June 15, 2007 / 6:02 PM / 12 years ago

U.S. law to spur new oil refineries a bust so far

WASHINGTON (Reuters) - A sweeping U.S. energy law that took effect almost two years ago to make it easier for oil companies to get permits for building refineries has so far failed to bear fruit despite soaring demand for gasoline.

The law was supposed get the United States its first new refinery built from the ground up since 1976. The timing appears to be good for starting a project, with gasoline supplies tight and pump prices at record highs.

When the Congress wrote the energy law in 2005, oil companies said there were many obstacles they faced to building new refineries, including high costs, difficult environmental regulations and community opposition to the huge structures.

Lawmakers tried to help by including in the final legislation a provision that would allow the Environmental Protection Agency to work with states to have a consolidated permit request for a new refinery, avoiding a lengthy and duplicative review process.

“I’ve had general discussions with industry leadership about wanting to help in that regard, but at this point in time no one has stepped forward,” said EPA Administrator Stephen Johnson.

“We want to do everything we can to help expedite permitting so we can have more refineries and at the same time making sure that they’re meeting the environmental standards,” he said.

The bill also contained tax relief for current refineries, allowing a company to immediately deduct on its tax returns half the cost of expanding an existing facility’s production capacity by at least 5 percent.

The legislation also expanded the current tax breaks for small refiners by raising the oil processing capacity of eligible facilities to 75,000 from 50,000 barrels a day.

While there have been refinery expansions every year for more than a decade, the industry has not taken up Congress’ offer to build a new refinery, even though the need for more refining capacity is clear.

The United States consumes about 21 million barrels of oil a day, but can only process about 17.5 million of those barrels, requiring imports of gasoline and other petroleum products to meet domestic demand.

The Senate this week rejected putting more relief in a new pending energy bill for oil companies to build refineries, with critics arguing the industry never used the incentives provided by Congress two years ago.

“They already got their streamlined provisions” for permits in the 2005 law, said Sen. Barbara Boxer of California. “They never took advantage of it,” she said during debate this week.

Johnson said EPA’s regulations were not burdensome enough to prevent a new refinery and that’s not a valid excuse from the industry.

“It doesn’t hold water from the standpoint of whether you are a refiner, or whether you are a citizen, or whether you’re a part of EPA, no one wants dirty air,” he said.

Guy Caruso, who heads the federal Energy Information Administration, said the incentives in the 2005 law to encourage new refineries never amounted to much anyway.

He said while profits from making gasoline are high at the moment, it is the fear of what may happen in the years ahead that affects refinery construction decisions today.

“These are 20 and 30-year investments,” Caruso said. “The economics have been quite good for the past several years. I guess the real issue is the long-term, whether they can assume they’ll have the kind of (profits) that we’ve seen recently continuing.”

Both the Bush administration and Congress are pushing for more production of ethanol and other alternative fuels over the next decade that would reduce gasoline consumption.

That’s causing companies to rethink the need for expanding refineries, much less considering building new ones, according to the industry’s main trade group, the National Petrochemical and Refiners Association.

“Look at the conflicting messages we’re getting from policy makers,” said NPRA spokesman Bill Holbrook. “You’re going to stop and consider what investments you’re going to make ... to continue making a product (like gasoline) that some are trying to limit distribution of,” he said.

But the EPA’s Johnson said even with more alternative fuels, gasoline demand will increase from today’s levels in the United States and other countries like China and India, so there will be a need for more refining capacity.

“The energy needs for the globe are ever increasing,” he said. “We believe there are many tools in the toolbox” to meet that fuel demand.

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