The Impact of Environmental Compliance Costs on U.S. Refining Profitability

Introduction and Summary

The profitability of U.S. refining operations in the 1990's has been low and generally declining. This trend raises concerns about the long-term prospects for investment in this key energy sector. Growth in capacity, modest growth in product demand, and heightened environmental standards have contributed to this development. In particular, U.S. refiners have sharply increased their capital expenditures in response to the requirements of the Clean Air Act Amendments of 1990. The main focus of this presentation is on the financial impacts of these U.S. refining pollution abatement investment requirements in the 1990's.

The analysis presented in this report utilizes a financial reporting framework drawing on government and industry data sources. The results are for the major energy companies reporting to the Energy Information Administration's Financial Reporting System (described below). For these companies, the results in this report indicate that the financial effects of pollution abatement requirements on U.S. refining operations in the 1990's have been minor in relation to the overall deterioration in the financial performance of the industry.

Comparing financial measures for 1988 and 1989, which were years of high refining/marketing profitability just prior to the passage of the (Federal) Clean Air Act Amendments of 1990, to the most recently available results for 1993 through 1995, suggests that about 5 percent of the $1.52 ($1995) per barrel decline in the majors' net cash margin from U.S. refining and marketing operations came from increased operating costs traceable to pollution abatement. Further, of the 12 percentage point decline over the 1988 to 1995 period in the return on investment to the majors' U.S. refining/marketing operations, slightly over 1 percentage point can be attributed to increased capital expenditures and operating costs for pollution abatement.

This analysis draws on data from the Energy Information Administration's Financial Reporting System (FRS), the Bureau of the Census' Pollution Abatement Costs and Expenditures, and the American Petroleum Institute's Petroleum Industry Environmental Performance.¹ The FRS is an annual survey that collects, through Form EIA-28, financial and associated operating information from the top 24 U.S.-based major energy producing companies. The data are reported on a line-of-business basis, including the U.S. petroleum refining and marketing line of business. The FRS companies occupy a major part of the U.S. refining industry. For example, during the 1990's thus far, the FRS companies' share of U.S. crude distillation capacity has ranged from 66 percent to 69 percent. However, the FRS does not collect financial data on pollution abatement. Capital expenditures and operating costs for pollution abatement for the FRS companies are prorated, on the basis of their share of refining capacity, from totals for the entire U.S. refining industry reported in various issues of the Census publication through 1994. Pollution abatement data for 1990 through 1995 were also collected by the American Petroleum Institute. These data are used for estimates of the FRS companies' pollution abatement expenditures and costs for 1995.² Both of these data collection programs recognize that estimates may be necessary in order to provide pollution abatement expenditures and costs. Nevertheless, the data are provided by the companies actually incurring the expenditures and, consequently, are based on operating experience rather than engineering estimates alone.

File last modified: October 29, 1997

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