The 4th meeting of the Special Subcommittee on Energy was held on Friday, November 17, 2006, at 1:30 PM, at the Marathon Ashland Refinery, Catlettsburg, Kentucky. Representative Tanya G. Pullin, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Robert Stivers II, Co-Chair; Representative Tanya G. Pullin, Co-Chair; Senators Walter Blevins, Jr., Charlie Borders, Denise Harper Angel, and Johnny Ray Turner; Representatives Rocky Adkins, Eddie Ballard, James E. Bruce, Dwight D. Butler, J. R. Gray, Rick G. Nelson, Fred Nesler, and Tom Riner.
Legislative Guests: Representatives John Will Stacy and Jim Gooch.
LRC Staff: D. Todd Littlefield, Committee Staff Administrator, Taylor Moore, and Susan Spoonamore, Committee Assistant.
On Thursday night, at the Greenbo Lake State Park, Rep. Pullin welcomed members and introduced students from the Argillite Elementary School who gave a special performance for members and parents.
On Friday morning members embarked upon a barge ride down the Ohio River along with representatives from Marathon Marine and the Marathon Refinery. Doug Sparkman, Manager; Philip Hall, Human Resources Manager; Fred Nyhuis, Jr.; and Dianne Clement, Advanced Community Relations Representative, from Catlettsburg Refining, spoke to members about the refinery. They noted that:
· The Refinery has storage capacity for 222,000 barrels of oil per day;
· Most of their product is shipped via barge to terminals along the Ohio River, while some products are shipped via pipeline, rail or truck;
· The Refinery owns or operates 62 terminals and leases 15 light product terminals; 23 heavy oil terminals and 14 leased terminals;
· The Refinery also owns 10 inland waterway tow boats and 167 barges, in addition to 5 leased barges; and,
· Approximately 830 people are employed with an annual payroll of $101 million dollars.
In 2005, the Refinery was awarded five safety awards by the National Petrochemical and Refiners Association for safety performance — the most ever achieved in the history of the refinery, as well as having the lowest number of designated environmental incidents. The Refinery Modernization and “Clean Fuels” project completed will result in more than a 50 percent reduction in sulfur dioxide emissions and a 25 percent reduction in Nox emissions.
Upon conclusion of touring the M/V Superamerica tow boat, members then went to the Refinery for a brief committee meeting and tour of the facilities.
Rep. Pullin called the meeting to order.
Minutes of the October 20, 2006 meeting were approved, without objection, upon motion of Rep. Ballard and seconded by Rep. Gray.
A Resolution encouraging the Kentucky Congressional delegation to fully fund the Army Corps of Engineers Ohio River locks maintenance and improvements, was adopted, without objection, upon motion made by Sen. Turner and seconded by Sen. Harper-Angel.
Doug Sparkman, Manager, of Catlettsburg Refining stated that the company has approximately $4 billion in assets, and pays approximately $119 million in taxes. He said that the Economic Development Cabinet estimated Marathon Petroleum Company’s economic impact to be over $1 billion.
He explained that the refinery was built in 1924 producing 1,000 barrels a day. In 1998, Marathon and Ashland merged assets, then in 2005 Marathon bought Ashland’s minority share.
Mr. Sparkman stated that the refinery has the capacity to store around 222,000 barrels a day. He said that Marathon holds 830 refineries, of which 500 are represented by the United Steel Worker’s Union. The average wage is approximately $29 per hour for hourly workers, and there are 330 salaried personnel working on the site.
He stated that gasoline and gasoline components are the majority of what the refinery produces. The refinery is an all clean fuels refinery — making very low sulfur products. Marathon is one of the very few refineries in the Midwest that can actually make low sulfur kerosene. They are one of the largest asphalt producers in the United States. They also make a large variety of special chemicals – supplying Ashland Oil.
Mr. Sparkman explained that the crude oil they refine comes from all over the world. However, the majority of the crude that they use to make fuels comes from the United States. The Arab crudes, medium and light, are exclusively used for lube oil production.
Except for some eastern Kentucky crude, the majority of crude comes through the pipeline from the Gulf Coast. However, there is a dedicated pipeline, which is owned exclusively by Marathon, that runs from Petoka directly into the refinery.
He stated that Marathon Petroleum does have access to the Canadian market, but their pipeline is not rated to handle Canadian crudes because they are very heavy and very viscous. In order to run Canadian crude the Company would have to make significant investments in their pipeline and refinery.
Mr. Sparkman stated that, since 1998, Marathon has spent approximately $700 million in upgrades. He said that $500 million was spent to take the sulfur out of gasoline which was mandated by the Environmental Protection Agency. Signification amounts of investment have also been made to upgrade infrastructure, security and technology. Since the September 11 attacks, the refinery has spent just over $5 million addressing security issues.
The last refinery built in the U.S. was in 1976 in Louisiana. In the late 1970’s there were over 300 refineries, and now there are approximately 150. The biggest thing that has caused a lot of refineries to go out of business is the competitive landscape.
Mr. Sparkman stated that the demand for refined products has grown sharply over the last 3 years mainly due to the demand growth in China. As a result, the demand has put huge pressure on crude and prices. The terrorism factor also comes into play and the markets fluctuate according to what is going on politically which influences the price of crude oil and hence gasoline.
