National Petroleum. Council(E8tablis~eJby t~e Secretary of t~e Interior)

May 10, 1973

My dear Mr. Secretary:

On behalf of the members of the National Petroleum Council, I am pleased to transmit toyou herewith the summary report on Factors Affecting U.S. Petroleum R efining asapproved by the Council at its meeting on May 10, 1973. The full report of the MainCommittee, containing more detailed supporting information and data, will be submittedto you in the near future upon its completion and printing.

On Feb:ruary 9,1972, the Assistant Secretary of the Interior asked the National PetroleumCouncil to undertake a study of the factors-economic, governmental, technological andenvironmental-which may affect the domestic refining industry's ability to respond todemands for essential petroleum products.

In response to this request, the NPC Committee on Factors Affecting U.S. PetroleumRefining was established under the chairmanship of Orin E. Atkins, Chairman of theBoard, Ashland Oil, Inc., with the assistance of a Coordinating Subcommittee, chairedby George Holzman, General Manager, Refining, Shell Oil Company.

This report was actually completed just prior to the issuance of the President's EnergyMessage to Congress on April 18, 1973, and does not take into account or evaluate anyof these policy changes or recommendations.

The energy message addressed a range of key factors which directly affect U.S. energysupply and are important in assuring a healthy domestic petroleum refining industry.The enclosed report evaluates the various factors affecting the domestic refining industryand virtually all the basic factors mentioned are still relevant. This is particularly sofrom the point of view of future governmental policy.

Solutions to the present domestic refining problems will not be achieved easily or rapidly.We wish to point out that significant lead time is inherently involved in implementingany industry or government programs designed to enhance U.S. petroleum refiningcapabilities. The effects of any programs in terms of increased capacity and volumes offuel could not be realized for 3 or 4 years.

The National Petroleum Council sincerely hopes that this study will be of benefit to theGovernment in the difficult decision-making process that lies ahead.

Honorable Rogers C. B. MortonSecretary of the InteriorWashington, D. C.

;;~i~.d'H. A. True, Jr.Chairman -

1625 KStreet, N. W., Wa8~ington, D. G. 20006 (202) 393-6100

Factors Affecting U.S.Petroleum Refining

A Summary

May 1973

Prepared by theNational Petroleum Council's Committee

on Factors Affecting U.S. Petroleum RefiningOrin E. Atkins, Chairman

with the Assistance of the Coordinating SubcommitteeGeorge Holzman, Chairman

NATIONAL PETROLEUM COUNCIL

H. A. True, Jr., Chairman

Robert G. Dunlop, Vice Chairman

Vincent M. Brown, Executive Direct01'

Industry Advisory Council to the

U.S. DEPARTMENT OF THE INTERIORRogers C. B. Morton, Sec1'eta1'y

Stephen A. Wakefield, AssistantS ecreta1'y f01' Energy and Minerals

Duke R. Ligon, Director,U.S. Office of Oil and Gas

All Rights ReservedLibrary of Congress Catalog Card Number: 73-84033

© National Petroleum Council 1973Printed in the United States of America

Preface

On February 9, 1972, the National Petroleum Council, an officially establishedindustry advisory body to the Secretary of the Interior, was requested by the AssistantSecretary of the Interior-Mineral Resources to undertake a survey of the factors­economic, governmental, technological and environmental- which affect the ability ofdomestic refining capacity to respond to demands for essential petroleum products. TheAssistant Secretary asked that the Council's report discuss those elements which areconsidered essential to the development of domestic refining capacity. A copy of therequest letter is included as Appendix l.

In response to this request, the National Petroleum Council established a Committeeon Factors Affecting U.S. Petroleum Refining under the chairmanship of Orin E. Atkins,Chairman of the Board, Ashland Oil, Inc., and the cochairmanship of Hon. Stephen A.Wakefield, Assistant Secretary of the Interior for Energy and Minerals. The Committeewas assisted by a Coordinating Subcommittee, chaired by George Holzman, GeneralManager, Refineries, Shell Oil Company. (For a listing of members of the Committeeand its subcommittees, see Appendix 2.) This report is designed to call attention to thosefactors and issues which have affected domestic refining capacity.

The results of the investigation are presented in this report, Factors Affecting U.S.Petroleum Refining-A Summary. The more detailed findings of the Committee, whichare the basis of this report, are contained in the full report of the Committee, publishedseparately. In addition, the Committee undertook to supplement a previous NPC reportentitled, Impact of New Technology on the U.S. Petroleum Industry (1946-1965). Thisreview as regards refining technology is also published separately.

Table of Contents

Introduction 1

Part One-Conclusions and Recommendations

Conclusions "... . . . . . . .. ....... ... ..... . .. . . . .. . . .... 3

Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Part Two-Summary of Volume Two

Chapter One-Trends in Petroleum Refining Requirements,Capacity and Capabilities 13

Chapter Two-Factors Affecting Refining Shortfall andEnvironmental Conservation 23

Chapter Three-Storage and Transportation Requirements 27

Chapter Four-Petroleum Refining Economics... ...... ... ....... . . . . .. . . .. 33

Chapter Five-Oil Import Policy and Other Related Issuesof Government Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Appendices

Appendix 1- Study Request Letter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Appendix 2-List of Committee Members 47

Appendix 3-Fundamentals of Refining Operations and Product Use . . . . . . . . . 51

Appendix 4-Illustrative Economic Model Studies . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Glossary ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 65

Introduction

Refining is an integral part of the domesticpetroleum industry. It is only through thisprocess that crude oil can be transformed intothe many varied products which have becomethe basis for the Nation's continued develop­ment. Refined petroleum products form thebasis for heating oils, motor fuels, plastics,building materials, synthetic fibers, medicines,rubber, paint solvents, bio-degradable deter­gents, asphalt and lubricating oils, as well asmany other products.

The petroleum industry, which has beencalled upon to supply the Nation's consumerswith three-fourths of their energy needs, is acomplex web of interrelated functions. In total,over 40,000 companies perform the primaryfunctions of exploration, production, transpor­tation, refining and marketing. This report isaddressed primarily to the refining function.

The growth of the domestic refining segmentof the petroleum industry is affected by thegrowth of the other segments. For example,domestic oil and gas production rates directlyaffect the amount and location of refining ca­pacity requirements. Similarly, the develop­ment of transportation systems which allow theUnited States to realize the benefits of largemodern tankers affect refiners' decisions regard­ing size and location of new refinery sites.

There are nearly 200 companies in the con­tinental United States which are directly in­volved in the process of crude oil refining. Theserefineries are located in 40 states and range incapacity from 250 barrels per calendar day(250 B/ CD) to over 400,000 barrels per calen­dar day (400 MB j CD).*

U.S. refiners have a highly diverse range ofeconomic and industrial interests. Some refinersemploy simple distillation techniques for theproduction of the most elemental refined prod­ucts, while others are largely engaged in themanufacture of motor fuels and domestic heat­ing oils. Still others produce a broad spectrumof petroleum products, including highly sophis­ticated petrochemicals. The various processingtechniques and ,types of equipment employed inthe manufacture of finished petroleum productsare numerous. Because of the diversified inter­ests, manufacturing techniques and raw ma­terials base, different refining facilities have

different interests and requirements.This report attempts to delineate broad areas

of concern to refiners and to suggest policyoptions which will help maintain the health andviability of the refining segment of the petro­leum industry.

While numerous factors will be discussed inthe body of the report, the single most influen­tial factor on U.S. petroleum refining today­and indeed on the entire petroleum industry-isthe current transition from operating in an eraof stable and ample domestic crude and productsupplies to operating in an era of instabilityand shortage. Refiners are no longer assuredof the availability of needed raw materials ofeither the quantity or the quality for whichtheir refineries were designed.

This NPC study addresses the past, presentand future trends in domestic petroleum refin­ing in relation to requirements, capacities andcapabilities. In addition, technological factorsthat have contributed to the shortfall in do­mestic refining capacity are evaluated. To de­termine past, current and near-term refiningcapacity, an extensive survey was conducted,the composite results of which appear in thefull report of the Committee.

In order to analyze the construction of newrefining capacity, the study addresses the eco­nomic factors which indicate the advantagesand disadvantages of building domestic refin­eries vs. building refineries in foreign perimeterlocations such as eastern Canada and the Carib­bean. Oil import policy, environmental consid­erations and other pertinent government poli­cies are evaluated.

Due to the scope and complexity of the assign­ment, this study is presented in three volumes.This summary report contains the conclusionsand recommendations of the National PetroleumCouncil and incorporates a summary of thesecond volume-the Committee's full report.The third volume is an update of the refiningsection of a previous NPC report entitled, I1n­pact of N e1U T echnology on the U.S. P etToleu?nIndustTY (1946-1965).

" Since product demands are expressed as dailyaverages, daily average or calendar day refinery ca­pacities are used throughout this report.

1

Part OneConclusions and

Recommendations

Conclusions

This study has determined that a number offactors involving supplyj demand, environmen­tal and economic concerns have contributed tothe shortfall of domestic refining capacity. It isimportant to realize that no single program orpolicy has caused nor will alleviate current andprojected shortfall of domestic refining capac­ity. Any measures taken to attain short-termresults must be cognizant of the effect of thesemeasures upon long-term situations. Several ofthe more important factors which have an im­pact upon the refining situation and their impli­cations are discussed in the following sections.

Supply and Demand

Product Demands Exceeding Capacity

The requirements for refining capacity areset by the demand for petroleum products,which is expected to grow at a rate of 5.7percent per year from 1971 to 1975, 2.7 percentper year from 1976 to 1980, and 3.0 percent peryear from 1981 to 1985. At these growth rates,demand for petroleum products will be nearlydouble the demand for the 1971-1985 period,increasing from 15 million barrels per day(MMBj D) in 1970 to over 26 MMBj D in 1985.The refining capacity necessary to satisfy 1985demand will therefore exceed 25 million barrelsper calendar day (MMBj CD). Operating ca­pacity of U.S. refineries on January 1, 1973,was 13.2 MMBj CD, with about 2.5 MMBj Dof products being imported. Thus, if projectedpetroleum product requirements are to be met,it will be necessary to construct new refineriesor expand existing refineries to add about 9MMBj CD of capacity by 1985. The additionalcapacity will have to be built in the UnitedStates or come from existing or future offshorefacilities in order to meet projected demandas shown in Figure 1. If these requirements

were to be met solely from U.S. refineries withpetroleum product imports completely eliminat­ed, about 12 MMBj CD of new capacity willhave to be constructed by 1985.

U.S. refining capacity was adequate to meetrefined product demands until the 1960's. Sincethen, a shortfall in domestic refining capacityhas developed, especially for residual fuel oil.Imports of such products have increased sub­stantially, particularly into the East Coast.Until now, physical refining capacity has existedin the United States to meet the total demandsfor lighter fuel products-gasoline, jet fuels,etc. Now, however, demand for light productshas also exceeded domestic capacity. By 1975,the total "shortfall" of domestic refining ca­pacity is projected to be 25.9 percent of totalrefining capacity required or 4.8 MMBj CD.

The present shortfall of domestic refiningcapacity is the result of a series of emergingtrends intensified by a surge in demand in 1972.For example, the current deficit of heavy fueloil capacity developed over an extended periodof time, while the shortfall in capacity to meetlight product requirements is of more recentdevelopment. It takes several years for newplans to become operational, and lead time mustbe considered an important element of futureplanning. Because of the necessary lead time toplan and build new capacity and because nolarge increments of new capacity are now inthe construction stage, it has been necessary tomodify import controls to permit an increasein product imports in order that projected de­mand can be met. While this assumes thatsufficient petroleum products are available inworld markets, the Committee has not evaluatedworld refining capacity to determine the validityof this assumption. However, it is felt that, iflarge increases in U.S. demand continue, worldcapacity may be outstripped by demand, muchas U.S. capacity was in 1972.

3

30 .----------r--------.--------.---,--------,--------,-------~

ACTUAL PROJECTED

U.S. OPERATINGCAPACITY *

U.s. REFINING CAPACITY REQUIREDTO SATISFY PRODUCT DEMAND

WITH NO PRODUCT IMPORTS

251--------+-------1---+---+-----+----/----;4--------1,/

,//

,/

>­<{Clc:<{ClZ

~ 20 1-----------i-- ----___+---j-----+-----:7~--_+-7"'~---_+------____j<{uc:w"­C/l-Iwc:

~ 151-----------i~-----___+--_+_:L-~4-------:::;......~_+---'~----_+------____jcozo-I-I

2

U.S. CAPACITY REQUIRED TO SATISFYPRODUCT DEMAND WITH PRODUCT

IMPORTS CONTINUING AT 1972 RATES

10 t::;;;.;;;;:iiii"..-.::;;:;;;9S;;7"'~~-_+ -_t--___lr__----t_----__t----_j

5L-----..l...--------L----l...------..l-----.L.----_.....L ----'1960 1965 1970 1975 1980 1985

YEAR·Statistical projection of historical and survey capacity data-not a forecast.

Figure 1. Total U.S. Operating Refinery Capacity vs. Requirements-1960-1985.

Uncertainty Concerning Assurance ofSupply and Quality of Crude Oil

The decline in exploration for and productionof domestic crude oil has resulted in greaterdifficulties in obtaining assured crude supplies.This has had an inhibiting effect on the expan­sion of U.S. refineries. In 1975, crude oil andproduct imports are expected to be double the3.4 MMB/ D imported in 1970; imports in 1985could be as high as 19.2 MMB/ D, dependingupon the degree of national commitment todomestic energy production. * Thus, domesticrefineries are now compelled to rely increasinglyupon foreign sources of crude supplies. In orderto meet requirements-at least in the shortterm-the United States will also have to de­pend upon foreign refining capacity for in­creased amounts of product imports.

In addition to the uncertainty regarding long­term assurance of crude oil supply, the distinc­tive characteristics of the crude oil itself areimportant factors in the refining process. A

given refinery cannot effectively process everytype of crude oil. If a refinery processes a typeof crude oil for which it was not designed, theeffective throughput capacity of the refinerywill in many cases be reduced substantially.Today there is a shortage of both domestic andforeign low-sulfur crude oil, and this is expectedto continue in the near future. Many domesticrefineries are designed, both from a metallur­gical and from a processing viewpoint, to ac­commodate only low-sulfur crude oil. High­sulfur crude oil-the type most generallyavailable from foreign supply sources- cannotbe exclusively processed in a domestic refinerydesigned for 10'w-sulfur cl;ude oil without theinstallation of additional facilities and/ or exten­sive modification of existing facilities to preventcorrosive damage and to meet product specifica­tions.

* National Petroleum Council, U.S. Ene1°UY Outlook­A SummaTY Rep01·t of the National PetToleum Council(December 1972).

4

Increased Demand for Refined PetroleumProducts and Petrochemical andSubstitute Natural Gas (SNG) Feedstocks

The demand for refined petroleum productscould increase above projected requirements ifdemand is stimulated by such factors as thecontinuation of current shortages of naturalgas, continuation of delays in bringing nuclearfueled electricity generating capacity on line,and a future decrease in the availability ofenvironmentally and economically acceptablelow-sulfur coal.

Although oil is not completely interchange­able with other fuels in existing equipment, itcan .supplement the needs in any energy con­summg sector of our economy. In effect, it canact as the "swing" fuel. If gas finding rates aredisappointingly low in the future, oil can beused to fill the need. The same concept holdstrue for oil as an alternate to nuclear powerand coal when necessary and where applicable.

The required specifications for individualproducts are affecting both the type and theamount of capacity required. The increasingdemand for low-sulfur residual fuel oils (0.3­weight-percent sulfur) requires the installationof extensive treating facilities. Not all crudeoils can be processed utilizing existing tech­nology to. yield these fuels economically, andcrudes WhICh are naturally low in sulfur are inshort supply in world markets. Motor gasoline,representing nearly 40 percent of total U.S. oildemand, is also sensitive to environmentallyenduced specification changes. Emission con­trol equipment on new automobiles is reducingfuel efficiency, thus increasing gasoline demand.While this in itself is increasin o' refinery ca­pacity requirements, the need for ~nleaded O'aso­~ine fo~ these new vehicles is also signific~ntlym~reasmg the amount of crude capacity re­qUIred to produce a given volume of gasoline.

In the last few years, the domestic manufac­ture of petrochemicals has become closely re­lated .to domestic crude oil refining capacity.SupplIes of domestic natural gas liquids whichare important petrochemical feedstocks 'are de­clining, and petrochemical producers ar~ havingto turn more and more to refinery naphtha andgas oil. This shift in feedstock will result in acloser relationship between the refinino- andpetrochemical industries as well as in inc~easedneed for integration of petrochemical and refin­ing planning and operation.

The National Petroleum Council has project­ed petrochemical feedstocks to grow from lessthan 6 percent of total petroleum demand in1970 ~o about 8 percent in 1985.'" If refiningcapaCIty moves offshore, then petrochemicalproducers may have to use imports for theirfeedstock supplies. Conversely, if refining ca-

pacity is kept onshore, feedstock supplies canbe expected to be more readily available.

An additional demand factor which will affectboth petrochemical and refining operations isthe planned reforming of naphtha and otherpetroleum liquids into SNG. Feedstocks forSNG manufacture could approach 1 MMBj Dby 1985.

Environmental ConcernsAmericans are becoming aware of the poten­

tial conflict between energy requirements andenvironmental goals. Both high energy con­sumption rates and satisfactory maintenanceof environmental standards are possible butonly through dealing effectively with the totalenvironmental, social and economic system.

The principal environmental factors whichhave had inhibiting influences on the expansionof domestic refinery capacity are discussed inthe following sections.

Availability of Refinery SitesRequirements relating to construction and

operating permits and other environmental con­siderations have seriously limited and delayedsite development for new plants. Environmentalissues and restrictive emission requirementshave delayed or actually prevented new refiningconstruction. Of more concern than the diffi­culty of complying with these requirements arethe instances where proposed refinery construc­tion-after complete compliance with federal,state and local requirements-is halted by citi­zen group court actions.

Despite the rigorous standards for both waterand air quality that refineries must meet nowand in the future, resistance still exists in manyareas of the country to constructing plants, evenwith appropriate environmental equipment. .Itis hoped that, as the public becomes more awareof the excellent pollution control performanceof modern refineries, such resistance towardplant location will disappear.

Availability of Deepwater Port Facilitiesfor Crude Oil Imports

While domestic reserves need to be developedto their fullest extent, a need will still exist forsupplemental quantities of crude oil from othercountries. The most efficient and economicalmethod of transporting these requirements torefinery centers is through the use of very laro-ecrude carriers (VLCC's). Effective use ~fVLCC's-tankers having greater than 150,000

* NPC, U.S. Energy Outlook: An Initial Appmisal1971-1985, Volume Two (November 1971).

5

deadweight tons (DWT) displacement- will re­quire the construction of deepwater ports lo­cated offshore, with pipelines delivering sup­plies from these superports to refineries.

Documented evidence shows that most spillsfrom tankers occur during loading and unload­ing at ports now located on shorelines. Deep­water unloading terminals offer environmentaladvantages in that they would minimize suchoccurrences and effects of accidental spills onnearby shorelines by requiring less frequentship movements and by allowing these move­ments to take place at more remote distancesfrom land. Likewise, VLCC's with compart­mented cargoes and highly trained crews, alongwith sophisticated new navigation equipmentand safety developments, offer environmentaladvantages over smaller vessels.

Availability of Crude OilAs mentioned earlier, basic to any refinery

construction plans is the assurance of avail­ability of suitable crude oil of known qualityand assured stability of supply for a reasonableperiod of time. Environmental concerns have,at times, delayed the development of supplies ofavailable or potentially available crude oil torefineries.

Perhaps the most important hinderance torefining construction is unreasonable interfer­ence with access to domestic crude oil resourcesafter detailed studies have assessed the impactof environmental issues and demonstrated cost­benefit effectiveness. For example, reserves ofcrude oil on the North Slope of Alaska whichwere discovered in 1968 have been estimated tobe over 10 billion barrels, a volume which isequivalent to about one-third of the knownreserves of the lower 48 states. Billions ofdollars of industry's capital have been renderednon-productive by citizen group court actionsand other delays associated with environmentalconcerns. These dormant reserves have not onlydrained funds from uses in other ventures, suchas expanding refinery capacity, but have in­creased our Nation's dependence on importswith attendant penalties on national securityand balance of trade. The Nation cannot affordto allow these resources to remain unused in­definitely. Even under the most optimistic pre­dictions, it will be several years before suppliesof crude oil can be moved from the AlaskanNorth Slope to domestic refineries.

The potential for discovery of large quan­tities of crude oil and natural gas exists in off­shore waters surrounding our continent. How­ever, many areas of the continental shelf of theUnited States remain undeveloped or under­developed because of environmental concerns.

6

Economic FactorsImportant changes are taking place in the

economic environment in which refineries findthemselves. Crude oil is being supplied in in­creasing amounts from foreign sources, andprices of foreign crude oil landed in the UnitedStates are rising sharply, exceeding delivereddomestic prices in some cases. Refining facili­ties are becoming more complex in both designand materials requirements and are increas­ingly more expensive per barrel of capacity.

The principal economic factors affecting theexpansion of domestic refining capacity arediscussed in the following sections.

The Economic Outlook for New RefiningInvestment Has Become Uncertain

Refiners are having to compete for funds incapital markets at a time when investmentdollars are becoming tight and are being at­tracted to those investments with a rate ofreturn more commensurate with future risk andstability. Rates of return on refining invest­ment must be adequate if financing is to beavailable for construction of new domestic re­fining capacity. Current economic conditionsand the lack of encompassing US. policies onenergy matters has made the outlook for newinvestments in new refineries quite uncertain.

Illustrative economic comparisons have beenprepared concerning the cost of operating arefinery located in perimeter areas (Caribbeanor eastern Canada) to the cost of the samerefinery located in either Petroleum Adminis­tration for Defense (PAD) District I (US.East Coast) or PAD District III (US. GulfCoast).* In all cases, the refineries were oper­ated on the same Middle East crude. They wereoperated to produce a product mix comparableto the projected growth in District I productdemand between 1970 and 1985, with the prod­ucts ultimately delivered to the same marketlocations in District 1. These costs do not in­clude any cost associated with acquiring thecrude oil import quota but do include 1972level import duties. They assume an applica­tion of current statutory income tax rates­zero for the Caribbean example, 48 percent forthe United States and 49 percent for an easternCanada refinery.

