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

Workshop on ULSD for ILTA members on October –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 ILTA PROGRESS REPORT

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.

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.

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

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 INCENTIVES FOR 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 OBJECTIVE OF CUSTOMER INTERVENTION

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

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

DEFENSE OPTIONS FOR TERMINALS Defenses to EPA enforcement action –EPA test result is wrong –Section 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

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

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?)

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 ppm –When fuel exceeds 15 ppm –Testing by customer, and procedure when results differ Statement of truck loading policy Downgrading and redesignation limitations

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

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

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

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