He stated that the industry feels that the market forces will spur new production if allowed to work. We are seeing a worldwide construction boom. He said that Saudi Arabia has already announced over 1 million barrels of new refining export capacity. They are building refineries next to their crude oil fields and their intent is to send the gasoline to the United States; their diesel to Europe; and then they will dispose of the rest of the products in the open market. Instead of transporting their crude oil, they are going to transport their products. Many other world companies have announced similar expansion plans. The profits being made are being reinvested in expansion.
Mr. Sparkman stated that there is a need for alternative fuels. But, because there is not a viable alternative presently, Marathon intends to maintain a strong position in the petroleum industry. He agreed that Marathon had to position itself for the future because of the worldwide expansion in energy demand taking place.
The Company’s attitude is that more refining capacity is needed. There are 3 major expansion projects on the books and are in various stages of development. The Garyville Refinery has already announced a $3.2 billion expansion by adding 180,000 barrels of capacity of the end of 2010. This will make Garyville the 5th largest refinery in the United States.
Marathon Petroleum has joined with the Anderson Company, which is a large grain manufacturer/producer, to develop ethanol plants. He said they had just announced the ground-breaking of their first plant.
Mr. Sparkman stated that they are working very hard to secure a Canadian oil supply arrangement. Marathon needs to be a part of a reliable crude supply that is on our continent. He said that this venture would require billions of dollars in refinery modifications. He explained that a Canadian oil supply partner would be essential in getting two other projects off the ground. One is a coker project at the Detroit refinery and the other is a coker project at the Catlettsburg refinery.
Rep. Atkins asked about the $3.2 billion dollar expansion at the Garyville plant and would the expansion include the capacity to do 180,000 barrel a day?
Mr. Sparkman stated that the Garyville plant is located in Louisiana, and the expansion would include the 180,000 barrels a day.
Rep. Atkins asked how many barrels a day were being produced now at the Garyville plant.
Mr. Sparkman stated that they were doing about 275,000 barrels a day, and the plant was already set up for heavy sour crude.
Sen. Borders asked if Marathon was concerned about a disruption in the oil supply from Saudi Arabia. He also asked how they felt about securing oil from Alaska.
Mr. Sparkman stated that a disruption in the oil supply from Saudi Arabia would not have a big impact locally, but there is a need to produce more oil from the United States. Anything we can do in the U.S. to increase our own oil production is in our best interest.
Sen. Borders asked if the United States was still mainly dependent on foreign crude.
Mr. Sparkman stated that even though oil production in the United States was declining, they were still working to become independent. He said that Chevron recently discovered a new field in the Gulf of Mexico, and that the Garyville project would not be ready until the year 2010.
Sen. Borders asked if an oil supply disruption would be disastrous? He also asked if it was important to pursue alternative fuels in combination with increasing oil production.
Mr. Sparkman stated that if the oil supply gets disrupted, then yes, we would be in a world of hurt. He stated that their plant was not immune from hurricanes. He said that because of Hurricane Katrina, the Gulf crude supply was curtailed and the refinery almost had to shut down. Being dependent on crude from the Gulf Coast is somewhat of a liability. Having a Canadian oil project as another connection to get oil into this refinery is important. The Midwest is short about 1 million barrels a day of refined products and we are the net importer of refining products to the Midwest market.
Rep. Adkins sought to clarify that he was also promoting biomass to liquids and oil shale to liquids. There are a broad range of products that can be turned into transportation fuels. He encouraged the representatives from Marathon to work with the Center for Applied Energy Research (CAER) to discuss some of the decisions that Marathon is getting ready to make. He said that working with the CAER would enhance opportunities in new technologies and provide greater potential for the future of the refinery.
Mr. Sparkman stated that he would be glad to talk with the folks at the Center for Applied Energy Research.
Mr. Sparkman continued that new capacity was going to be built and it would be extremely efficient. He said that because the Catlettsburg refinery was old, it was more expensive to operate, but expansion in alterative fuels would increase supply.
He stated that they were opposed to the construction of a high cost power plant in Kentucky. He said that if the plant was built in Eastern Kentucky it would add $15 million a year to their electricity costs.
Rep. Stacy asked how a new IGCC power plant in Eastern Kentucky would affect their costs.
Mr. Sparkman explained that IGCC is a different way of making electricity where the coal is gasified. The advantage of their way is being able to sequester the CO2 and it is a much cleaner process. The disadvantages are that it is much more expensive; it is cutting edge technology; and it is not proven on a large commercial scale.
Rep. Adkins stated that AEP would like to build the total cost of the plant directly into the rate base instead.
Mr. Sparkman explained that Marathon Petroleum is Kentucky Power’s biggest customer. Making it a tax payer issue instead of solely a rate payer issue would be preferable, at least for them as a business.
Mr. Sparkman concluded by stating that they realized the need to continue making the refinery more competitive. We need to work in concert with our energy suppliers such as Kentucky Power to make sure what we do going forward is to our mutual benefit. We have got to be able to work together to solve some of our problems. Energy is a national issue, it is not just a business. He said it was important to understand what each other’s issues were so good dialogue could be established.
Rep. Adkins stated that the $700 million that had been put into the plant since 1998 had gone right back into the community. The Marathon Petroleum Company complex is the heart and soul of this area in a lot of different ways.
Rep. Gray stated that Marathon had done a good job of using union labor.
Rep. Sparkman stated that he did not want to mislead anyone because they have on occasion used non-union labor.
Rep. Pullin thanked Marathon Petroleum for hosting the meeting. She said the refinery was a key component to the whole energy infrastructure in the United States.
The meeting adjourned at 3:00 p.m.