While these studies are only illustrative ex­amples, they indicate that a refinery located inDistrict III can expect average product costs

* These illustrative economic comparisons we1'e pre­pared p1'ior to the issuance of the President's EnergyMessage to Congress of April 18, 1973, and do not takeinto account the oil import proclamation containedtherein.

which are on the order of $0.60 per barrelhigher than the refinery located in the Carib­bean. Assuming that such a refinery is builtin District I, the economic advantage of theCaribbean refinery is reduced to approximately$0.40 per barrel. On the other hand, in easternCanada, where the tax rates are comparableto those in the United States, the economicadvantage tends to disappear-except in thoseinstances where specific tax advantages andother benefits have been granted.

Recent Product Price Controls Will Leadto Increasing Supply Shortages

If the United States continues to imposeprice controls- direct or indirect-on petroleumand/ or refined petroleum products in order tostabilize the economy, the full cost and financialrisk of providing new supplies of petroleumproducts must be recognized, including highercosts of imported supplies. If they are not,refinery expansion will be discouraged, andshortages of domestically refined petroleumproducts will occur. To the extent available,products would have to be imported from worldmarkets at prices which are not subject to U.S.price controls. This, in turn, could drive marketprices for imported products landed in theUnited States higher than those of productsrefined domestically, a consequence currentlybeing experienced.

Restrictive and InflexibleImport Regulations *

The relative inflexibility of the crude oil quotasystem, coupled with the decline in domesticcrude oil production, has restricted the develop­ment of new refining capacity. While it is truethat total U.S. import quotas would increaseby the amount of new capacity built, there hasbeen no direct mechanism to provide an existingrefiner or a potential refiner with the necessaryaccess to foreign crude oil supplies necessary tothe operation of new refinery capacity in theUnited States. Limited and inadequate starterallocations were the only existing provisionsfor granting crude access for new refiningcapacity. The difficulties and costs of acquiringimported supplies from others were discourag­ing factors in refiners' decisions regarding newcapacity construction.

The exemption of certain products from for­mal quota controls, however, has led to theconstruction of sizable refining capacity outside

the United States. The ability to import theseproducts into the United States, the ability toacquire long-term foreign crude oil supplies,and the economic advantage of offshore refiningfavor the buildup of refining capacity in theseperimeter areas.

Requirements for Transportation andStorage Facilities

Increased requirements for petroleum willrequire the expansion of transportation andoperational storage facilities. Most of the in­cremental crude oil supplies will be importedfrom the Middle East and Africa. For suchlong distances and large quantities, the mosteconomical and environmentally safe system forreceiving such oil is by direct shipment to therefining center utilizing VLCC's and properlydesigned deepwater crude unloading terminals.Considering the lowest cost logistical systemfor waterborne imports of crude oil, the capitalrequired for the 1971-1985 period is substan­tial. Estimated investments for deepwater portfacilities and for foreign construction of new250,000 DWT vessels range from $14 to $16billion. Total capital requirements may be high­er depending on the extent to which U.S. ship­yards must be used for vessel construction.Additionally, cargo preference legislation whichwould require the use of American flag vesselson direct shipments to the United States wouldsubstantially increase the transportation chargeper barrel of delivered oil. Because of theseincreased costs, such legislation would act as adisincentive in the construction of U.S. refiningcapacity.

Storage requirements will also rise as importsincrease. Domestic refineries running on do­mestic crude oil production need very littlecrude storage. With future receipts arrivingin VLCC's, refiners will need facilities to storetheir large cargoes (almost 2 million barrelscan be carried in a 250,000 DWT tanker) andto maintain a working inventory to ensurecontinuous operation in the event that ship­ments are delayed.

* The P1'esident, in his ene1'gy message to Cong1'essof A1Jril 18, 1973, has removed by proclamation allexisting tariffs on imported c1'ude oil and products andhas suspended direct control over the quantity of crudeoil and ?'efined p?'oducts which can be impO?·ted. Inplace of the control system, the P1'esident has initiateda license fee system. The President stated that, toenCOU?'age domestic ?'efinery const1'uction, crude oil inamounts up to th1'ee-fourths of new 1'efining capacitymay be imported for a pe?'iod of 5 y ea1'S without beingsubject to any fees.

7

Recommendations

u.s. Energy Policy ObjectivesThe National Petroleum Council recognizes

that the primary energy industries, in coopera­tion with the Government, are responsible formeeting the energy needs of American society.This responsibility must be met while assuringfree consumer choice at the lowest costs con­sistent with adequacy of long-term supply,preservation of the environment, and promo­tion of efficient use of energy and energy con­servation. The impact of the effects of energyavailability and costs on economic welfare andprogress and, more importantly, the need topreserve national security underline the sig­nificance of this responsibility.

The NPC's recent U.S. Energy Outlook reportincludes recommendations for a U.S. energypolicy.':' This study reiterates some of thoserecommendations since petroleum refining is anintegral part of the energy industries and, asSUCh, is affected by overall U.S. energy policies.This report also contains additional recommen­dations which are more specifically related todomestic petroleum refining operations.

These recommendations are made with thebelief that a healthy and viable domestic petro­leum industry, in all its functional operations,is essential to the economic well-being and thenational security of the United States. Increased"exportation" of petroleum refining capacityoutside the United States results in the loss ofdomestic financial and manpower employmentopportunities; reduces taxation revenue to fed­eral, state and local governments; results inlarger deficits in the U.S. balance of trade andpayments; and adversely affects other types ofmanufacturing.

The United States Must Have aNational Sense of Purpose toSolve the Energy Problems

A long-term national sense of purpose mustevolve to meet the social and economic issues

related to energy problems similar to the na­tional dedication to environmental conservationand full employment. It is this dedication andthe cooperation among government, industryand private citizens that must be expanded ifthe issues relative to locating and siting futurerefining facilities are to be resolved. Environ­mental issues and aesthetic considerations mustbe balanced against the socio-economic benefit~

of developing adequate sites for refining facili­ties to meet public requirements. The need toprovide our Nation with adequate energy at areasonable cost is a matter of such vital concernthat it will necessitate rational resolution of theinconsistencies and conflicts emerging in fed­eral, state and local planning involved in sitingand other considerations.

The Federal GovernmentShould Encourage an Economicand Fiscal Climate Conduciveto Energy Development

It has been projected that meeting U.S. en­ergy requirements during the 1971-1985 periodwill require capital outlays of between $450and $550 billion. For such vast sums of moneyto be generated by U.S. energy suppliers, sev­eral conditions must exist:

• Competition: Competitive markets are aparticularly effective mechanism for de­termining price levels necessary to balanceenergy demand and supply. The complexoperation of market forces will best serveconsumers and the national interest by pro­viding energy in amounts needed and informs preferred for environmental reasons.Market forces, if unfettered, would pro­mote efficient use of energy and allocate

* NPC, U.S. Energy Outlook-A Summary Rep01"t ofthe National Pet1'oleum Council (December 1972), pp.75-80.

9

resources among energy activities on aneconomical basis.

Vigorous competition requires unrestrict­ed entry into the various energy fuels mar­kets, subject to applicable antitrust laws.Competition is stimulated when a supplierof one fuel can provide additional capitalinvestment, technology and managementskill for the development of other fuels.

• F?'ee MaTket PTices : A favorable economicclimate enabling companies to generate in­ternal sources of capital as well as to com­pete in capital markets is essential to thelong-term development of energy resources.Profitability is essential to free enterprise,and prices must be permitted to reflectcosts and provide an adequate return oninvested capital.

Because of the deep and inseparable rela­tionship between domestic refining and theworld petroleum :ndustry, it is very un­likely that the problem of new refiningcapacity will be met without restoring thefree play of an open domestic market. Inrecent years, product prices have been in­adequate to provide sufficient return onnew investments commensurate with therisks involved. Any external forces suchas price controls which hold prices belowmarket clearing levels will continue thetrend of insufficient returns of the industry.Flexibility to adjust prices based on marketsupply and demand forces within theUnited States should be sufficient to per­mit realization of an adequate return onpresent and future investment.

• Fiscal Policies: Fiscal policies, such as theinvestment tax credit and accelerated de­preciation rates, should be utilized to fosterthe availability of capital requisite for theconstruction of new refineries. Such pol­icies should be designed to encouragegrowth of domestic refining, petrochemicaland SNG facilities.

Whatever policies are adopted should beclear and firm. If investors believe thatgovernment inducements to build onshorerefineries are temporary, the economic at­tractiveness of onshore refineries will beweakened. For example, turning the in­vestment tax credit on and off to controlthe economy is not an effective inducementto refinery construction.

Import Policies Should BeDesigned to Encourage the Growthof Domestic Refining Capacity *

Increasing product imports at the expense ofdomestic refining capacity would place the

10

United States in a position of having to dependon foreign sources for a growing part of itscrude oil supply. It would also, to an increasingdegree, result in U.S. dependence on foreignprocessing capacity. This would appear to becontrary to U.S. national security and nationaldefense as defined by Section 232 of the TradeExpansion Act of 1962.

In order to be effective, any system of importcontrols, whether quota restrictions or varia­tions thereof, should at the very least consider-

• More favorable provisions for importationof crude oil than refined products

• Provisions to ensure a market for all do­mestic crude production

• Policies that provide the domestic refinerassurances of an adequate and long-termsupply of crude oil from domestic as wellas foreign sources and, in so doing, assuremaximum utilization of existing refiningcapacity

• Incentives to offset the disadvantages facedby domestic refiners when manufacturingproducts currently exempt from formalquota control

• Provision for maintenance of the U.S.petrochemical industry's competitive posi­tion in world markets

• Consistency and stability in order to pro­vide refiners the basis for establishing long­term planning objectives

• Emergency reserve oil storage capability t• Compatibility with overall objectives of

national energy policy.

The Construction ofModern Transportation FacilitiesShould Be Encouraged

Unloading facilities for VLCC's, built as closeas practical to the coastal refining centers, re­sult in the lowest cost transportation system.This would ideally place the unloading facilityjust offshore, with onshore distribution madeby pipeline. The site must have sufficiently deepwater, uncongested approaches from the sea

* The President, in his energy message to Congressof April 18, 1978, has removed by proclamation allexisting ta1-iffs on imported crude oil and products andhas suspended direct control over the quantity of crudeoil and refined p1'oducts which can be imported. Inplace of the control system, the President ha,s initiateda license fee system. The P1'esident stated that, toenCOU1'age domestic refinery construction, crude oil inamounts up to three-fourths of new r efining capacitymay be imported for a period of 5 years without beingsubject to any fee s.

t An in-depth analysis of this subject is currentlybeing made by the NPC's Committee on EmergencyPreparedness.

and minimum potential for environmental dis­ruption. With the equipment possible under theexisting technology, near pollution-free opera­tion is attainable. In addition, if it is not at anexisting terminal or refinery, the site shouldhave an onshore area suitable for oil storagefacilities and access to a sufficient infrastruc­ture for support of the facility. Specific site lo­cations for deepwater terminals are currentlyunder study by government and industrygroups. Because offshore refineries can takeadvantage of the lower unit costs associatedwith VLCC's and deepwater ports, the lack ofsuch facilities has in the past and will continuein the future to act as a disincentive to the con­struction of domestic refining capacity.

An additional cost to a domestic refiner offoreign crude oil would be incurred by legisla­tion requiring receipt in American flag tankers.Any benefits of such legislation to the economymust be weighed carefully against the addedcosts incurred.

A Rational Balance Must Be AchievedBetween Environmental Goals andEnergy Requirements

The goals of a cleaner environment and in­creased domestic refining capacity are not in­compatible. Both are important to the Nation'swell-being, and both can be accommodated. Itis not necessary to export refining capacity tomaintain a reasonably clean environment.

Recent experience has shown that many ofthe present refineries can be expanded and thenecessary new refineries can be built whileachieving a satisfactorily clean environment. Inthis effort to expand our energy supply, it isessential that the emission standards imposedbe realistic. As zero emission levels are ap­proached, costs and operating problems tend tobecome excessive, often without measurablebenefit to the environment and often with at­tendant waste of resources.

Economically viable refineries have certainrequirements for their location. These includeland space, access to raw material supply, prod­uct distribution systems and adequate labor.While local communities should be concernedwith environmental protection, they must rec­ognize the Nation's need for essential plantsand facilities. Regulations regarding the officialsanction of refinery sites should be revised tospeed up the approval process while maintain­ing proper environmental protection for thecommunities involved.

The cost benefit of the following features ofenvironmental improvement must be weighedcarefully. In particular, it should be noted that,as environmental standards are made more re-

strictive, costs and the use of irreplaceableresources go up at an increasing rate.

• Consumption of petroleum products willbe increased by the substitution of low­sulfur residual fuel oil, liquefied petroleumgas (LPG) and distillate fuels for naturalgas and non-petrOleum fuels (such as coal)as well as by the use of less efficient auto­mobile engines.

• Refining costs and crude oil requirementswill be increased substantially in orderthat fuels meet Environmental ProtectionAgency (EPA) proposed lead regulationsand the required auto emission standardsestablished by the 1970 amendments to theClean Air Act.

• Transportation costs will be increased bybanning deepwater port construction andconstruction of refineries in the most eco­nomical locations.

• The magnitude of expenditures for environ­mental needs are significant as even largerefineries (over 100 MB/ CD) report costs inexcess of 10 percent of all refinery invest­ment to meet environmental regulations.

Both Government and IndustryShould Continue to PromoteEnergy Conservation and Efficiencyof Energy Use in Order to EliminateWaste of Our Resources

Energy producers and the U.S. Governmentshould exert positive leadership in advocatingenergy conservation measures. However, forcedreductions in energy consumption should be em­ployed only on an emergency basis.

A reduction in future petroleum requirementscan be achieved if the Nation takes timely andvigorous steps to use petroleum products andnatural gas more prudently than it has in thepast. To the extent that conservation results inreduced consumption, the strain on domesticrefining capacity will be lessened. Additionally,the burden of either crude oil or product im­ports will be reduced.

Federal Policies Should EncourageDomestic Crude Oil and NaturalGas Production and Developmentof Synthetic Fuels

Assurance and stability of crude oil supply isnecessary to plans and programs for expandingor building refining facilities. Increased avail­ability of domestic crude oil supply offers thegreatest assurance against future supply inter­ruptions and provides a stable economic climate

11

which would attract and encourage private in­vestment capital for the construction of refiningfacilities. Utilization of the Nation's vast re­sources of coal , oil shale and tar sands to manu­facture synthetic oil and gas for fuels and feed­stocks will also have a stabilizing effect on theassurance of supply and the stability of theeconomic climate.

Similarly, additional domestic supplies ofnatural gas should be encouraged in order todecrease the burden placed on refining capacityto manufacture those additional products whichare now required due to current shortages ofnatural gas.

The artificially low price for gas establishedby the Federal Power Commission (FPC) hasinfluenced the consumer in both choice of energysource and the amount used. The competitiveprice established for alternate fuels, such ascoal, fuel oils and heating oils, has affected pro-

12

duction and the economics of producing thesealternate sources of energy. Rapidly increas­ing consumer demands for natural gas-the"cheap" fuel-coupled with insufficient sup­plies have contributed to the overall energyshortage.

The Federal GovernmentShould Coordinate the ManyCompeting and ConflictingAgencies Dealing with Energy

Much of the confusion and delay that nowplagues energy suppliers stems from conflictsamong government agencies. All too often oneagency may encourage an action while anotheragency prohibits it. Consistent guidelines andstability of policy on energy matters are neces­sary to ensure that the Nation's vital needsare met.

Part TwoSummary of the Full Report

of the Committee

Chapter One

Trends in Petroleum RefiningRequirements, Capacity andCapabilities

IntroductionIn this report, refining capacity is defined as

the capacity to process crude oil, Le., crude. oilthrouO'hput for the purpose of manufacturmgrefined products. The processing of crude oil tofinished products requires many varied st.eps.These steps or unit processes are determmedprimarily by two considerations: (1) the typeand quality of crude oil to be processed and(2) the type and volum~ of finishe.d productsdesired. Each refinery m the Umted Statesprocesses a mixture of crude oils different fromthat being processed in any other refinery, hasa different configuration of processing units toconvert the crude oil to refined products, andproduces a different mixture of refined products.Therefore, reported refining .cap~city is basedon a certain type of crude 011 bemg processedand the manufacture of a premised mixture ofrefined products having defined characteristicsor meeting certain specified requirements.

A chanO'e in the type of crude oil availableto a refin:ry will affect the capacity of the re­finery to process crude oil. Many refine~ies aredesio'ned to process low-sulfur crude oIls andwould soon become inoperable if significant vol­umes of hiO'h-sulfur crude oils were processed.Appendix 3, "Fundamentals of Refining Oper­ations and Product Use," is a brief explana­tion of basic information and interrelationshipsconcerning crude oils, refining operations andrefined products.

In order to develop data for a study of domes­tic refining capacity, it was considered impor­tant to have not only historical data but alsodata concerning the current status and future

plans for additional refining ~apacity. For.thispurpose, a survey questionnaIre was .sub!liIttedto all companies operating refinerIes m theUnited States. The respondants representedover 90 percent of U.S. capacity. Key. conc~u­

sions and data derived from the questIOnnaIreare used throllO'hout this volume, and a sum­mary of the s;rvey results is included a.s anappendix in the full report of the CommIttee.It should be noted that the survey data reflectpresent and future plans as of the fall of 1~72.

The results serve as a background agamstwhich effects of recent economic and govern­mental changes can be evaluated.

Historical and ProjectedProduct Demands

The requirements for refining capacity arerelated to and dependent upon petroleum prod­uct demands. The NPC has recently made acomprehensive long-term projection of petro­leum demand in the United States through1985.* These projections were used with s~me

near-term adjustments, and the future r~qUlre­

ments for refining capacity were estn,natedfrom these projections. That report proJectedthe energy outlook through 1985, ~ssuming thatgovernment policies and regulat~ons a~d theeconomic climate for the energy mdustrIes ex­isting at that time would continue withoutmaj or changes.

In the Initial Appraisal, an assessment wasmade of total U.S. energy consumption by.mar­ket sectors. The various fuel subcommItteesapplied their respective judgments in decidingwhat factors would affect demands for the par­ticular fuel examined and took into account ~he

probable supply of other fuels .. The res~ltm.g

U.S. energy balance for the Ini~Ial AppraIsal ISshown in Figure 2. From thIS balance, final

* NPC, U.S. Energy Outlook: An Initial Appraisal1.971-1985, Volume Two (November 1971).

13

120000

(316Bill KWH)

(6. 1 TCF)

5YNGA5(0.9 TCF)

---- 80000

---- 100000

_ 0

~--- 20000

1----- 90000

~---70000

1----- 10000

'J---- 30000

0."~--- 40000

1985198019751970

0 _

20000----

10000----

70000 -----'\----.1-----

30000 ---~illiliillillGJ---1

60000----

80000 --------/---"..".,--

90000 ----- -------+------+----

GEO·102581 r-THERMAL

1!'!'!'!'!o,'.!!'!o,'.!~~......... (34 Bill

100000 -----------+---+-------li@:·"'i:\;:t':::::: : ·:··· · ·f-K-W_H~I_~:::. NUCLEAR-- "."« 926 ~.i l.I ..~.I'J. .Hk

:,:::::::::,:::::':::::i,:::::::::;:;:::.::

110000 ------------~~-~-----~~--------~I~II:~--- 110000.". :':':':'.:::-:-:.:.:-:.:.:

T rill ion Trill ionBTU BTU

(BTU 10 12) (BTU 10 12)

130000 ------------- TOTAL----------- -------------- 130000

DOMESTIC.~E~N~E~RG~Y_--------~~;;;':!!I!I!'!OEM~D ... 124942 ... *~~~MAL

120000 ---------------+-t---">.,---------------~J:I:I:i·:~:~~~~:l~:::1li:!I! ~i~1 KWH)

Source: NPC, "U.S. Energy Outlook: An Initial Appraisal 1971-1985," Volume One (JUly 1971), p. 15.

Figure 2. U.S. Energy Balance-Initial Appraisal.

14

projections of future demand for refined prod­ucts were made.

Examination of Figure 2 shows that the de­mand for energy is expected to almost doubleduring the 1971-1985 period. In order to meetthese energy requirements, a tremendous in­vestment program is required to find and pro­duce more oil and gas; to build the refineriesthat are needed to process the additional vol­umes; and, at the same time, to expand thedistribution systems that will deliver the addi­tional products to the consumer. Other energysuppliers will also have to expand, and theywill require additional funds to develop newcoal and uranium mines, to build nuclear andconventional power stations, and to developtechnology to commercialize new sources ofenergy. Substantial investments will also berequired so that existing as well as new facil­ities can meet environmental standards.

The historical growth rate for refined prod­ucts shows an average increase of 3.2 percentper year from 1961 to 1965 and 5.1 percent peryear from 1966 to 1970. Future demand forpetroleum products is expected to grow at arate of 5.7 percent per year from 1971 to 1975,2.7 percent from 1976 to 1980 and 3.0 percentper year for the 1981-1985 period. The his­torical data and the projected growth rates areshown in Table 1.

The historical demand for petroleum prod­ucts and the Committee's projection of futuredemand for these products are plotted in Figure3. However, there are many factors which canalter future demand for products. Already, en-

vironmental concern over pollution from high­sulfur fuels has reduced or eliminated the use oftraditional fuels such as coal and high-sulfurresidual oils in many areas. Since reserves ofnatural gas and supplies of low-sulfur residualoils are insufficient to fill the void, many indus­trial consumers have had to switch to distillatefuels. This situation, plus the swing by big con­sumers on interruptible gas service to the useof propane, butane or distillates, further com­pounds the problem of projecting demand.

Historical and ProjectedDomestic Refining Capacities

Prior to making projections of future refiningcapacity, historical data concerning past capac­ity, additions or abandonments and refinery con­dition were considered. In the 10-year period,January 1, 1962, to January 1, 1972, additionsto capacity totaled 5.4 MMBj CD while reduc­tions to capacity totaled 2.1 MMBj CD. Nearly78 percent of the added capacity was accom­plished through expansion of or additions toexisting facilities. Grass roots refineries werealso constructed during the period, but they ac­counted for only 1.2 MMBj CD of capacity addi­tions. The concurrent reductions in capacityincluded partial or total shutdowns of 73 re­fineries.

