By Terry Scruton
We all know it's coming. There's nothing we can do about it. It will be here before the year is out. No, it's not the bird flu. It's ultra low-sulfur diesel, and by June, most refiners should be gearing up for the big retail roll-out in October and the even bigger roll-out of new engines in 2007.
But will they be ready in time? Will there be enough supply to satisfy demand? And will those supplies that are available be up to snuff, performance-wise?
The experts say the answer to those questions is yes, but not without a few possible bumps along the way.
Are we there yet?
The first deadline for the rollout of ultra low-sulfur diesel is June 1. By that date, according to the Environmental Protection Agency, 80 percent of the total diesel-refining capacity in the U.S. is to be switched over to ultra low-sulfur diesel.
Al Mannato, fuel issues manager with the American Petroleum Institute - a research and lobbying organization that represents the U.S. oil and natural gas industries - said the oil industry is poised to exceed that goal by at least 8 percent.
"We estimate about 88 percent will actually be produced by June," he said.
That's good news for the engine manufacturers, who need the fuel for some last-minute testing and tweaking of the 2007 engines. Several manufacturers said ULSD wasn't exactly easy to come by for their early testing phases.
Jason Phelps, a spokesman for Caterpillar, said that his company had engines ready to go for testing in early 2005, but there was precious little ULSD to be found.
"Basically, we had these engines and we wanted to get them out to our customers," he said. "For us, having ULSD was critical to our testing procedures."
Phelps said Caterpillar started calling petroleum companies and was able to find a partner in BP Amoco PLC. Working with BP, Caterpillar was able to get temporary ULSD tanks installed in locations near to their customers who were testing the engines.
Those early supply gaps raised concerns among some that ULSD may not be widely available when the '07 engines roll out. The oil industry and the government, however, said there is nothing to worry about.
John Millet, a spokesman for the EPA, said that, so far, it looks like everything is in place for a smooth rollout at the refineries in June.
"It's been a challenge for engine manufacturers and fuel refiners and suppliers," he said. "Right now, it looks like all signals are go."
Mannato said the Oct. 15 deadline shouldn't be an issue because there won't be many vehicles on the road at that point that run exclusively on ULSD. He said the only areas that could potentially see any supply gaps at the retail level are those that are farthest from the refining centers, where the fuel has to pass through multiple hand-offs before reaching the retail level.
"Truckers just need to check at the pump," he said. "It may not be available at every single station in an area, but should be available generally."
A smooth transition?
If there is one area for concern, it is the transitional period between June 1 and Oct. 15.
During that time, the entire diesel supply chain will be put to the test as the old fuel is cleaned out and the new fuel is piped in.
One of the biggest concerns is contamination. As the ULSD gushes through the pipelines, tanks and terminals, there will be residue from the old diesel still hanging around. That won't be a huge problem at first, because from October through December, there won't be many vehicles on the road that can only run ULSD.
But once the 2007 engines hit the streets, any remnants of old diesel left in the pipelines could gum up the works if it makes it into the new engines. That's why the EPA pushed back the retail deadline from September to October, to allow for more time for the supply chain to adjust.
Mannato said that, with the extra time, the oil refineries and terminals should be able to work out any bugs.
"We hope there aren't any problems on the rollout," he said. "We're working with a multi-industry work group to ensure that there are good communications out there to make sure the transition will be as smooth as possible."
Joanne Shore, senior oil market analyst with the federal government's Energy Information Administration, told "Land Line Now" that contamination is one of the biggest issues the industry will be watching during the transitional phase.
"Throughout that path, it's traveling in pipelines and tanks that also are carrying fuels with very high sulfur content," she said. "The concern is that this fuel can easily become contaminated. All it has to do is go through one manifold that wasn't properly cleaned from a high-sulfur fuel and you have a batch that's ruined."
Millet said the EPA is ready for the possibility of supply disruptions because of contamination, though he declined to specify exactly what contingency plans the agency has in place.
"I think from what we see right now, we're confident that it's going to be a smooth transition," he said. "We have enough possibility for further flexibility, if needed. The EPA could take actions to further smooth the transition. Right now we don't see any necessary steps at this point. If there are any problems, we'll cross those bridges when we come to them."
Shore said that the oil industry itself is already doing a good job of working out the bugs in the system.
"These kinks are being worked on as we speak," she said. "The industry has been producing some ultra low-sulfur diesel and running test batches through different pipelines and terminals. Everybody is trying to work this out. But it's a very difficult fuel to deliver."
Money in the tank
As with anything new, one of the first things drivers want to know is how much it will cost.
Shore said that, while there are various estimates, most are saying that the cost at the pump will be about 5 or 6 cents higher than what current diesel is running.
"That's relatively consistent with what Europe was seeing," she said. "Europe is seeing prices there elevated. They have a low-sulfur diesel that has been in place for about a year. So, yes, prices will be a bit higher as we move ahead."
Of course the other cost is the engines themselves, which, depending on whose estimate you believe, could add anywhere from $5,000 to $10,000 to the cost of a new truck.
Caterpillar's Phelps said he thinks those numbers will come down some as more trucks get out into the market.
"It's like any new gadget," he said. "How much did an iPod cost two years ago?"
Another possible cost issue could be that of fuel economy and overall performance.
Mannato said ULSD has 1 percent lower energy density than current diesel, which means there will be a reduction in power and fuel economy, although a very small one.
"People aren't going to likely be able to see that," he said.
However, engine manufacturers could hold the solution to some of these problems. Phelps said that testing so far on Caterpillar's 2007 engines shows about a 2-percent to 4-percent increase in fuel economy.
"That's not attributable to the fuel," he said.
Phelps said the increases showed up on testing for both the mid-range and heavy-duty engines.