[Senate Hearing 116-349]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 116-349
 
       THE UPCOMING IMPLEMENTATION OF THE INTERNATIONAL MARITIME 
 ORGANIZATION'S NEW GLOBAL SULFUR STANDARD FOR MARINE FUELS, WHICH IS 
                 SET TO TAKE EFFECT ON JANUARY 1, 2020

=======================================================================

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           DECEMBER 10, 2019

                               __________
                               
                               
                               
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                       Printed for the use of the
               Committee on Energy and Natural Resources

        Available via the World Wide Web: http://www.govinfo.gov
        
        
        

                            ______

             U.S. GOVERNMENT PUBLISHING OFFICE 
39-874                 WASHINGTON : 2021         
        
        
               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                    LISA MURKOWSKI, Alaska, Chairman
JOHN BARRASSO, Wyoming               JOE MANCHIN III, West Virginia
JAMES E. RISCH, Idaho                RON WYDEN, Oregon
MIKE LEE, Utah                       MARIA CANTWELL, Washington
STEVE DAINES, Montana                BERNARD SANDERS, Vermont
BILL CASSIDY, Louisiana              DEBBIE STABENOW, Michigan
CORY GARDNER, Colorado               MARTIN HEINRICH, New Mexico
CINDY HYDE-SMITH, Mississippi        MAZIE K. HIRONO, Hawaii
MARTHA McSALLY, Arizona              ANGUS S. KING, JR., Maine
LAMAR ALEXANDER, Tennessee           CATHERINE CORTEZ MASTO, Nevada
JOHN HOEVEN, North Dakota

                      Brian Hughes, Staff Director
                     Kellie Donnelly, Chief Counsel
            Tristan Abbey, Senior Professional Staff Member
                     John Crowther, Senior Counsel
                Sarah Venuto, Democratic Staff Director
                Sam E. Fowler, Democratic Chief Counsel
           Nicole Buell, Democratic Professional Staff Member
       Armando Avila, Democratic Senior Professional Staff Member
       
       
                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Murkowski, Hon. Lisa, Chairman and a U.S. Senator from Alaska....     1
Manchin III, Hon. Joe, Ranking Member and a U.S. Senator from 
  West Virginia..................................................    23

                               WITNESSES

Capuano, Hon. Linda, Administrator, U.S. Energy Information 
  Administration, U.S. Department of Energy......................    25
Butler, John W., President & CEO, World Shipping Council.........    55
Morgan, Derrick, Senior Vice President, American Fuel & 
  Petrochemical Manufacturers....................................    60
Nerurkar, Neelesh, Vice President, ClearView Energy Partners, LLC    72
Webster, Jamie, Senior Director, Center for Energy Impact, Boston 
  Consulting Group, and Fellow at Columbia University's Center on 
  Global Energy Policy...........................................    79

          ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Butler, John W.:
    Opening Statement............................................    55
    Written Testimony............................................    57
    Responses to Questions for the Record........................   101
Capuano, Hon. Linda:
    Opening Statement............................................    25
    Written Testimony............................................    27
    Responses to Questions for the Record........................    99
ConservAmerica:
    Letter for the Record........................................   153
Manchin III, Hon. Joe:
    Opening Statement............................................    23
Morgan, Derrick:
    Opening Statement............................................    60
    Written Testimony............................................    62
    Responses to Questions for the Record........................   148
Murkowski, Hon. Lisa:
    Opening Statement............................................     1
    Letter from Dr. Capuano dated 11/7/19........................     3
Nerurkar, Neelesh:
    Opening Statement............................................    72
    Written Testimony............................................    74
    Responses to Questions for the Record........................   150
Webster, Jamie:
    Opening Statement............................................    79
    Written Testimony............................................    81
    Responses to Questions for the Record........................   152


       THE UPCOMING IMPLEMENTATION OF THE INTERNATIONAL MARITIME 
 ORGANIZATION'S NEW GLOBAL SULFUR STANDARD FOR MARINE FUELS, WHICH IS 
                 SET TO TAKE EFFECT ON JANUARY 1, 2020

                              ----------                              


                       TUESDAY, DECEMBER 10, 2019

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:00 a.m. in 
Room SD-366, Dirksen Senate Office Building, Hon. Lisa 
Murkowski, Chairman of the Committee, presiding.

           OPENING STATEMENT OF HON. LISA MURKOWSKI, 
                    U.S. SENATOR FROM ALASKA

    The Chairman. Good morning, everyone. The Committee will 
come to order.
    We are here this morning to examine the implementation of 
the International Maritime Organization's New Global Sulfur 
Standard for Marine Fuels. This is known as IMO 2020. This new 
standard will formally take effect on January 1st of 2020, just 
about three weeks from today.
    IMO 2020 has been years in the making, decades in the 
making, so this is really no surprise that we are up against 
this implementation date, but I still think that for some, it 
is like, where did this come from? Well, there is a little bit 
of history out there. Its purpose, of course, is to reduce air 
pollution from shipping around the world. It accomplishes that 
purpose by limiting the sulfur content of marine fuel, which is 
how much sulfur is in the diesel that ships use to move across 
the ocean, and limiting that amount to 0.5 percent by mass. 
Those sulfur reductions will bring global health benefits that 
all of us should welcome and support.
    At the same time, I think we can be proud that here in the 
United States the sulfur content of marine fuel is already 
limited to 0.1 percent by mass. As is true on so many different 
environmental issues, the United States is leading the way here 
and that is a good thing. Over the last several years the 
global shipping industry has been preparing to comply with IMO 
2020. Three primary options to do that appear to be number one, 
of course, using low-sulfur diesel fuel; secondly, installing 
exhaust scrubbers; or third, switching to liquified natural gas 
which, of course, emits virtually zero sulfur.
    No matter which method is chosen, I think we recognize it 
takes time and it takes money. Whether it is a ship installing 
a scrubber, a refinery making an upgrade to produce low-sulfur 
fuel, or a company buying or converting to an LNG-powered 
vessel, we all know it just takes time and, of course, it takes 
money. It is generally agreed that the U.S. refining industry 
is uniquely positioned to benefit from IMO 2020. The 
investments have been made. Refineries are optimized. All of 
that supports good paying jobs and will help mitigate potential 
impacts to domestic and global fuel prices.
    There is still some disagreement over what those exact 
impacts will be, but I am glad to see a consensus, or at least 
something that resembles a consensus, among the many analysts 
that the impacts of IMO 2020 will be less than what was 
projected just a year ago. We had a hearing back in February 
and I remember asking at that point in time, are we ready for 
this? And there was some criticism. It is like, whoa, is 
Murkowski backpedaling on this saying that we don't need to do 
it? But I was asking the perfectly legitimate question, are we 
going to be ready? And I think that we do appear to be in a 
better place today than we were back then.
    What is critical now with implementation just a few weeks 
away is for compliance to continue at full speed. There is no 
stopping IMO 2020, and I certainly hope that no one will 
construe that this oversight hearing was an effort to do that.
    With that said, it is also important for us to be vigilant. 
I come from a state that, as you all know, we pay some of the 
highest prices for energy in the country. So I have been paying 
very, very close attention to what IMO 2020 could mean for 
Alaskans, especially those who live in rural and remote areas 
where shipping prices are already very high and truly the case 
of economic hardship for so many. I had written the 
Administrator, Dr. Capuano, who is with us today. We appreciate 
you being here. But I had written asking that the EIA closely 
monitor implementation. I am going to enter your response to 
that letter, Dr. Capuano, in today's hearing record. So I thank 
you for that.
    [Letter to Dr. Capuano and her response follows.]
    
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    The Chairman. I welcome the panel that has joined us this 
morning to share with us what you have seen in the markets and 
what you believe may be coming soon. I think we recognize that 
even while we have known that this is coming, there are some 
complexities here. So we appreciate you being here to share 
your expertise with us.
    With that, I turn to my colleague, Senator Manchin.

