A Presentation by

Randall ThompsonConocoPhillips Pipe Line

to the

Western Regional Air PartnershipDenver, CO July 16, 2003

A Presentation by

Randall ThompsonConocoPhillips Pipe Line

to the

Western Regional Air PartnershipDenver, CO July 16, 2003

Distribution Issues for Distribution Issues for ULSD and Not so ULSDULSD and Not so ULSD

Regional CharacteristicsRegional Characteristics

PADD 3, Gulf CoastPADD 3, Gulf CoastLargest supply region: No foreign nation has higher refined Largest supply region: No foreign nation has higher refined product output than PADD 3product output than PADD 3Origin of 80% of all refined products, 83% of the low sulfur Origin of 80% of all refined products, 83% of the low sulfur distillate and 94% of the high sulfur distillate shipped by distillate and 94% of the high sulfur distillate shipped by pipeline between U.S. regions. pipeline between U.S. regions.

PADD 1, East CoastPADD 1, East CoastLargest recipient of other region’s supplies; ~60% Largest recipient of other region’s supplies; ~60% of all inter-regional product pipeline movements go of all inter-regional product pipeline movements go to EC; 90% of high sulfur distillate movementsto EC; 90% of high sulfur distillate movementsLargest concentration of oil-heated homes Largest concentration of oil-heated homes (Northeast)(Northeast)Only region where ~all pipelines carry high sulfur Only region where ~all pipelines carry high sulfur distillatedistillate

PADD 2, MidwestPADD 2, Midwest

Infrastructure rich, but logistics strained Infrastructure rich, but logistics strained

Contrast agricultural west (sparse) with Contrast agricultural west (sparse) with industrial east (dense)industrial east (dense)

Recipient of ~30% of pipeline product; origin Recipient of ~30% of pipeline product; origin of 8%; much intra-regional flowof 8%; much intra-regional flow

PADD 5, West CoastPADD 5, West Coast

2-3 distinct refined product markets2-3 distinct refined product markets

California separate; no HSDCalifornia separate; no HSD

PADD 4, Mountain PADD 4, Mountain

Market tiny but growing; infrastructure sized to fitMarket tiny but growing; infrastructure sized to fit

Distances long, infrastructure thin, terrain steepDistances long, infrastructure thin, terrain steep

Few products (LSD only, e.Few products (LSD only, e.g.);g.); tanks optimized tanks optimized

Product Integrity During Movement

Reformulated regular gasoline

• Pipelines use optimum sequencing of product grades to reduce thepotential for contamination and/or downgrading of the products transported.

Low sulfur diesel fuel

Kerosene/ Jet Fuel

High Sulfur Diesel

Conventional regular gasoline

All premium

grades

Reformulated regular gasoline

• Different product batches are “pushed” through the system abutting each other. The product is kept in turbulent flow to minimize interfaces, the mixing zone between batches.

First, the On-Highway DatesFirst, the On-Highway Dates

Jun. 1, 2006Jun. 1, 2006

Jul. 15, 2006Jul. 15, 2006

Sept. 15, 2006Sept. 15, 2006

Jun. 1, 2010Jun. 1, 2010

Oct. 1, 2010Oct. 1, 2010

Dec. 1, 2010Dec. 1, 2010

Begin producing/importing 15 ppm for on-Begin producing/importing 15 ppm for on-highway use, at least 80% of on-highway highway use, at least 80% of on-highway volume; 20% can be 500 ppmvolume; 20% can be 500 ppm

Terminals & other downstream must comply Terminals & other downstream must comply (protect, track)(protect, track)

Retail outlets must comply Retail outlets must comply

No 500 ppm on-highway produced/importedNo 500 ppm on-highway produced/imported

No 500 ppm on-highway downstreamNo 500 ppm on-highway downstream

No 500 ppm on-highway at retailNo 500 ppm on-highway at retail

Outline of Non-Road ProposalOutline of Non-Road Proposal

Applies to transportation/vehicle fuels:Applies to transportation/vehicle fuels: Non-Road (NR); 500 ppm from 2007-2010, then 15 ppm Locomotive and Marine (LM); 500 ppm from 2007-2010;

then 500 ppm but marked from 2010-2014; then ?? ppm

Does NOT apply to stationary fuelsDoes NOT apply to stationary fuels Furnace, boiler, turbine, e.g. All called “heating oil” (HO) Marked from 2007-2010