Comparisons between Bureau of Mines andNPC questionnaire data indicate that onlyminor changes in total refinery operating capac­ity occurred in 1972. Based on historical per­formance, it would be reasonable to expect

TABLE 1

TOTAL U.S. DEMAND FOR REFINED PETROLEUMPRODUCTS-1960-1985

Total U.S. Demand*(MMB/CD)

Average Annual Growthover Previous Period

MMB/CD

196019651970197519801985

1970-1985 Average

10.011.715.019.822.626.2

3.25.15.72.73.0

3.8

0.320.660 .960.540.73

0.77

* Includes adjustments of Figure 2 data for export demands and more recent 1975 projections.

15

ActAl PROJECTlD

//~.

/'/

,,/"1.-/

,,/",

..,'"/

//

/

~/

~

30

0--- 25CD~

~0z<!~w0I-U::l0 20aa:"-~::lw-laa:I-w"-~ 15::l-l<!I-aI-

10

o1960 1965 1970 1975

YEAR

1980 1985

Figure 3. Total U.S. Demand for Refined Products-1960-1985.

that, in the future, about 2 percent of the Na­tion's refining capacity (or about 0.3 MMB/ CD)will be abandoned each year. These shutdownsreflect obsolescence due to a combination oflogistic, technological, environmental and eco­nomic considerations. The fact that little oper­ating capacity was reported to be shut downduring 1972 probably reflects the current andgrowing shortage of U.S. refining capacity, andthere may be a temporary deviation from thehistorical abandonment trend. However, itshould also be pointed out that the refineries notresponding to the survey generally are small.Historically, small refineries have had the high­est abandonment rate, with the average size ofshutdowns during the 10-year period beginningJanuary 1, 1962, being under 30 MB/ CD.

An additional factor which leads to a reduc­tion of capacity is the type of crude oil pro­cessed. As discussed in detail in Appendix 3,if a refinery is forced to process certain typesof crude oil for which it was not designed, itseffective throughput capacity will, in many

16

cases, be reduced substantially. For example,a refinery designed to process a crude oil witha high gravity cannot process equivalent vol­umes of low-gravity crude oil. Both domesticand foreign low-sulfur crude oils are in shortsupply, and many refineries are designed toprocess only this type of crude oil, both from ametallurgical and from a processing viewpoint.High-sulfur crude oils, the type generally avail­able from foreign supply sources, cannot beprocessed in a refinery designed for low-sulfurcrudes without the installation of additionalfacilities and/ or extensive modification of exist­ing facilities to prevent corrosive damage andto meet product specifications.

Based on the results of the industry ques­tionnaire, the operating capacity of U.S. re­fineries as of January 1, 1973, was 13.2MMB/ CD. This total represents nearly 12.3MMB/ CD of reported operating capacity andslightly under 1.0 MMB/ CD of capacity oper­ated by companies not responding to the NPCquestionnaire. This capacity compares with

the 13.0 MMB/ CD of total U.S. operating ca­pacity as reported by the Bureau of Mines asof January 1, 1972.

Results of questionnaire responses were alsotabulated for planned refinery expansions,abandonments and grass roots constructionthrough 1978 and are shown in Table 2. Thesechanges to capacity and the resulting totalcapacity based on survey results reflect plans asof late 1972. Recent changes in the political andeconomic climate are not reflected.

Figure 4 and Table 3 show the historical data,the response to the questionnaire, and a pro­jection of the data-not a forecast-to the year1985.

Also shown in Figure 4 are historical andprojected crude oil throughput rates to refin­eries. In Figure 4, and in all projections ofrequired refining capacity, a 92-percent refineryutilization factor has been used (i.e., 92 barrelsof actual crude throughput for each 100 barrelsof crude oil distillation capacity). Historicalexperience shows that this represents the hio'h­est rate which has been sustained by the ind7Is­tryon a year-in, year-out basis. The questionof the industry being unable to run at 100pe~'cent of rated crude distillation capacityanses from the anomoly in the definition of a"crude distillation capacity." It does not takeinto account the fact that other materials, suchas natural gas liquids, unfinished oils and par­tially refined oils, are often run in the crudedistillation unit. A refinery is a continuous flowoperation, and any imbalances in the capacityof essential downstream units, such as catalytic

cracking and catalytic reforming units, canrestrict the overall refinery input volume. Op­erating capacity cannot be recovered if prob­lems occur ""hen operating at maximum rates.Variations in crude oil supply, type and trans­portation, as well as unexpected process unitdowntime, etc., make the use of an overallindustry utilization factor necessary.

Refining Capacity Shortfall

Until recently, the shortfall in U.S. refiningcapacity has been primarily confined to heavyoil capacity. This deficit developed over manyyears and ""as essentially attributable to theunderlying economics of fuel use patterns anddomestic refining. As the real price of indus­trial fuels fell , domestic refiners became in­creasingly unable to compete. Foreign refinerswith unlimited access to low cost foreign crudecould build relatively simple and inexpensiverefineries to supply the U.S. heavy fuel oilmarket at a cost competitive with gas and coal.Import policies recognized the prevailing eco­nomics affecting the manufacture of residualfuel oil in the United States and providedaccordingly for liberal importation of heavyoils.

Under these circumstances, refinery capacityto meet demand for heavy oils in the UnitedStates was increasingly built in the offshoreareas adjacent to the U.S. markets, and U.S.capacity was designed to increase light productyields. The economics for an offshore refineryto produce fuel oil are, however, changing. Low

TABLE 2

U.S. OPERATING REFINING CAPACITYQUESTIONNAIRE RESPONSE

(MMB/CD)

1973 1974 1975 1976 1977 1978

Beginning-Year Capacity 13.2 13.2 13.5 13.9 14. 6 14.6Add: Grass Roots 0.1 0.1 0 .4 0.3

Expansion 0.2 0.4 0.4 0.1 0.1Less : Abandonment 0.1 0 .1 0 .1

Year-End Capacityt 13.2 13.5 13.9 14.6 14.6 15.0

Mid- Year Average Capacity 13.2 13.3 13.7 14.3 14.6 14.8

* Less tnan 0.1.

t Includes 1.0 MMB/ CD capacity not reported to questionnarie.

17

20

>- 15<!Cla:<!ClzUJ...J<!ua:UJ 10Cl.C/)...JUJa:a:<!a)

z0...J...J

:2 5

ActUAL PROJEC~EDSTATIS~ICALPROJECTION OF

HISTORICAL AND SURVEY CAPACITY\DATA-NOT A FORECAST ". ......

".'"~....... "....... ". ......

v". -X_x-

"1---". ......

x_x ~

".-- "........ '-- CRUDE RUNS

/-.............. @ 92"'{' OF CAPACITY

."./--- ~------- X's = SURVEY DATA

1985198019701965 1975

Y EA R

Figure 4. Total U.S. Operating Refining Capacity and CrudeRuns (Year-End Capacity )-1960-1985.

o1960

TABLE 3

TOTAL U.S. REFINING CAPACITY­ACTUAL AND PROJECTED*

Number of OperatingRefineries

Total U.S. Mid-Year AverageRefining Capacity

(MMB/CD)

196019651970197519801985

290273262

9.610.212.313 .715 .617.4

* Not a forecast.

18

TABLE 4

COMPOSITION OF U.S. IMPORTS OF REFINED PETROLEUM PRODUCTS*(MB/CD)

Product Group 1960 1965 1970 1972

Light ProductsGasoline 27 27 67 68Jet Fuels 34 81 144 195Middle Distillates (Ex . No. 4 Fuel Oil) 35 36 81 97LPG 4 21 52 89Petrochemical Feedstocks 1 15 8Solvent Naphthas 8 6 2

Total Light Products 100 174 365 459

Heavy ProductsResidual Fuel Oil 637 946 1,528 1,742No.4 Fuel Oilt 70 85Asphalt 17 17 17 25Lubricants and Wax 1 3

Total Heavy Products 654 963 1,616 1,855

Natural Gasoline and Plant Condensate 6 86Unfinished Oils 45 92 108 125

Total NGL* and Unfinished Oils 45 92 114 211

Total Product Imports 799 1,229 2,095 2,525

Bonded Products Incl uded AboveLight Products 20 51 144 179Heavy Products 104 136 117 125

Total Bonded 124 187 261 304

Imports for ConsumptionLight Finished Products 80 123 221 280Heavy Finished Products 550 827 1,499 1,730

Total Finished Products Importedfor Consumption 630 950 1,720 2,010

NGL and Unfinished Oils 45 92 114 211

Total I mports for Consu mption 675 1,042 1,834 2,221

* Data from U.S. Department of Commerce, as reported by Bu reau of Mines.

t Census classified No.4 fuel oil as distillate fuel and industry as a heavy fuel.

:j: Natura l gas liquids.

cost and low-sulfur foreign crude oil supplieswhich provided incentives for offshore manu­facture of heavy fuel oil are in tight supply.Additionally, demand for low-sulfur fuel oil hasincreased substantially and, in order to increaseproduction levels, refiners may have to install

costly desulfurization equipment when appro­priate crudes can be obtained.

Generally, however, U.S. domestic refiningcapacity was adequate to meet refined productdemand until the 1960's. Since that time, ashortfall in refining capacity has been develop-

19

ing, and total product imports have been in­creasing sharply as shown in Table 4. It shouldbe noted that a large share of the total importswere heavy fuel oils and that a large share ofthe light product imports were bonded fuels .Also, a large portion represented unfinished oilsimported for final processing in U.S. refineries.Table 5 shows the trend in refinery capacityutilization over the last 12 years. As a rule, thephysical capacity has existed to meet total lightproduct demands. In 1972, U.S. product de­mand increased more than 1.1 MMB/ CD, or7.4 percent. Domestic capacity plus authorizedimports became insufficient to meet demand and,as a result, large draw-downs of inventoriesoccurred. Current industry projections for 1973show that another large increase in demand maybe expected, and therefore even higher levelsof product imports will be required to meetdemands.

Figure 5 provides a graphic demonstrationof the widening spread between refinery capac­ity required to satisfy total demand for productsand the estimated refining capacity to be avai l-

able. For 1975, the shortfall of refining capacityis projected to be 4.8 MMB/ CD or 25.9 percent.By 1980, this may increase to 26.7 percent, andin 1985 product demand is projected to exceedU.S. capacity by 30.7 percent or 7.7 MMB/ CD.A tabulation of these data is included in Table6. Tables 7 and 8 show basic data and deriva­tions of capacity requirements.

Oil imports must rise rapidly in the shortterm in order to covel' the growing gap betweentotal requirements and domestic porduction. Oilimport policies, comparative economics of U.S.and offshore refineries, and envi ronmental con­cerns bear importantly on how much oil refiningcapacity will be built in the United States dur­ing the next 15 years. This in turn will deter­mine the ratio between crude and productimports. Unless suffic ient refinery capacity isadded to meet growing consumer needs fornonresidual products, the United States will beforced into reliance on imported light products(e.g., motor gasoline, aircraft fuels and homeheating oils) and will continue to be dependenton imports of heavy fuel oi l.

TABLE 5

TRENDS IN U.S. REFINING CAPACITY UTILIZATION *(MB/CD)

20

1960 1965

Crude Runs to Still s 8,067 9,043Estimated NGL and Unfinished Oils

Processed in Crude Units 403 452

Estimated Total Throughput in Crude Units 8,470 9,495

Average Crude Distillation Capacity (Mid·Year) 9,587 10,166

Apparent Spare Crude Distillation Capacity 1,117 671

Finished Products Imported for ConsumptiontLight Oils 80 123Heavy Oils 550 827

Total Finished Products Importedfor Consumption 630 950

Refinery Capacity Equivalent:F 685 1,033

Apparent Shortfall in U.S. Ref in ing Capacityto Meet Total Requi rements (432) 362

* U.S. Bureau of Mines data.

t Excl uding imports in bond and fuels imported for military offshore use.

:j: I mports converted to capacity equivalent using 92-percent utilization factor.

1970

10,869

546

11,415

12,270

855

2211,499

1,720

1,870

1,015

1972

11 ,699

586

12,285

13,134

849

2801,730

2,010

2,185

1,336

30~--------r--------.-----'-----'---------'-------'---------'

ACTUA L PROJECTED

U.S. OPERATINGCAPACITY *

u.s. REFINING CAPACITY REQUIREDTO SATISFY PRODUCT DEMAND

WITH NO PRODUCT IMPORTS

25 I--------+-------+-- ---I-----+------_+_-----/"~_=_+_-----___{

,/,/

/",/

U.S. CAPACITY REQUIRED TO SATISFYPRODUCT DEMAND WITH PRODUCT

IMPORTS CONTINUING AT 1972 RATES

10 I::::;:;:;;;;;;;;~...- ..."""'E?~~--+-_+---r_----_+-----+----_l

>­<l:aa:<l:azUJ...J 20 I---------t--------+--_+_----+--~"-------_+-~'--------_+_------___j<l:ua:UJa..en...JUJa:a:<l: 151-------t-------+--_+_~-_/_'__+-------::;......=-_+-----'~----_+_------_icczo...J...J

:;.;

198519801975YEA R

19701965

5 L- ---.1 ......J._ _ -L. --'- -'- -L. -'

1960

· Sta t istical projection of historical and survey capacity data-not a forecast .

Figure 5. Total U.S. Operating Refining Capacity VB. Requirements-1960-1985.

TABLE 6

PROJECTION OF TOTAL u.s.REFINING CAPACITY SHORTFALL 1960-1985

Total RefiningCapacity Required

Mid-Year Average to SatisfyShortfallRefining Capacity Product Demand

(MMB/CD) (MMB/CD) MMB/CD %

1960 9.6 9.1 (0.5) (5.2)

1965 10.2 10.5 0.3 2.91970 12.3 13.2 0.9 6.81972 13.1 14.3 1.2 8.41975 13.7 18.5 4. 8 25.91980 15.6 21.3 5.7 26.71985 17.4 25.1 7.7 30.7

21

22

TABLE 7

U.S. PETROLEUM SUPPLY AND DEMAND-1970-1985(MB/CD)

1970 1972 1973 Projection

Actual Actual Estimated 1975 1980 1985

Total U.S. Product Demand 14,942 16,589 17,600 19,800 22,550 26,200

Refinery Capacity(Mid-Year Average) 12,270 13,134 13,234 13,735 15,614 17,359

Refinery Crude Runs ' 10,869 11,699 12,175 12,636 14,365 15,970Unfinished Oil Reruns (Net) 105 141 150 200 250 300Process Gain 359 388 400 415 500 550Product Output 11,333 12,228 12,725 13,251 15,115 16,820

Supply FactorsNGL Transfers 1,663 1,827 1,860 1,700 1,600 1,500Other Hydrocarbon Inputs 17 28 30 48 75 150Crude Transfers to Fuel Oils 14 12 12 12 12 12Finished Product Imports

Bonded Fuels 261 304 325 375 500 625Imports for Consumptiont 1,720 2,010 2,648 4,414 5,248 7,093

Decrease in Product Inventories -66 180U.S. Refinery Output 11,333 12,228 12,725 13,251 15,115 16,820

Total Supply 14,942 16,589 17,600 19,800 22,550 26,200

. Refinery crude runs calculated at 92 percent of refinery capacity-1973-1985.

t Imports for consumption assumed to balance supply /demand-1973-1985.

TABLE 8

APPARENT SHORTFALL IN U.S. REFINING CAPACITY 1973-1985(MB/CD)

19851973 overBase 1975 1980 1985 1973*

Average Crude Capacity 13,234 13,735 15,614 17,359 4,125

Finished Products for Imports Requiredto Balance Supply/ Demand 2,648 4,414 5,248 7,093 4,445

Capacity Equivalent of Product Importst 2,878 4,798 5,704 7,710 4,832

Capacity Required to Meet TotalProduct Requirements 16,112 18,533 21,318 25,069 8,957

• To meet demands and replace all product imports by 1985, capacity required :1985 - 25,0691973- 13,234

11,835 MB/ CD or approximately 1 MMB/ CD per year growth in capacity required.

t At 92-percent utilization factor .

Chapter Two

Factors Affecting RefiningShortfall and EnvironmentalConsiderations

Factors Affecting Demand for CapacityThere are four maj or factors affecting the

need for individual petroleum products andcrude oil. These are-

• The demand for energy in the United Stateswhich is projected to grow at an averagerate of 4.2 percent per year through 1985

• The supply of natural gas which has be­come very short due to decreasing discov­eries and increasing demands

• Environmental concerns which have great­ly contributed to the delay in many nuclearpower plants being constructed or goingon-stream

• Environmental legislation which is causing,or will cause, the displacement of high­sulfur coal and fuel oil and leaded motorgasoline by low-sulfur fuel oil and low-leador unleaded motor gasoline.*

Fluctuations in total oil demand and in de­mand for individual products stem from the factthat, although oil is not completely interchange­able with other fuels in existing equipment, itcan supply the needs in any energy sector ofour economy. In effect, it can act as a "swing"fuel. If natural gas finding rates are disap­pointingly low in the future, oil can be used tofill the need. The same concept holds true foroil as an alternate to nuclear power and coalwhen appropriate.

The power industry's efforts to utilize nuclearpower plants have been delayed by constructionlead time problems, cooling water dischargestandards and environmental court actions.

There are not sufficient production facilities forlow-sulfur coal, and there are not sufficientreserves of low-sulfur coal within reasonabledistances to satisfy the demand. Thus, manypower plants have been, or will be, convertedto run on low-sulfur fuel oil. This conversionhas increased the demand for fuel oil overnormal rates, thus contributing to the currentlow-sulfur fuel oil shortages.

Additionally, the supplies of low-sulfur crudeoil are limited, and their worldwide availabilitywill tighten as countries compete more vigor­ously in the world market for a limited resource.Also, low exploration finding rates and limitedlease sales have led to few new domestic sourcesof oil being developed.

On January 10, 1973, the EPA published itsregulations requiring the general availability ofunleaded gasoline by July 1, 1974. These regu­lations were issued on the premise that a cata­lytic device was necessary to control auto emis­sions, that a suitable device (50,000 mile life)could be developed , and that lead would poisonthe catalyst. EPA also proposed that leadedgrades of gasoline be limited to 2.0 grams pergallon of lead by January 1, 1975, and 1.25grams per gallon by January 1, 1978.

One direct effect of the techniques used tocontrol these emissions is that a vehicle's fuelefficiency is lowered. As a result, it is necessaryto process more crude oil in order to producethe additional gasoline that is required. Re­stricting the use of lead additives in gasolinewill require refiners to use more crude oil inorder to produce more high-octane gasolinecomponents. If the volatility of today's gasoline

* In his April 18, 1973, energy message, the Presidentaffixmed EPA's call to use the most environmentallydesirable fuels only for attainment of "Primary" airquality standards (those related to health) as outlinedby the 1970 Clean Air Act Amendments and alloworde1'ly attainment of the more stringent "Secondary"standards (those related to general welfare).

23

has to be changed to accommodate emISSIOncontrol objectives, which was proposed at onetime by a major automotive manufacturer, theuse of more crude oil will be required. Thecumulative effect of all these requirements couldcause an increase in our need for crude oildistillation capacity by 1985 beyond that shownin Figure 5.

Factors Affecting Expansion ofRefining Capacity

Within today's economic climate, there areuncertainties and technological problems whichcontribute to the shortfall of refining capacity,as described in the following:

• There is difficulty in economically provid­ing flexibility in capacity to accommodatethe varying characteristics of the crude oilresulting from uncertain supply sources.During the latter part of 1972 and the earlypart of 1973, inland refineries have oper­ated at reduced rates due to a lack of crudeoil. Some Gulf Coast refineries have oper­ated at reduced rates both due to a lack ofcrude oil and due to the type of crude oilavailable to them. When considering re­finery expansion or the addition of newrefineries, it is necessary, for proper designof the type and size of process conversionunits, to know the characteristics of thecrude oil to be processed.

• When considering the expansion of currentrefineries or the addition of new refineries,there are uncertainties as to how to processthe heavier portion of the crude oil. Low­sulfur residual can be produced directlyfrom low-sulfur crude oils. However, addi­tional low-sulfur domestic crude oils arenot available, and low-sulfur crude oilsfrom North and West Africa, the MiddleEast and Indonesia are not available insufficient quantities due to limited produc­tion and the competition for these crudeoils by other countries. The coking processcan be used on high-sulfur residuals, butdisposing of the high sulfur-content cokepresents a problem due to environmentalrestrictions.

Direct desulfurization of high-sulfur re­siduals can presently be accomplished onlyon certain low metal-content residuals.Low-sulfur residuals can be produced fromhigh metal-content residuals by the indirectroute of desulfurizing the gas oil and thenblending the desulfurized gas oil with theresidual. This operation, however, offersonly limited reduction in sulfur levels and,as a result, is not capable of producingenough of the high volumes of 0.3-percent-

24

sulfur heavy fuel oil required in certainareas.

Flue gas desulfurization which wouldallow the use of high-sulfur fuels has re­ceived widespread attention, but full scalecommercial flue gas desulfurization pro­cessing for large installations is still notfully operable. Progress has been slow dueto the magnitude and complexity of theproblem. These processes are not likely tobe in wide use in time to meet existing andproposed environmental targets. Estab­lishing regulations beyond available tech­nology may increase research and develop­ment efforts but, at the same time, thegrowth of the industry can be seriouslyaffected.

Refinery Requirements Responsive toEnvironmental Needs

Nationwide, the contribution of refineries toatmospheric pollution is relatively small, asshown in Table 9. In local situations, however,control of refinery emissions is required andcan be achieved as is shown by the example inTable 10.

The situation with regard to aqueous effluentsfrom refineries is similar in that the nationalcontribution of refineries is not large. Also,reliable technology is available to make refineryeffluent water fully suitable for discharge intosensitive aquatic environments.

Among the many steps the petroleum indus­try has taken to reduce pollution are-

• Ai1' : (1) Greater use of low-sulfur fuelsand sulfur recovery plants, increased ca­pacity to desulfurize products, develop­ment of new processes for removing sulfuroxides from stack gases; (2) control ofhydrocarbon emissions and odors by float­ing roofs on storage tanks, mechanical sealson pumps, closed systems to recover ventedvapors; (3) reduction of particulate emis­sions by smoke controls, electrostatic pre­cipitators and cyclone separators; (4) spe­cial furnaces to burn gases containingcarbon monoxide; and (5) air quality mon­itoring instruments.

• Water : (1) Expansion of water reuse sys­tems and increased use of air cooling; (2)multiple-stage effluent treating to removeoil and other wastes, biological treatmentto remove organic materi.al which mightbe harmful to marine life; and (3) designand remodeling of facilities to minimizethe possibility of oil spillage, closer surveil­lance of oil transfer operations.