              STATEMENT OF HON. JOE MANCHIN III, 
                U.S. SENATOR FROM WEST VIRGINIA

    Senator Manchin. Thank you, Madam Chairman, and thank you 
for convening this meeting today to discuss the International 
Maritime Organization's New Global Sulfur Standards for Marine 
Fuels. With less than a month until their standards go into 
effect, I look forward to discussing implementation with our 
esteemed witnesses and I thank you all for being here today.
    As you might know, West Virginia might not be on the firing 
line of these new ocean vessels, but we are concerned. It is 
somewhat familiar territory for me also because we have done 
this work already on coal plants to cut emissions for 
SOX and NOX and particulates, as you 
know, and we have been successful at that. And let me tell you, 
it made a big difference in states like mine. I have told 
people before, I remember growing up, my mother would hang our 
clothes out and they came back a little bit dirtier than when 
they went out. So it did make a big difference, and we all 
really, truly noticed it.
    These new sulfur standards for open ocean shipping will 
help us take another step in the right direction by ensuring 
sulfur content in maritime fuels drops from 3.5 percent to 0.5 
percent. This will be an impactful change as more than 80 
percent of our global trade is transported by sea. In fact, 
marine fuels account for just 7 percent of our transportation 
fuels demand, yet they account for 90 percent of the 
transportation sector's sulfur dioxide emissions. That is hard 
to comprehend, 90 percent are coming from one source, even 
though it is only 7 percent of the total.
    It is estimated that as a result of these standards more 
than two million barrels per day of high-sulfur fuel will be 
displaced from the sector. Implementing these regulations will 
dramatically decrease the SOX emissions which is 
both good for the environment and for human health. My 
understanding is that the IMO has also already implemented 
efficiency standards and plans for reducing greenhouse gas 
emissions so that the shipping industry moves forward on 
climate solutions in addition to local air pollution.
    There are three main options for reaching the new 0.5 
percent standard using lower-sulfur diesel fuels, switching to 
other lower sulfur emitting fuels such as LNG or biofuels or 
outfitting ships with scrubbers to clean high-sulfur fuel oil. 
In U.S. waters, ships already are required to comply with a 
more stringent standard, but I look forward to hearing about 
how industry is prepared for this switch for global routes.
    At this point it is estimated that only three to five 
percent of the total global ship fleets will be outfitted with 
scrubbing technology. That means that in short-term, at least, 
most ships will switch to using lower-sulfur diesel fuels. With 
increasing demand for cleaner fuels, the U.S. is well-
positioned to capture that increased market share with fuels 
already in the market. We checked with some of the refineries, 
and they say they are capable of meeting this demand.
    This puts American refineries and energy producers at an 
advantage. We are ahead of the curve because, I have said, we 
have had sulfur standards in place since 2015 that are five 
times more stringent than the new global sulfur standards, and 
our refiners have invested billions in upgrading their 
infrastructure to make cleaner fuels. The IEA estimates that 
the new standard will further increase refining capacity to 
meet increased demands for low-sulfur bunker fuels by 300,000 
barrels per day. And as new ships are being built, other low-
sulfur fuels such as LNG are expected to play an increasing 
role in helping ships meet the new standards.
    Some forecasts show that the amount of LNG used as bunker 
fuel globally may double by 2030 as a result of this rule from 
three percent to seven percent. This is a success story for 
many U.S. companies. We need to keep our eye on the ball and 
ensure that we continue to position U.S. companies to lead the 
world in clean energy. Ensuring that we maintain a competitive 
advantage can go a long way in promoting our nation's energy 
security while benefiting the economies and communities of oil 
and gas producing states, such as my home State of West 
Virginia. We keep saying that we need to continue to innovate, 
and elimination is not going to solve the world global problem.
    West Virginia ranks fourth among the states in total energy 
production. It is the seventh largest producer of marketed 
natural gas in the nation. Our underground gas storage capacity 
accounts for almost six percent of the nation's total capacity. 
Promoting sound policies and regulations that responsibly tap 
into these resources and others, including those in Alaska and 
along the Gulf Coast, will only benefit our nation's energy 
security and will add much needed jobs. That is important for 
our economy and for geopolitical balance around the world. It 
is also important for human health and the environment. We have 
made great progress reducing air pollution and acid rain with 
scrubbers and cleaner fuels. This rule keeps our foot on the 
gas. We also need progress reducing global carbon dioxide 
emissions, which the EIA said in a report last month, rose in 
2018 for the first time since 2014. We must all be cognizant of 
that. This is a concerning trend. I hope today's conversation 
can highlight the types of solutions we should be pursuing.
    With that, Chair Murkowski, I look forward to hearing from 
our esteemed witnesses today.
    The Chairman. Very good, thank you.
    We will begin this morning's panel with Dr. Linda Capuano, 
who I have just introduced, who is the Administrator for the 
Energy Information Administration (EIA) and has been before 
this Committee many times. We welcome you back.
    Mr. John Butler is the President and the CEO of the World 
Shipping Council. Thank you for joining us this morning.
    Mr. Derrick Morgan is the Senior Vice President for Federal 
and Regulatory Affairs at the American Fuel and Petrochemical 
Manufacturers (AFPM) Association. Thank you.
    Mr. Neelesh Nerurkar is the Vice President for ClearView 
Energy Partners. Thank you for joining us.
    And Mr. Jamie Webster has also been before this Committee 
before. He is the Senior Director at the Boston Consulting 
Group's (BCG) Center for Energy Impact. So we welcome you to 
the Committee.
    We would ask that you try to keep your comments to about 
five minutes. Your full statements will be included as part of 
the Committee record. Once you have all concluded your 
statements, we will have an opportunity for questions and your 
responses.
    Again, thank you for joining us, and Administrator Capuano, 
if you would like to begin please.

        STATEMENT OF HON. LINDA CAPUANO, ADMINISTRATOR, 
  U.S. ENERGY INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF 
                             ENERGY

    Dr. Capuano. Chairman Murkowski, Ranking Member Manchin and 
members of the Committee, I appreciate the opportunity to 
testify about EIA's view on the effects that the upcoming IMO 
2020 regulations may have on the global oil market as presented 
in our November Short-Term Energy Outlook, or STEO. The 
upcoming regulations take effect on January 1st and will limit 
marine fuel sulfur content to 0.5 percent by weight, down from 
3.5 percent which was established in 2012. We expect this will 
increase demand for low-sulfur crude and put about $2 per 
barrel of upward pressure on light, sweet crude oil prices in 
2020.
    EIA expects the price impact to dissipate as the market 
adjusts. This is particularly relevant to states like Alaska 
where diesel fuel is important to the economy. However, we also 
expect the projected slowing growth of global GDP to slow oil 
demand growth and cause global oil inventories to generally 
increase placing an offsetting downward pressure on oil and 
petroleum product prices. As a result, our November STEO 
forecasts Brent crude oil prices to average slightly higher 
than $60 per barrel in 2020 compared with the average of $64 
per barrel in 2019. Relative to refined products, the bunker 
fuel is a small share of the global and U.S. liquid fuels 
market.
    However, low-sulfur refined products have experienced 
upward price pressure in the U.S. as ship operators purchase 
and store low-sulfur marine fuels. Trade Press reports that the 
price differential between low- and high-sulfur fuel oil on the 
U.S. Gulf Coast has increased over threefold in the last three 
months. Similar trends have emerged on trading locations around 
the world. The price effects from this shift in marine and fuel 
demand is most visible in the low- and high-sulfur residual 
fuel oil market, but other refined, excuse me, other refined 
petroleum products such as diesel fuel, gasoline and jet fuel 
may also be showing small price increases.
    Relative to retail prices at the pump, in general, we 
expect the price premiums for low-sulfur, refined products to 
be reflected in higher refining margins through 2020. We also 
expect these price premiums will be offset by the forecasted 
lower crude oil prices. As a result, we expect that 2020 
gasoline and diesel retail prices at the pump to be similar to 
those in 2019.
    Relative to U.S. exports, the current high refining margins 
are providing economic incentive for global refiners to 
maximize low-sulfur distillate fuel output. Much of the U.S. 
refinery capacity, in particular, is well-positioned to produce 
the low-sulfur diesel fuel, and we project U.S. refinery 
average utilization rates will increase to more than 90 percent 
in 2020. Because U.S. demand for bunker fuel is relatively low, 
we expect U.S. refiners will export much of the increased 
production to supply increasing global demand. We estimate that 
U.S. exports of crude oil and petroleum products started 
exceeded imports in September of this year. We expect the U.S. 
net exports will continue to grow in 2020 and that low-sulfur 
fuels will provide a large share of the increases in exports.
    However, in the long-term, our Annual Energy Outlook 2019 
projects that the U.S. net exports of diesel will eventually 
decrease as the global shipping industry installs more 
scrubbers that will reduce the demand for low-sulfur diesel and 
as more liquified natural gas technologies are incorporated 
into new ship construction and the number of LNG-powered ships 
increases. Although we expect limited effects on the price of 
crude oil from the IMO 2020 regulations, there are many 
unknowns about how the global refining and shipping industries 
will respond and how actual industry decisions will affect 
crude oil prices.
    For example, in the short-term, smaller, more remote crude 
oil, excuse me, smaller, more remote ports may face logistical 
and fuel availability issues compared with larger, more active 
ports. However, we believe that supply patterns will evolve 
over time and ship owners will adjust to potential short-term 
dislocations of fuel.
    In summary, despite the upward pressure on prices from the 
IMO 2020 regulations, we expect crude oil prices to average 
slightly higher than $60 per barrel in 2020 as the downward 
pressure, oil price pressure, from the slowing global economic 
growth outweighs concerns about the IMO 2020 regulation. EIA 
continuously monitors global economic conditions as part of our 
forecast analysis. The impact of the IMO's sulfur regulation 
for marine fuels will be included in that analysis which we 
update and publish monthly in our STEOs and annually in the 
AEO.
    Chair Murkowski and members of the Committee, thank you for 
the opportunity to present this information and this concludes 
my testimony.
    [The prepared statement of Dr. Capuano follows:]
    
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    The Chairman. Thank you, Administrator.
    Mr. Butler, welcome.

