Independent Liquid Terminals Association

1. Independent Liquid Terminals Association PROGRESS TOWARD IMPLEMENTATION THE VIEW FROM THE MIDDLE Petroleum Industry Workshop on ULSD November 10-11, 2005

2. ILTA PROGRESS REPORT • Workshop on ULSD for ILTA members on October 18-19 • D & T—a critical component of compliance • Legal and contract issues—a major concern • Sulfur testing—need for policies and procedures • Consensus on key issues • Receipts from pipelines • Deliveries to petroleum marketers • Contract with fuel owner

3. RECEIPTS FROM PIPELINES • Deliveries to terminals should not exceed 13 ppm. • To meet customer needs, terminals expect to receive 13 ppm. • Why do pipeline customers need 13 ppm deliveries at terminals? • ULSD contamination is a new market risk. • No built-in tolerance for terminals and distributors.

4. ROLE OF TERMINAL CUSTOMERS • Typically, the terminal customer owns the fuel. • Most independent terminals are for-hire • Do not own the product • Facilities available to general public • Generally serve multiple customers • Customers are usually shippers on the pipeline served by the terminal • If necessary, terminals will ask customers to request pipelines to deliver at 13 ppm.

5. WHY IS 13 PPM CRITICAL? • Terminals are the collision point of two unchangeable limitations coming from opposite directions. • Refiners will produce at noless than 8 ppm. • Retailers will sell at nomore than 15 ppm. • No safety margin for terminals if— • Incoming ULSD is 14-15 ppm • Downstream parties need at least 1 ppm • Testing tolerance of 2 ppm remains unchanged

6. INCENTIVES FOR CUSTOMER INTERVENTION • ULSD rules create multiple economic risks. • If contamination causes downgrades or retail violations, customer pays economic price. • Loss of revenue due to • Lower selling price • Lower sales volume • Additional costs of storage and handling • Inability to take full advantage of market changes • Strong incentive to reduce contamination

7. OBJECTIVE OF CUSTOMER INTERVENTION • Manage contamination risks • At all points along the distribution chain • How will terminal customers do that? • Allocate reasonable contamination “allowances” among the parties that transport and distribute the fuel • Ensure that pipeline share of allowance is limited • Enhance probability of avoiding downgrades • Reduce risk of violations at retail level

8. LEGAL ISSUES • Liability risk for terminals • Minimal “safety margin” for sulfur content of ULSD handled by terminals • Automatic presumption of liability • Measurement of sulfur content—a critical element of affirmative defense • Sulfur testing variability is too large to ensure measurements that resolve liability • Frequency of sampling and testing by terminals

9. PARALLEL LEGAL PROCEEDINGS • EPA enforcement actions • Notice of violation • Terminals presumed liable, in absence of clear cause • Assumption: contaminated fuel in distribution system for 25 days • Penalties up to $32,500 per violation per day • Civil lawsuits • Breach of implied warranty • Misrepresentation of product specification • Unfair trade practice under state law

10. DEFENSE OPTIONS FOR TERMINALS • Defenses to EPA enforcement action • EPA test result is wrong • Section 80.613 defenses • Violation not caused by terminal operator • Product transfer documents show fuel in compliance • Adequate quality assurance and testing program • Defenses to civil lawsuits • Test results are wrong • No damage to diesel engines • Compliance with EPA regulations • “Causation” not shown

11. SULFUR TESTING CHALLENGE • Testing is critical for limiting liability. • Must rely on very small differentials in sulfur content (1-2 ppm) for affirmative defense, but— • Testing does not provide reliable, consistent measurement of small differences in sulfur content. • The reality: excessive variance in results • Different testing methods • Labs, on-site (bench top and online), mobile labs • Variations in testing conditions and technician training

12. WHOSE TEST PREVAILS? • Pipeline delivers to terminal • Pipeline test shows 13 • Terminal test shows 15 • EPA inspects terminal tank • Terminal’s sample tests at 15 • EPA’s sample tests at 18 (Tank shutdown?) • EPA samples tank at retail outlet • EPA test shows 18 (NOV triggered?) • Retailer’s subsequent test indicates 17 (No NOV?)

13. DISCUSSIONS WITH CUSTOMER • Notify customer (ULSD owner) of need for 13 ppm fuel delivered to terminal. • Define consequences when delivery is non-conforming— • When fuel is 13-15 ppm • When fuel exceeds 15 ppm • Testing by customer, and procedure when results differ • Statement of truck loading policy • Downgrading and redesignation limitations

14. DISCUSSIONS WITH PIPELINE • Agreement that fuel will not exceed 13 ppm, except under defined circumstances • Protocols when nonconforming fuel delivered— • Fuel tests at 13-15 ppm • Fuel exceeds 15 ppm • Pipeline bears burden of downgrade? • Differences in sulfur test results • Do pipeline tariff provisions cover all potential ULSD issues?

15. DISCUSSIONS WITH MARKETERS • Will the marketer (or tank truck operator) agree to use trucks dedicated to ULSD? • If not, agree on contractual requirements • No prior delivery of high sulfur fuel • Adequacy of truck draining and cleaning • Truck driver training requirements • Increased risk of static discharges • Use of conductivity improver • Truck operator’s insurance coverage

16. ACTIONS WITHIN TERMINALS • Establish sulfur testing regimes • Self-testing or outside lab • Frequency of sampling and testing • Reliance on non-tested samples • Detailed procedures for non-conforming fuel • When fuel is 13-15; when fuel exceeds 15 • Develop ULSD compliance manual • Provide indemnification of owners • Parent, joint venture partners, individuals

17. ULSD COMPLIANCE MANUAL • Essential tool for— • Reducing contamination risk • Limiting liability and reducing penalties • Prescribe measures for protecting fuel • List procedures employed when fuel found to be non-complying • Identify cause, take corrective actions • Criteria for lockdown of a tank holding non-complying fuel • Identify downgrade limitations