• Noise and l1:ght: (1) Use of silencers andother devices to reduce noise emissions and(2) use of low-level, shielded and smokeless

TABLE 9

ESTIMATED NATIONWIDE EMISSIONS-1969*(Million Tons per Year)

Petroleum Refining

Tota l Emissions

Sulfur CarbonOxides Particulates Monoxide

2.0 0.1 2.6

33.4 35.2 151.4

Hydro­carbons

2.3

37.4

NitrogenOxides

< 0.1

23.8

• Cumulative Regulatorv Effects on the Cost of Automotive Transportation (RECA n, Final Report of the Ad HocCommittee Prepared for the U .S. Office of Science and Technology (February 28, 1972) .

incinerators to reduce smoke, glare andnoise from flares.

Future new refineries will incorporate manyof the current emission and effluent controlsystems together with newly developed pro­cesses. Environmental studies at the site willbegin before construction to establish and docu­ment the preconstruction conditions. Thesestudies will also serve to anticipate any poten­tial adverse impact of the facilities and topermit revisions of the design to minimize oreliminate this impact. These studies will becontinued through the initial period of opera­tion to document the suitability of the pollutioncontrol facilities as they are designed. Whereappropriate, buffer zones will be provided toisolate operating units from surrounding resi-

dential or recreational areas. Peripheral land­scaping will be used to improve the refinery'sappearance.

Existing refineries either are already in con­formance with ambient air quality standards orwill be under legally binding schedules for in­stalling the necessary equipment. Further, ra­tional evaluations have shown that many of thepresent refineries can be expanded and thenecessary new refineries can be built whileachieving a satisfactorily clean environment.In order for the goal of expanded energy supplyto be met, it is essential that the emission stan­dards imposed be realistic. As zero emissionlevels are approached, costs and operating prob­lems tend to become excessive, often withoutmeasurable benefit to the environment and oftenwith attendant waste of resources.

TABLE 10

REFINERY AIR CONTAMINANT EMISSIONSLOS ANGELES COUNTY-JANUARY 1971 *

(Tons per Day)

Without Control Program

With Control Program

SulfurOxides

1,320

55

Particulates

15

10

CarbonMonoxide

1,635

5

Hydro­carbons

1,495

295

NitrogenOxides

130

95

* Profile of Air Pollution Control (A ir Pollution Control District, County of Los Angeles, Cal if. , 1971).

25

TABLE 11

PAD Districts III and V show the largest per­centage increases (see Table 11). However,these numbers may understate the problem be­cause, as pointed out previously in this report,U.S. refinery capacity as reported in the 1972NPC questionnaire will be unable to meet near­term demands. For long-distance hauls, e.g.,Persian Gulf to the United States, the mosteconomical and environmentally safe system toreceive the oil is via direct shipment from thesupply source to the refining center using acombination of VLCC's and properly designeddeepwater crude unloading terminals.

Economies of size enable VLCC's to transportcrude more economically on longer hauls thancan smaller vessels, providing port facilities areavailable to handle the VLCC's. In order tohandle such vessels, ports must have berths ofsufficient capacity and length and tankage ofsufficient volume for unloading full cargoes.For shorter moves, other transportation sys­tems provide various levels of economy.

In 1970, there were approximately 4,000 shipunloadings to handle petroleum imports to theUnited States. These ships averaged 30,000DWT. If projected 1985 imports use this sameaverage ship size, then traffic would increaseto approximately 18,000 annual ship calls. Port

REFINERY RECEIPTS OF CRUDE OILDIRECTLY BY WATER

(Percent of Total Crude Oil Receipts)

Chapter Three

Storage and TransportationRequirements

The NPC U.S. Energy Outlook report pro­jects that future oil demands will increasegreatly from present requirements. In addition,it is possible that domestic production will notexpand significantly above current levels, neces­sitating an increase in the importation of crudeand/ or products. The logistics system, includ­ing transportation and storage facilities, tohandle increased crude as well as potentialproduct imports will impact upon the consumeras well as upon the construction of U.S. refiningcapacity.

Added importation of large quantities of oilwill require substantial expansion of transpor­tation and storage facilities both to receive theoil and subsequently to transport it to the con­suming locations. Considering only the lowestcost logistical system for importing crude oilto onshore refining centers, the amount of cap­ital required for the increase in imports duringthe 1970-1985 period is very large. Estimatedinvestments for the facilities, including newvessels, range from $14 to $16 billion depend­ing upon whether PAD District I increases aredelivered directly to PAD District I or-asreflected in the higher number-whether theyare supplied from PAD District III. Figure 6shows a map of the United States outlining thefive PAD districts.

Marine TransportationImport of petroleum into the United States

can be accomplished either with waterborne orwith overland transportation systems. Currentprojections indicate that the majority of importincreases will come from the Persian Gulf.Results from the NPC survey show that refinersare planning increased marine receipts of crude.

1972

1978

PAD Districts

III

85 15

87 30

V

45

59

TotalU.S.

27

38

27

UTAH

COLORADO

IV

ARKANSAS

III

KANSAS

OKLAHOMA

TEXAS

NEBRASKA

SOUTH DAKOTA

NORTH DAKOTA

NEW MEXICOARIZONA

NOTE: Alaska and Hawaii areincluded in PAD District V

~-<p--",

" ()Oa """ °0 '"--~

HAWAIIAN ISLANDS

O~

I:>:)00

Figure 6. Petroleum Administration for Defense (PAD) Districts.

congestion from these ships will substantiallyincrease the opportunity for accidents and per­haps increased ,vater pollution. If, on the otherhand, the imports arrive in optimally sizedships (including VLCC's averaging 250,000DWT), total activity could be reduced to about3,000 annual ship calls- a level below 1970 calls.

VLCC's reduce the total number of shipsrequired and thereby reduce the chance ofcollisions. Furthermore, since VLCC's require70 to 100 feet water depths (which is morethan existing terminals have), new deepwaterunloading sites can minimize the intrusion oftankers into existing inner harbors, thus reduc­ing the risk of groundings. Historical data oncollisions and groundings demonstrate that mostoil spilling accidents occur where harbor con­gestion is great and when the maneuvering ofthe ships is restricted by narrow, windingchannels.*

There is a great disparity between what re­finers plan to do about marine facilities as indi­cated in the survey and what would have to bedone to maximize use of existing sites. Only anet of four berth additions (1972 to 1978) werereported in the survey as planned, a split be­tween Districts I, III and V. Thus, the totalreported berths go from 233 in 1972 to 237 in1978. Most of these berths (138 in 1978) havea water depth of less than 35 feet. Only twolocations exist with 60 feet or more water (bothin PAD District V). Results of the refinerysurvey reveal that, if existing refineries were toexpand to make maximum use of existing refin­ing sites, over 60 marine facilities would needto be constructed or developed, and 9 of thesewould require over 60 feet of water.

Unloading facilities for VLCC's, built as closeas practical to the coastal refining centers,result in the lowest cost system of operation.This would ideally place the unloading facilityjust offshore, with onshore distribution madeby pipeline.t The site must have sufficientlydeep water, sufficient shelter from storms, un­congested approaches from the sea, and mini­mum potential for environmental disruption.With the equipment possible under the existingtechnology, near pollution-free operation is at­tainable. In addition, if it is not at an existingterminal or refinery, the site should have anonshore area suitable for oil storage facilitiesand access to a sufficient infrastructure for sup-

* "Tankers and Ecology," Paper Presented by JosephD. Porricelli. Virgil F. Keith and Richard L. Storch atthe Annual Meeting of the Society of Naval Archit~ctsand Marine Engineers, New York, N.Y., November11-12, 1971.

t For illustrative calculations comparing deepwateroffshore oil terminals with and without pipeline servicesee Soros Associates, Inc., Offsh01'e Terminal Systen:.Concepts (1972) .

port of the facility. Specific site locations fordeepwater. terminals are currently under studyby government and industry groups. Muchwork has been done by the Corps of Engineerswhich is responsible for development of har­bors.t The Council on Environmental Qualityis making extensive studies of seven loca'tions.§The Maritime Administration has commissioneda study of a multipurpose terminal off theDelaware Coast. II Jointly owned terminals havebeen studied in the lower Delaware Bay area,off Louisiana, and the Texas Gulf Coast, andindividual projects have been discussed formany additional sites.*':'

Cargo Preference LegislationCargo preference bills such as those which

have recently been before Congress would, ifenacted, directly and negatively affect the eco­nomic feasibility of U.S. refining. While themost recent bilI before the Senate was defeated,there will undoubtedly be continuing attemptsto impose U.S.-flag vessel preferences for theshipment of imported oil.

The justification for cargo preference legisla­tion, which would require that a certain per­centage of oil imports be carried in U.S.-flagvessels, is the creation of incentives to buildup and maintain a healthy and viable U.S.-flagfleet. Although such legislation is intended toimprove and benefit distressed conditions in theAmerican Merchant Marine fleet, it raises farmore serious problems and complications withregard to (1) U.S. relationships in interna­tional trade, (2) the economics of the domesticrefining industry, and (3) future cost of energyto American consumers.

There are a great number of substantivereasons why the cargo preference bills are con­trary to national economic interests, nationalsecurity objectives, consumer objectives and,specifically, the oil refining industry.

• The cargo preference legislation would in­variably raise costs to the refiner whichcan be expected to lead to higher retailprices. Thus there is a direct and negativeimpact on consumer interests. Moreover,

:j: For extensive environmental and cost/ benefit anal­ysis of use of VLCC's for U.S. imports, see U.S. Depart­ment of Army, Corps of Engineers, U.S. DeepwaterP01·t Study, IWR 72-8 (Institute for Water Resources,August 1972) .

§ U.S., Congress, Senate, Committee on Interior andInsular Affairs, Deep Wate1' Port Policy Issues, SerialNo. 92-26, April 25, 1972, p. 28.

II Soros, Offsh01'e Te1'minal System Concepts.

** The President, in his ene1'gy message to Congressof April 18, 1973, proposed legislation for Congressionalconsideration granting the Department of the Interiorauthority to license deepwater tenninals in federalwaters.

29

the cost will continue to rise as the UnitedStates becomes more dependent upon oilimports.

• Narrowing these "flag questions" to theoil industry, and specifically to the refiningindustry, this study reflects a need forabout 9 MMB/ CD of additional refiningcapacity in the United States by 1985.Cargo preference legislation would have aserious adverse effect on new refinery con­struction to meet this growing demandfor products. Such legislation would forcerefineries to import a portion of their crudein U.S. vessels. This would mean that, asforeign crude accounts for a larger andlarger share of total refinery crude inputs,the landed cost of the average barrel ofcrude would be higher. To the extent thatrefineries would have to draw crude in­creasingly from the Middle East, the longhaul would raise costs substantially.

Cargo preference legislation would alsoseverely affect the economics of any incen­tive plan designed to locate new heavy fuel­oriented refineries in the United States.These plants would run primarily if notexclusively, on foreign crude. Su~h newU.S. plants would, however, be competingwith existing heavy fuel-oriented refinerieslocated offshore. If these U.S. refineriesmust use U.S.-flag vessels to import a largeportion of their crude, they may well notbe competitive with existing foreign heavyfuel refineries. Under such circumstancesit is most likely that refiners would con~tinue to see an incentive to locate heavyfuel refineries in the Caribbean and otheradjacent areas.

• Any increase in fo r eign petroleum importcosts would also adversely affect the com­petitiveness of U.S. petrochemical manu­facturers who rely upon imported crudefor a portion of their feedstocks.

If indeed there is a case for a strongU.S;-flag fleet from the standpoint of na­tional security, then the subsidies requiredto build and operate such a fleet should becovered by the Merchant Marine Act. Infact, a comprehensive Merchant MarineAct providing construction and operationsubsidies is already in effect. Under thisAct, U.S. Government grants, financedloans and direct federal operating differen­tial subsidies are offered. However thisAct is based on dry cargo and liner trans­portation concepts which are not readilyapplicable to tanker and dry bulk trading.Consideration should be given to modifyingand liberalizing the Merchant Marine Actto apply to the special needs generated bythe bulk segment of the U.S. maritimeindustry.

30

Pipeline TransportationIn addition to marine transportation, pipe­

lines are a maj or mode of transportation forpetroleum. In 1971, some 64 percent of move­ments between PAD districts were made bypipeline. The increasing dependence on foreignoil will necessitate additional pipeline systemsdesigned both to move crude from offshore un­loading terminals as well as to transport ade­quate supplies to the many refineries in thecountry which do not have direct marine access.Additionally, should major expansions of refin­ing capacity occur on the Gulf Coast, it is logicalto assume that there will be increasing numbersof product pipelines for moving products fromthe Gulf Coast to both the Midwest and theEast Coast. The need for pipeline capacity tothe inland refiner is underlined by the surveyresults which indicate that the 1978 PAD Dis­trict II crude running capacity is not matchedby crude receipts, with a deficit of 0.4 MMB/ CD.

Rail and Truck TransportationRail and truck movement of crude is planned

to decrease as a percent of crude capacity. Sur­vey results indicate 1972 rail/truck receipts at1.1 percent of capacity V8 . 0.9 percent in 1978.Product movements by rail/truck from refin­eries are projected to remain at the same level(13 percent of capacity).

Storage RequirementsFuture requirements for crude tankage vol­

ume will be affected by the increased percentageof imported crude and movement of crude overgreater distances as well as the increase in aver­age vessel size. At the same time, product tank­age requirements will also increase due toincreased demand levels. The optimum amountof tankage at a refinery is a function of the sizeand frequency of crude arrivals and productshipments. The trade-offs are excess tankageon the one hand or tanker delay, commingledstocks or refinery downtime on the other. Num­ber, types and relative amounts of stocks alsoaffect the absolute volume of tankage required.

Refinery tankage, described in terms of daysof crude running capacity, has historicallytended to decrease over time. The results of therefinery survey show this trend continued rela­tive to reported planned refining capacity. Re­ported 1972 crude intermediates and productstorage capacity available was 87.5 days ofcrude run, declining to 82.1 days in 1978. Thisis about the same rate of decline as estimatedfor actual inventory (as opposed to capacity)from Bureau of Mines data. * This would indi-

* NPC, Petroleum Storage Capacity (1970), p. 10.

cate a trend towards higher utilization (Le., in­ventory level divided by capacity) at the endof the period. Higher utilization is in line withhistorical trends. * However, if the refiningshortfall is to be met with onshore capacity,proportionate volumes of tankage must beadded. Alternatively, tankage will be requiredin the United States for increased product im­port volumes to meet the refining capacityshortfall. Much of increased product importsmay be expected to go directly to consumers(such as shore-located power plants) or dis­tribution terminals. For example, in PAD Dis-

trict I, the largest importing district, signifi­cant volumes of storage are located at terminalsnot associated with refineries. These storagecapacities were not included in the refinerystorage of the 1972 NPC survey. Hence nostatement can be made on the adequacy of tank­age to receive imported products. The overalladequacy of tankage including that of refineries,terminals and consumers will be considered inthe forthcoming NPC Emergency Preparednessstudy.

* NPC, Petroleum Storage Capacity, p . 6.

31

Chapter Four

Petroleum Refining Economics*

Important changes are taking place in theeconomic environment surrounding U.S. re­finers. Crude oil supplies are coming from newsources and prices of foreign crude oils arerisino- ~harply; new environmental regulationsare c~using changes in product characteristics,making refineries more costly; domestic crudeoil supplies are declining; both crude oil andproduct prices are subject to controls; and arecent sharp surge in oil demand has straineddomestic refinery production capabilities. Theseconditions and the lack of a consistent govern­ment approach with respect to matters affectingrefineries-particularly long-term access to for­eign supplies of crude oil and product importpolicies-have made the outlook for investmentsin new refineries in the United States muchmore uncertain than it was in the 1960's.

A continuation of these conditions will createan increasing shortage of domestic refiningcapacity between now and 1985. Furthermore,there could be a future worldwide shortage ofrefining capacity available to supply U.S. mar­kets, depending on economic and political condi­tions both here and abroad. While the Com­mittee has not evaluated the ability of worldrefining capacity to meet the growth in bothU.S. and non-U.S. world demand, the assump­tion is made that sufficient refining capacity willbe built. However, it is felt that, if petroleumproduct demands continue the rapid growthwhich occurred during the last 1 to 2 years andif U.S. policies are not sufficiently responsiveto the refining situation, adequate worldwidecapacity may not exist. Some of the capacity tomeet U.S. demand has already been constructedjust outside the perimeter of the United Statesfor the specific purpose of supplying U.S. de­mand for selected products.

A number of key factors have dictated thedecisions made by some companies to establishrefining facilities in perimeter locations. Someof these factors are as follows:

• To accommodate revisions in U.S. importquot(~ restrictions: Foreign crude oil couldbe imported without limitations into perim­eter locations. Products could be manu­factured that were exempted from formalU.S. quota controls, such as residual fueloil for District I, and exported to theUnited States.

• Fo?' logistical consider'ations: Natural deep­water harbors were available to accommo­date larger, more efficient and economicaltankers.

• To minimize the risks associated with ac­quiring crude oil supply: Foreign refinerylocations frequently provided greater long­term access to necessary foreign crude oilsupplies than did refinery locations in theUnited States.

• To avoid environmental delays: In recentyears, environmental constra;ints in. theUnited States have made foreIgn locatIonsmore attractive. Environmental obstacleshave been less severe in the foreign pe­rimeter locations in terms of building orexpanding refining capacity compared toalternative U.S. locations. These offshoreareas have low-density populations and lessport siting problems. .

• To minimize overall costs: EconomIC ad­vantages favored refining operations insome perimeter locations compared to on­shore U.S. locations. These included lowercrude oil handling, transportation andoperating costs and advantageous tax pro-

* This chapter was prepared pdor to the issuance Ofthe P1"esident's Energy Message to Congress ?f. Apnl18 1973 and does not take into account the otl t?nportpr~cla?n~tion contained therein.

33

visions and other industrial developmentincentives.

Relative EconomicsAs part of this study, illustrative relative

e~onomics of refining foreign crude oil domes­tIcally as compared to offshore locations wereprepared. A crude supply, transportation andmanufacturing "model" was constructed toshow the order of magnitude of the differentialcosts of producing petroleum products betweenthe areas studied.

The illustrative case studies indicated that anew refinery located on the East Coast designedto meet a balanced growth in product demandbet~veen 1970 and 1985, with full provisions forenvIronmental considerations, would experienceaverage costs of between $5.58 and $6.07 perbarrel of product produced assumino' a crudeoil cost of $2.50 per barrei f.o.b. th~ PersianGulf (see Appendix 4). A refinery located inthe Caribbean, using the same crude price andproducing the same product slate, would havean average cost of $5.42 to $5.68 per barrel ofproducts after paying 1972 level product dutiesand transportation costs to the East Coast.Therefore, the Caribbean location shows an ad­vantage of $0.16 to $0.39 per barrel over anEast Coast site. Each cost is inclusive of a10-percent and 15-percent rate of return re­spectively, on invested capital. In the inst~nceof the Caribbean location, the product cost hasno income tax cost.

These cost comparisons are illustrative ratherthan typical, but they do display that the over­all economic climate was more favorable off­shore than onshore and that income tax ac­counted for a significant portion of the differ­ence. However, these relationships may notnecessarily be a consistent compelling businessor economic motivation for offshore locations.Whether the magnitude of the difference is$0.16 per barrel or $0.39 per barrel, there wasan economic incentive to locate refineries off­shore where overall costs are lower than on­shore and where there was a greater access tolong-term crude oil supplies.

A refinery location in eastern Canada dis­played a less favorable economic climate thanone in either the Caribbean or District 1. Ifstatutory tax rates are applied in easternCanada, costs would have ranged between $5.76and $6.16 per barrel. However, special conces­sions and incentives are available in the Cana­dian tax laws and make generalized compar­isons difficult.

Income TaxesIn~ome taxes paid by offshore refineries vary

conSIderably. Several Caribbean countries offer

34

tax concessions to new industry in order tostimulate economic development. These conces­sions can range from a total exemption from in­~ome tax for several years (tax holiday) to nomcome tax at all. In several Caribbean coun­tries, a graduated fee is charged which in­creases the cost of refining operations proO"res­sively over time. In eastern Canada the statu­tory income tax rate is currently at'49 percentalong with a pollution tax of $0.04 per barrel.In contrast, the U.S. tax rate is 48 percent. Theaspect of taxes can be a very important factorin the decision to locate a refinery onshore vs.offshore.

Price ControlsIf the United States continues to impose price

controls-direct or indirect-on petroleum and/or refined petroleum products in order to sta­bilize the economy, the full cost and financialrisk of providing new supplies of petroleumproducts. must be recognized, including highercosts of Imported supplies. If they are not, re­finery expansio.n will be discouraged, and short­ag:es of domestIcally refined petroleum productsWIll occur. To t~e extent available, productswould have to be Imported from world marketsat prices which are not subject to U.S. pricecontrols. This, in turn, could drive marketprices for imported products landed in theUnited States higher than those of products re­fined domestically, a consequence currentlybeing experienced.

Crude Oil SupplyBased on the projections in the NPC U.S.

Energy Outlook report, a growinO" share ofdomestic demand for oil products ;ill have tobe satisfied by imports of crude oil or products.Incremental. crude oil supplies will come largelyfrom the MIddle East and North Africa wherethe greatest resources are located. Technologyto produce potential future sources of petroleumliquids, such as oil shale and Canada's tar sandsis not yet able to provide economical supplies i~competition with Middle Eastern and North~frican .crude oils. However, at the presenttIme, pnces of foreign crude oil and productslanded in the United States are in some caseshigher than prices for conventional domesti~supplies.

U~certainties .with respect to crude supplyfall mto two major categories-volumetric andeconomic. Potential political actions in the pro­ducing countries raise the spectre of possiblei~terruptions of crude oil deliveries. Also, ac­tIons by the producing countries could resultin large, unilateral increases in prices. Trans­portation costs add another dimension of eco­nomic uncertainty.

Whether crude oil and/or refined productscome directly to U.S. coastal regions or indi­rectly through an offshore refinery, very largeshipping and terminalling facilities and invest­ments will be required.

As domestic dependence on imported suppliesof crude oil and refined products increases, U.S.policies must be adjusted to safeguard againstthe uncertainties surrounding assurance ofsupply.

Construction Costs and Limitations

Refinery construction costs for domestic andforeign locations can vary widely. Lower for­eign costs for a refinery to supply a particularregion of the United States could influenceoffshore refinery construction as opposed todomestic construction.