         STATEMENT OF JOHN W. BUTLER, PRESIDENT & CEO, 
                     WORLD SHIPPING COUNCIL

    Mr. Butler. Thank you, Chairman Murkowski, Ranking Member 
Manchin, members of the Committee. I appreciate the invitation 
to testify today.
    The World Shipping Council's members carry over 90 percent 
of the United States' international containerized ocean import 
and export commerce. Approximately 1,200 oceangoing liner 
vessels, mostly container ships, make more than 28,000 port 
calls in the United States in a given year--almost 80 port 
calls a day. The industry provides American importers and 
exporters with door-to-door delivery service for almost any 
commodity to and from about 190 countries around the world. 
Approximately 35 million 20-foot equivalent units of 
containerized cargo are imported into or exported from the 
United States each year.
    I have submitted a written statement for the record. This 
morning, I'd just like to highlight a few points from that 
longer statement.
    First, the implementation of the IMO 2020 Marine Fuel 
Sulfur Regulation will not disrupt the critical flow of 
containerized international trade moving into and out of the 
United States. The international liner shipping industry will 
function the same next month and the months after as it does 
today.
    Second, as the Chairman has pointed out, this standard that 
will go into effect on January 1 has been in the works for over 
a decade. The 0.5 percent sulfur limit was adopted in 2008 by 
governments working through the International Maritime 
Organization, or IMO. That limit was subject to a formal review 
at the IMO in 2016 and the IMO, with the support of the United 
States, determined that sufficient fuel would be available to 
meet the 0.5 percent standard by 2020. These global reductions 
in the sulfur content of marine fuel are anticipated to result 
in substantial improvements in public health.
    My third point and especially because of the long lead time 
between adoption and implementation, governments, the shipping 
industry, fuel suppliers and the IMO have had the opportunity 
to prepare for the clean fuel requirement. Those efforts 
include regulatory amendments and guidance undertaken by both 
the IMO and the U.S. Coast Guard as well as extensive 
preparations across the industry in terms of engineering, crew 
training and contracting for fuel supplies. All affected 
parties have been working for the past several years to ensure 
that the new limits are implemented as smoothly as possible.
    Fourth and finally and most important from the ocean 
carrier perspective, we need a level playing field in terms of 
enforcement in order for this regulation to work as designed. 
Although we do not expect major disruptions in broader 
petroleum markets, there will be a cost differential associated 
with this cleaner fuel. If everyone is not playing by the same 
rules, that cost differential can penalize responsible actors 
and reward bad actors. On this point it is critical that the 
U.S. Coast Guard and the EPA, the IMO and governments around 
the world continue to emphasize that they will consistently 
enforce this requirement.
    I thank you for the opportunity to testify. I welcome your 
questions.
    [The prepared statement of Mr. Butler follows:]
    
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    The Chairman. Thank you, Mr. Butler.
    Mr. Morgan, welcome.

 STATEMENT OF DERRICK MORGAN, SENIOR VICE PRESIDENT, AMERICAN 
               FUEL & PETROCHEMICAL MANUFACTURERS

    Mr. Morgan. Thank you, Chairman Murkowski, Ranking Member 
Manchin and members of the Committee. It's my pleasure to be 
here today to present AFPM's perspective on the IMO 2020 
regulation.
    AFPM, the American Fuel and Petrochemical Manufacturers, 
represents more than 90 percent of the refining and 
petrochemical capacity in the United States. Our members obtain 
crude oil and natural gas and manufacture it into the gasoline, 
diesel, jet fuel, marine fuel, home heating oil and thousands 
of other products that make modern life possible. The subject 
of today's hearing, IMO 2020, is nearly 12 years in the making, 
as you pointed out, Chairman Murkowski.
    It is poised to be a tremendous success story for the 
environment, for American manufacturing jobs and for U.S. 
energy security. In 2008, the IMO committed to lower sulfur in 
marine fuels and determined the final timetable and sufficient 
supplies in 2016. In this way, the world is starting to catch 
up to the lower-sulfur standards we've already implemented in 
U.S. waters, starting in 2012 and then rationing down to 0.1 
percent in 2015. AFPM fully supports an on-time implementation 
of IMO 2020 and consistent global enforcement of the new 
standard.
    My written testimony includes some detailed explanations, 
so I'll just highlight a few major points.
    First, our member companies have invested tens of billions 
of dollars to become the most complex and flexible refining 
industry in the world. For example, the first chart in the 
appendix to my written testimony shows refiners in regions such 
as Russia and the Middle East are simply not as complex as here 
in the United States and they produce a higher percentage of 
high-sulfur fuels. Investments in the U.S. have increased the 
ability to process a wider variety of feedstocks more 
efficiently and produce cleaner fuels, including for IMO 2020.
    Second, the complexity and flexibility of American 
refineries combined with lower-sulfur crude oils produced 
domestically should lead to increased exports and an even more 
positive trade balance on petroleum and petroleum products. 
This rule will benefit American manufacturers and our employees 
while reducing sulfur emissions.
    Third, although the U.S. is particularly well-positioned 
for IMO 2020, the global industry as a whole is also ready. 
AFPM has been a member of a coalition of national refining 
trade associations from around the world called the Marine 
Platform 2020. The Platform's goal is to support implementation 
of IMO 2020 and to advise governments and stakeholders about 
implementation. And that's just what we've been doing as AFPM.
    I had the opportunity and privilege to join the United 
States delegation to the last two Marine Environment Protection 
Committee meetings at the IMO, and I can tell you the result of 
the meetings was an increased understanding by the world 
governments about how IMO 2020 will work in practice. The 
discussion was not if or when the new standards take effect, 
but the how, a specific detail, such as sampling and 
enforcement. In the marketplace there is already compliant fuel 
available at major ports globally and pricing benchmarks have 
been in place for much of the year already.
    As with any new program of this magnitude, there will be 
bumps in the road and even unforeseen challenges. Local 
availability and quality in some ports may present challenges 
for shippers, but these are solvable and will be worked out by 
the marketplace. Several of our members are working to position 
themselves and their bunker fuel supply of partners as the 
ready answer to the question, where can I get quality and 
compliant fuel?
    On a more macro level, I've included some relevant quotes 
in my testimony referencing analysis at EIA and IEA. These 
analyses are largely in line with expectation of investment 
banking community and other independent experts that 
implementation has already begun and there is sufficient 
compliant fuel available. The doomsday scenarios of some 
analysts that grabbed headlines in the last year with 
predictions of much more expensive crude oil and diesel fuel 
are just not materializing.
    In summary, as a result of years of multinational 
coordination and planning and investment by the refining and 
shipping industries and hard work by the professionals at EPA 
and the U.S. Coast Guard, IMO 2020 is expected to have 
substantial environmental benefits and promote U.S. energy 
security.
    Again, I appreciate the opportunity to share our views and 
I look forward to answering any questions you may have.
    [The prepared statement of Mr. Morgan follows:]
    
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    The Chairman. Thank you, Mr. Morgan.
    Mr. Nerurkar, welcome.

