Multi-Association letter regarding EU Fuel Quality Directive

May 20, 2013
Dr. Jos Delbeke
Director General
Directorate-General for Climate Action
European Commission
Brussels, Belgium  B-1049
RE: U.S. Stakeholders Opposition to the Proposed Modifications to Article 7a of the EU Fuel Quality Directive (98/70/EC)
Dear Director General Delbeke:
AFPM, API, NAM and the Institute for 21st Century Energy (EI) are U.S. stakeholders writing to express and reiterate our strong opposition to the proposed modifications to Article 7a of the European Union (EU) Fuel Quality Directive (FQD) (98/70/EC) (the “proposal”).  
In its current form, the ICF Analysis does not address significant concerns related to the United States (U.S.) and EU refining industries, nor does it address concomitant impacts on the U.S. – EU fuels market.  
We appreciate your efforts to involve stakeholders potentially impacted by this proposal. Unfortunately, the meeting convened on April 15, 2013, did not address our concerns, nor did it provide options for further consideration in the context of the ICF Analysis. We also believe the counter proposal outlined by Italy and supported by industry (the so called “Option 0”) was not adequately considered. In light of significant Member State support for Option O, we urge DG Climate to give it serious consideration. 
AFPM, the American Fuel & Petrochemical Manufacturers, is a trade association representing high-tech American manufacturers of virtually the entire U.S. supply of gasoline, diesel, jet fuel, other fuels and home heating oil, as well as the petrochemicals used as building blocks for thousands of vital products in daily life.  AFPM members manufacture virtually all the fuel and petrochemicals produced in the U.S., as well as fuels that are in some cases exported to the EU.  As such, our businesses will be directly and adversely affected if the European Commission adopts this proposal which would require separate reporting values for products derived from oil sands and oil shale crudes.
API, American Petroleum Institute, is a national trade association that represents all segments of America’s technology-driven oil and natural gas industry.  Its more than 500 members – including large integrated companies, exploration and production, refining, marketing, pipeline, and marine businesses, and service and supply firms – provide most of the nation’s energy.  The industry also supports 9.2 million U.S. jobs and 7.7 percent of the U.S. economy, delivers $85 million a day in revenue to our government, and, since 2000, has invested over $2 trillion in U.S. capital projects to advance all forms of energy, including alternatives. As U.S. refiners continue to export diesel to meet EU consumer demand, the importance of ensuring that there is a level playing field in the treatment of crude oils and fuel products is of primary concern.
The National Association of Manufacturers (NAM) is the oldest and largest industrial trade association in the United States, representing 12,000 small and large manufacturers in every industrial sector and in all 50 states. The NAM is very concerned about the process by which the FQD was developed and the discriminatory impact it would have on U.S. manufacturers. The refining industry is one of America’s largest manufacturing sectors and refined petroleum products play a critical role in meeting the energy needs of the United States and other countries. 
The U.S. Chamber of Commerce, the world’s largest business federation, represents the interests of more than three million businesses and organizations of every size, sector, and region.  At the U.S. Chamber’s Institute for 21st Century Energy Institute (EI), we are deeply concerned about the proposed amendment to the FQD that would discriminate against crudes and fuels derived from oil sands and oil shale.  EI believes that the separate reporting value within the FQD is an unjustified, selective, and punitive measure that would result in disproportionate harm to U.S. exports to Europe.
There are potential World Trade Organization (WTO) concerns with the proposal.
We believe, as the Canadian government has suggested, that this proposal as drafted raises potential WTO concerns related to the core principles of the “Most-Favored Nation” and “National Treatment” and the strictures concerning market-distorting technical barriers to trade.  Should this proposal be adopted in its current form, we will give serious thought to requesting that the U.S. Government seek redress at the WTO. 
The proposal will significantly impact the U.S. – EU fuels trade, potentially resulting in the inability of the U.S. to export diesel and other petroleum products to the EU.  Compliance would require establishment of extensive, costly and unworkable Identity Preservation schemes to track crude oil molecules, through production into finished products and to end-users.
The methodology for implementing the proposal places carbon intensity (CI) values on crudes produced from oil sands and oil shale along with synthetic fuels that, for all practical purposes, makes the crudes and products derived from them, unsalable in the EU.  
Differing fuel production and usage patterns account for robust transatlantic trade in gasoline and diesel.  According to the U.S. Energy Information Administration (EIA), in 2012, the U.S. refining industry exported 335 thousand barrels per day (KBD) of diesel to the EU, and the EU refining industry exported 349 KBD of gasoline to the U.S.  Together this represents $32 billion in trade per year.   
If adopted, this proposal would make U.S. exports of diesel and other petroleum products to the EU problematic because it would require U.S. refiners to ensure that any petroleum product is not produced using crude oil derived from oil sands and oil shale in the crude slate.   Since crudes are comingled based on refinery configuration and economics, the need to ensure that oil sands crude does not end up in a particular refinery’s diet would require establishment of a complex Identity Preservation scheme.  The details of the resulting Chain of Custody system would require directing crudes to particular refineries, product segregation based on crude input, and establishment of a rigorous recordkeeping and accounting scheme to manage the process.  This would be significantly more challenging than the Chain of Custody schemes required of biofuel suppliers in the EU, given that segregation of biomass supply on a supplier basis is more achievable due to the nature of biofuel lot production and the mass balance approach utilized.  The onerous nature of such accounting would likely have a significant impact on the U.S. – EU fuels trade.