Regardless of whether capacity is built on­shore or offshore, the capability of the world­wide heavy construction industries will bestrained to provide the new refining capacityneeded to meet the rapid growth in demand forpetroleum products. The availability of tech ­nical manpower and construction labor and thecapacity for equipment fabrication appear crit­ically short. In addition to the demands formanpower and equipment for the refining,chemical and power generating industries, totalconstruction requirements are increased by theneeds for SNG and synthetic fuel facilities.

Petrochemical Feedstocks

In the last few years, the domestic manufac­turing of petrochemicals has become closelyrelated to domestic crude oil refining. Suppliesof domestic natural gas liquids, which are im­portant petrochemical feedstocks, are no longergrowing, and petrochemical producers are hav­ing to turn more and more to refinery naphthaand gas oil for new feedstock supplies. TheNPC has projected that petrochemical feed­stocks are expected to grow from less than 6percent of total petroleum demand in 1970 toabout 8 percent in 1985.';' If refining capacitymoves offshore, then petrochemical producersmay have to use imports for their feedstocksupplies, which would adversely affect the U.S.balance of trade. Conversely, if refining ca­pacity is kept onshore, feedstock supplies canbe expected to be more readily available.

As one element in the overall petrochemicaleconomic equation, the availability of amplefeedstock supplies at internationally competi­tive prices will have an important bearing onfuture decisions to build petrochemical plantsin the United States or overseas.

FinancingThe capital required for providing for the

Natiort's oil demands will be much greater thanit has been in the past. Indeed, the capital re­quired for new petroleum refining and trans­portation facilities needed by the Nation tosupply 1985 demand is in the range of $60 to$70 billion, including capital to comply withenvironmental standards.

In spite of the magnitude of this capitalrequirement and the increasing competition forfunds in capital markets, refining investmentswill be made as long as rates of return areadequate relative to other opportunities in worldfinancial markets. However, if rates of returnon investment are not deemed adequate byinvestors, difficulties in financing will restrictconstruction of new domestic refining capacity.

Environmental ConsiderationsEnvironmental considerations increase the

demand for and cost of petroleum products innumerous ways. For example:

• Consumption of petroleum products will beincreased by the substitution of low-sulfurfuel oil, LPG and distillate fuel for alterna­tive high-sulfur petroleum, natural gas andnon-petroleum fuels (such as coal) and bythe use of less efficient automobile engines.

• Refining costs and crude oil requirementswill be increased sharply in order to pro­duce environmentally acceptable fuels andto meet environmental standards.

• Transportation costs will be increased ifrefinery construction continues to be de­layed or banned in the more economicallocations.

• The magnitude of expenditures for en­vironmental needs are significant as evenlarge refineries (over 100 MB/ CD) re­port costs exceeding 10 percent of all re­finery investment to meet environmentalregulations.

Estimates of expenditures to meet existingand proposed environmental regulations wereobtained from the refining survey. Over the6-year period 1973-1978, costs in terms of con­stant 1970 dollars are expected to total $3.3billion for the 12.3 MMB/ CD capacity coveredby the survey response. This is equivalent toan expenditure of $266 per daily barrel ofcapacity, of which $112 will be required formanufacturing unleaded gasoline, $54 for con­trol of refinery water effluent, $89 for controlof ambient air, and $11 for control of refinery

* NPC, U.S. Enm'gy Outlook: An Initial Appraisal1971-1985, Volume Two (November 1971).

35

noise and light. These environmental expendi­tures will be required over the next 6 yearsand are in addition to substantial expendituresalready made by the industry. For perspective,this $3.3 billion expenditure is equivalent tothe expenditures required to construct between1.3 and 2.2 lVIlVIB/ CD of additional refinerycapacity, based on refinery construction costsof $1,500 and $2,500 per daily barrel of ca­pacity, respectively.

In addition, the facilities necessary to effectthe reduction of sulfur content in heavy fuel oilare estimated to cost $400 per barrel of fuel oiloutput to lower the content from 1.4 percentto 0.3 percent. Reduction of the sulfur levelfrom 1.4 percent to 0.7 percent would cost $320per barrel, whereas reducing sulfur from 1.4

36

percent to 1.0 percent would cost less than $100per barrel of fuel oil output capacity.

Refinery FuelUnlimited gas supplies will not be available

for new or expanded domestic refining capacity.New refining capacity will increasingly dependon internally produced low-sulfur fuel at sub­stantially higher costs than has been the casein the past when natural gas was available atartificially low prices or when high-sulfur fuelcould be used. Foreign refineries will also burninternally produced fuel , but less stringentsulfur emission standards in certain countriesusually result in lower fuel costs than atdomestic refineries.

Chapter Five

Oil Import Policy and OtherRelated Issues ofGovernment Policy*

IntroductionGovernment policies, legislation and reO"ula­

tions at the federal as well as state and locallevels have become an increasingly more impor­tant factor to be considered in buildinO" andoperating refineries in the United States.'" It iscritical, the.refore, that (1) existing policiesand regulatIOns be evaluated in terms of theirimpact on t~~ shortfall of refining capacity, (2)current polIcIes and regulations be modified asnecessary to facilitate sufficient supply of im­ported crude oil and products to meet the short­te~m ~rowth ~n demands, and (3) new policygUIdelInes be Implemented within a reasonableperiod of time in order to maximize 10nO"-termdomestic refining capabilities. b

The decline in production of domestic crudeoil and the near-term shortaO"es in domesticrefining capacity have been c~ntributinO" fac­tors in the emerging shortages of crude oil andp~oducts in t~e. United States. Long-term plan­nIng by the oIl mdustry to provide for increaseddom~stic prod~ction of crude oil and adequaterefinmg capacIty for processino' both domesticand foreign crude supply has become increas­ingly more difficult. Uncertainties and incon­sistencies in government policies and the lackof . co~sistent and cohesive long-term policygUldelmes aggravated the planning environ­ment. Sound government policy guidelines atfederal as well as state and local levels arenecessary if the oil industry is to maximizesupply for domestic sources.

The relative inflexibility of the crude oilquota system, coupled with the decline in do-

mestic crude oil production, has restricted the~evelopmentof new refining capacity. While itIS true that total U.S. import quotas wouldincrease by the amount of new capacity builtthere has been no direct mechanism to provid~an existing refiner or a potential refiner withthe necessary access to foreign crude oil sup­plies necessary to the operation of a new re­finery in the United States. Limited and inade­quate starter allocations were the only existinO"provisions for granting crude access for ne;refining capacity. The difficulties and costs ofacquiring imported supplies from others werediscouraging factors in decisions regardinO" newcapacity construction. b

Oil Import Policy-1959-1973The principal element of government policy

affecting the petroleum refining industry andthe petrochemical industry has been the Man­datory Oil Import Program. This program wasinstituted by Presidential Proclamation in 1959in order to restrict imports of petroleum to alevel which would not threaten the nationalsecurity and to provide a basis for preserving

" The President, in his energy message to Congressof April 18, 1973, has removed by proclamation allexisting tariffs on imported crude oil and products andhas suspended direct control over the quantity of C1'udeoil and refined products which can be imported. Inplace of the control system, the President has initiateda license fee system. The President stated that toenco~t1'age domestic refinery construction, crude oil inamounts up to three-fourths of new refining capacitymay be imported for a period of 5 years without beingsubject to any fees.

This chapter was prepared prior to the issuance ofthe President's Energy Message and does not take intoaccount or eval~wte any of the policy changes or 1'ecom­mendations contained therein. The chapter does how­ever, evaluate va,rious factors which affected r~fineryoperations prior to April 18, 1973. Many of thesefa:ctors are still relevant, particularly from the point ofv~ew of future governmental policy decisions and arepresented in that light. '

37

a vigorous and healthy petroleum industry inthe United States. These restrictions and limi­tations on imports of petroleum were considerednecessary to prevent a surplus of low costforeign production from displacing higher costdomestic supplies. It was evident that, unlessa reasonable limitation on imports were im­posed, the following might occur:

• Oil imports would flow into this countryin increasing quantities, entirely dispro­portionate to the quantities needed to sup­plement domestic supply.

• There would be a resultant discouragementof, and a decline in, domestic production.

• There would be a substantial reduction indomestic exploration and development.

• In the event of a serious emergency, thisNation would find itself years away fromattaining the level of petroleum productionnecessary to meet national security needs.

The Mandatory Oil Import Program has beenin operation for more than 14 years. Duringthis time period, it has maintained the totallevel of imports "controlled" within the frame­work of the President's Proclamation and hasprovided procedures for allocating importsamong eligible domestic companies. As the im­port program has evolved, the volume restric­tions on certain imports have been removed.For purposes of this study, these imports aredesignated as "decontrolled." At the same time,certain procedures for distributing the quotafor "controlled" imports have been revised inorder to accommodate changing conditions andcircumstances in the oil and petrochemicalmarl{ets. Without elaborating in detail, theMandatory Oil Import Program established-

• A system of quota-regulated imports inthree separate geographic areas- east ofthe Rockies (Districts I through IV), WestCoast (District V) including quota draw­backs for production of low-sulfur fuels,and Puerto Rico

• A system of licenses for decontrolled im­ports of petroleum products from foreignrefineries, principally residual fuel oil

• An allocation system for distribution ofquota licenses to petroleum refiners, petro­chemical companies and, to a limited ex­tent, marketers without raw material pro­cessing facilities

• Preferential status for overland importsfrom Canada and Mexico in recognition oftheir proximity to the U.S. market andtheir inherent security advantages

• Special exceptions for promoting and en­couraging exports of petrochemicals anddevelopment of new industries in PuertoRico, the Virgin Islands, etc.

38

Quota-Controlled ImportsImports subject to quota limitations and allo­

cations have been primarily limited to crudeand unfinished oils requiring further processingin U.S. refineries and petrochemical plants.The allocation of licenses to refiners has beenbased on an applicant's refinery input proratedby a predetermined graduated scale for differ­ent levels of input. Basically, the sliding scalesystem provides smaller refiners a proportion­ately larger volume of import licenses relativeto their eligible inputs than larger refiners.Quota allocations for the manufacture of petro­chemical derivatives have been included in thequota system since the mid-1960's. The quotalicenses for petrochemical feedstocks are allo­cated to both eligible petroleum refiners andchemical companies on a fixed percentage ofplant input. The petrochemical import regula­tions for allocation of feedstock quota permitthe licensee, with proper certification, to importup to 100 percent of such allocations in the formof unfinished oils. The import regulations per­mit the exchange of import licenses for domesticfeedstock.

The total level of quota-controlled importseast of the Rocky Mountains is shown in Table12. Until recently, this level was set at a fixedpercentage of domestic crude and natural gasliquids production. Imports on the West Coast(District V), also shown in Table 12, have con­tinually been derived as the difference betweendomestic supply and total demand. Overland

TABLE 12

CONTROLLED IMPORTS(MB/CD)

1960 1970 1973*

Districts 1-IVt

Finished Products 76 171 130Crude and Unfinished Gil t 776 1,138 2,600

Total 852 1,309 2,730

District Vt

Finished Products 7 18 8Crude and Unf inished Gilt 292 464 942

Total 299 482 950

• As authorized prior to Apr i l 18,1973.

t Includes over land imports from Canada and Mexico.

:j: Includes petroleum refiners and chemical companies.

imports from Canada into Districts I throughIV are included in the "controlled" level ofimports.

Crude and natural gas liquids production hasfailed to increase since 1970 (remaining atabout 10 MMBj CD). As a result, quota importsinto Districts I through IV have increased sub­stantially since 1970 in order to meet the grow­ing shortfall in domestic production. Quota­controlled imports will have more than doubledduring this time.

Decontrolled ImportsSince 1966, imports of residual fuel oil on

the East Coast (District 1) have been exemptfrom formal quota limitations. Very little re­sidual fuel is imported into the other districtsand is generally subject to quota restrictions. .The growth in residual fuel demand since theinception of the Mandatory Oil Import Programhas been met entirely from offshore sources.Production of heavy fuel oil in U.S. refineriesactually declined during this period.

Imports of LPG from the Western Hemi­sphere, asphalt, overland imports of finishedproducts from Canada processed from Canadianorigin oil, No. 4 fuel oil imports, and morerecently No. 2 fuel oil imports (the first 4months of 1973) have been excluded from quotarestrictions. In addition, a small but growingbonded fuel market has continually been ex­empt from import restrictions. This is fuelloaded in the United States on vessels and air­craft engaged in foreign commerce.

Imports formally exempt from quota restric­tions increased from about 700 MBj D in 1960to almost 2.5 MMBj D in 1972. The increaseof almost 2.0 MMBj D has been primarily sup­plied from refining capacity located in areasadjacent to the U.S. mainland, but in effectrepresents refining capacity that might other­wise have been built in the United States.

The ability of refiners to supply this marketby processing foreign crude oil in areas adja­cent to the U.S. East Coast has been the pri­mary factor contributing to the export of refin­ing capacity from the U.S. mainland. Increasingrequirements for imported naphtha to meetpetrochemical feedstock demands and potentialrequirements for manufacture of SNG couldaccelerate this trend. The U.S. refiner, becauseof import restrictions and economic considera­tions, is at a disadvantage in supplying thismarket. Until recently, the economics of thedomestic refining industry necessitated mini­mizing the yield of the lower value heavy fueloils. The increased demands for higher valuelow-sulfur fuels has modified comparative prod­uct economics to some extent.

Oil Policy ConsiderationsImport controls alone have not achieved the

desired levels of exploration for new oil andgas reserves in the United States over the last10 to 15 years. Furthermore, it is evident thatcertain features of the import control systemhave contributed to the export of some typesof refining capacity. Nevertheless, it is fair toconclude that, in the absence of the oil importprogram, domestic crude oil production wouldbe less than current levels, and substantiallymore refining capacity to supply the U.S. mar­ket might have been built in foreign locations.It should be recognized, however, that the cir­cumstances and conditions leading to the adop­tion of formal quota controls in 1959 havechanged considerably, as discussed in the fol­lowing:

• The domestic oil industry has moved froma period of "surplus" productive capacity(Districts I through IV) to a period ofdeveloping shortages of crude oil as well asrefined products.

• The surplus of foreign productive capacityhas been reduced significantly with devel­oping shortages of low-sulfur crudes.

• The landed price of foreign crude oil andproducts has increased and in some casesnow exceeds the price of equivalent do­mestic petroleum.

• The ownership of petroleum reserves inforeign producing areas is reverting to thehost country governments by reason ofrecent agreements between internationaloil companies and host governments. Theserecent agreements have resulted in advanc­ing the return of reserves to the host coun­tries from the original terms of the con­cession agreements.

In evaluating the impact of these changingcircumstances on oil import policy and the im­port control system, it is quite evident thatother policy considerations should complementthe oil import control system as a means fordeveloping an economic climate favorable tolong-term development of domestic productivecapacities as well as refining capacity. Theseconsiderations include but are not limited to thefollowing:

• Recognition by the Federal Governmentthat petroleum prices in the United Statesmust be adequate to provide sufficient re­turn on the new investments necessary todevelop domestic resources. Flexibility forprices to adj ust based on market supplyand demand within the United Statesshould provide sufficient incentive to de­velop a relevant degree of self-sufficiency

39

in raw material supply and processingcapabilities.

• The need to reevaluate certain aspects ofenvironmental regulations in order to en­sure that benefits are commensurate withcost.

• The need to establish standards for orderlysiting of new energy producing facilitiesin order to prevent the serious delays nowrealized in almost all facets of the energyindustries.

Oil Import Policy and Refining CapacityAt present, the petroleum industry is operat­

ing near or at maximum refining capacity inthe United States, with every indication thatpersistent shortages of capacity will exist forat least the next several years. The lag indevelopment of new refining capacity in theUnited States, coupled with the extent of ca­pacity already exportE-d to the Caribbean andother adjacent areas, is cause for serious con­cern. These trends involve a number of complexconsiderations, the more important of which arediscussed in the following sections.

The National Security

In evaluating the relationship of oil importsto requirements of national security, the TradeExpansion Act of 1962 (Sec. 232-Safeguard­ing National Security) provides that the Presi­dent and the Office of Emergency Preparednessshall give consideration to-

· . . domestic production needed for project­ed national defense requirements, the ca­pacity of domestic industries to meet suchrequirements, existing and anticipatedavailabilities of the human resources, prod­ucts, raw materials, and other supplies andservices essential to the national defensethe requirements of growth of such indus~tries and such supplies and services includ­ing the investment, exploration and devel­opment necessary to assure such growth,and the importation of goods in terms oftheir quantities, avai labilities, character,and use as those affect such industries andthe capacity of the United States to meetnational security requirements.

· .. further recognize the close relation ofthe economic welfare of the Nation to ournational security, and shall take into con­sideration the impact of foreign competi­tion on the economic welfare of individualdomestic industries; and any substantialunemployment, decrease in revenues ofgovernment, loss of skills or investment orother serious effects resulting from 'thedisplacement of any domestic products by

40

excessive imports shall be considered, with­out excluding other factors, in determiningwhether such weakening of our internaleconomy may impair the national security.

An expanding domestic refining industrycapable of meeting primary product demandsis essential to the economic structure of the U.S.oil industry and the considered requirements ofnational security. Although the U.S. oil indus­try will require substantially larger volumes offoreign oil to supply the anticipated growth indemands, maximizing domestic refining capacityto the fullest extent possible provides a greaterdegree of flexibility in meeting basic nationalsecurity requirements. Increasing product im­ports at the expense of domestic refining ca­pacity would place the United States in a posi­tion of having to depend on foreign sources fora growing part of its crude supply. It wouldalso force the United States to rely, to an in­creasing degree, on foreign processing capacity.This would appear contrary to the nationalsecurity and the national defense as defined bySection 232 of the Trade Expansion Act of 1962.

Political and Economic Risks

One of the more critical issues to be consid­ered in evaluating an onshore vs. an offshorelocation of future refining capacity to meetdomestic requirements is the uncertainty cre­ated by political and economic instability invarious areas of the Free World. The growingrate of expropriation and nationalization ofAmerican and other foreign investments invarious -areas of the world must be consideredin evaluating the advantages and disadvantagesof import policies which would substantiallyincrease product supply from foreign refiners.

Short of actual expropriation and/ or nation­alization is the threat or risk of host govern­ment control of part or all of the operations ofa particular facility. This could affect a com­pany's operation in any number of ways, includ­ing the availability of supply, price and possiblycontrol of finished product sales in consumingareas. These are risks which must be weighedin evaluating the long-term security of suchfacilities.

Foreign Host Country Demands

Notwithstanding the political and economicrisks involved in the export of refining capacityto supply the U.S. market, there is the realpossibility that, in the long run, the U.S. Gov­ernment may not be in a position to effectivelyimplement policies designed to maximize con­struction of refining capacity in the UnitedStates.

The participation agreements negotiated with

foreign producing countries have raised thepossibilities of future participation by theseproducing countries in the downstream refineryoperations of the oil industry. The extent towhich this may materialize in the constructionof new capacity in either the consuming mar­kets or producing areas could have far-reachingsignificance in regard to long-term importpolicies.

Balance of Trade

The NPC U.S. Energy Outlook report con­cludes that oil imports could increase from 3.4MMBj D in 1970 to as much as 19 MMBj D by1985 and that the deficit in balance of trade inpetroleum liquids could increase from almost$3 billion in 1970 to almost $30 billion annuallyby 1985. ':' Deficits of this magnitude wouldobviously have serious consequences on theNation's overall balance of payments by 1985.Increasing product imports to meet the growingdomestic shortfall of refining capacity wouldfurther aggravate the already unfavorable bal­ance of trade estimated for 1985.

Employment in the United States

In a recent study, the Department of theInterior indicated that the "export" of refiningcapacity since 1961 has eliminated employmentopportunities in the United States not only inrefining but also in other allied and supportingindustries.t

The study by the Department of the Interiorindicates that more than 100,000 jobs may havebeen lost as a result of the increase in productimports of almost 2 MMBj CD over the last 10years. The loss of about 25,000 of these jobsis directly attributable to refinery employmentand the balance to allied industries. This is aserious loss of employment opportunities "vhichwould undoubtedly be accelerated if the UnitedStates commits itself to greater dependence onforeign processing capacity.

Modification of the ImportControl System

Oil import policy and the implementing con­trol system can be effective and instrumental inpromoting the long-term growth of domesticrefining capacity, providing sufficient and ade­quate economic incentives prevail to encouragerefinery investment in the United States.

The Mandatory Oil Import quota systemalone is no longer an effective means for ensur­ing an adequate supply of petroleum to meetrequirements in the United States. Uncertain­ties concerning the future direction of importpolicy, uncertainties with respect to allocations

within the existing system, and quota restric­tions limiting access to foreign supply havemade it increasingly difficult for any refiner torealize an assured and adequate long-term sup­ply of crude oil necessary for large scale expan­sion of refining capacity. The resulting lag indevelopment of new refining capacity, coupledwith the deficit in domestic raw material supplyand the rapid increase in requirements for for­eign crude oil, has created an urgent need formodification of existing import controls.

Short-Term Considerations

Short-term considerations within the importcontrol system have become critical in the last6 to 12 months as evidenced by the growingshortages of both crude oil and products, by thenecessity to eliminate controls on light heatingoils for the first 4 months in 1973, and by thefact that the refining industry is operating ator close to maximum effective capacity.

With no substantial additions to capacityscheduled to come on-stream over the next sev­eral years, the growth in petroleum demand,at least through 1975, will have to be suppliedincreasingly by imports of finished products,assuming sufficient foreign refining capacity isavailable to meet these requirements. Lead timeof at least 3 years to construct new large incre­ments of refining capacity preclude any otherpossibilities at the present time to meet the nor­mal short-term growth in petroleum demands.

It is important to recognize, however, thatproduct imports discourage the development ofdomestic refining capacity. At the same timeincreased petroleum product imports are es­sential to meet demand over the near term.Changes in the import program to accommodateadditional product imports have been necessary,but it is important that any such change orchanges be compatible with long-term goals andpriorities of import policy. Adequate incentivesto phase out the short-term increase in productimports will be necessary as additional domesticrefineries are brought on-stream.