STATEMENT OF NEELESH NERURKAR, VICE PRESIDENT, CLEARVIEW ENERGY 
                         PARTNERS, LLC

    Mr. Nerurkar. Thank you and good morning, Chairman 
Murkowski, Ranking Member Manchin and distinguished members of 
the Committee. My name is Neelesh Nerurkar. I analyze energy 
and climate policy at ClearView Energy Partners, LLC, an 
independent research firm that serves institutional investors 
and corporate strategists. Thank you for having me as part of 
your conversation today.
    Earlier in my career, when I was working at the 
Congressional Research Service, I considered it a privilege to 
support this Committee's critically important energy and 
environmental policy responsibilities. In my current capacity 
it's an honor to contribute to your discussion.
    ClearView's clients look to our firm to provide objective, 
transparent analysis of market dynamics. Last year, we received 
many inquiries after media reports of alarming outlooks for the 
IMO 2020 fuel changeover, including oil market chaos and price 
spikes for middle distillate fuels like diesel. At the time our 
firm offered a contrarian perspective. We anticipated a more 
muted oil market result and our current stance remains 
consistent with that view.
    I'd summarize ClearView's IMO 2020 outlook in three points. 
First, the IMO adopted the sulfur cap more than a decade ago 
and remain committed to its implementation; second, the global 
refining and shipping sectors have taken steps to mitigate 
potential shortfalls of low-sulfur marine fuel; and third, the 
change is not taking place in isolation. Trade tensions and 
global economic slowdown have dampened oil demand growth which 
may ease the transition. Let me briefly explain the three 
points.
    The IMO sulfur restrictions are intended to produce health 
and environmental benefits including reductions in 
cardiovascular disease, lung cancer, asthma and acid rain. The 
IMO set its 2020 limit in 2008. It officially reaffirmed this 
deadline in 2016, and it's since focused on sulfur cap 
implementation and long-term carbon emissions goals.
    The global shipping industry uses about 3.4 million barrels 
a day of high-sulfur fuel oil as of 2018. Our firm looked at 
nine global fuel production and consumption variables and how 
they could address the sulfur cap gap, the new demand that the 
2020 rules would create. Refiners have many ways to make low-
sulfur marine fuel. We modeled a distillate intensive scenario 
as an acid test to feasibility. In that scenario, 900,000 
barrels a day of gap closure could come from distillation, 
conversion and desulfurization capacity additions, 800,000 
barrels a day could come from higher refinery utilization rates 
and 400,000 barrels a day could come from diesel yield 
maximization. Refiners could choose other options as well. For 
example, they can use a broader part of the barrel to make very 
low-sulfur fuel oil. An early report suggests that many have 
done so.
    The shipping industry also has been preparing. Scrubbers 
that allow ships to continue using high-sulfur fuel oil could 
close the gap by another 500,000 barrels per day. Slow 
steaming, sailing slower, could cut another 100,000 barrels per 
day. LNG bunkering could displace around another 50,000 barrels 
a day. And in our base case, a 20 percent non-compliance rate 
could amount to another 700,000 barrels per day. Finally, not 
that it would be good news, but a slowing global economy could 
weaken non-marine distillate demand growth and a U.S.-China 
trade war could reduce fuel reused in the shipping sector. 
Taken together, this implies a 2020 low-sulfur marine fuel 
shortfall of roughly 100,000 barrels per day.
    Our analysis acknowledges several risks. For example, a 
high compliance scenario might imply a 500,000 barrel per day 
shortfall. On the other hand, the rapid expansion of very low-
sulfur fuel oil production and slower economic growth might 
lead to no shortfall. Closing a shortfall of 100,000 barrels 
per day could come out of inventories or it could be a demand 
response to higher prices. The shortfall, however, looks modest 
in comparison to the 36 million barrel per day global market 
for middle distillates which suggests limited price impacts.
    We believe the shipping industry may now be approaching the 
peak of transition. A straightforward metric for market stress 
in this case is diesel prices, and notably they've remained 
relatively flat. This is not to minimize the challenge. The 
maritime refining industry has undertaken vast preparation and 
considerable investment. Reports of fuel quality and limited--
fuel quality concerns and limited fuel availability could still 
point to challenges, especially at smaller ports and during the 
early months of transition.
    That said, I would suggest that the data thus far does not 
appear to validate predictions for dramatic widespread 
dislocations.
    Madam Chairman, this concludes my prepared testimony. I 
look forward to answering questions you or your colleagues may 
have.
    [The prepared statement of Mr. Nerurkar follows:]
    
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    The Chairman. Thank you.
    Mr. Webster, welcome.

STATEMENT OF JAMIE WEBSTER, SENIOR DIRECTOR, CENTER FOR ENERGY 
    IMPACT, BOSTON CONSULTING GROUP, AND FELLOW AT COLUMBIA 
          UNIVERSITY'S CENTER ON GLOBAL ENERGY POLICY

    Mr. Webster. Thank you, Chairman Murkowski, Ranking Member 
Manchin. My name's Jamie Webster. I'm with the Boston 
Consulting Group's Center on Energy Impact. I know we've 
already had several witnesses, so I don't want to repeat some 
of the same comments. What I would like to highlight is that 
despite this clear standard, we're still dealing with 
significant uncertainty as we roll forward and that uncertainty 
is likely to last at least through the first half of 2020.
    Chairman Murkowski, your letter to the EIA in September, I 
think, perfectly captured that uncertainty that we're looking 
at. That said, the clear standard that was put out has really 
helped both the shipping industry and the refining industry to 
get ready for this. And I think we're going to be in a much 
better position as many others have said, relative to some of 
the, some of the commentary that was made a year or a year and 
a half ago.
    I also think that there's some valuable lessons in this IMO 
transition. Boston Consulting Group, like many groups, sees 
that over the next several years and several decades there are 
going to be significant energy transitions that take place. 
We've already had some here in the United States, and they're 
going to continue.
    I think the lessons that we've learned here is the 
importance for industry to have a very clear mandate on what 
the change is going to be as well as making sure that different 
industries are able to talk with one another as these changes 
go forward. I've had the privilege with BCG of being able to 
sit with both refiners as well as shipping industry, as well as 
logistics and it was very clear that if there had been some 
earlier discussions, that would have helped even more with some 
of this, some of this uncertainty.
    I'd also say that for us, as we're looking at the length 
and magnitude of what this could end up being, I think, a 
smaller disruption than many people thought. We're looking at a 
few key measures.
    One is the number of scrubbers that are being installed. 
About a year, year and a half ago, very few ships were showing 
any real interest in putting in scrubbers. But in the last, 
less than a year, you've seen a real boost in that interest. 
And there is now, if you lined it up in a queue, there's a line 
of approximately 350 miles long of ships waiting to put 
scrubbers in because they see that that's going to be 
beneficial for them. The constraints holding back the amount of 
ships that can actually go in is obviously berthing space as 
well as talent and some special alloys that need to be put in.
    The second thing that we're going to be looking at is we're 
going to be looking at our friends from AFPM and their members 
as well as those around the world in terms of understanding 
exactly how much fuel is able to come on without creating some 
significant disruptions. While we do see some pricing 
differentials, obviously, have already occurred and will 
continue to occur, we're not overly concerned about that. We're 
also going to be focused on global economic growth which has 
already been talked about here, and the odd thing that actually 
is slower economic growth actually reduces the impact from 
this.
    And finally, it's compliance. Our view on compliance is 
that it's actually going to be relatively high. I've had a 
chance in the last couple of months of traveling to Asia and a 
couple of other countries, countries that had, for a while, 
were discussing potentially not complying with the IMO and it 
does seem that at this point almost everybody is on board with 
that at this point. So I think the compliance is actually going 
to be relatively high.
    We do think that there's going to be a cost of between $25 
billion and $30 billion globally for this change. I will also 
say that there's a lot of uncertainty around that. Other firms 
have come up with numbers as high as $60 billion, but realize 
this is not a U.S. number. This is a global number and this is 
something that is going to be applied over the next couple of 
years. And so, while we expect that shippers are probably going 
to be able to pass these costs all the way down to the consumer 
level, it's unlikely, except in perhaps some remote 
communities, for it to be a significant, significant change.
    Finally, we're looking at, sorry, we are also looking at 
compliance and how that is going to, going to roll through.
    I appreciate the attention of the Committee on this 
important issue. I do think that there's a lot of lessons as 
this relates to future energy transitions and look forward to 
your questions.
    Thank you.
    [The prepared statement of Mr. Webster follows:]
    