This proposal would little or no impact on the global production of oil sands crudes.  It would also likely necessitate alternative diesel sources for the EU fuels market, reducing its supply diversity, and resulting in a net increase in global GHG emissions.
The challenges detailed above warn of a significant decrease in U.S. – EU fuels trade, making the export of diesel from the U.S. to the EU less likely if the proposed measure is adopted.  If the U.S. did not export diesel to the EU, such diesel could come at a higher price to EU consumers as well. 
The proposal would not reduce global GHG emissions, but instead may be viewed as an attempt to reduce the global use of oil sands crude. Crude and fuel markets are global in nature.  If U.S.-produced diesel is not exported to the EU, the 335 KBD supply shortfall, representing 8%  of the total EU diesel consumption, would need to be imported from elsewhere. Moreover, the measure is unlikely to result in a net reduction in use of oil sands crude globally because crudes and fuels refined from them would be shipped to other markets (termed crude and fuel “shuffling”). Ironically, fuel consumption from increased transportation of these crudes and fuels to other markets likely would increase global GHG emissions, directly counter to the stated objective of reducing GHG emissions. The Wood Mackenzie consulting study  details the likely impact of the proposal on global crude and fuel trading. Further, this study finds several EU refineries may become uneconomical; losing just one refinery could lead to a loss of ~4500 jobs with overall GDP reductions of $2.2 billion. Additionally, higher GHG emissions would stem from transportation of crudes and fuels to alternative markets. For additional information, a study on crude shuffling and GHG impacts may be found in a study by Barr Engineering. 
Oil Sands crudes are within the average band of GHG emissions used in the EU.
The Government of Alberta, Canada commissioned a study which concluded that oil sands derived crudes fall well within the band for production GHG emissions for all crudes used in the EU.  This study, which utilized Jacobs Engineering as contractor, was completed less than a year ago.  It was produced in a transparent fashion with full participation from several members of DG Climate, and full disclosure of both the data utilized and model results.  We are not aware of any objection being raised by DG Climate or any other directorates general that would call the results of this analysis into question. Thus, we are unable to comprehend why Article 7a establishes a higher carbon intensity for oil sands derived crudes than other crudes currently used in EU refineries.
The ICF Analysis does not sufficiently address these concerns, and is thus fatally flawed.
The ICF Analysis does not adequately address the issues raised above, nor does it portray the real consequences of the proposal.  It outlines EU fuel and feedstock projections, but employs unrealistic assumptions about how the fuels market in the EU will react to the proposal.  It does not address the true nature of the proposal – that is, the impact of assigning default CI values to crude oils derived from oil sands and oil shale crudes, and synthetic fuels.  While it outlines broad proposals for GHG calculation methods, it does not address either the lack of publically available data needed for such calculations, or the crudes which this proposal attempts to regulate.  We conclude, therefore, that the serious shortcomings of this analysis render it an inadequate assessment of the impacts of the proposal.
The ICF Analysis was performed without taking into account the comments of the EU or U.S. refining industry.
There has been considerable work and communication by Europia, an EU Trade organization, and by the Government of Alberta on many of the points raised above.  This includes the work done with Wood Mackenzie and Jacobs Engineering analyses on the crude production CI, and the many discussions that the Trades have had with members of DG Climate and other members of the European Commission.  All of these studies were performed in an open, collaborative fashion, and a thorough review of the results has either taken place or is underway.  We do not understand why these substantive analyses were minimized in the ICF Analysis, or why only the completed impact scenarios were presented to the expert teams as a fait accompli, without an option to comment as the study was being undertaken nor the necessary steps of commenting on results when those become available.
The EU and the U.S. refiners’ industries remain committed to making cost effective contributions to reducing global GHG emissions.  In the EU, Trades, Europia and Concawe have led this charge, while in the U.S., AFPM and the American Petroleum Institute are pursuing qualitatively similar initiatives.  
We conclude, however, that this EU proposal would not achieve its stated goal of GHG reductions, would as a practical matter be unworkable, and further would not have a meaningful impact on the use of oil sands crudes.  Further, it will damage U.S. – EU fuel trade, could be costly for EU consumers, and reduce EU energy security.  The ICF Analysis is not sufficient for measuring the true impacts of the proposal largely because it does not take into account these substantive issues.  
Because of the perverse consequences the proposal would create, we respectfully urge the Commission to abandon the current proposed modifications to the FQD in favor of one that provides a single value for crudes and does not assign separate default GHG values for fuels derived from oil sands and oil shale feedstocks.  
We would welcome the opportunity to discuss our concerns in further detail at a meeting at your earliest convenience.  If convenient for you, we would propose that representatives of AFPM and the U.S. Chamber of Commerce meet with you on June 17th or 18th at your office in Brussels.  We hope that your schedule will accommodate such a meeting.  Thank you for your consideration of this important matter. 
Charles T. Drevna
American Fuel & Petrochemical Manufacturers
Jack Gerard
President & CEO
American Petroleum Institute
Linda Dempsey
Vice President for International Economic Affairs
National Association of Manufacturers
Karen Harbert
President & CEO
Institute for 21st Century Energy
U.S. Chamber of Commerce
cc: Dr. Marianne, Klingbell, Deputy Secretary General, European Commission
      European Union Commission Members
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