API sees ultra low sulfur rollout challenges

NEW YORK (Reuters) - The transition to ultra low sulfur diesel next month is likely to run into "speed bumps" along the way, the head of a trade group representing the largest U.S. energy companies said on Monday.

Under the new rules, refiners and importers must cut sulfur content in highway diesel from the current 500 parts per million to 15 ppm starting in June, with ultra low sulfur diesel required for all on-road diesel vehicles starting with the 2007 model year.

"Every time you introduce a change of this magnitude, there's always a couple little speed bumps in the road because you're talking about a very complex system," Red Cavaney, chief executive of the American Petroleum Institute said at the Reuters Global Energy Summit in New York.

Some energy experts are concerned the switch could cause similar supply disruptions to those seen for gasoline in recent weeks along the East Coast and in Texas as the industry removed the water-fouling additive MTBE and replaced it with ethanol.

"We're producing a lot less (ultra low sulfur diesel) than what we're going to need to," John Felmy, the API's chief economist, said at the summit.

U.S. refiners produced about 270,000 barrels a day of ultra low sulfur diesel last week, less than the average of about 2.4 million barrels required for June 1 through December 31, Felmy noted.

Since diesel meeting the new specification will be required at retail stations and wholesalers only in the fall, Felmy said "there will be adequate supply by that time because nothing needs it right now except for maybe some inner city fleet buses."

Cavaney also said the Environmental Protection Agency "seems pretty convinced that there are enough refineries who have made the commitment to this that there's going to be (enough) supply."

The industry has spent $8 billion on capital improvements to meet the new specifications, according to the API.