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    The Chairman. Very good, thank you, Mr. Webster.
    Thank you, each of you, for your comments this morning. 
This is actually very encouraging to hear that you feel that we 
are in a pretty good place and that the United States is 
leading for lots of good reasons--the environment, the jobs 
that are created and the energy security initiatives.
    My colleague has another appointment very shortly, so I am 
going to defer to Senator Cassidy to begin the round of 
questions.
    Senator Cassidy. Thank you, Madam Chair.
    Dr. Capuano, of course, all politics is local. I am hearing 
about how Louisiana Light Sweet is going to have a $2 
differential upon that sour crude from elsewhere. But you said 
it is going to last for two years. When I look on Wikipedia 
though, there are a lot of countries with light, sweet oil 
which, I presume, is if already not in compliance inherently is 
soon to be.
    So it seems like, is there not enough of the light, sweet 
in the distillates worldwide to meet demand? Because you 
mentioned there will be a shortage of demand.
    Dr. Capuano. So, to be more specific, we're seeing that 
you'll see a price differential initially in 2020 which will 
dissipate as you move out of 2020. It's being offset by the 
fact that the lower demand globally for energy fuel oil will 
compensate for that. It really becomes more of a question of 
getting the right fuel to the right place at the right time. 
And there's some adjustment----
    Senator Cassidy. So the Gulf Coast, where we have Louisiana 
Light Sweet off the coastline----
    Dr. Capuano. Yeah.
    Senator Cassidy. ----with our refineries right there, that 
is one more reason to make New Orleans and Lake Charles your 
hub for international shipping. Is that a fair statement?
    Dr. Capuano. Correct. Yeah.
    And so, what'll happen is there'll be some, some shipping 
routes will adjust over time and that's, I think, where the 
focus would be.
    Senator Cassidy. You threw in LNG as part of the mix, I 
think, you or Mr. Butler. How quickly will people transition 
because it seems like the price differential is even more 
favorable for liquefied natural gas?
    Dr. Capuano. You bring up a really good point. So, the 
decision that, the decision that needs to be made, which I 
cannot answer how the businesses will make that decision, is 
you can either buy light, sweet crude. You can buy the low-
sulfur fuel. You can buy a scrubber and buy high-sulfur fuel 
and reduce the sulfur yourself or you can go to LNG, an LNG 
ship.
    Like I said, we have done long-term projections, and you'll 
see in our AEO that we do see growth in the LNG shipping.
    Senator Cassidy. Now, growth could be--or growth can be----
    Dr. Capuano. Yeah. And over time will tell, time will tell. 
And we, again, look at data and project forward. I might, and 
some other, the--some other people have mentioned decision, the 
decision-making that might go on in choosing between an LNG and 
a scrubber. Can someone make a comment?
    Senator Cassidy. Mr. Webster, a thought on this?
    Mr. Webster. Thank you for your question, Senator.
    So we do anticipate that LNG shipping is going to grow over 
the next couple of years. Some of the decisions----
    Senator Cassidy. But quickly or modestly?
    Mr. Webster. I think it's actually going to be relatively 
slow. It's starting from a very low base. I don't see it as 
something where it's going to be some giant amount. There's 
approximately 60,000 ships that, kind of, traverse the 
international----
    Senator Cassidy. How much does it cost to retrofit?
    Mr. Webster. If I recall, it's around a 30 to 30 percent 
increase and you also have to deal with, which I think my 
colleague from the Shipping Council can discuss, is there's an 
impact in terms of how much you can actually ship on the ship 
because, of course, the LNG material takes up more space in the 
ship.
    Senator Cassidy. Got it, okay.
    And then the local, Mr. Butler, you mentioned about the 
local and country enforcement. But I am presuming that there is 
a whole set of countries that we know that are going to 
enforce. The U.S. is going to enforce. France is going to 
enforce. Germany is going to enforce. Australia. Japan.
    Shipping routes are typically not going to be between, you 
know, they are international. How likely is it that a ship 
would not eventually go to a country that, by golly, we know is 
going to enforce? Do you follow what I am saying? Can we rely 
upon this network of countries that we trust to enforce to 
capture all of the shipping just because it is international 
and, by definition, sooner or later they go through a 
jurisdiction which does enforce?
    Mr. Butler. Senator, I mean, this is probably the most 
critical question with respect to this regulation at this point 
because both from the standpoint of sending the right signals 
to markets--the more people that comply, the higher the 
compliance rate, the more clear signal you'd get from the 
demand side and the better response you'd get from the supply 
side.
    Speaking of the IMO----
    Senator Cassidy. Well, I have limited time. My specific 
question with international shipping routes being what they 
are, what is the likelihood that any ship could escape the 
jurisdiction of a country that, by golly, we know is going to 
enforce this standard?
    Mr. Butler. The likelihood of escape, so long as the 
signatories to this convention enforce, the likelihood that a 
ship can escape is quite low.
    Senator Cassidy. Now some of those countries may have 
signed, but we don't trust them. Just the countries that we 
trust, how much do we think that they are going to be able to 
enforce this?
    Mr. Butler. Well, I have to ask you to define that 
universe, but this is where I was going a minute ago which is, 
it's critical that countries like the United States and other 
developed countries that already have experience in enforcing 
the emission control areas the way we do in the U.S. and 
Canada, that we keep this enforcement issue on the front 
burner.
    Senator Cassidy. Great, thank you.
    Thank you, Madam Chair.
    The Chairman. Thank you, Senator Cassidy.
    Senator Manchin.
    Senator Manchin. Thank you, all. I appreciate very much you 
enlightening us on this matter. We discussed there are three 
main methods the marine fleet can utilize to meet the new IMO 
regulations, including switching to lower-sulfur fuels, using 
cleaner alternative fuels and LNG or biofuels. Which one do you 
think is the most cost-effective and what adjustments will need 
to be made?
    I have a follow-up question to you, you might want to think 
about. I am old enough to remember when basically unleaded gas 
came on to the market. All the engines had to be, kind of, 
retrofitted, catalytic converters, not that they even talked 
about biofuels and ethanol and all that.
    What adjustments, I mean, what cost of adjustments are 
there? Are they going to be fighting back, pushing back? Have 
they made those adjustments? Looked into what engine 
adjustments are needed rather than retrofitting? A gasoline 
engine can be retrofitted to LNG. Can a diesel fuel engine be 
retrofitted to LNG? Does anybody know those answers? Do we have 
any engine experts here?
    Mr. Morgan. I believe that LNG would require a new engine.
    Senator Manchin. A new engine.
    Mr. Morgan. Yeah. But the, I think, you know, every harbor 
will have a competitive marketplace for the fuels. We're seeing 
an introduction in a lot of these ports of a very low-sulfur 
fuel oil.
    Senator Manchin. Which one do you think they are going to 
switch to?
    Mr. Morgan. I think a lot of it will be very low-sulfur 
fuel oil and that will be green gas oil which is more akin to 
like a diesel.
    Senator Manchin. That would be the cheapest way----
    Mr. Morgan. So there would be some that go a more diesel-
like route and some that go to a fuel oil route that's just 
lower-sulfur that, I think, we've seen a number----
    Senator Manchin. And we touched on the enforcement, you 
know.
    Mr. Morgan. Yeah, I think----
    Senator Manchin. The only thing we can enforce is what is 
coming into our ports, correct?
    Mr. Morgan. That's right. Each country is responsible for 
enforcing it in their ports.
    Senator Manchin. Their ports.
    Mr. Morgan. In their ports or that and the flag state also. 
So if a ship has a flag of a certain country, that flag state 
can also enforce the measure. So it's both port states and flag 
states that enforce the measure.
    Senator Manchin. And you believe that we will be prepared 
starting next month?
    Mr. Morgan. Yes. The professionals at the U.S. Coast Guard 
have already been enforcing the ECA, so the Emission Control 
Areas, that's actually much lower than this new proposal in our 
waters and their enforcement is world class and is looked at as 
a model around the world. So we will definitely be ready.
    Senator Manchin. I had one other question. The emissions, 
EIA reported emissions from 2018 went up for the first time 
since 2014. It is primarily due to higher natural gas emissions 
from more extreme summer and winter weather and transportation-
related petroleum emissions. Does the EIA expect high emissions 
to continue in 2019 as they have in 2018, and can you discuss 
the outlook for natural gas deployment and what implications 
that might have for emissions?
    Dr. Capuano. You're referring to the fact that EIA had 
forecasted rising emissions of 2.7 percent in 2018?
    Senator Manchin. Yes.
    Dr. Capuano. We expect that U.S. energy-related carbon 
dioxide emissions will decline by 1.7 percent in 2019 and 2 
percent in 2020.
    Senator Manchin. That is attributed to what?
    Dr. Capuano. That lower forecast energy consumption in 2019 
and the demand, lower demand, in space cooling and the weather. 
Those are the major factors.
    Senator Manchin. Okay.
    Of course, we talked about the refineries. You think there 
is not going to be a shortage? You think we are able to meet 
those demands----
    Mr. Morgan. Yes, indeed.
    Senator Manchin. ----and be able to ship this low-sulfur 