Tracks on-highway v off-highway, and NRLM v HOTracks on-highway v off-highway, and NRLM v HO Provisions for Small Refiners and for CreditsProvisions for Small Refiners and for Credits Giveth (Baseline) and Taketh Away (downgrade, Giveth (Baseline) and Taketh Away (downgrade,

more grades)more grades)

Now, the “Non-Road” Proposed DatesNow, the “Non-Road” Proposed Dates

Jun. 1, 2007Jun. 1, 2007

Aug. 1, 2007Aug. 1, 2007

Oct. 1, 2007Oct. 1, 2007

Jun. 1, 2010 Jun. 1, 2010 (also ULSD)(also ULSD)

Jul. 15, 2010 Jul. 15, 2010 (also ULSD)(also ULSD)

Sep. 1, 2010 Sep. 1, 2010 (also ULSD)(also ULSD)

Begin producing/importing 500 ppm for non-Begin producing/importing 500 ppm for non-road, loco., marine (NRLM); mark heating oilroad, loco., marine (NRLM); mark heating oil

NRLM v HO segregated & tracked NRLM v HO segregated & tracked downstreamdownstream

NRLM v HO segregated & tracked at retailNRLM v HO segregated & tracked at retail

Produce/import NR at 15 ppm; LM marked Produce/import NR at 15 ppm; LM marked (still 500 ppm); HO not marked (still 500 ppm); HO not marked

Downstream Downstream

RetailRetail

Illustration of 2007 ProgramIllustration of 2007 ProgramBased on Distillate Use in 2001Based on Distillate Use in 2001

0

200

400

600

800

1000

1200

1400

1600

P5: WestCoast

P4: Mtn P3: GulfCoast

P2:Midwest

P1: EastCoast

KB

D

Highway 15 ppm Potential Highway 500 ppmNRLM 500 ppm Not Subject to S Rules

80% On-Highway

Res/Comm; Indus.; Elec. Gen.; Oil Co.

Farm; Rail; Marine; Mil.; Constr; Off-Hwy

Source: EIA, Sales of Fuel Oil & Kerosene. Includes No. 1 and No. 2 distillate/diesel to mirror EPA proposal. All CA use is classified as 15 ppm. “TCO” means Temporary Compliance Option. Illustration based on historical patterns.

20% TCO

Illustration of 2010 ProgramIllustration of 2010 ProgramBased on Distillate Use in 2001Based on Distillate Use in 2001

0

200

400

600

800

1000

1200

1400

1600

P5: WestCoast

P4: RockyMtn

P3: GulfCoast

P2:Midwest

P1: EastCoast

KB

D

15 ppm 500 ppm Not Subject

On-Highway; Farm; Mil.; Constr.; Off-Hwy

Res/Comm; Indus.; Elec. Gen.; Oil Co.

Rail; Vessel

Source: EIA, Sales of Fuel Oil & Kerosene. Includes No. 1 and No. 2 distillate/diesel to mirror EPA proposal. All CA use is classified as 15 ppm. Illustration based on historical patterns.

Too Simple!!Too Simple!!

2006 (4)2006 (4) On-road (OR) 15 ppm OR 500, OR Sm. Ref. 500 Non-Road, Loco, Marine

(NRLM) 500 dyed Heating Oil (HO) dyed

2014 (3)2014 (3) OR 15, NR 15 LM 500 HO

Potential Distillate Product Segregations

2007 (5)2007 (5) OR 15 OR 500, OR Sm. Ref. 500,

NRLM 500 undyed NRLM 500 dyed NRLM Sm. Ref. dyed (Yes . . .) HO dyed[?]+marker

2010 (4)2010 (4) OR 15, Non-Road (NR) 15 Loco, Marine (LM) 500 marker NR Sm. Ref. 500 dyed HO

And this is before Kero or Military Jet Fuel!And this is before Kero or Military Jet Fuel!