Long-Term Considerations

The NPC U.S. Energy Outlook report recom­mended that import policies be designed to en­courage the growth of domestic refining ca­pacity by assuring refiners adequate access tolong-term crude oil supplies. The extent towhich product imports may be required to meet

* NPC, U.S. Energy Outlook-A Report by the Na­tional Pet?'oleum Council's Committee on U.S. Ene?'gyOutlook (December 1972).

t U.S. Department of the Interior, Office of Oil andGas, T?'ends in Capacity and Utilization (December1972) .

41

short-term considerations should not obviatethe need for long-term policy guidelines toencourage the development of domestic refiningcapabilities.

Various proposals and recommendations torevise the import control system and make itmore responsive to refinery requirements havebeen studied and considered. These proposalsinclude but are not limited to-

• Modification of the existing quota systemwith special incentives for development ofU.S. refining capacity

• Elimination of formal quota controls oncrude oil, a phaseout of product imports,or alternatively a tariff on product importswith provision for standby controls in th~event that foreign productive capacitythreatens the well-being of the domesticproducing industry

• A tariff system with a phaseout of formalquota controls

• A quota-auction system or quota-tariff sys­tem

• Elimination of crude quota controls by re­quiring each refiner to run a predeterminedpercentage of U.S. produced petroleumliquids.

It is not the intent of this study to evaluatethe advantages or disadvantages of any of thespecific proposals suggested, but to considerthose guidelines essential to the long-term devel­opment of crude processing facilities. In orderto be effective, any system of import controls,whether quota restrictions or variations there­of, should at the very least consider-

• More favorable provisions for importationof crude oil than refined products

• Provisions to ensure a market for all do­mestic crude production

• Policies that provide the domestic refinerwith assurances of an adequate and long­term supply of crude oil from domestic aswell as foreign sources and, in so doing,assure maximum utilization of existing re­fining capacity

• Incentives to offset the disadvantages facedby domestic refiners when manufacturingproducts currently exempt from formalquota control

• A degree of consistency and stability inorder to provide refiners with the basis forestablishing long-term planning objectives

• Compatibility with overall objectives ofenergy policy.

Natural Gas PoliciesFederal control of wellhead prices of natural

gas at artificially low ceilings ha::; contributedto (1) an inflated demand for gas relative to

42

other energy fuels, (2) a reduction in explora­tion activity for new gas reserves, and thus (3)an accelerated depletion of existing reserves.

As a result, shortfalls in natural gas supplieshave become more frequent in recent years.With a continuance of the existing economicand policy environment, the projected shortagein domestic supply is almost directly propor­tional to the increase in future requirements.

Because of environmental considerations andother factors, oil has been and will continue tobe required in increasing quantities to meet thisshortfall in domestic gas supply. To this extent,the current shortage of gas, attributable to pastfederal policy, has contributed to inflating thedemand for oil and attendant refining capacity.

Permitting field prices of natural gas to reachtheir competitive levels with other energy fuelsources would expand exploration efforts fornew oil and gas reserves and future domesticsupplies to meet market requirements. Theextent to which additional domestic supplies ofnatural gas can effectively reduce the Nation'soverall energy shortfall, there would be anequivalent reduction in the demand for oil anda reduction in required refinery capacity.

Refinery Siting and Land UseLocal environmental restrictions and a grow­

ing antagonism on the part of some state andlocal governments and privately organized citi­zen groups to the location of heavy industry,such as refineries and electric power plants,have created serious problems for locating newfacilities in the major energy markets of theEast and West Coasts. For example, Californiaand Delaware have legislated coastal land uselaws that place major restrictions on the indus­trial use of coastal zones.

The NPC refinery survey revealed that veryfew companies were planning new refineries­eight refineries with a total of only 900 MB/ CDcapacity are in the planning stage industry­wide. Other companies reported that land wasavailable, but that environmental considerationshave forced them to defer any firm plans.

With today's political, social and environ­mental climate, there are many restrictions im­posed by regulatory authorities which are con­tributing to the shortfall of refining capacity.

Survey data from the industry indicate that,in general, refinery expansion can take place atexisting locations. These expansions are subjectto the lengthy process of obtaining permitsunder local zoning and environmental ordi­nances and in accordance with all federal regu­lations. However, new grass roots refinery sitesare difficult to obtain, particularly on the Eastand West Coasts where additional refining ca­pacity is most needed. In these areas, local

ordinances and state regulations, such as coastalzone acts, restrict construction within specifieddistances of the coastline and make the possi­bility of development of marine facilities veryunlikely.

The East Coast (PAD District I) has thelargest population and is in the least favorableposition of any area with respect to energyself-sufficiency. In 1971, crude capacity wasonly 25.1 percent of product demand. About2.0 MMBj D of products were imported fromoffshore (89 percent of U.S. total product im­ports), and about 3 MMBj D were brought infrom the South and Southwest by ship and pipe­line. There has been essentially no significant

. growth in the refining capacity on the EastCoast since import controls were adopted. Pro­jections of petroleum product requirements in­dicate an increase between 1970 and 1985 of4.8 MMBj D. This represents 41.1 percent ofthe total growth for the United States duringthat time period.

If it is necessary to ship foreign crude oil tothe Gulf Coast for refining and then back tothe East Coast, there will be added costs. Inview of the impending shortfall of refinedproducts, the usual product allocation proce­dures or the attempt to fulfill the shortfall fromforeign supply sources will impact more heavilyon the East Coast consumer.

Several legislative bills before the Congressare specifically related to land use planning ofboth private and federal lands. These billswould provide for-

• Land use planning and management by thestates

• Planning in terms of population growth,expanding urban development, industrialdiversifications, etc.

• A means of overriding conflicting patternsof land use and lack of uniformity amonggovernmental entities

• Exercising authority on the location andsiting of key facilities by assuming localregulations do not unreasonably restrictland use.

Legislation of the type now under considera­tion would have little impact on the energyindustry until at least 1980 because of proce­dures which essentially provide the states withlead time of at least 5 years to develop landuse plans. Even then, there is no assurancethat such legislation would enable industry todevelop adequate refining facilities.

Traditionally the United States has placedprimary reliance on the private sector for theproduction, generation, distribution and mar­keting of energy and energy fuels. This reli­ance necessarily implies the availability of landfor energy-related facilities.

Proper land use planning at both the stateand federal levels is recognized as an importantgovernmental function. However, such plan­ning, in addition to meeting preservation, con­servation and environmental goals, must makespecific provisions for energy-related facilitiesfor both public utilities and private business.

Construction Lead TimeRefinery equipment is, by its nature, large,

complex and costly. Even under the best ofcircumstances, it takes a long time to plan for,design and construct a new process facility.For example, the construction of an alkylationplant with known technology and proved en­gineering takes 1.5 to 2.0 years. The lead timefor a process using new technology can be 5 ormore years when research is required.

Lead times are being lengthened by the needto file impact statements, obtain permits, holdpublic hearings and attend to all the complexadministrative procedures established by fed­eral, state and local agencies. It is estimatedthat the current lead time for a major processfacility is 3 to 6 years.

Long lead times accentuate the importanceof long-range planning. The lack of a nationalenergy policy to establish goals, set prioritiesand help coordinate the interested federal, stateand local agencies makes it difficult for thepetroleum industry to effectively plan how tosupply its share of the U.S. growing energyneeds.

Coordination of AgenciesDealing with Energy

Prompt action should be taken to develop acomprehensive national energy policy and acoordinated, consistent program to accomplishnational energy goals. The chief role of theGovernment should be to establish prioritiesand guidelines and to eliminate the delays, con­flicts and confusion that presently prevailamong the many different federal, state andmunicipal agencies involved in energy matters.

43

Appendices

Appendix I

United States Department of the InteriorOffice of the SecretaryWashington, D.C. 20240

February 9, 1972Dear Mr. True:

The increasing dependency of this Nation on imported supplies of petroleum, bothcrude and refined products, the sources of which vary considerably in reliability, is acause for serious concern. At the same time the United States appears to be increasingits dependence on refining facilities and capabilities located outside this country. Thisgrowing proportion of foreign manufactured petroleum products which are necessaryfor the economic well-being and security of this Nation is also a matter of increasingconcern.

I therefore request that the Council undertake, as a matter of urgency, a survey ofthe factors-economic, governmental, technological and environmental-which may affectthe domestic refining industry's ability to respond to the demands for essential petroleumproducts that are made upon it. The Council should discuss those elements which aredeemed essential to a healthy domestic refining industry. To the extent that petroleumbelonging to other phases of petroleum supply and consumption impinge upon growthand technological capabilities of the refining segments, these should be included in theanalysis.

Representatives of the Department of the Interior will consult with you in the nearfuture to arrive at a detailed outline of the matters relative to this general request.

Sincerely yours,

/ S/ HOLLIS M. DOLEAssistant Secretary of the Interior

Mr. H. A. True, Jr.Acting ChairmanNational Petroleum Council1625 K Street, N.W.Washington, D.C. 20006

45

Appendix 2

National Petroleum Council Committee onFactors Affecting U.S. Petroleum Refining

ChairmanOrin E. Atkins

Chairman of the BoardAshland Oil, Inc.

CochairmanStephen A. WakefieldAssistant Secretary for Energy and MineralsU.S. Department of the Interior

Ex OfficioH. A. True, Jr.PartnerTrue Oil Company

*

Robert O. AndersonChairman of the BoardAtlantic Richfield Company

H. Bridges, PresidentShell Oil Company

Edward M. Carey, PresidentNew England Petroleum Corporation

1. H. Dawes, DirectorClark Oil & Refining Corporation

Cortlandt S. Dietler, PresidentWestern Crude Oil, Inc.

J . C. Donnell IIChairman of the BoardMarathon Oil Company

*

SecretaryVincent M. BrownExecutive DirectorNational Petroleum Council

Ex OfficioRobert G. DunlopChairman of the BoardSun Oil Company

*

B. R. DorseyChairman of the BoardGulf Oil Corporation

Charles W. Else, PresidentIndependent Refiners Association

of America

James W. Emison, PartnerOskey Gasoline & Oil Company, Inc.

George F . Getty IIExecutive Vice PresidentGetty Oil Company

Maurice F. GranvilleChairman of the BoardTexaco Inc.

47

Robert C. Gunness, PresidentStandard Oil Company (Indiana)

Fred L. Hartley, PresidentUnion Oil Company of California

Leon HessChairman of the BoardAmerada Hess Corporation

A. V. Hoffman, PresidentNational Petroleum Refiners Assn.

Herbert C. JohnsonChairman of the BoardConsolidated Natural Gas Company

John A. Kaneb, PresidentNortheast Petroleum Industries, Inc.

W. W. Keeler, DirectorPhillips Petroleum Company

C. B. McCoyChairman of the Board and PresidentE. 1. du Pont de Nemours & Company, Inc.

Randall Meyer, PresidentExxon Company, U.S.A.

O. N. MillerChairman of the BoardStandard Oil Company of California

Henry A Rosenberg, Jr., PresidentCrown Central Petroleum Corporation

Robert V. SellersChairman of the BoardCities Service Company

Chas. E. SpahrChairman of the BoardThe Standard Oil Company (Ohio)

Coordinating Subcommitteeof the National Petroleum Council's

Committee on Factors Affecting U.S. Petroleum Refining

ChairmanGeorge HolzmanGeneral Manager, RefineriesShell Oil Company

Assistant to the ChairmanLeonard A. GoldsteinManager, Special ProjectsManufacturing Operations DepartmentShell Oil Company

*Charles BarreVice President, RefiningMarathon Oil Company

George BishopVice President, ManufacturingPhillips Petroleum Company

Dr. Edgar N. BrightbillAssistant DirectorPurchasing DepartmentE. 1. du Pont de Nemours & Company, Inc.

Fred DennstedtVice President, RefiningExxon Company, U.S.A.

Cortlandt S. Dietler, PresidentWestern Crude Oil, Inc.

James W. Emison, PartnerOskey Gasoline & Oil Company, Inc.

48

*

CochairmanStephen A. WakefieldAssistant Secretary for Energy

and MineralsU.S. Department of the Interior

SecretaryAndrew AvramidesDeputy DirectorNational Petroleum Council

*Howard M. JoinerVice PresidentSupplemental SuppliesConsolidated Gas Supply Corp.

A. W. Kusch, Vice PresidentManufacturing, Research and EngineeringAtlantic Richfield Company

R. C. McCayAssistant to the PresidentTexaco Inc.

Edward N. Marsh, Vice PresidentResearch and EngineeringThe Standard Oil Company (Ohio)

W. E. PerrineExecutive Assistant to the PresidentAshland Oil, Inc.

John H. Rabbitt, ManagerIndustry AffairsCorporate DevelopmentSun Oil Company

Facilities and Technology Task Groupof the National Petroleum Council's

Committee on Factors Affecting U.S. Petroleum Refining

Chairman

George BishopVice President, ManufacturingPhillips Petroleum Company

Assistant to the Chairman

E. W. Mills, DirectorOperations Analysis & Economic EvaluationPhillips Petroleum Company

*

R. K. ArzingerRefinery ManagerGetty Oil Company

L. H. Corn, DirectorProcess EngineeringGulf Oil Corporation

P. R. CoronadoOperations Manager, Refining DivisionMarathon Oil Company

J. A. GravesAssistant ManagerSupply DepartmentExxon Company, U.S.A.

*

Cochairman

Eugene L. PeerIndustrial Specialist-RefiningU.S. Office of Oil and GasDepartment of the Interior

Secretary

Marshall W. NicholsEconomics CoordinatorNational Petroleum Council

*

David P. Handke, ManagerEngineering ServicesThe Standard Oil Company (Ohio)

A. S. Lehmann, General ManagerResearch Organization & FacilitiesShell Development Company

Richard Nelson, ManagerPlanning and EconomicsClark Oil & Refining Corporation

Charles M. Russell, Jr.Manager, Planning and AnalysisAshland Oil, Inc.

Economic and Environmental Task Groupof the National Petroleum Council's

Committee on Factors Affecting U.S. Petroleum Refining

Chairman

W. E. PerrineExecutive Assistant to the PresidentAshland Oil, Inc.

Assistant to the Chairman

Kenneth G. BrownChappaqua, New York

* *

Cochairman

Herbert J. AshmanIndustrial Specialist-Economics

and CoordinationU.S. Office of Oil and GasDepartment of the Interior

Secretary

Andrew AvramidesDeputy DirectorNational Petroleum Council

*

49

John M. Abel, ManagerEconomic & Corporate PlanningUnion Oil Company of California

G. H. CookNew England Petroleum Company

R. E. FarrellDirector, Environmental AffairsThe Standard Oil Company (Ohio)

J. F. Horner, Vice PresidentRefining, Transportation & EngineeringAmerican Oil Company

John G. McDonald, ManagerFacilities Planning and Economics AnalysisThe Standard Oil Company (Ohio)

J. R. McLeod, ManagerEconomic AnalysisResearch and Corporate Planning GroupCities Service Company

L. A. McReynolds, DirectorPetroleum Products and

Environmental ConservationResearch and Development DepartmentPhillips Petroleum Company

Dr. J. M. NelsonManager, Petrochemical &

Energy Development SectionPurchasing DepartmentE. 1. du Pont de Nemours & Company, Inc.

John F. Roorda, ManagerChemical EconomicsShell Chemical Company

Dr. Casey E. Westell, Jr.Director, Industrial EcologyTenneco Inc.

Government Policies Task Groupof the National Petroleum Council's

Committee on Factors Affecting U.S. Petroleum Refining

ChairmanR. C. McCayAssistant to the PresidentTexaco Inc.

Assistant to the ChairmanPaul A. SaurerAssistant ManagerPetroleum EconomicsTexaco Inc.

John G. Buckley, Vice PresidentNortheast Petroleum Industries, Inc.

Fred DennstedtVice President, RefiningExxon Company, U.S.A.

Cortlandt S. Dietler, PresidentWestern Crude Oil, Inc.

James W. Emison, PartnerOskey Gasoline & Oil Company, Inc.

Howard M. JoinerVice PresidentSupplemental SuppliesConsolidated Gas Supply Corporation

Donald C. O'HaraExecutive Vice PresidentNational Petroleum Refiners Assn.

50

* *

CochairmanDr. J. Lisle ReedPetrochemical SpecialistU.S. Office of Oil and GasDepartment of the Interior

SecretaryVincent M. BrownExecutive DirectorNational Petroleum Council

*

N. G. PayneDirector of Import SuppliesWestern Hemisphere Petroleum Div.Continental Oil Company

John SavoyEconomics and Industry AffairsSun Oil Company

J. J. Simmons IIIVice PresidentAmerada Hess Corporation

S. E. Watterson, Jr.Assistant ManagerEconomics DepartmentStandard Oil Company of California

Harry D. WilliamsWashington CounselAshland Oil, Inc.

Appendix 3

Fundamentals of RefiningOperations and Product Use

Past History of Product UseThe demand for petroleum products has

o-rown enormously in the past 25 years in both~olume and complexity. During this period,demand for all products has increased from lessthan 5 MMBj D to over 16 MMBj D in 1972.The most spectacular growth has been. in theuse of aviation fuels, where consumptIOn hasincreased over 30 times the amount userl at theend of World War II.

The quality of virtually all l?etroleum pr?d­ucts has been improved sigmficantly durmgthis period, resulting in more efficiency withless polluting emissions such as those caused bysulfur.

Petroleum products are the maj or source ofenergy for transportation and are the raw ma­terials for many of the products throughout oureconomy. They also provide a ~;ubstantial p.artof the enero-y for the productIOn of electncalpower. The~ provide the m.obility required fornational security and contnbute greatly to theeconomic welfare of our society.

The chief factors contributing to the rapidlygrowing demand for petroleu:n are the i~creas­

ino- population and the rapId growth m thede':nand for energy. The U.S. per capita de­mand for petroleum products has more thandoubled since World War II.

The United States has become a nation onwheels. Four out of five workers use an auto­mobile for commuting to and from work Ov~r

80 percent of the vacationing public use theIrown automobiles for transportation.

Air travel developed rapidly after WorldWar II causino- rapid growth in the demand foraviatio~ gasoline. The jet age beg1l:n in the1950's, creating a demand for an entIrely new

fuel. Faster and larger planes were required tosupply the very rapidly increasing demand forair travel. Although Americans travel morethan the rest of the world combined, air travelin the United Shtes is still in the early stagesof growth. . .

The demand for oils for space heatmg m­creased sharply after World War II, chieflybecause of the switch from coal for home use.In 1946 2.7 million homes in the United Stateswere c~ntrally heated with oil, increasing to11.2 million by 1969. . .

The demand for residual fuel oIls for heatmglaro-e buildings rose substantially after World

b . ••

War II because of the large mcrease m newconstruction of such buildings. In the past fewyears, the demand for residual fuel. oils h.astaken a sharp increase as a result of mdustrIaland electrical power plant usage. Nuclearpower generation has not developed as rapidlyas previously anticipated, and coal has not beenable to fill the increasino- demand for low-sulfurfuels. During the 194°6-1970 period, residualfuel oil experienced an overall growth rate of2.2 percent per year. However, anr:ual growthfor this fuel increased 4.2 percent III 1971 andover 8.9 percent in 1972. .

LPG is a laro-e-volume product whIch has ex­perienced an o;erall growth rate since WorIdWar II of approximately 10 percent per yearand has continued at a rate of about 5 percentper year since 1960.

Product Development-Characteristicsand Improvements

Motor FuelsMotor Gasoline

Since World War II, gasoline has changed inhydrocarbon composition and is now a productmade by careful blending of refinery stock pre-

51

pared by involved new processes and specialadditives developed in extensive research pro­grams. The most outstanding change in gaso­line during this period has been a vast improve­ment in antiknock quality. Although the pastbenefits enjoyed by the consumer in terms ofhigh-efficiency, high-performance automobilesare being eliminated in order to meet automo­bile pollution regulations, this octane qualitynot only is needed but will have to be increasedto supply unleaded fuels of the future. Higheroctanes have been obtained largely by new re­fining technology and processing, includingbetter desulfurization of gasoline blendingstocks which has made the lead antiknock addi­tives more effective. During this same period,the control of gasoline volatility has improved,contributing to better engine performance.

Special detergent or dispersant additives arenow available to help maintain a clean car­buretion system, resulting in improved engineperformance, better mileage in city driving, re­duced carburetor maintenance and reduced ex­hause pollutants.

At present, there are proposed regulationslimiting the lead alkyl content of future motorgasolines. In addition, one grade of unleadedgasoline must be available for public use bymid-1974. The primary reason for these con­siderations is the expectation that low-lead orunleaded fuels will permit operation of pro­posed pollution control systems on automobiles.Voluntary action on the part of the oil industryhas already resulted in general availability oflow-lead and unleaded gasolines. This trendwill undoubtedly continue, bringing about in­creasing supplies of these types of fuels, andwill result in major investments for properprocess facilities. Further changes in motorfuel characteristics may be required. Suchcharacteristics as sulfur content, volatility andboiling range may require further modificationsto satisfy automobile pollution control systemrequirements.

Diesel Fuels

Like gasoline, distillate diesel fuels for use inautomotive diesel engines have been improvedduring the past several years to meet require­ments imposed by changes in engine design andoperation. The most significant change in dieselfuels has been the use of hydrogen treating inrefineries, primarily to reduce sulfur content.In addition, fuels have been gradually improved,resulting in decreased engine deposits, smokeand odor. Railroad diesel fuels have not changedsignificantly since the large diesel engines usedin railroad service operate satisfactorily onfuels with less exacting specifications.

The use of additives in diesel fuels has be­come more common to provide improvements

52

such as lower pour points, ignition quality andstorage stability. Recent air pollution regula­tions have generated an increased interest inantismoking additives.

Other Petroleum Motor FuelsLPG has been used as a motor fuel since the

1920's in bus, truck and taxi fleet operationswhich have central servicing centers. The useof compressed natural gas (CNG) and liquefiednatural gas (LNG) as motor fuels is a recentdevelopment proposed for urban use in servicevehicle fleets.

Aviation FuelsAviation Gasoline

Quality control is particularly important inaviation gasoline production. Antiknock con­trol is especially critical because, unlike themotorist, the pilot is not able to hear an engineknock over the noise level. Other importantquality factors are volatility, freezing point,heat of combustion and oxidation stability.Quality control surveillance and close processcontrol have enabled the industry to produce auniform-quality premium product.

Jet FuelsCommercial kerosine was first used as a fuel

in early development on jet aircraft since it pro­vided the necessary volatility and was a readilyavailable commercial product of rather uniformcharacteristics. Jet fuels are exposed to bothhigh and loW temperatures in use. Therefore,these fuels must have very low freezing pointsand must be stable when exposed to high tem­peratures. The JP-4 and JP-5 military jet fuelsand equivalent commercial fuels have thermalstability properties satisfactory for operationsup to speeds of Mach 2.

