A Presentation by

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

• PADD 1, East Coast
• Largest recipient of other regions supplies
  60 of all inter-regional product pipeline
  movements go to EC 90 of high sulfur distillate
  movements
• Largest concentration of oil-heated homes
  (Northeast)
• Only region where all pipelines carry high
  sulfur distillate

• PADD 3, Gulf Coast
• Largest supply region No foreign nation has
  higher refined product output than PADD 3
• Origin of 80 of all refined products, 83 of the
  low sulfur distillate and 94 of the high sulfur
  distillate shipped by pipeline between U.S.
  regions.

• PADD 2, Midwest
• Infrastructure rich, but logistics strained
• Contrast agricultural west (sparse) with
  industrial east (dense)
• Recipient of 30 of pipeline product origin of
  8 much intra-regional flow

• PADD 4, Mountain
• Market tiny but growing infrastructure sized to
  fit
• Distances long, infrastructure thin, terrain
  steep
• Few products (LSD only, e.g.) tanks optimized

• PADD 5, West Coast
• 2-3 distinct refined product markets
• California separate no HSD

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First, the On-Highway Dates

• Jun. 1, 2006
• Jul. 15, 2006
• Sept. 15, 2006
• Jun. 1, 2010
• Oct. 1, 2010
• Dec. 1, 2010

• Begin producing/importing 15 ppm for on-highway
  use, at least 80 of on-highway volume 20 can
  be 500 ppm
• Terminals other downstream must comply
  (protect, track)
• Retail outlets must comply
• No 500 ppm on-highway produced/imported
• No 500 ppm on-highway downstream
• No 500 ppm on-highway at retail

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Outline of Non-Road Proposal

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

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Now, the Non-Road Proposed Dates

• Jun. 1, 2007
• Aug. 1, 2007
• Oct. 1, 2007
• Jun. 1, 2010 (also ULSD)
• Jul. 15, 2010 (also ULSD)
• Sep. 1, 2010 (also ULSD)

• Begin producing/importing 500 ppm for non-road,
  loco., marine (NRLM) mark heating oil
• NRLM v HO segregated tracked downstream
• NRLM v HO segregated tracked at retail
• Produce/import NR at 15 ppm LM marked (still 500
  ppm) HO not marked
• Downstream
• Retail

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Illustration of 2007 ProgramBased on Distillate
Use in 2001
Res/Comm Indus. Elec. Gen. Oil Co.
Farm Rail Marine Mil. Constr Off-Hwy
20 TCO
80 On-Highway
Source EIA, Sales of Fuel Oil Kerosene.
Includes No. 1 and No. 2 distillate/diesel to
mirror EPA proposal. All CA use is classified as
15 ppm. TCO means Temporary Compliance Option.
Illustration based on historical patterns.
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Illustration of 2010 ProgramBased on Distillate
Use in 2001
Res/Comm Indus. Elec. Gen. Oil Co.
Rail Vessel
On-Highway Farm Mil. Constr. Off-Hwy
Source EIA, Sales of Fuel Oil Kerosene.
Includes No. 1 and No. 2 distillate/diesel to
mirror EPA proposal. All CA use is classified as
15 ppm. Illustration based on historical
patterns.
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Too Simple!!
Potential Distillate Product Segregations

• 2006 (4)
• On-road (OR) 15 ppm
• OR 500, OR Sm. Ref. 500
• Non-Road, Loco, Marine (NRLM) 500 dyed
• Heating Oil (HO) dyed

• 2010 (4)
• OR 15, Non-Road (NR) 15
• Loco, Marine (LM) 500 marker
• NR Sm. Ref. 500 dyed
• HO

• 2014 (3)
• OR 15, NR 15
• LM 500
• HO

• 2007 (5)
• OR 15
• OR 500, OR Sm. Ref. 500, NRLM 500 undyed
• NRLM 500 dyed
• NRLM Sm. Ref. dyed (Yes . . .)
• HO dyed?marker

And this is before Kero or Military Jet Fuel!
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Special Concerns in the Mountain and Plains
States

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

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California's Special Challenges

• Currently, all LSD
• California reg applies 500 ppm to all uses, not
  just highway
• Jet interface goes to LSD
• Transmix tanks must have space used for transmix
  and to meet DOT requirement for pressure relief
  capacity

• Then, all ULSD
• ULSD cannot accept jet interface
• Must wrap ULSD in gasoline, transmix will double
• No home for any accidental downgrade

LOCKOUT

• Transmix issues
• More customer/shipper truck trips to haul
  transmix
• Increased truck traffic coincides with truck
  increase for ethanol shipments
• If customers/shippers miss schedule, not enough
  space to meet DOT pressure relief requirement.

LOCKOUT
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Kero for Winterizing DieselAn Issue in the North

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

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Sequencing and Interfaces Nationwide Impact

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

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A Home for DowngradeAn Uncertainty Nationwide

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

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Downgrade Limitation

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

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The Downgrade Limitations Limitations

• Stationary Uses (HO) dominated by space heating
• Seasonal
• Variable with the winters severity
• Concentrated in a limited geographic area
• Availability may decrease as distributors choose
  between a seasonal product and 15 ppm on-road
• If cant move off-spec ULSD to HO, may have to go
  to transmix may overburden will cost
• Why not dyed NRLM?
• Will further fragment market, stress
  infrastructure, slow market correction

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Dyes and Markers

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

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Tracking and Recordkeeping

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

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Mismatched Timing Undercuts Ramp-up

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

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Uncertainties Now

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

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Uncertainties Later

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