Statement of Robert W. Gee, Assistant Secretary Office of Policy and International Affairs
Department of Energy
submitted to the Committee on Environment and Public Works
United States Senate
September 16, 1998

Mr. Chairman. members of the Committee, I am pleased to submit for the record this statement discussing the Federal reformulated gasoline (RFG) program and S. 1576, which would amend the Clean Air Act as it relates to the Federal RFG program in California

DOE has been actively involved in supporting the Environmental Protection Agency (EPA), since the passage of the Clean Air Act Amendments of 1990, in the development and implementation of the RFG program and in the analysis of its cost and benefits. Most recently, the Department of Energy:

- Conducted a reassessment of the cost-effectiveness of the Phase II nitrogen oxides (NOx) reduction requirements for RFG. This assessment was used by EPA as part of its basis for denying a petition to change the standards.

- Provided detailed comments to EPA recommending changes to the rules to limit state opt-outs from the federal RFG program enabling refiners to avoid being put at risk by states withdrawing. at will. from the program.

- Provided analysis in support of EPA rules regarding foreign refiner gasoline quality baselines when those rules were challenged in the World Trade Organization (WTO). Subsequently, DOE provided additional analysis and comments to help guide the changes, in those rules, that were required to comply with the WTO ruling.

- worked with EPA and the refining industry to make appropriate changes in the per gallon NOx reduction requirements that helped reduce the cost of RFG without compromising environmental quality.

- Lastly, DOE conducted a preliminary analysis of the investment requirements and cost for reducing sulfur levels in all gasoline.

These recent activities are a continuation of DOE involvement with the RFG program that traces back to the Clean Air Act Amendments of 199O, to the regulatory negotiation that laid the basis for the Federal RFG program? and to working with EPA and industry to help ensure a smooth program introduction on January 1, 1995. DOE has worked to help assure that the RFG program achieves its environmental goals while placing minimum burdens on consumers and avoiding, for reasons concerning energy security, any effect of reducing domestic refining capacity.

When Congress passed the RFG program requirements, it intended to provide multiple benefits. For example. oxygenates are required throughout the year. not just in the high-ozone season. as part of the plan to gain a wide range of benefits through gasoline reformulation. The DOE believes these benefits, relating to both the environmental quality and supply of gasoline are important and suggests that all parties proceed very carefully in making any changes to the Clean Air Act that would affect this aspect of the program. S. 1576 would modify the Federal RFG requirements by allowing California state requirements to be the only requirements applicable to gasoline in that state. The most important of these changes, from our perspective, is the bill's effective elimination of the requirement for oxygenates in RFG and the likely consequences that such a change would have.

In this context, I would first like to discuss issues related to how oxygenates affect the quality of gasoline. To the extent that this legislation would allow a reduction in the use of oxygenates, the benefits that oxygenates provide in the formulation of clean gasolines could be lost. Oxygenates provide primarily two fuel quality benefits:

1) Oxygenates in reformulated gasoline contribute to a high quality gasoline that runs well and provides the octane levels consumers want while helping to reduce ozone forming emissions. DOE's analyses of Federal Phase 11 RFG performance requirements and other clean gasolines show that oxygenate use in general, and ethers like MTBE in particular, are economically attractive in formulating clean gasolines. even in the absence of an oxygenate requirement, because of their contribution to octane levels. distillation properties and dilution of undesirable components like sulfur and olefins. For example, a recently completed DOE analysis indicates that under the current economics of gasoline blending, if no oxygenates were required, two-thirds or more of the MTBE volume now used by east coast refiners in Phase II RFG would still be utilized. If oxygenate prices were cut for some reason by as little as a nickel per gallon, east coast refiners would not alter the volume of oxygenate use at all, because of the desirable properties of oxygenates relative to other possible blendstocks. Oxygenates would be the cost-effective source for the desired blendstock properties.