fuel that is basically refined in America right now, the United 
States, to these other ports?
    Mr. Morgan. Yes, I think on two fronts the United States is 
well-positioned. On the upstream side for crude oils, the crude 
oils produced in the United States are lower in sulfur and so, 
all things being equal, will be more valuable on the world 
market for refiners that are not as complex and need to start 
with the lower-sulfur level in order to make the products that 
are in demand.
    And then also on the refining side, because our refining 
sector is so complex and flexible, we can take a variety of 
feedstocks, including higher-sulfur fuels and we can turn that 
into lower-sulfur products.
    Senator Manchin. Have you seen any movement whatsoever? 
Have they stockpiled right now so some of the countries in some 
of the ports which have a lot of activity from importing and 
exporting, have they started bringing in this lower-sulfur fuel 
to meet this type of demand? Have you seen that type of 
transaction?
    Mr. Morgan. Yes.
    Senator Manchin. Going back to the United States because we 
are the one main supplier right now, correct?
    Mr. Morgan. We are a very important supplier in the world 
market, certainly. And exports have been increasing, especially 
distillate fuels and ports are getting prepared to have the 
stockpiles on hand of both low-sulfur fuel oil and in some 
cases, marine gas as well.
    Senator Manchin. Thank you, Madam Chair.
    The Chairman. Thank you. I appreciate the discussion about 
the enforcement piece of it, because while we have had these 
ECA standards in place and, as you point out, the U.S. Coast 
Guard has been good, as they are, in making sure that those 
standards are being met. I do appreciate that this is now going 
to be a step up, whether for the U.S. Coast Guard or for EPA on 
enforcement.
    I wrote a note to myself making sure that we are checking 
in with the Administration to make sure that from a budget 
planning perspective going forward they are factoring this in 
to that expanded mission set there.
    I appreciate, again, I think the, not the optimism, but, 
kind of, the reality check that the sky is not falling. We are 
moving forward. The clarity of these standards has been very, 
very important, not only here in this country but around the 
world, globally. We are going to see better, greater 
environmental positive impact and that is very, very important. 
But it seems that every one of you has had, kind of, little 
asterisks about the overall negative impact. It is going to be 
fine, except for those, perhaps, remote locations.
    Director Capuano, you mentioned the smaller more remote 
ports might have logistical issues. It has been suggested that 
in some of the areas, such as Alaska or Hawaii, that rely more 
on diesel, you know, and if we're not, if it is not maritime 
fuel, it is aviation fuel for us. And so, a couple questions, 
and this is directed to you, Administrator.
    You have mentioned that you are going to be doing 
continuous monitoring on this which we appreciate. I think you 
actually said, monthly, which is great. I am curious to know to 
what extent you actually narrow it down to focus on some of 
these more remote and rural areas in the country--Alaska, 
Hawaii--that have the potential to be more negatively impacted 
because of our high transportation costs that will be impacted?
    Dr. Capuano. The current EIA data collection does not go 
down to the state and the port level, to the smaller ports. 
However, we do monitor the trade press. As I said, we will be, 
we pay attention to the IMO each month now. And so, if we start 
to see something changing within a specific area as a result of 
communications through the trade press, we will then go 
investigate it and it would be something that we could talk 
about as a special issue. But it's not something that we 
routinely collect.
    The Chairman. Well, we want to really try to understand. 
And again, the reason I raise this, the reason I am asking is 
not because we want to back off of this, but again, we have 
some very, very challenged parts of the country and we want to 
be able to figure out how they move forward in a way that is 
not going to damage their very, somewhat fragile economies.
    Mr. Morgan, let me ask you. Have you assessed the regional 
refining capacities individually, the refineries that supply 
places like Alaska and Hawaii and other remote and rural parts 
of the country? Are you convinced that they too are ready for 
the implementation?
    Mr. Morgan. As you mentioned, there are some challenges, 
especially getting fuel into Interior Alaska. It's an expensive 
proposition. Alaska has five refineries and produces the bulk 
of the needs for Alaska. Some additional fuel is imported, 
especially from Washington State and some other locations. I 
don't believe that the IMO specification will present a 
significant additional challenge to the challenges that already 
exist.
    One factor is that home heating oil sulfur specifications 
in Alaska are actually, haven't been reduced like they have 
been, for example, in the Northeast United States where it's on 
par now with on-road diesel. And so, actually, the sulfur in 
home heating oil in Alaska will allow a little bit more 
flexibility in the short-term. And so, I think that the 
challenges that have always been there will continue to be 
there, of course, but Alaska's five oil refineries are prepared 
for this.
    The Chairman. We are actually not at five anymore, but that 
is, kind of, a sad story.
    What about AV gas, aviation?
    Mr. Morgan. Same. The refineries in Alaska produce the bulk 
of the aviation fuel. It's actually higher than the gasoline 
fuel demand, as you know, there, and diesel is higher still. So 
I assume that that product mix, of course the individual 
companies will make those decisions, but I assume it'll 
continue to remain at the same level to meet the demands in 
Alaska.
    The Chairman. Let me ask a question to you, probably, Mr. 
Butler. The considerations that a shipping company would make 
in determining do we install the scrubbers? Do we move to an 
LNG retrofit? And I appreciated your example, your visual, Mr. 
Webster, about 350 miles of ships waiting to have scrubbers 
installed. That says to me that we have a backlog here in terms 
of our capacity, whether it is to build out LNG vessels and we 
know that we have some that are being built for the Alaska 
trade. We have seen one, a couple, that have gone out to Puerto 
Rico. We would love to see more of these coming on, but we have 
shipbuilding capacity that, I think, is limited.
    How much of a factor is the capacity to do the build-out to 
more LNG-powered vessels, the ability to move quickly with the 
scrubber installation or the factors that are under 
consideration by the shipping companies?
    Mr. Butler. So there are quite a number of factors with 
respect to each of those decisions. Maybe I'll cut to the end 
first and then work backward.
    The Chairman. Nice.
    Mr. Butler. And that is, we expect that well over 80 
percent of the compliance will come from burning one type of 
low-sulfur fuel oil or the other.
    The Chairman. Okay.
    Mr. Butler. As Senator Manchin said, he had a couple of 
statistics on projections with respect to scrubbers and LNG and 
there will be increased penetration of those technologies in 
the short-term, but they're not going to make up anything like 
the bulk of the compliance option. It's simply a matter of 
what's available and the cost and the disruption involved with 
retrofitting to some of the other technologies.
    Some folks like scrubbers. Some folks don't. There are some 
operational challenges associated with scrubbers and then a lot 
of people are looking at this and saying, well, I see a cost 
benefit if the spread between low-sulfur and high-sulfur fuel 
oil stays high for a long time. I get a payout from the 
scrubber, but if that differential shrinks in a fairly short 
order, maybe it's not worth taking that step.
    The Chairman. Thank you.
    Let me turn to Senator Heinrich.
    Senator Heinrich. Ranking Member Manchin asked a good 
question which is, can you convert diesel over to liquid 
natural gas? And the answer is, yes. There are some 
complications there because diesel uses compression ignition 
whereas liquid natural gas does not so you have to introduce 
some sort of an ignition source or you can just use a very 
small amount of diesel which then, it will compression ignite.
    The Chairman. It is so good to have an engineer on the 
Committee.
    Senator Heinrich. You can convert those things over. And I 
think it is important for this discussion because we have to 
realize, sort of, where we----
    Senator Manchin. [off mic]
    Senator Heinrich. ----uh, no, but if you look it up on MIT 
Technology Review, you can read all about it.
    It is important for this discussion because we have been 
burning tar for a long time for maritime applications. When we 
talk about fuel oil, bunker fuel, 3.5 percent sulfur, none of 
us would allow a power plant in our hometown to burn this 
product because it is, kind of, what is left over after all the 
other good stuff comes out of the refinery process.
    It is helpful to understand in context that makes 
international maritime shipping the sixth largest emitter of 
greenhouse gas as if it were a country. It is a bigger source 
of greenhouse gases than Germany. That doesn't take into 
account carbon black or black carbon which we used to call 
soot. Sounds a little fancier, black carbon, but that has an 
incredibly disproportionate impact on things like snowpacks in 
the West and melting sea ice in the Arctic.
    So we have a long way to go here beyond just looking at the 
0.5 percent. But I am curious, Mr. Butler, what the World 
Shipping Council is doing, in addition to the work on sulfur 
that we are discussing today, to reduce your CO2 
pollution levels and to look at the impact of black carbon in 
shipping?
    Mr. Butler. Starting with the CO2 question. This 
is following the carbon, or the sulfur discussion at the 
International Maritime Organization. The Marine Environment 
Protection Committee at IMO is, they can ``walk and chew gum.'' 
