ~all pipelines carry high sulfur distillate PADD 3, Gulf Coast • Largest supply region: No foreign nation has higher refined product output than PADD 3 • Origin of 80% of all refined products, 83% of the low sulfur distillate and 94% of the high sulfur distillate shipped by pipeline between U.S. regions. PADD 2, Midwest • Infrastructure rich, but logistics strained • Contrast agricultural west (sparse) with industrial east (dense) • Recipient of ~30% of pipeline product; origin of 8%; much intra-regional flow PADD 4, Mountain • Market tiny but growing; infrastructure sized to fit • Distances long, infrastructure thin, terrain steep • Few products (LSD only, e.g.); tanks optimized PADD 5, West Coast • 2-3 distinct refined product markets • California separate; no HSD

  3. Jun. 1, 2006 Jul. 15, 2006 Sept. 15, 2006 Jun. 1, 2010 Oct. 1, 2010 Dec. 1, 2010 Begin producing/importing 15 ppm for on-highway use, at least 80% of on-highway volume; 20% can be 500 ppm Terminals & other downstream must comply (protect, track) Retail outlets must comply No 500 ppm on-highway produced/imported No 500 ppm on-highway downstream No 500 ppm on-highway at retail First, the On-Highway Dates

  4. Outline of Non-Road Proposal • Applies to transportation/vehicle fuels: • Non-Road (NR); 500 ppm from 2007-2010, then 15 ppm • Locomotive and Marine (LM); 500 ppm from 2007-2010; then 500 ppm but marked from 2010-2014; then ?? ppm • Does NOT apply to stationary fuels • Furnace, boiler, turbine, e.g. • All called “heating oil” (HO) • Marked from 2007-2010 • Tracks on-highway v off-highway, and NRLM v HO • Provisions for Small Refiners and for Credits • Giveth (Baseline) and Taketh Away (downgrade, more grades)

  5. Jun. 1, 2007 Aug. 1, 2007 Oct. 1, 2007 Jun. 1, 2010 (also ULSD) Jul. 15, 2010 (also ULSD) Sep. 1, 2010 (also ULSD) Begin producing/importing 500 ppm for non-road, loco., marine (NRLM); mark heating oil NRLM v HO segregated & tracked downstream NRLM v HO segregated & tracked at retail Produce/import NR at 15 ppm; LM marked (still 500 ppm); HO not marked Downstream Retail Now, the “Non-Road” Proposed Dates

  6. Illustration of 2007 ProgramBased on Distillate Use in 2001 Res/Comm; Indus.; Elec. Gen.; Oil Co. Farm; Rail; Marine; Mil.; Constr; Off-Hwy 20% TCO 80% On-Highway Source: EIA, Sales of Fuel Oil & Kerosene. Includes No. 1 and No. 2 distillate/diesel to mirror EPA proposal. All CA use is classified as 15 ppm. “TCO” means Temporary Compliance Option. Illustration based on historical patterns.

  7. Illustration of 2010 ProgramBased on Distillate Use in 2001 Res/Comm; Indus.; Elec. Gen.; Oil Co. Rail; Vessel On-Highway; Farm; Mil.; Constr.; Off-Hwy Source: EIA, Sales of Fuel Oil & Kerosene. Includes No. 1 and No. 2 distillate/diesel to mirror EPA proposal. All CA use is classified as 15 ppm. Illustration based on historical patterns.

  8. 2006 (4) On-road (OR) 15 ppm OR 500, OR Sm. Ref. 500 Non-Road, Loco, Marine (NRLM) 500 dyed Heating Oil (HO) dyed 2014 (3) OR 15, NR 15 LM 500 HO     Too Simple!! Potential Distillate Product Segregations • 2010 (4) • OR 15, Non-Road (NR) 15 • Loco, Marine (LM) 500 marker • NR Sm. Ref. 500 dyed • HO • 2007 (5) • OR 15 • OR 500, OR Sm. Ref. 500, NRLM 500 undyed • NRLM 500 dyed • NRLM Sm. Ref. dyed (Yes . . .) • HO dyed[?]+marker And this is before Kero or Military Jet Fuel!