Industrial and Heating FuelsLiquefied Petroleum Gas

LPG has taken on increased importance dur­ing the past few years. The extensive use ofcatalytic cracking and catalytic reforming pro­cesses and the growth in hydrocracking haveresulted in the production from natural gas pro­cessing. Prior to the start of the tremendousgrowth in the use of LPG in ethylene produc­tion, its major use was in household and indus­trial fuel, although LPG has long been used toa limited extent as a motor fuel.

Distillate Fuel OilDistillate fuel oil can be defined as Nos. 1, 2

and 4 heating oils, diesel oil and industrial dis­tillates. Grade No.2 fuel oil is the designationgiven to the heating or furnace oil most com-

monly used for domestic and small commercialspace heating.

The period since World War II has seenmarked changes in both the quality of homeheating oils and the manufacturing techniquesemployed in producing them. Domestic heatingoil should form no sediment in storage andleave no measurable quantity of ash or otherdeposits on burning. It should be fluid at stor­age conditions encountered during the wintermonths. The composition of the product mustbe controlled to assist in reducing smoke emis­sion. Low sulfur content has become quite im­portant. The fuel must have a light color, anattractive appearance and an acceptable odor.It is these properties, along with sulfur removal,which have undergone the greatest change inthe past 20 years.

In the early 1950's, hydrogen treating wasadopted as a means of reducing the sulfur andnitrogen compounds content of distillate fueloil. Through the use of this process, carbonresidue is reduced to less than 0.10 percent.Hydrogen-treated products are of excellentquality from the standpoint of a change in bothcolor and sludge formation during storage.

The superior processing techniques used inproducing distillate fuel oils today, coupled withthe improvements and developments in addi­tives, result in a cleaner-burning product. Thereduction in sulfur has contributed to the im­provement of air quality.

Residual FuelsResidual fuel oil can be defined as Nos. 5 and

6 heating oils, heavy diesel, heavy industrialand Bunker C fuel oils. Typically, these fuelsare used to provide steam and heat for industryand large buildings, to generate electricity andto power ships.

Since World War II, refining processes in theUnited States have continued to favor thebreaking up of the heavier residuum into lighterpetroleum products until residual fuel amountsto less than 8 percent of the crude refined.

Methods of desulfurizing low metal-contentresidual oils have been developed and are beingutilized as stringent air pollution regulationsbecome more widespread. The oil industry andboiler manufacturers have stepped up their re­search and development efforts considerably inthe areas of desulfurizing high metal-contentfuel oil and stack gas desulfurization.

Other Petroleum ProductsPetrochemical Feedstocks

Petrochemical feedstocks , such as benzene,toluene, xylene, ethane and propane, are usedin such diverse products as synthetic rub­ber, synthetic fibers and plastics. Tremendous

growth in the petrochemical industry over ~he

last 10 years has resulted in many new and Im­proved uses for petrochemicals.

LubricantsLubricants fall generally into three cate­

O"ories: automotive oils, industrial oils and~Teases. Engine oils, gear oils and automatictransmission fluids are three major lubricationproducts used in automotive operations. Theseproducts function to lubricate, seal, cool, clean,protect and cushion. Industrial oils are for­mulated to perform a broad range of functionsunder a variety of operating conditions. Themajor functions provided include lubrication,friction modification, heat transfer, dispersancyand rust prevention. Greases are basically gelsand are composed of lubricating oil in a semi­rigid network of gelling agents such as soaps,clays and, more recently, totally organic sub­stances.

Petroleum SolventsA variety of petroleum solvents are produced,

and critical specifications are largely a functionof the end product use. For example, rigidspecifications are required for petroleum sol­vents used in the paint industry. These prod­ucts must contain no materials that would dis­color pigments. They must possess low odorfor interior paints. Control devices make itpossible to maintain consistent product qualityeven under the most rigid specifications.

AsphaltThe heaviest fractions of a great many crude

oils include natural bitumens or asphaltenesand are generally called asphalt. Actually thismaterial is the oldest product of petroleumand has been used throughout recorded history.However, new uses and new demands forasphalt are continually being developed. Theindustry has satisfied these demands by chang­ing processing and types of crudes and by im­proving storage, transportation and blendingfacilities.

A Crude Oil Refinery *Crude oil is a substance comprised of a very

complex mixture of hydrocarbons, which aremolecules consisting almost solely of carbonand hydrogen atoms in various arrangements.Crude oil contains thousands of different mole­cules of varying sizes, their size being deter­mined by the number of carbon and hydrogenatoms aggregated together. As a result of thedifferent sizes and configurations, the molecules

* Terms used in this section are defined in theGlossary.

53

boil at different temperatures. It can be as­sumed that most of the molecules boil between100°F and something in excess of 1,500°F. Dueto the complexity of the hydrocarbon mixtures,only a few of the smaller, lower boiling mole­cules are named.

Paraffinic type crude oil is generally of high°API gravity and low in sulfur content andcontains a lesser amount of other contaminantssuch as metals and nitrogen. The straight-rungasoline derived from this type of crude oil islow in octane quality. The naphtha fraction isa poor reformer charge stock but an excellentSNG feedstock and cracking stock for olefms.The heavy naphtha and kerosine fractions giveproblems in meeting product freeze point speci­fications, and the diesel fuel fractions haveproblems in meeting pour point specifications.The residual fuel oils also have high pour points,and the asphalt quality is often poor. However,the heavy naphtha and kerosine have goodsmoke point characteristics, and the heavynaphtha, kerosine and light gas oil have highcetane indices. The volumes of residuals are

low and often can be cracked without too muchpenalty.

The physical properties of naphthenic crudeoils vary widely between different producingfields. They are generally of low °API gravity,may be either high or low in sulfur content, andare often high in nitrogen and metals. Thestraight-run gasolines from this source arehigher in octane but often of lesser volume. Thenaphtha is excellent reforming charge stock.The heavy naphtha has a poor smoke point andcetane index and should be reformed. The kero­sine and light gas oils have very poor cetaneindices and are not suitable for domestic dis­tillates. Pour points and freeze points of thislatter fraction are very low. The residual fueloil may be of high or low volume and high orlow sulfur and may be high in metals content.The metals are corrosive to boiler tubes, and theuse of high-sulfur fuel oils is becoming morerestrictive. These crudes are the source of naph­thenic lubricating oils, and the asphalt qualityis often good.

Intermediate type crude oils are, as their

CRUDE ROSTAM SAN ARDO REMARKS

Gravity (OAPI) 38 13Sulfur (wt. %) 1.5 2.0

L.V.% Type Intermediate NaphthenicROSTAM

- 0-SAN ARDO

Gasoline (60-4000FI

Octane 69_1 79.3

- 10-Naphthenes 20% 74%Aromatics 16% 12% San Ardo gasoline is only 3 percent

RVP 4.9 1.0 of crude and high in sulfur content.

GASOLINESulfur (wt. %) 0.05 0.33

- 20 ·

Kerosine (400·5000)

- 30 - Gravity (oAPI) 42 31Viscosity @ 100°F 33SUS 35 SUSSulfur (wt. %) 0.30 0.57

- 40 -Stove Oil (400.550°)

KEROSINE Gravity (oAPI) 40 29

- 50 - Viscosity @ 1000F 35SUS 43 SUS San Ardo distillate is not salableSulfur (wt. %) 0.47 0.76 due to failure to meet API , sulfurSTOVE OIL Pour -27°F -45°F and cetane specifications because of

· 60 - the naphthenic nature of the crude.

DIESE L Diesel Base (500-6500)

BASE Gravity (oAPI) 36 26- 70 - Pour +250F -25°F

Cetane 53.5 41.5Sulfur (wt. %) 0.92 1.01

- BO - Viscosity @ 100°F 39 SUS 54 SUS

TOPPEDCRUDE Topped Crude (6500 H)

·90 - Gravity (oAPI) 16 9Sulfur (wt_ %) 3.3 2.2Viscosity @ 1220 F 99SFS 1800 SFS

- 100 · Pour 70°F 80°F

Figure 7. Crude Oil Characteristics.

54

name implies, somewhere in between the paraf­finic and naphthenic type crudes. These crudesgenerally will fall in the medium to high gravityrange. Sulfur content may fall between 0.1- and2.5-weight-percent sulfur. Distillate generallymay be expected to be of sufficient quality. Fig­ure 7 illustrates the differences between atypical intermediate crude oil and a typicalnaphthenic crude oil.

Although we have discussed briefly the paraf­finic, naphthenic and intermediate types ofcrude oils, there exist many combinations ofthese crudes. The Bureau of Mines categorizesoils in the following classifications:

• Paraffin-Paraffin• Paraffin-Intermediate• Paraffin-Naphthenic• Intermediate-Paraffin• Intermediate-Intermediate• Intermediate-Naphthenic• Naphthene-Intermediates• Naphthene-Paraffin.

Crude oils are also classified as low sulfurcontent (below 0.5-weight-percent sulfur), in­termediate sulfur content (between 0.5- and1.0-weight-percent sulfur) and high sulfur con­tent (over 1.0-weight-percent sulfur). In gen­eral, the definition of a sweet crude oil is thatthe crude oil does not contain hydrogen sulfideand has below 0.5-weight-percent sulfur con­tent, with only a minor portion of the sulfurcontent being present as mercaptans. Mercap­tans (sulfur compounds) are one of the mostundesirable contaminants of crude oil andpetroleum products.

Each refinery processes a different mixture ofcrude oils, and over a period of time a process­ing sequence has been developed which convertsthese particular crude oils into the productsrequired by consumers in the marketing areaserved. Therefore, since it is not meaningful toattempt to describe the operation of an "aver­age" refinery, the following discussion chooses asimple-example refinery rather than an averageor typical refinery for its illustrative purposes.Figure 8 graphically shows the flow within theexample refinery.

When the crude oil is charged into this re­finery, the first processing equipment it reachesis called a crude oil distillation unit. The pur­pose of the crude unit is to separate the crudeoil into at least four different boiling rangefractions. The first fraction contains the lowerboiling materials and is termed straight-rungasoline. This lower boiling fraction is thenfurther processed into a finished gasoline blendstock. The next fraction boils between 400°Fand 650 °F and is called the straight-run dis­tillate fraction. This distillate fraction is thematerial that is primarily sold as kerosine, jet

fuel, heating oil (No.1 and No.2 fuel oil), anddiesel fuel.

The next and heavier fraction, which boilsbetween 650°F and 850°F, is called the gas oilfraction. It is somewhat difficult to define gasoil, except to say that it is usually the materialthat is heavier than the distillate fraction and isnot a black residual fuel oil. There is no con­sumer market for gas oil, and, since it is toohigh boiling to be sold as distillate and toovaluable to be sold as residual fuel oil, it isnecessary to convert this fraction into some­thing that can be utilized in the marketplace.Generally speaking, the molecules are cracked(molecular rupture) into smaller-size moleculesboiling in the gasoline and No. 2 fuel oil boilingrange.

The heaviest fraction from the crude unit isusually referred to as the residuum and includesmaterials that boil at 850°F to the heaviestmaterial in the barrel of crude which boils inexcess of 1,500°F.

After the crude has been separated into thesefour fractions, each fraction is further pro­cessed to yield ;::t product slate that can beaccommodated in the market. The actual re­fined product distribution varies considerably,depending upon the exact nature of the crudeoil that is available and the demands in themarketing area surrounding the refinery.

Many years ago, the straight-run gasolinefraction was used directly as automotive gaso­line. Technological developments have nowmade this material, as it is contained in thecrude oil, unsuitable for modern day engines.Today, it is necessary to process the straight­run gasoline by molecular rearrangement andby making certain changes in the moleculesthat will increase the octane number. This isusually accomplished by sending the straight­run gasoline to a fractionator and separatingit into two fractions. The lower boiling frac­tion, boiling between 100°F and 200°F, is calledlight, straight-run gasoline and has ordinarilygone directly into automotive gasoline. Al­though the octane number is not extremelyhigh, light, straight-run gasoline can be in­cluded in finished gasoline. However, underproposed no lead regulations, additional pro­cessing will be required to increase the clear(no lead) octane rating of the straight-rungasoline.

The remaining portion of the straight-rungasoline boiling between 200°F and 400°F issent to a catalytic reformer. The catalytic re­former uses a very expensive catalyst contain­ing platinum. The heavy gasoline is first mixedwith hydrogen and the temperature increasedto over 900 °F. When it is passed over theplatinum catalyst, hydrogen is removed fromsome of the compounds, greatly increasing the

55

en0')

... GAS Fuel Gas ..... RECOVERYPLANT

I Liquified Petroleum Gas (LPG) ~ ....

, ..~ ISOMERIZATION Isobutane

Pu rchased Butane.. UNIT

MOTOR ANDAviation ...

... ..I

AVIATION Premium ...Light Straight Run Gasoline ... FUEL

(100 · 2000 F) ..~ ,n. ~t.... BLENDING Regular ...

To Gas Recovery ...

Heavy Straight RunCATALYTIC

Reformate~ REFORMING(200 ·4000 Fl

...UNIT

Crude Oi l ... CRUDE AlkylateUNIT I Turbine Fuel ...

I

I I I

...

Distillates

Hy~gen

... HYDRO· ... Kerosine ......

(400· 6500 F)... TREATER ~~ .. No.1 Heating Oil ...

DISTILLATE ...BLENDING Diesel Fuel ...

Fuel ... ..I -...

"No, 2 Heating Oil ......

GAS... RECOVERY ---. ALKYLATION... UNITPLANT

I Y LPG ...

Gas Oil (650· 8500 F) , ,. ... CATAL YTl.C

(850 .toooFl

CRACKINGUNIT

ICatalytic Gasoline

Catalytic Cycle Oil

Catalytic Heavy Cycle Oil No. 5 & No.6 Fuel Oils ...

t ...... VACUUM Residuum Road Oils and Asphalts ...

Topped Crude ... UNIT ..(8500 • 15000 F)

Figure 8. Process Flow-Example Refinery.

octane number. When performing this opera­tion, some of the molecules rupture, producingpropane and butane which are then sold asliquefied petroleum gases. After adding 3 gramsper gallon of lead alkyl, the usual range ofoctane numbers in gasoline resulting from thisprocess is 90 to 103. Once the platinum catalysthas been used for a considerable length of time,it becomes economically unusable and must berejuvenated or replaced.

The next heavier fraction from the crude stillis the distillate fraction. Ordinarily, the dis­tillates are treated to improve color stabilityand reduce the sulfur content to very low levels.The process whereby this treatment is accom­plished is called hydrodesulfurization. Thisprocess consists of mixing hydrogen with thedistillate at an elevated temperature of between600°F and 700°F, then passing the hydrogen­distillate mixture over a catalyst usually con­taining the metals cobalt and molybdenum. Thesulfur contained in the distillate reacts with thehydrogen to form hydrogen sulfide gas. Thisgas is then collected with various other refinerygases and sent to a central unit where thesulfur is removed as elemental sulfur. Thiselemental sulfur is a basic raw material usedin many industrial applications. The treateddistillates are fractionated to specifications forspace heating oil, industrial heating oil anddiesel fuel.

Gas oil, the next higher boiling range frac­tion from the crude still, is converted into mar­ketable products by processing in a unit calleda catalytic cracking unit. The catalyst used inmost installations is a finely divided materialthat is about the consistency of fine sand. It isgenerally composed of silica and alumina, theprincipal components of naturally occurringclay. The newer catalyst used today is modifiedinto particular crystalline structures, greatlyenhancing the value of the catalyst to a refinerby improving the yields of gasoline, which inturn increases the value of the total productsfrom the catalytic cracking unit. The objectiveof this unit is to reduce the molecular size ofthe gas oil by rupturing or cracking the mole­cules and thereby lowering their boiling pointsinto the gasoline and distillate boiling range.The gasoline from the catalytic cracking unitgoes directly to the motor gasoline pool and hasquite a high octane number-between 96 and99 after adding 3 grams of tetraethyl lead pergallon. As a result of this process, the unitmakes a considerable amount of fuel gas thatcan be used as refinery fuel and a rather largevolume of propane and butane fractions whichalso contain the olefins propylene and butylene.

Olefins are molecules from which a part ofthe hydrogen has been removed. These olefinsare reacted with isobutane (a four-carbon mole-

cule where the carbon atoms are not in astraight line but are what is termed "branchedhydrocarbons"). This isobutane may be madeto react with hydrogen deficient molecules ofbutylene to make isooctane or with propyleneto make isoheptanes. The isoparaffin mixtureprocessed from this reaction is termed alkylateand is used for blending premium gasoline. Ithas also been used for many years as the prin­cipal high octane component of aviation gaso­lines. The octane number of the alkylate usuallyranges from 103 to 107 with 3 grams of tetra­ethyl lead per gallon.

Not all of the gas oil is converted into gaso­line and alkylation unit feed in the fluid cata­lytic cracker. Part of the gas oil feed is onlyreduced in boiling range to a range comparableto that of the distillate fraction from the crudeoil, and this material is the principal base stockfor No. 2 heating oil. A small amount of veryheavy fuel oil is made, which is a distillate fuel,but this is usually blended in with residual typefuel oil for sale.

The fourth and highest boiling fraction fromthe crude oil-topped crude-is processed inseveral different ways, depending upon geo­graphic location of the refinery and the marketdemands of the area. This extremely high boil­ing fraction of the crude oil can be furtherprocessed through a vacuum distillation unit.The purpose of the vacuum unit is to allowvaporization of more of the heavier gas oilmolecules from the crude residue without ther­mal disintegration of the molecules. The hydro­carbons vaporized can be included in the fluidcatalytic cracker as additional gas oil feedstock.The heavier residual bottoms can be furtherprocessed into various kinds of fuel oil, pri­marily No.6 or bunker fuel oil, and/ or asphalt.

The refinery described above is of the simplestform. Many specialty products-such as sol­vents-can be made in a refinery. Special pro­cessing can be performed to recover a varietyof aromatics, including benzene, toluene andxylenes, for which there is a demand in thepetrochemical markets. Typical boiling rangesfor the major petroleum products are shownin Figure 9.

Several gasoline streams of varying qualitycan be produced from this refinery which canbe blended in various proportions for makingthe different grades of gasoline and achievingdesirable characteristics in each of the market­able grades.

Each petroleum refinery processes a differenttype of crude oil, and each refinery uses differ­ent amounts and types of conversion units. Theconversion units are designed on the basis ofconverting the particular hydrocarbons in theavailable crude oil to the volume and type ofproducts required by the consumer.

57

200

58

Motor Fuel

Turbine Fuel

Kerosine

Stove Oil

Diesel Fuel

Furnace Oil

Fuel Oils

o 400 600 800

TEMPERATURE (Degrees Fahrenheit)

Figure 9. Typical Product Boiling Ranges.

1000 1200

Appendix 4

nlustrative EconomicModel Studies*

To illustrate the relative economics of refin­ing foreign crude oil domestically and offshore,an economic model was constructed and studieswere made to evaluate different situations thatmight arise between now and 1985. Many ofthe cases concentrated on the situation in Dis­trict I (due to the critical refinery shortage inthat area) and on the likely refining combina­tions for meeting the demand. Other districtswere also examined to determine the cost ofmeeting the demand district by district. Com­parisons between District I onshore refineriesand offshore refineries were made, and the costsof supplying environmentally acceptable fuelswere examined.

In addition to direct refinery-to-refinery com­parisons illustrating the basic onshore/ offshorecost differences, three energy scenarios werepostulated to determine the overall effect onDistricts I, II and III: (1) a product importscenario in which import quota controls con­tinue and the growth of domestic capacity isprojected from the responses to the surveyquestionnaire with foreign capacity making upthe difference; (2) a national security scenariowhich brings all new capacity onshore; and (3)a zero growth scenario, an unlikely situationwhere all new capacity moves offshore. Thefull report of the Committee details the method­ology of the model as well as numerous othercombinations studied. This Appendix is de­signed to summarize those data.

Principal assumptions used in the economicmodels are as follows:

• Growth in product demand is based on theInitial Appraisal.t

• Demand growth is to be satisfied in new200 MB/ CD refineries. (Actually, a sub-

stantial amount of product will be pro­duced by expanding existing refineries.)

• Iranian light crude oil is representative offuture crude oil supplies. The crude oilprice is an assumed price for 1985. Recentdollar devaluation and negotiated changesbetween international oil companies andMiddle Eastern countries indicate that thisprice ($2.50 per barrel) might be reachedby the 1975-1977 period. If this price isexceeded, the effect will be to increase theper barrel cost of products from both on­shore and offshore refineries. This increasewill be almost the exact amount of the perbarrel crude oil price increase.

• Crude oil import quotas are available atno cost.

• Crude oil is delivered to offshore (Carib­bean) refineries in VLCC's, and productsare barged to the United States.

• Import duties on all products are assumedto be at 1972 levels.

• For domestic refineries, crude oil is de­livered in VLCC's to an offshore deepwatertransshipment port and thence by barge tothe United States or (in the case of Dis­trict III) in VLCC's to an offshore receiv­ing terminal.

• Construction costs will increase 3 percentper year to reflect anticipated real costincreases in the construction industry.

* The illustrative economic model studies p1'esented inthis Appendix W61'e prepa1'ed prior to the issuance ofthe President's Ene1"gy Message to Congress of Ap1'il18, 1973, in which the President 1"emoved by p1"oclama­tion all existing tariffs on imported crude oil andproducts and suspended direct control OVe1" the quantityof c1'ude oil and 1"efined product imp01·ts. In place ofthe cont1'ol system the President has initiated a licensefee system. This Appendix does not attempt to evaluate01' comment on the P1'esident's Energy Message and isbased solely on policies in effect prior to Ap1'il18, 1.973.

t NPC, U.S. Ene1"gy Outlook: An Initial Appraisal1971-1985, Volume Two (November 1971) .

59

• All dollar costs are expressed in constant1972 dollars.

• Manpower cost is assumed to be effectively28 percent higher in the United States thanoffshore (Caribbean).

• Expected product costs include interest onworking capital and an assumed return oninvestment required on fixed assets. Al­though costs were computed for rates ofreturn from 4 percent to 20 percent, costsare displayed at 10-percent and 15-percentrates of return for illustrative purposes.Rate of return is based on the discountedcash flow (DCF) method or internal rateof return method commonly used in theeconomic analysis of business projects.