2) Oxygenates also help reduce air toxic emissions from reformulated gasoline. Gasoline is a mixture of different hydrocarbons with varying properties including toxicity. To achieve reductions in gasoline's overall toxicity, refiners must reduce aromatic hydrocarbons (especially benzene). By itself, aromatics reductions would rob the gasoline of octane and volume. however" oxygenates can restore octane and volume without refining more crude oil or making expensive refinery investments in new processing equipment. A detailed examination of 1996 RFG and conventional gasoline quality data, as reported to EPA under the RFG reporting requirements, has shown benzene and toxic emission reductions in RFG that substantially exceed the program requirements. In fact, most of the RFG produced in 1996 exceeded the Phase 11 (year 2000) requirements for toxic reductions. Some of this additional toxic reduction is directly attributable to the Clean Air Act requirement to use octane enhancing oxygenates, making it economically attractive for refiners to reduce aromatic and benzene levels.

I would now like to turn to several issues related to oxygenates use and gasoline supplies. The United States has moved into a period where consumers' demand for gasoline is coming close to overtaking the U. S. refining system's capability to produce it, particularly during summer months. We should be very careful that actions taken in the area of reformulated gasoline do not have unintended consequences of reducing the future available supply of gasoline. I would like to make three specific points:

1) From an energy security perspective, oxygenates provide a way to extend gasoline supplies. The transportation sector is almost totally dependent on oil. One of the few near-term options for reducing oil dependency is to expand our use of oxygenates. While it is true that some oxygenates are imported. a greater fraction of the oxygenates used in RFG is domestically produced than is the case for the oil used to produce the rest of the gasoline mixture. In addition. the Department is developing renewable oxygenate production technology that would not rely on any imported sources of energy. Nevertheless, even in the current market, oxygenate use in reformulated gasoline, which is primarily MTBE, saves over 200,000 barrels per day of oil use in the United States.

The potential for future savings is much greater. Expanding the use of renewable energy sources is an important goal of our Comprehensive National Energy Strategy, which will be achieved in part through greater use of oxygenates derived from domestic renewable sources. Ethanol. now produced mainly from corn. has an important role in meeting the oxygenate requirements of the RFG. Over time we expect that ethanol used in clean gasolines will increase, and the expanded production of ethanol will be based on a technology that uses non-food cellulosic feedstocks. The Department is developing improved feedstock and conversion technology to provide an economically competitive source of renewable transportation fuels that produce low air emissions, require no foreign sources of energy, and have extremely low emissions of greenhouse gases. We believe that Congress wanted to encourage the renewable ethanol industry when the Clean Air Act Amendments were passed and we think that preserving this opportunity for renewables is important.

2) A key supply related issue that needs to be considered when contemplating changing the very important part of total Californians' demand for automotive fuel, currently about 900.000 barrels per day. Outside of California, MTBE plays a less significant but nonetheless important role. About 150,000 barrels a day are used, most of it in Federal reformulated gasoline. For east coast refiners who make about 60% of their gasoline reformulated with MTBE, this oxygenate also is important component of total gasoline volume, equal to the total gasoline output of a couple large refineries.

Our data, shown in Figure 2, suggest that the California refineries could not significantly reduce oxygenate use during the peak gasoline season without adding additional refinery capacity. Figure 2 shows the refinery operation situation in California in the summer of 1997 when the whole country experienced strong gasoline demand and price increases, and through June 1998. The top gasoline producing refineries in the state were operating at, if not above, sustainable capacity during the summer of 1997 and at similar levels again in 1998. That high level of capacity utilization was with the high level of MTBE use that I just pointed out. Without the option of running more crude oil, the only options to reduce MTBE use, and still meet gasoline demand during the peak season. would be to import other gasoline blendstocks or finished gasoline or reduce the production of other products. Because of California's very stringent gasoline and diesel standards, strong demand for all transportation fuels, and long and expensive transportation links to other supply regions (like the U.S. Gulf Coast)? these options do not appear to be economically attractive. For all of these reasons, any reduction in California oxygenate use as a result of this bill is likely to be limited.

In closing, I would like to point out that we recognize that the states have legitimate interests in this important public policy issue There is a danger. however, that S. 1576 could have a detrimental effect on the overall Federal RFG program and state gasoline quality regulations. While the immediate impact of this bill might be limited to gasoline regulation in California. it is clear that the states look to the Congress. which passed the Clean Air Act. for national leadership in this area. If an exemption were permitted for California, other states may also ask for legislation to modify Federal RFG requirements in their areas. In our opinion, this would result a significant impact on the environment, gasoline consumers, and the motor fuels industry--which has, in good faith, made investments to meet important environmental regulations that were originally called for by the Congress.