They do a lot of things but carbon emissions is very much top 
of the agenda right now.
    Senator Heinrich. What are, specifically, your trade 
organizations? What are you doing to lead upfront?
    Mr. Butler. Well, next week we're going to be, along with 
most of the other trade associations that have observer status 
at the IMO as we do, we're going to be making a quite detailed 
lengthy proposal urging the IMO to set up a new research and 
development body to--funded by a fee on each ton of fuel 
burned--to look at the question of what are the fuels of the 
future because, as I'm sure you know, we have an IMO standard 
that calls for a 50 percent absolute reduction in carbon 
emissions by 2050.
    Senator Heinrich. 2050.
    Mr. Butler. We can't get there with existing technology.
    Senator Heinrich. What is the differential in terms of 
carbon emissions from bunker fuel today switched over to 
natural gas?
    Mr. Butler. Well, there's a lot of debate about that. At 
the point of combustion there is a benefit to natural gas. 
There is a debate going on about the life cycle emissions of 
greenhouse gases with respect to those two fuels.
    Senator Heinrich. With respect to methane? Is that what you 
are referring to?
    Mr. Butler. That's part of it, yup.
    Senator Heinrich. Yes, well that is an issue of whether or 
not we capture methane. So we need to start capturing methane. 
But within the shipping industry what is the increment from 
bunker fuel down to natural gas?
    Mr. Butler. Well, I think it's looked at, at point of 
combustion, as probably 25 percent improvement.
    Senator Heinrich. Okay.
    Mr. Butler. If you have efficient combustion.
    Senator Heinrich. Right.
    Mr. Butler. Because there's a question there.
    Senator Heinrich. It is also worth noting that liquid 
natural gas emits almost zero black carbon. So that is an 
additional benefit to getting some of these conversions in the 
pipeline.
    Ms. Capuano, do you, or actually, Mr. Webster, what do you 
estimate is a current payback period for conversion from fuel 
oil to liquid natural gas? Do you know what those figures are?
    Mr. Webster. Yeah, we didn't look at that. We looked at how 
much it would be for a scrubber at current rates.
    Senator Heinrich. Okay.
    Mr. Webster. Which is between two and three years, 
depending on what the spread is, but the spread right now, it's 
quite short. So, going back to Senator Manchin's question, so 
if you wanted to pick the best, kind of, option today----
    Senator Heinrich. It would be?
    Mr. Webster. ----the scrubber in many ways is that best 
option and then longer-term----
    Senator Heinrich. And scrubbers would remove black carbon 
as well as sulfur, correct?
    Mr. Webster. I believe so. You said that, Senator, yeah, 
yeah.
    The Chairman. Thank you, Senator Heinrich.
    Senator Hirono.
    Senator Hirono. Thank you, Madam Chair.
    For Mr. Butler, Hawaii depends on international maritime 
shipping to meet our needs more than any other state. So in 
Hawaii the two largest shipping companies have both announced a 
three percent fuel surcharge to their shipping customers to 
cover the costs of the change to lower-sulfur fuel which is 
lower than what some consumers in Hawaii had feared earlier 
this year. The companies are investing in new ships as well as 
scrubber systems for their older ships that will let the older 
ships continue to use the higher-sulfur fuel.
    What has guided the decisions by your member shipping 
companies decisions on whether to use low-sulfur fuels in their 
ships versus installing a scrubber to continue burning high-
sulfur fuels? Is----
    Mr. Butler. Well, again, a lot of it depends on, there are 
any number of factors that go into it. Some folks, as an 
operational matter. I mean, scrubbers, depending on the size of 
the ship, they can take up a significant amount of space on the 
ship. So, as an engineering matter, if you have room in the 
engine room and engineering spaces, that's always a question as 
to whether you can actually do it.
    And then there are questions of cost tradeoff. And I think, 
you know, that's always, as with any technological bet, that's 
always an educated guess because we don't know in the future 
what the cost of the low-sulfur fuel is going to be. You talk 
to folks like those to my left, you get their best opinion 
about what the markets are going to do and then you make that 
cost decision based on what your ships look like, what your 
trading profile looks like.
    Senator Hirono. I think you testified that most of your 
memberships will burn the lower-sulfur fuels rather than going 
to scrubbers.
    Mr. Butler. Everything we see is that the vast majority of 
the vessels will indeed comply----
    Senator Hirono. Using the----
    Mr. Butler. ----by using the lower-sulfur fuel.
    Senator Hirono. And then, I had a subsequent question, 
which I think Mr. Webster may already have responded to. How 
long are your members expecting to need to recoup the 
investments that they are making to comply with the rule? I 
suppose an investment is installation of scrubbers.
    Mr. Webster testified that it would maybe, it would take 
two to three years to recoup the investment in a scrubber which 
doesn't seem that long a timeframe to recoup.
    Mr. Butler, would you like to comment?
    Mr. Butler. Well, I think maybe those--as a trade 
association we don't have specific analysis on that. A lot of 
it depends on the individual situation, but I have heard that 
sort of a number based on certain assumptions about a continued 
spread between high-sulfur and low-sulfur fuel. But again, at 
the end of the day it depends on, in two or three years, what 
that spread is.
    Senator Hirono. So, for Mr. Butler, again. Do you agree 
with Mr. Webster that price increases for consumers will likely 
not be significant given the small share of shipping in the 
total product price?
    Mr. Butler. I think, as a broad matter, that's probably 
correct. When you look at the price increase directly to the 
vessel operators, the carriers, it's substantial because it 
hits in one place. By the time that increase is spread out 
across the value of the cargo on that ship, it's quite 
diffused.
    Senator Hirono. So, Mr. Webster, do you think that because 
you can spread out the cost of compliance to the total, you 
know, products being shipped, would that apply to a place like 
Hawaii that has a particularly high reliance on shipping to 
meet our needs?
    Mr. Webster. Senator, thank you for the question.
    We haven't examined Hawaii, specifically, but our view on a 
global basis is that it should be quite small in terms of how 
that goes across. There was one analysis by Flexport which 
stated that each television would be, at even a large spread, 
would be about $0.50 more per television next year. Obviously 
televisions also go down about 17 percent a year. So it's quite 
small.
    Senator Hirono. That is good to hear because there have 
always been concerns that somehow or other the shipping to 
Hawaii and the Jones Act adds so much to the cost to consumers 
and, frankly, it does not. And so neither will this particular 
change.
    So, for Mr. Nerurkar, I think you talked a little bit about 
the public health benefits and environmental benefits of this 
2020 rule. Could you just talk a little bit more about the 
benefits to both health and environmental benefits of this 
lower-sulfur fuel?
    Mr. Nerurkar. Sure. There was a study in the Journal of 
Nature last year that shipping emissions contribute to about 
400,000 premature deaths and also 14 million cases of asthma 
and that the implementation of the 2020 standards would reduce 
that by 34 percent and 54 percent respectively.
    Senator Hirono. What is the study you are referring to?
    Mr. Nerurkar. It's in the Journal of Nature.
    Senator Hirono. Journal of Nature.
    Mr. Nerurkar. Yeah.
    Senator Hirono. What issue?
    Mr. Nerurkar. In my prepared comments link.
    Senator Hirono. Oh.
    Mr. Nerurkar. And I'm happy to send----
    Senator Hirono. Thank you. Thank you very much.
    Thank you, Madam Chair.
    The Chairman. Thank you, Senator Hirono.
    Senator King.
    Senator King. I apologize for being late. I think I may 
recover some ground. I hope not to take too much time.
    I guess one question, Mr. Butler, is there sufficient 
refining capacity to produce the amount of low-sulfur fuel that 
we are going to see demanded within the system?
    Mr. Butler. The short answer is yes. I would defer to Mr. 
Morgan on the refining capacity, but whereas and this was 
brought up earlier in the hearing, whereas a couple of years 
ago there were real questions, I think, about whether refiners 
in the end would step up with the investments necessary to 
produce this fuel, what we're seeing now is much more 
encouraging.
    The other thing I would mention that hasn't come up yet 
today is that there are already ships on the water burning the 
low-sulfur fuel today because it's, you know, you don't fill up 
every three days at the gas station with these vessels.
    Senator King. Right.
    Mr. Butler. So we're already in the implementation phase.
    Senator King. Mr. Morgan, you concur that there is not 
going to be a bottleneck here?
    Mr. Morgan. Yes, I do. The United States, in particular, 
has some room, as Administrator Capuano has talked about, to 
increase utilization rates. In addition, because our refineries 
have additional complexity, they'll be able to use those 
complex pieces of the refinery to produce more low-sulfur fuel.
    Senator King. Mr. Butler, and I think Senator Cassidy may 
have touched on this, you are expecting international 
compliance as well as the U.S.? You don't see this as us doing 
something that nobody else is doing?
    Mr. Butler. No, Senator. I don't see us as being the only 
ones enforcing. With that said though, the U.S. has in the past 
had a leadership role in terms of enforcement and with this 
regulation perhaps more than many others that we have seen 
coming out of the IMO, that enforcement piece is simply 
critical.
    This is not a situation where regulation says to a ship 