• Future effects of inflation are not included.• An income tax rate of 48 percent applies

to onshore locations. No income tax isassumed for an offshore Caribbean locationon the premise that refiners would be in aposition to use tax concessions commonlyavailable. However, the full report of theCommittee. sho'ws offshore Caribbean costswith tax rates up to 28 percent for pur­poses of comparison. In Eastern Canada,the 49-percent statutory tax rate is as­sumed to be in effect.

These studies do not attempt to give finiteanswers on preferable locations either onshoreor offshore. Each refinery location , of course,presents a special case, with its own particularsite, transportation, labor, environmental andother related operating situations. However,the studies do adequately show the order ofmagnitude of the differential costs of producingpetroleum products between the general areasstudied.

On the basis of these assumed data, it wouldbe expected that, to a large degree, the neces­sary refineries will be constructed offshore (ex­cept in the cases of Districts IV and V wheresuitable offshore locations are not readily avail­able, but refineries supplying the U.S. WestCoast from a Pacific Island or the West Coastof Latin America are not inconceivable). How­ever, the Government may conclude that otherconsiderations-military and economic security,balance of trade, and provision of jobs for U.S.citizens-provide greater overall benefits forthe national economy than the cost savings fromusing foreign refineries. If overriding benefitsrequire that new refining capacity be locatedin the United States, some differential incen­tives will be required to induce the domesticconstruction. Whatever policy is adopted, itshould be clear and firm. If investors believethat government inducement to build onshorerefineries is temporary, the economic attractive­ness of doing so will be weakened. A programaimed at the lowest possible current product

60

prices is not compatible with having ampledomestic refining capacity. Policies that try toaccomplish both of these objectives are ambigu­ous and are not likely to be effective.

The national implications of refining costdifferences between offshore and onshore loca­tions under various policy conditions are clearlyillustrated in terms of District I supply. (Thesame principles apply to a lesser degree in Dis­tricts II and III.) Table 13, which summarizesthe studies in the full report of the Committee,provides a basis for studying the patterns ofrefinery construction that are likely to resultunder various sets of circumstances. It showsillustrative expected costs, including return oninvested capital, for supplying District I's prod­uct demand by several different methods, as­suming no cost for crude oil import tickets andno price controls.

The assumptions and data in Table 13 canbe summarized as follows:

• A ssumt'ng 1"e fine1"ies can be built in District[ and imports of light p1'oducts are pro­h'ibited: New balanced refineries will bebuilt in District I and will save consumersabout $0.42 to $0.50 per barrel over bring­ing heavy fuels from offshore (item dminus item b of Table 13). The term"balanced refinery" refers to a refinerywith a product slate of both light andheavy products proportional to the project-

TABLE 13

ILLUSTRATIVE RELATIVE COSTSFOR SUPPLYING DISTRICT 1*

($/Bbl of Product in 1985)

10% DCF 15% DCFRate Rate

Origin of Supply of Return of Return

a. Offshore Balanced Refinery(Full Range of Products) 5.42 5.68

b. District I Balanced Refinery 5.58 6.07

c. District III Balanced Refinery 5.85 6.28

d. Combination of a LightProducts Refinery inDistrict I and a HeavyFuel Oil Refinery Offshore 6.08 6.49

e. Combination of a LightProducts Refinery inDistrict III and a HeavyFuel Oil Refinery Offshore 6.10 6.56

• These cost data include 1972 level U.S . import duties.For a detailed explanation of these data and other cases studied ,see the full report of the Committee .

ed growth in product demands. To assurethe production of low-sulfur heavy fuel oilin District I, it might also be necessary tolimit its import from specialized units , suchas low-sulfur crude oil topping plants.

• Assuming ?'e/in e1'ies can be built in Dist1'ictI and in1,po?'ts of light p1'oducts a1'e peT­mitted: Balanced refineries will be builtoffshore to supply District I demands at asaving of $0.16 to $0.39 per barrel over anonshore, balanced refinery (item b minusitem a) . In other words, a cost disad­vantage of $0.16 to $0.39 per barrel overand above the crude oil import quota cost

TABLE 14

must be overcome if the refineries are tobe built in the United States.

• Assuming re/ineTies cannot be built in Dis­tTic t I cmd light pToduct imp01-ts aTe 1)1'0­hibited: There would be a slight advantageof $0.25 to $0.28 per barrel to supplyingDistrict I from balanced refineries in Dis­trict III instead of from light productrefineries in District III and heavy fuel oilrefineries offshore (item e minus item c) .As previously noted, it might also be neces­sary to prevent fuel oil imports from low­sulfur crude oil topping plants.

• Assuming 1'e/ineTies cannot be built in Dis-

I LLUSTRATIVE COSTS OF ONSHORE VS. OFFSHORE

REFINERIES TO SUPPLY DISTRICT I GROWTH IN DEMAND

($/Bbl of Product in 1985)

Origin of Supply

Onshore

District I District III Offshore*

Crude O il in Pers ian Gulft 2.65 2.63 2.69T ra nsportation a nd Terminalling:j: 1.28 1.21 1.00Duty 0.11 0 .11 0.29Operating Cost s 0.48 0.45 0.38Product Transportation 0.51 0.27Interest on Work ing Capital 0.08 0.08 0.10Marketing Expe n se 0.05 0.05 0.05Income Ta xes§ 0.52 0.45Return on Refinery Investment II 0.90 0. 79 0.90

Total (15% DCF Rate of Return) 6.07 6.28 5.68

Total (10% DCF Rate of Return) 5.58 5.85 5.42

• Th e tabulation of costs shown in this table for an offshore refinery is not based on any parti cular location, nor arethere currently any offshore refineries making the assumed "bala nced" District I slate of products . Current offshore re­fineries are of the hydroskimming type, feeding mixtures of low-sulfur and high-sulfur crude, primarily producing fueloil for the U.S. market. Consequently, these costs are not intended to display actua l circumstances of current offshoreconditions.

t Prices of crude oi l in the Persian Gulf are the same. Figures in the table differ because they are expressed in dollarsper barrel of product, and product yields vary from locat ion to location . Costs include butane purchases and excludecost of acquiring import quota.

:j: Shipping at Worldscal e 70 rates. Oil moves to District I by VLCC to a Caribbean terminal and thence by barge tothe United States. District III uses VLCC's and a man-made deepwater port.

§ 48-percent tax rate onshore and zero offshore. It is assumed that a refiner offshore will make full use of tax con­cessions.

II 15-percent rate of re turn . Return is re lated to est imated refinery investments. Offshore refin ery invest ments in­clude a power plant which onshore refineries do not have .

61

TABLE 15

SENSITIVITY OF PRODUCT COSTTO INCOME TAX RATE AND RATE OF RETURN

($/Bbl of Product in 1985)

tTict I OInd light 1J1'oduct impoTts (LTe peT­mi tted: Balanced refineries would be builtoffshore to supply District I at $0.43 to$0.60 per barrel saving over an onshore,balanced refinery in District III (item cminus item a). In other words, a cost dis­advantage of $0.43 to $0.60 must be over­come if the refineries are to be built in theUnited States in the event that they areprohibited in District 1.

Offsetting the cost disadvantages of onshorerefineries the Nation's economy would benefitfrom the' creation of U.S. jobs, savings in thebalance of trade, and a more secure refiningsystem.

AO'ain in terms of District I supply, Table 14illustrates where the differences between ex­pected offshore and onshore costs occur.

It can be seen that several cost variationsexist between onshore and offshore refineries.In general, the lower crude oil handling costsand lower operating costs offshore just aboutoffset the duty on products imported into theUnited States. In addition, offshore refineriesfrequently enjoy tax advantages.

Because of the assumption that crude oil im­port licenses are available at no cost, thesestudies show that providing refiners with freeaccess to foreign crude oil will not, by itself,be enough of an incentive to cause new grassroots refinery construction onshore. Supple­mental incentives or programs, such as firmrestrictions on product entry, are required toensure onshore construction.

If foreign taxes are assumed to be higher, orif the rate of return is assumed to be IO'wer,the $0.39 per barrel advantage of foreign refin­eries shown in Table 14 will be less. Theseeffects are illustrated in Table 15.

The illustrative economics of a refinery lo­cated in eastern Canada (as shown in Table 16)show quite a different set of economics than thecases previously described. In eastern Canada,

Advantage of OffshoreRefinery over District I

10% DCF 15% DCFRate Rate

of Return of Return

TABLE 16

ILLUSTRATIVE COSTSOF EASTERN CANADA REFINERY*

$/Bblof Product

in 1985

Crude Oil in Persian Gulf 2.63Transportation and Terminalling 1.10Duty Crude and Products 0.29Operating Costs 0.31Product Transportationt 0.20Interest on Working Capital 0.10Marketing Expense 0.0649% Income Tax 0.52Return on Investment

(15% DCF Rate of Return) 0.91

Total 6.12Pollution Tax 0.04

Total (15% DCF Rate of Return) 6.16

Total (10% DCF Rate of Return) 5.76

• Estimated from existing operations; hence the productslate is not wholly consistent with the product slate projec­tions used to develop Table 14.

t At Worldsca'le 125 rates.

the current income tax rate is 49 percent and,in addition there is a statutory $0.04 per barrelenvironme~taltax now applicable. As indicatedby Tables 15 and 16, when the perimeter loca­tion income tax rates are comparable to domes­tic U S tax rates the economic advantage ofoffsh~r~ locations' tends to disappear vis-a-visan onshore location.

As an indication of the relationship betweencurrent product prices and current costs, oneillustrative case was prepared to show the costassociated with a 200 MB/ CD District I bal­anced refinery using 1973 construction and op­erating costs. The results are that the productvalue is $5.67 per barrel and $5.30 per barrelat 15-percent and 10-percent DCF rates of re­turn, respectively. The comparable averageproduct price (as of December 1972) for anEast Coast location was $4.85 per barrel. Hence,if a refinery could be built overnight, the refin­eries could expect a rate of return of 3 percentrelative to December 1972 product prices.

Not all new U.S. refinery capacity will moveoffshore in response to these economic forc~s.

The projection of domestic refinery .caI?acItyexpansion, based on the NPC suryey, ~ndIcates

that some new domestic constructIon wIll occur.

0.390.17

(0.02)

0.160.05

(0.02)

0% Tax Rate Offshore28% Tax Rate Offshore48% Tax Rate Offshore

62

In the event that cost differences remain (cou­pled with crude oil availability and governmentpolicy uncertainties), exported capacity willincrease by about 5 MMBj CD by 1985 to supplyDistrict I and part of District II.

The illustrative cost of supplying this 5MMBj CD from domestic refineries instead offrom offshore refineries "vas reached not bycomparison of individual refineries, but by pair­ing two scenarios, each of which would providethe growth in demand for Districts I, II andIII. One scenario is based on domestic construc­tion as projected from the survey and on crudeoil and product import quota controls. Theother is based on effective programs to bar

additional product imports over current levelsand to solve environmental siting problems. Inthis latter scenario, all new refining capacityis built in the United States. The differencebetween these two scenarios in the costs ofsupplying the growth in demand is $0.17 perbarrel of product (average cost of $6.07 perbarrel for the product-import scenario vs. $6.24per barrel for the no-product-import scenario).This figure should be regarded as a rough mea­sure of the cost to keep refining capacity in theUnited States when the three districts are con­sidered as a whole. The cost difference foractual refinery construction in a single districtcould be higher.

63

Glossary

Glossary

oAPI gravity-American Petroleum Institutegravity is an expression of the density or theweight of a unit volume of material whenmeasured at a temperature of 60 0 Fahrenheit.

alkylate-a synthetic gasoline of high octanenumber used in aviation and motor gasolineproduced from an olefin and isoparaffin.

alkylation-a refinery process for chemicallycombining an isoparaffin and olefin in thepresence of a catalyst. Sulfuric acid andhydrofluoric acid are the most commonly usedcatalysts.

alumina-a natural occurring type of clay con­taining a high percent of hydrated aluminumoxide commonly referred to as bauxite. Alsoa synthetically produced hydrated aluminumoxide of high purity. Used in refin ing pro­cesses as a drying agent and as a support forcertain catalysts.

aromatic hydrocarbons-hydrocarbons charac­terized by the presence of a six-membered,unsaturated ring structure of carbon atoms.Examples include benzene, toluene and xy­lenes.

benzene-clear, colorless, extremely flammableliquid of molecular weight 78.11 found as ahigh octane component of catalytic reformate.Used in organic synthesis and as a solvent.

butane:-a hydrocarbon of the paraffin series,consIsts of 4 carbon atoms and 10 hydrogenatoms. A naturally occurring component ofcrude oil and natural gas as produced at thewell. A gas at room temperature and atmo­spheric pressure. Used in motor fuel, aspetrochemical feedstocks, and as LPG (bottlegas) .

butyle~e-a hydrocarbon of the olefin series,consIsts of four carbon atoms and eight hy­d.rogen atoms. A product of a cracking opera­tIon and a gas at ambient temperature andatmospheric pressure. May be used as a com~

ponent of motor fuel, feed to an alkylationunit, or in petrochemical operations.

carbon monoxide-colorless, odorless, very toxicgas formed as a product of incomplete com­bustion of carbon (as in water gas and pro­ducer gas, exhaust gases from internal com­bustion engines) .

catalyst-a substance capable of changing therate of a reaction without itself undergoingany net change.

catalytic cracking unit-a refinery process unitthat converts a high boiling range fractionof petroleum (gas oil) to gasoline, olefin feedfor alkylation, distillate, fuel oil and fuel gasby use of a catalyst and high temperature.

catalytic reforming-a catalytic process usedto improve the antiknocl< quality of low oc­tane gasoline by conversion of naphthenes(such as cyclohexane) and paraffins intohigher octane aromatics such as benzene,toluene and xylenes.

cetane index or cetane number-a term indicat­ing quality of diesel fuel as octane numberindicates a quality of gasoline.

cobalt-a tough, lustrous, silver-white metalrelated to iron and nickel. In refinery use,cobalt oxide is combined with molybdenumoxide to make a catalyst used in hydrodesul­furization units.

crude unit-first processing equipment whichcrude oil reaches after it enters a refinery.Separates the crude oil into at least fourdifferent boiling range fractions. The fourboiling ranges would be gasoline, distillate,gas oil and topped crude.

cyclone separator-a mechanical device for sep­aration of liquid or solid particles from a gasstream by use of centrifugal force.

desulfurization-the process for removal of un­desirable sulfur or sulfur compounds frompetroleum products, usually by chemical orcatalytic processes.

downtime-time during which a machine, de­partment or factory is inactive during normaloperating hours.

65

effluent-material discharged or emerging froma process or from a specific piece of equip­ment.

electrostatic precipitator-a device used to sep­arate particulate materials from a vaporousstream. Separation is made by electricallycharging the solid particles which are thenattracted to an electrode of the oppositecharge while the vapors pass through with­out change. This device is commonly used toremove particulates from catalytic crackingunit flue gases.

floating roof storage tank-a type of storagetank having a specially designed roof thatfloats on the surface of the product in thetank. The floating roof essentially eliminatesevaporation loss experienced with fixed rooftanks.

flue gas-the products of combustion consistingprincipally of nitrogen, steam and carbondioxide with small amounts of other com­ponents such as oxygen and carbon monoxide.

freeze point-the temperature at which a liquidchanges to a solid.

gas oil-a petroleum product produced eitherfrom the distillation of crude oil or synthetic­ally by a cracking process. The boiling rangemay vary from 500°F to 1,100°F.

hydrocarbon-any of a large class of organiccompounds containing only carbon and hy­drogen, comprising paraffins, olefins, acety­lenes, alicyclics and aromatic hydrocarbons.Crude oil, natural gas, coal and bitumens areprimarily hydrocarbons.

hydrodesulfurization-the removal of sulfurfrom hydrocarbons by reaction with hydro­gen in the presence of a catalyst.

hydrofluoric acid-a colorless liquid boiling at67°F soluble in all proportions in water. Thewater mixture is extremely corrosive to met­als. Adequate safety precautions must beused when working with either liquid orvapor hydrofluoric acid. The use in the oilindustry is as a catalyst in alkylation unitsand in acidizing oil wells.

hydrogen sulfide-a poisonous, colorless, flam­mable gas, which may be prepared by thedirect combination of hydrogen and sulfur.Hydrogen sulfide can be reacted with causticto form sodium sulfide or charged to a sulfurplant to produce sulfur. A component of sourcrude oils.

intermediate crude oil-a crude oil containingboth naphthenes and paraffins. Usually ofintermediate sulfur content and in the me­dium gravity range.

isobutane-a hydrocarbon containing 4 carbonatoms and 10 hydrogen atoms, the same asnormal butane. Different arrangements of themolecular structure result in different phys­ical properties. Isobutane with olefin (s) is

66

the feed to an alkylation unit to produce highoctane gasoline.

isooctane-a hydrocarbon composed of 8 car­bon atoms and 18 hydrogen atoms, a liquid atnormal temperatures and a highly desirablecomponent of gasoline. Although found incrude oil, the principal source is from syn­thetic processes such as alkylation.

liquefied natural gas (LNG)-natural gas whichhas been liquefied at a temperature of minus258°F for ease of storage and transportation.

liquefied petroleum gas (LPG)-as a rule, it isa mixture of natural and/ or refinery gases,compressed until a liquid and contained underpressure in steel cylinders. It is used as fuelfor many different purposes, such as tractors,buses, trucks and stationary engines; for do­mestic and industrial purposes; and for powergeneration where commercial natural gas isnot available. New uses are constantly beingfound. A recent development is the use ofLPG as a direct quick-freezing agent in thefrozen foods industry. It is also known andmarketed as butane, propane, bottled gas, etc.

mercaptans-organic compounds possessing athiol group (-SH). The simpler mercaptanshave a strong, repulsive, garlic-like odorwhich becomes less pronounced with increas­ing molecular weight. Small amounts areintentionally added to LPG so that even smallleaks will be readily noticeable.

molybdenum- silvery-white, very hard, metal­lic element with physical properties similarto those of iron and chemical properties sim­ilar to those of a non-metal. The oxide ofmolybdenum with the oxide of cobalt is usedto make hydrodesulfurization catalyst.

naphtha-liquid hydrocarbon fractions, gener­ally boiling within the gasoline range, recov­ered by the distillation of crude petroleum.Used as solvents, dry cleaning agents andcharge stocks to reforming units to makehigh octane gasoline.

naphthenic crude oil-a crude oil that containsa large amount of naphthenic type com­pounds. A source of naphthenic lubricatingoils. Characteristics vary widely between thedifferent producing fields.

natural gas liquids (NGL)-a mixture of liquidhydrocarbons naturally occurring in suspen­sion in natural gas and extracted by variousmeans to yield a liquid product suitable forrefinery and petrochemical feedstocks.

nitrogen oxide-any of several oxides of nitro­gen, some of which are formed in a mixtureas toxic fumes by the action of nitric acid onoxidizable material or by the decompositionof metal nitrates used as catalysts in refin­eries and the combustion of gasoline in in­ternal combustion engines.

octane number-a term numerically indicatingthe relative antiknock value of a gasoline. Itis based upon a comparison with the refer­ence fuels isooctane (100 octane number)and normal heptane (0 octane number). Theoctane number of an unknown fuel is thevolume percent of isooctane with normal hep­tane which matches the unknown fuel inknocking tendencies under a specified set ofconditions.

olefins-a class of unsaturated (hydrogen de­ficient) open-chain hydrocarbons of whichbutene, ethylene and propylene are examples.Propylenes and butylene olefins with isobu­tane are used in an alkylation unit to producehigh octane gasoline. Ethylene is the feed­stock used by chemical plants to producepolyethylene plastic

paraffin-a white, tasteless, odorless, waxy sub­stance obtained from some petroleum oils.

paraffinic type crude oil-a crude oil containingpredominantly paraffinic hydrocarbons. Sometypes of this crude oil are used to producehigh quality motor oils.

petrochemical feedstock-a fraction of crudeoil or hydrocarbons which are used as acharge to process units in the production ofpetroleum based chemicals.

platinum-a silvery-white metallic elementclosely related to silver and gold. Used inthe manufacture of catalysts used in catalyticreforming and isomerization units.

pour point-temperature at which an oil com­mences to flow under stated condition. Low­est temperature at which an oil can bepoured. Reported in increments of 5°F.

propane-a saturated hydrocarbon containingthree carbon atoms and eight hydrogenatoms, gaseous at normal temperature andpressure, but generally stored and trans­ported as a liquid under pressure. Used fordomestic heating and cooking and for certainindustrial purposes, such as metal cutting.

silica-dioxide of silicon. Used in the manu­facture of glass and refractory materials.

smoke point-the maximum height a flame canbe extended without smoking the lamp chim-

ney when testing kerosine under specifiedtest conditions.

straight-run distillate-fraction of crude o~l

which boils between 400 °F and 650 °F. PrI­marily sold as kerosine, heating oil (No. 1and No.2 fuel oil), and diesel fuel.

straight-run gasoline-low boiling fraction ofcrude oil which, after further processing, isused as a finished motor gasoline blendingstock.

substitute natural gas (SNG)-a gas havingsimilar chemical and use properties to naturalgas. Manufacturable from petroleum liquids,coal and other hydrocarbons.

sulfuric acid-a heavy corrosive oily dibasicstronO' acid that is colorless when pure and isa vig~rous oxidizing and dehydrating agent.Composed of sulfur, oxygen and hydrogen.Used in the chemical refining of petroleumproducts. One of the two commonly usedcatalysts for alkylation units.

sweet crude oil-a crude oil having so littlesulfur that it requires no special treatmentfor the removal of sulfur compounds.

tetraethyl lead (TEL)-an organic lead com­pound which usually is added in concentra­tions up to 3 grams per gallon to mot?r andaviation gasoline to increase the antIknockproperties of the fuel.

toluene-an aromatic solvent having a specificgravity ranging between 0.8690 and 0.8730.Has many chemical uses and may be a c?m­ponent of aviation gasoline or motor gasohne.

topped (reduced) crude-a residua~ p~od~ct re­maininO' after the removal, by dIstIllatIon orother processing means, of an appreciablequantity of the more volatile components ofcrude petroleum.

vacuum unit-a unit operated below atmospher­ic pressure which allows vaporization of moreof the heavier gas oil molecules from thecrude residue without thermal disintegrationof the molecules.

vapor recovery system-system for controllinghydrocarbon vapor losses from a refinery.

volatility-that property of a liquid which de­notes its tendency to vaporize.

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