Reason to Rush Into Cleaner Fuels

Much of the burden of the Clean Air Act recently enacted by Congress will fall on oil refiners, who must embark on a major and costly reformulation of gasoline.

Until now, oil companies have hoped to avoid this burden, or at least to soften the blow. Now that legislation is in place, it’s becoming clear what must be done to meet the letter of the law--and, more important, what opportunities exist in a changing business environment.

The drive for cleaner fuels will mean that oil refiners can profit if they reformulate before their competitors do. It is also likely to bring new opportunities to natural gas and electric utility companies, not to mention entrepreneurs and investors.

The reformulation ahead represents the most significant change in fuels since unleaded gasoline. To produce cleaner gasoline, new hardware must be installed in refineries to reduce levels of objectionable compounds and toxins and to add oxygenates for leaner combustion and lower carbon monoxide emissions.

It will be costly. By the year 2000, domestic refiners will need to invest from $10 billion to $22 billion. This investment will raise gas pump prices by about a nickel a gallon. But the prospects are not nearly as dire as some industry lobbyists have predicted.

Companies that respond quickly to the changes ahead can gain a competitive edge.

The Clean Air Act mandates that gasoline sold in nine metropolitan areas--including Los Angeles, San Diego, New York and Chicago--undergo reformulation in phases, beginning in 1995. The shift in marketing patterns will be far-reaching.

Although on paper the law affects only certain regions, in practice it is likely that gasoline sold in most areas of the United States will be reformulated by the decade’s end.

Logistics is one reason.

Terminals supplying reformulated gasoline to a legislated region typically also supply bordering areas.

Furthermore, many city and state governments are likely to extend the federal standards to their areas.

Competition, too, will drive change. Companies are already realizing that reformulated gasoline offers excellent product differentiation in an age of environmental awareness.

In California, Atlantic Richfield is adding to market share by promoting and selling a form of cleaner gasoline.

Marathon, Phillips and Conoco market their gasoline in the Midwest, largely in cities not covered by the law.

Yet these companies are already positioning themselves by selling reformulated gasoline in cities such as Denver, St. Louis and Detroit.

Consumers in these cities, not lawmakers, are the force behind this marketing strategy.

Among domestic refiners, the likely winners will be those who quickly reformulate, differentiate their products and stake out their markets.

They can reap profits in the next few years. Some companies may back out of regions where they are not strong.

Overall, the competition and marketing changes brought by reformulation will contribute to the current trend of industry consolidation.

Because foreign suppliers are unlikely to meet U.S. reformulation standards, at least for a few years, the resulting drop in gasoline imports should favor domestic refiners.

Reformulation may also benefit U.S. auto makers, who are hopeful that the more uniform compositions of gasoline will make it somewhat easier for them to design vehicle improvements to further reduce tailpipe emissions.

In the next 10 to 15 years, the role of alternative fuels will likely be limited to a small share of fleet vehicles, such as urban buses, delivery trucks and government and company vehicles.

Methanol is often mentioned as an alternative fuel, but it appears more likely that compressed natural gas (CNG) will be the choice for safety, operational and cost reasons.

A variety of suppliers could market CNG, most notably local gas companies. Entrepreneurs could also play a role in marketing CNG.

Amoco has announced that it will introduce CNG refueling stations at some locations to take advantage of its vast natural gas reserves.

In the long term, electric fleet vehicles appear to be an attractive answer to emissions problems in polluted areas. Milk trucks in London now run on electricity. However, such vehicles need to improve operating range and efficiency.

If cost-efficient electric vehicles are introduced, the winners would be electric utility companies.

Although new fuel requirements may be difficult and costly, those who successfully take up the challenges of reformulation and cleaner energy will be rewarded.