Infrastructure sized to fit market's characteristicsInfrastructure sized to fit market's characteristics Terrain; Distances; Volumes; Sources; Demand mix

Transport one diesel for on-road and off-roadTransport one diesel for on-road and off-road No tanks or piping for add'l grade during phase-inNo tanks or piping for add'l grade during phase-in Systems dictate break-out tanksSystems dictate break-out tanks

Special Concerns Special Concerns in the Mountain and Plains Statesin the Mountain and Plains States

California's Special ChallengesCalifornia's Special Challenges

Currently, all LSDCurrently, all LSD California reg applies 500 ppm to all uses, not just highway Jet interface goes to LSD Transmix tanks must have space: used for transmix and to

meet DOT requirement for pressure relief capacity Then, all ULSDThen, all ULSD

ULSD cannot accept jet interface Must wrap ULSD in gasoline, transmix will double No home for any accidental downgrade

Transmix issuesTransmix issues More customer/shipper truck trips to haul transmix Increased truck traffic coincides with truck increase for

ethanol shipments If customers/shippers miss schedule, not enough space to

meet DOT pressure relief requirement.

LOCKOUTLOCKOUT

LOCKOUTLOCKOUT

Kero for Winterizing Diesel:Kero for Winterizing Diesel:An Issue in the NorthAn Issue in the North

Kerosene for "winterizing" dieselKerosene for "winterizing" diesel Keep product flowing in cold weather Common in cold climates Must be 15 ppm in 15 ppm diesel

Currently, can use jet fuel or K1 (heating kero)Currently, can use jet fuel or K1 (heating kero) Share (optimize) tanks/piping

New requirement will require segregation (unless New requirement will require segregation (unless jet also at 15 ppm)jet also at 15 ppm) Reduce flexibility Increase cost of handling small volumes

Sequencing and Interfaces:Sequencing and Interfaces: Nationwide Impact Nationwide Impact

If/while LSD or HSD market available, use to buffer jet and If/while LSD or HSD market available, use to buffer jet and ULSD ULSD Impacts sequencing/cycles, but little impact on infrastructure LSD (smaller market) will have larger % gain from downgrade

If sequence jet with ULSD, must remove interface to transmixIf sequence jet with ULSD, must remove interface to transmix 2x interfaces creating transmix (old + new), so double volume Tanks required at new locations?

If no LSD or HSD market available, buffer jet and ULSD If no LSD or HSD market available, buffer jet and ULSD w/gasoline w/gasoline Increases gasoline cycles, but decreases vol. to market Increases transmix, and its infrastructure

If jet fuel spec reduced to 15 ppmIf jet fuel spec reduced to 15 ppm What of lubricity and other quality issues?

A Home for Downgrade:A Home for Downgrade:An Uncertainty NationwideAn Uncertainty Nationwide

May not ship it, but may create itMay not ship it, but may create it Enough to merit a tank?

Will customers/shippers want LSD? HSD?Will customers/shippers want LSD? HSD? More downgrade further downstream (%)More downgrade further downstream (%) Need a home for downgrade at line's end every timeNeed a home for downgrade at line's end every time

"Last" (most downstream) customer for LSD/HSD must take all

Stop line for slower delivery speed (cf. Atlanta's gasoline)

Downgrade LimitationDowngrade Limitation

For on-highway ruleFor on-highway rule “Downgrade” reclassifies volumes from 15 ppm pool to

the on-highway 500 ppm pool; limited to 20%/yr of 15 ppm Includes normal interface and mistakes No limitation on reclassifying to off-highway

Under proposalUnder proposal “Downgrade” reclassifies volumes from 15 ppm pool to

ALL of the 500 ppm pool, on-highway and NRLM; limited to 20% of 15 ppm annually

Still includes normal interface and mistakes Can only reclassify to heating oil without limitation

Every party downstream of refiner/importerEvery party downstream of refiner/importer