  9. Special Concerns in the Mountain and Plains States • Infrastructure sized to fit market's characteristics • Terrain; Distances; Volumes; Sources; Demand mix • Transport one diesel for on-road and off-road • No tanks or piping for add'l grade during phase-in • Systems dictate break-out tanks

  10. California's Special Challenges • Currently, all LSD • California reg applies 500 ppm to all uses, not just highway • Jet interface goes to LSD • Transmix tanks must have space: used for transmix and to meet DOT requirement for pressure relief capacity • Then, all ULSD • ULSD cannot accept jet interface • Must wrap ULSD in gasoline, transmix will double • No home for any accidental downgrade LOCKOUT • Transmix issues • More customer/shipper truck trips to haul transmix • Increased truck traffic coincides with truck increase for ethanol shipments • If customers/shippers miss schedule, not enough space to meet DOT pressure relief requirement. LOCKOUT

  11. Kero for Winterizing Diesel:An Issue in the North • Kerosene for "winterizing" diesel • Keep product flowing in cold weather • Common in cold climates • Must be 15 ppm in 15 ppm diesel • Currently, can use jet fuel or K1 (heating kero) • Share (optimize) tanks/piping • New requirement will require segregation (unless jet also at 15 ppm) • Reduce flexibility • Increase cost of handling small volumes

  12. Sequencing and Interfaces: Nationwide Impact • If/while LSD or HSD market available, use to buffer jet and ULSD • Impacts sequencing/cycles, but little impact on infrastructure • LSD (smaller market) will have larger % gain from downgrade • If sequence jet with ULSD, must remove interface to transmix • 2x interfaces creating transmix (old + new), so double volume • Tanks required at new locations? • If no LSD or HSD market available, buffer jet and ULSD w/gasoline • Increases gasoline cycles, but decreases vol. to market • Increases transmix, and its infrastructure • If jet fuel spec reduced to 15 ppm • What of lubricity and other quality issues?

  13. A Home for Downgrade:An Uncertainty Nationwide • May not ship it, but may create it • Enough to merit a tank? • Will customers/shippers want LSD? HSD? • More downgrade further downstream (%) • Need a home for downgrade at line's end every time • "Last" (most downstream) customer for LSD/HSD must take all • Stop line for slower delivery speed (cf. Atlanta's gasoline)

  14. Downgrade Limitation • For on-highway rule • “Downgrade” reclassifies volumes from 15 ppm pool to the on-highway 500 ppm pool; limited to 20%/yr of 15 ppm • Includes normal interface and mistakes • No limitation on reclassifying to off-highway • Under proposal • “Downgrade” reclassifies volumes from 15 ppm pool to ALL of the 500 ppm pool, on-highway and NRLM; limited to 20% of 15 ppm annually • Still includes normal interface and mistakes • Can only reclassify to heating oil without limitation • Every party downstream of refiner/importer

  15. NEW The Downgrade Limitation’s Limitations • Stationary Uses (“HO”) dominated by space heating • Seasonal • Variable with the winter’s severity • Concentrated in a limited geographic area • Availability may decrease as distributors choose between a seasonal product and 15 ppm on-road • If can’t move off-spec ULSD to HO, may have to go to transmix; may overburden; will cost • Why not dyed NRLM? • Will further fragment market, stress infrastructure, slow market correction

  16. Dyes and Markers • NRLM may be shipped dyed (visible) or undyed • If undyed, may be commingled with OR of comparable S • Whether dyed or undyed, cannot be commingled with HO unless moving to HO use • After NRLM dyed for IRS, can be commingled with higher S volumes such as from small refiners • HO must be marked w/ solvent yellow 124 (“Euromarker”) from mid-2007 to mid-2010, can be dyed • Loco, Marine (LR) marked w/ solvent yellow 124 from mid-2010 to mid-2014; HO no longer marked • Issues: Test for marker; jet fuel downstream; marker in transmix

  17. Tracking and Recordkeeping • Product Transfer Documents • Refiners and Importers to Downstream Parties, 2007-2010, for: • Undyed 500 ppm fuel • Undyed 15 ppm fuel • Dyed 500 ppm fuel (not for use in highway vehicles) • Dyed 15 ppm fuel (not for use in highway vehicles) • Dyed high-sulfur fuel (not for use in highway vehicles or certain nonroad engines) • Marked heating oil (not for use in NRLM equipment or highway vehicles) • Plus, for refiners & importers • Batch by batch for NRLM

  18. Mismatched Timing Undercuts Ramp-up • Later downstream compliance -- August 15, e.g., -- designed to allow system to saturate. • “Prohibited acts” start on June 1: violation before subject to rule • Calculation of 20% downgrade limitation begins June 1: downgrades, of necessity, will be high during the ramp-up • No environmental benefit, no program benefit

  19. Uncertainties Now • What will refiners produce? • What will marketers want? • Will tankage be adequate? • Will transmix infrastructure/processing be avail.? • What will the S content of the rest of dist. be? • What will the S content of jet be? • Will a new testing mechanism limit losses from protective cuts?

  20. Uncertainties Later • Every system and region has special issues • Universal: operations protocols more stringent; impact of error greater • Infrastructure – refining, transportation, distribution – stretched further • Flexibility and hence capacity decreased • Duration and severity of a price spike following a market imbalance increased

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