500 ppm Diesel Supply Issues in 2006

In 2006, 500 ppm highway diesel could come from two sources: either from refiners who produce both 500 ppm and 15 ppm highway diesel or from refiners who are now producing highway diesel but who choose not to make investments to produce ULSD and purchase credits to sell 500 ppm diesel. Few refineries are assumed to fall into the first group. Possible candidates would be refiners with large current production of highway diesel who have multiple distillate hydrotreating units and decide to revamp or replace a large unit to produce ULSD and maintain a second unit to produce 500 ppm highway diesel. This would also mean that the refiner would anticipate selling the 500 ppm diesel as non-road diesel in 2011, because building one large hydrotreater in 2006 would be more economical than building a second hydrotreater for ULSD in 2010. If the decision is made to invest to produce ULSD, a refiner is likely to invest to produce the full volume of highway diesel as ULSD. Some product that fails to meet the ULSD specifications could be downgraded to 500 ppm diesel fuel and sold as highway diesel during the transition period, but few refiners are assumed to produce both 15 ppm and 500 ppm diesel.

Production of 500 ppm highway diesel can clearly come from refiners who are now producing low-sulfur highway diesel and decide not to convert their refinery facilities in 2006. In Scenario 2, the number of non-producers of ULSD in PADDs I-IV totals 21. The characteristics of the 21 refineries that are the potential sources of 500 ppm highway diesel production in 2006 in Scenario 2 differ across the various PADDs. PADD I has 5 refineries and PADD II has 5 refineries that are assumed not to invest to produce ULSD. Nine of these ten refineries currently produce less than 10,000 barrels per day of highway diesel, and the other is under 20,000 barrels per day.

The profile of the PADD III refiners is quite different from those in the other PADDs. While PADD III has some small refineries in this group, several moderately large refineries are also included, which accounts for the fact that PADD III represents 56 percent of the total volume of PADD I-IV production that is estimated not to convert from low-sulfur diesel to ULSD in 2006. Most of these refineries are on the high end of the cost range and would have to build new units and/or deal with relatively high fractions of cracked stocks to produce ULSD.

Six refineries in PADD IV are estimated to have relatively high costs of ULSD production and are assumed not to invest to produce ULSD. The PADD IV refiners are relatively small. Most have some cracked stocks in the highway diesel feed stream and would need to build new units. The refiners not producing ULSD would need to obtain waivers or purchase credits to continue to sell 500 ppm diesel fuel into the highway market.