The Downgrade Limitation’s LimitationsThe Downgrade Limitation’s Limitations

Stationary Uses (“HO”) dominated by space heatingStationary Uses (“HO”) dominated by space heating Seasonal Variable with the winter’s severity Concentrated in a limited geographic area

Availability may decrease as distributors choose Availability may decrease as distributors choose between a seasonal product and 15 ppm on-roadbetween a seasonal product and 15 ppm on-road

If can’t move off-spec ULSD to HO, may have to go to If can’t move off-spec ULSD to HO, may have to go to transmix; may overburden; will costtransmix; may overburden; will cost

Why not dyed NRLM?Why not dyed NRLM? Will further fragment market, stress infrastructure, Will further fragment market, stress infrastructure,

slow market correctionslow market correction

NEWNEW

Dyes and MarkersDyes and Markers

NRLM may be shipped dyed (visible) or undyedNRLM may be shipped dyed (visible) or undyed If undyed, may be commingled with OR of comparable S Whether dyed or undyed, cannot be commingled with HO unless

moving to HO use After NRLM dyed for IRS, can be commingled with higher S volumes

such as from small refiners

HO HO mustmust be marked w/ solvent yellow 124 (“Euromarker”) be marked w/ solvent yellow 124 (“Euromarker”) from mid-2007 to mid-2010, from mid-2007 to mid-2010, cancan be dyed be dyed

Loco, Marine (LR) marked w/ solvent yellow 124 from mid-Loco, Marine (LR) marked w/ solvent yellow 124 from mid-2010 to mid-2014; HO no longer marked2010 to mid-2014; HO no longer marked

Issues: Test for marker; jet fuel downstream; marker in Issues: Test for marker; jet fuel downstream; marker in transmixtransmix

Tracking and RecordkeepingTracking and Recordkeeping

Product Transfer DocumentsProduct Transfer Documents Refiners and Importers to Downstream Parties, 2007-

2010, for: Undyed 500 ppm fuel Undyed 15 ppm fuel Dyed 500 ppm fuel (not for use in highway vehicles) Dyed 15 ppm fuel (not for use in highway vehicles) Dyed high-sulfur fuel (not for use in highway

vehicles or certain nonroad engines) Marked heating oil (not for use in NRLM equipment

or highway vehicles) Plus, for refiners & importersPlus, for refiners & importers

Batch by batch for NRLM

Mismatched Timing Undercuts Ramp-up Mismatched Timing Undercuts Ramp-up

Later downstream compliance -- August 15, e.g., Later downstream compliance -- August 15, e.g., -- designed to allow system to saturate. -- designed to allow system to saturate.

““Prohibited acts” start on June 1: violation before Prohibited acts” start on June 1: violation before subject to rulesubject to rule

Calculation of 20% downgrade limitation begins Calculation of 20% downgrade limitation begins June 1: downgrades, of necessity, will be high June 1: downgrades, of necessity, will be high during the ramp-upduring the ramp-up

No environmental benefit, no program benefitNo environmental benefit, no program benefit

Uncertainties NowUncertainties Now

What will refiners produce?What will refiners produce? What will marketers want?What will marketers want? Will tankage be adequate?Will tankage be adequate? Will transmix infrastructure/processing be avail.?Will transmix infrastructure/processing be avail.? What will the S content of the rest of dist. be?What will the S content of the rest of dist. be? What will the S content of jet be?What will the S content of jet be? Will a new testing mechanism limit losses from Will a new testing mechanism limit losses from

protective cuts?protective cuts?

Uncertainties LaterUncertainties Later

Every system and region has special issues Every system and region has special issues Universal: operations protocols more stringent; Universal: operations protocols more stringent;

impact of error greaterimpact of error greater Infrastructure – refining, transportation, Infrastructure – refining, transportation,

distribution – stretched furtherdistribution – stretched further Flexibility and hence capacity decreasedFlexibility and hence capacity decreased Duration and severity of a price spike following a Duration and severity of a price spike following a

market imbalance increasedmarket imbalance increased