owner, you have to install a particular piece of equipment, 
something like that. This is 24/7/365. It's an operating 
requirement. And so, it will require diligence by governments 
around the world.
    Senator King. And do these regulations apply to cruise 
ships as well as transport?
    Mr. Butler. They do.
    Senator King. All major shipping.
    Mr. Webster, can you give us a, sort of, percentage or 
technology breakdown between low-sulfur fuel scrubbers and LNG? 
Which is best? Forget about price for a minute, but just what 
do the technologies tell us?
    Mr. Webster. Um, so, in terms of best, that's a difficult 
question, as has been highlighted by some of the other 
witnesses.
    I would say for installing a scrubber, it's around, right 
now, around $4.7 million, approximately. That number has been 
coming down, but your operational----
    Senator King. But low-sulfur fuel requires no new 
equipment, is that correct?
    Mr. Webster. That is correct.
    So it's effectively a choice between do I want to spend 
CapEx or do I want to have a higher operating expense with the 
addition----
    Senator King. The assumption is the low-sulfur fuel will 
cost more, is that correct, Mr. Morgan?
    Mr. Morgan. Yes, it typically has, historically and 
requires additional, usually it requires additional processing 
in a refinery.
    Senator King. Can you give us a--it will increase the price 
that is being paid now by five percent? Ten percent? Two 
percent?
    Mr. Morgan. Well, the current, there are current spreads on 
the market and the low-sulfur fuel oil has trended above marine 
gas oil which would be, kind of, the two low-sulfur varieties 
and both of those are above what the high-sulfur fuel oil is 
now.
    Senator King. Right.
    Mr. Morgan. The way----
    Senator King. Can you give me a number, I mean, I am just 
trying to get a ballpark. Is it----
    Mr. Morgan. I'll be happy to provide that to you 
afterwards, yes.
    Senator King. Thank you.
    Mr. Morgan. They definitely change daily and in different 
locations are different prices for sure, but they are a bit 
more expensive. There are environmental benefits, obviously, 
that come along with that, but definitely having cleaner air 
does cost money.
    Senator King. Sure. And we didn't get Mr. Webster to LNG. I 
take it that would, well, I know you had the discussion with 
our resident engineer, Senator Heinrich. What kind of 
conversion requirements would be necessary to use LNG?
    Mr. Webster. So we think a retrofit would cost around $20 
million and a new ship about 20 to 40 percent more than a, kind 
of, conventionally-fueled ship, at present. I will say as you 
go down the experience curve, those numbers will, of course, 
come down.
    And you mentioned cruise ships before. So cruise ships have 
been the ones that have shown the most interest in both 
scrubbers and looking at LNG, obviously, as they go into ports 
that are monitoring those sorts of emissions.
    Senator King. Thank you. Very informative hearing. I 
appreciate all of you being here.
    Thank you, Madam Chair.
    The Chairman. Thank you, Senator King.
    It has been. It has been very interesting. You know, I 
think about what we are seeing in our state and I listened to 
Senator Hirono's questions. I mean, we are two states that are 
certainly entirely reliant on shipping and air. We do get some 
that is across the Canadian border after a couple thousand 
miles, but the vast majority of what we receive in our state 
comes to us through shipping. And it's not just our fuels, it 
is the plywood that you build with and it is our food source, 
85 percent of our food to the state.
    Senator King. Well, if you tip the globe just right and 
draw the map, you are not remote at all, necessarily.
    The Chairman. We are not remote. We are in the center of 
the universe and you know that.
    Senator King. Yes.
    The Chairman. But it is that center that is still 
surrounded by a great deal of water. We have watched with great 
interest as the industry has changed. The requirements that we 
saw through the ECA requirements and the standards for the 
cruise ships that were coming in. We have seen companies, 
Saltchuk has been a very early leader in terms of working to do 
LNG conversion. That is going to be significant for us.
    But when you still have so many communities that are 
reliant on diesel generation for the operation of their 
communities and that diesel has to come up from the Lower 48--
it has to be transferred to a barge that goes upriver several 
hundred miles and you are hoping that the water is high enough 
because otherwise you might only be able to get a barge in 
there once a year. The logistics that you speak to that we 
worry about, that could take what was otherwise just modest 
price increases and, in a region, have impact that is more than 
just modest. These are the things that I am interested in 
following and understanding and we appreciate, again, the level 
of monitoring.
    The issue that was raised about compliance. Global 
compliance is something that, I think, we all should be 
attentive to as well.
    I want to ask one last question, and I will throw it out 
there to any one of you.
    So when we had this, some of this discussion in February, 
there was a great deal more concern and I think it was you, Mr. 
Nerurkar, who said that ClearView had not been as concerned as 
some of the others in terms of what the potential price impacts 
may be. So we are sitting here now. This is December. Did the 
others just misread it? Have the refineries been working double 
time to get ready for this? Has there just been an awareness 
that, look, there are not going to be any waivers granted so we 
better get into the game here? What has happened between 
February and now that allows you to have this level of 
certitude with what you are sharing with us?
    And I throw that out to any of you.
    Mr. Nerurkar.
    Mr. Nerurkar. I think there have been two main factors that 
have caused this dynamic. The first is that we were looking at 
the broader oil market picture and some concerns about global 
economic growth and trade tensions that might slow oil demand 
and make the transition easier. The second factor is that we 
were looking at the capacity for the refining sector to adjust, 
and that might have been underestimated.
    And so, what we're seeing now is the transition is, kind 
of, getting to its peak is that, if anything, refiners are 
providing more of this very low-sulfur fuel oil than might have 
been expected and things are going more smoothly than people 
might have thought a year, two years ago.
    The Chairman. And I think one of you mentioned that one of 
the things that has helped has been the clarity of the 
standard, the certainty that this is the standard that we are 
going to, this is the date that we are going to and this is it. 
There is not a lot of grey or nebulous matter there. I am 
assuming that has helped. Sometimes we don't set standards with 
very clear certainty.
    Any other comments on what has changed between February and 
now?
    Mr. Webster.
    Mr. Webster. One other that I would say, Senator, is the 
amount of scrubbers that are getting put in. There really has 
been this real interest in suddenly putting them in and lots of 
companies looking at that are looking at, kind of, a hedging 
mechanism and saying, we're not quite sure what the prices are 
going to be so we're going to put in say, 10 or 15 percent of 
our ships with scrubbers. And that's why you're seeing so much 
of a backlog of those that are getting scrubbers. And of 
course, if you have a scrubber you don't need to have this new 
compliant fuel.
    The Chairman. Right, right.
    Mr. Butler, were you going to weigh-in there?
    Mr. Butler. The only thing that I would add is I think 
it's, part of it, is simply a function of as you get closer to 
a deadline like this, the commercial negotiations really kick 
into high gear. And so, you have a lot more information flowing 
in the market about supply and demand.
    Two years ago, we were hearing that it was hard for our 
members to get good information from their fuel suppliers about 
what this might look like because everyone was still trying to 
figure it out. When you get to the point of saying, well, I'm 
going to start needing deliveries in Q4, Q3/Q4 of 2019 and you 
have to talk about price and where is this fuel going to be, 
it's a much more concrete discussion and I think that's also 
been part of it.
    The Chairman. Yes, it becomes real.
    Mr. Morgan.
    Mr. Morgan. Yeah, I would echo a lot of what has been said 
and the refining industry has really positioned itself well, I 
think, here with the complexity for sure and also the 
competition. We, there is competition between and among the 
different companies that are members, for example, to provide 
that best solution and to provide it on a scale that is helpful 
for, you know, some of John's members and other shippers as 
well.
    And a lot of that can't really be discussed in a public and 
open way because people are competing against each other to 
provide that need. And once again, the engineers and 
professionals in the refining industry, I think, have done a 
good job to make sure that the fuels that are needed are gonna 
be there.
    The Chairman. Very good.
    Senator King, any follow-up?
    Thank you very much. We appreciate the discussion here this 
morning and your very sound efforts to make sure that we are 
current and up-to-date with this as we go into this new year 
with these new standards that, I believe, will be the right 
thing from an environmental perspective, certainly, and it 
sounds like it is not going to hurt the jobs and the economic 
benefits that we will see here in this country. We want to keep 
an eye on price because at the end of the day that is what 
really matters to a lot of those folks that are in some pretty 
remote areas and are paying high costs anyway.
    So we will keep an eye on this, but thank you for what you 
are doing to help educate and inform the Committee.
    With that, we stand adjourned.
    [Whereupon, at 11:20 a.m. the hearing was adjourned.]

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