ML20093F355

Testimony of CA Szabo Re Lilco Dependence on Oil for Fuel. Prof Qualification Statement Encl

ML20093F355
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Site:	Shoreham File:Long Island Lighting Company icon.png
Issue date:	07/16/1984
From:	Szabo C LONG ISLAND LIGHTING CO.
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ML20093F343	List: ML20093F339 ML20093F345 ML20093F348 ML20093F352 ML20093F355 ML20093F359 ML20093F363
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Text

LILCO, July 16, 1984 f~'}

U UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION Before the Atomic Safety and Licensing Board In the Matter of )

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LONG ISLAND LIGHTING COMPANY ) Docket No. 50-322-OL-4

) (Low Power)

(Shoreham Nuclear Power Station, )

Unit 1) )

TESTIMONY OF CORNELIUS A. SZABO ON BEHALF OF LONG ISLAND LIGHTING COMPANY

- r"T : Q.1. Please state your name and business address.

.V A. My name is Cornelius A. Szabo. My business address is 175 East Old Country Road, Hicksville, New York 11801.

Q.2. In what capacity are you employed?

A. I am Manager, Resource Evaluat:on for the Long Island I Lighting Company (LILCO). Since joining the company in 1981, I have also held the positions of Manager of Fos-sil Fuel Procurement, Manager of the Fuels and Chemical Division and Administrative Assistant to the Vice Pres-ident - Purchasing and Stores. I am responsible for projecting oil and coal prices and availability, and

.-s have testified as LILCO's expert witness in these l

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t O areas.. In fulfilling these responsibilities, I spend a substantial portion of my time tracking oil-related supply and demand trends and oil-related commercial and technological developments.

Q.3. -Please describe your educational background.

A. My; professional qualifications are being offered into evidence as~ Attachment 1 to this testimony. To briefly summarize my educational background, I earned a Bache-lor of Chemical Engineering degree from Manhattan Col-lege'and was awarded the Prutton Medal for the out-b .

standing chemical engineering graduate. I earned a Master.of Science degree in Chemical Engineering from Columbia University, where I was a National Science Foundation Fellow.

Residual oil'(the primary fuel used in LILCO's steam

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generating stations) is manufactured via chemical engi-neering technology, and'my comprehensive chemical engi-neering' education provides insight into the economics ,

and availability of residual oil. supply. Specifically, and as is discussed later, petroleum refiners, and par-ticularly U.S.. refiners, are-investing billions of dol-

-lars in chemical-engineering-based processes to convert

. residual oil to higher-valued products. This trend of j converting residual oil to higher-valued products is l

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decreasing the availability of residual oil, and in particular, residual oil derived from domestic crude oil.

- Q . 4.- Please describe your professional experience.

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- A. I was: employed for eight years in the petroleum indus-

.try with Mobil, Exxon and Shell in both marketing and planning related functions. I was a management consul-tant for ten yearr., and was. designated a Certified Man-agement Consultant by the Institute of Management Con-

.sultants. As a consultant, my clients' included utilities in thirteen states, federal energy agencies

)' and investment bankers involved in the financing of coal and petroleum projects. I conducted eight utility fuel-related management audits. I also served as_a

. consultant-to the state public service commissions of Connecticut, Delaware, Georgia, Massachusetts, New York i

and Pennsylvania in the areas of fuel procurement, sup-ply and' prices.

i-p Specifically relevant to my testimony in this proceed-ing are my eight. years of petrolsum industry planning and marketing-related experience. That experience pro-L.

vided me valuable insight into the market strategies and tactics employed by the world's fuel suppliers.

Furthermore, in 1977 I conducted a special management

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audit for the Boe.rd Chairman of the. Arabian American Oil-Company ("ARAMCO"). ARAMCO is the world's largest oil producing company and produces over 90 percent of Saudi Arabia's oil. Saudi Arabia is the world's largest oil exporter as well as one of the largest sup-pliers of imported oil to the United States. Saudi Arabia, with up to ten million barrels a day of spare installed oil production capacity, is the world's lead-oer in setting oil prices. .Through my ARAMCO assign-ment, I acquired detailed knowledge of both Saudi Ara-bian. oil operations _and the problems involved-in pricing fuel and in assuring a continuous, reliable A(_[ supply of Middle East oil to world oil" markets.

Q.5. Do you have experience related to nuclear fuel?

1 .A.- Yes.- While Manager of LILCO's Fuels and Chemical Divi-sion from January 1982 through October 1983, my

l. responsibilities included nuclear as-well as fossil: -

fuel. _I was-also responsible for the management audits of nuclear fuel at Omaha Public Power District, General l ,

Public Utilities'and Georgia Power Company. The man-l

-agement audit'of General Public Utilities was the first L audit conducted subsequent to the Three Mile-Island ac-r cident-at'the direction of the Pennsylvania Utility

_ ~ _ Commission.-

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. Please indicate-your experience as an expert witness

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regarding utility fuels.

.A. Since joining LILCO in 1981, I have testified as the i

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Company's expert witness on fuels before the New York Public Service Commission in two rate cases (case num-

i. 'bers 28176 and 28553)_and before the New York Depart-

. ment of Environmental Conservation in two hearings (the Port Jefferson Coal Conversion hearings and the Renewal 1

of'Special Fuel Limitations Applicable to Suffolk Coun-

-ty Generating Units hearings). While a management con-sultant, I testified in the capacity of a staff member

.to the Delaware Public Utility Commission in two hear-ings'(ths 1980 Delmarva Power & Light Electric Fuel Ad-justment hearings and the 1980 Delmarva Power &' Light Gas Production Cost' Adjustment hearings).

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. Q.7. Whatcis the purpose of your testimony?

. A. My' testimony describes the potential benefit to LILCO

, and the public arising from.the early performance of low power testing which in turn might lead to an earli-er date for commercial operation. Specifically, I will

-describe LILCO's dependence on oil to fire its generating plants and the potential instability of the price'and supply of that oil.

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Q.8. Are all of LILCO's power plants now in operation oil

, fired?

A. Yes,-however, natural gas can also be burned, when available during the warmer months, at the E.F. Barrett and Glenwood Steam Generator Units and the E.F. Barrett Internal Combustion Units. The total capacity of all dual fired units is 876 MW, less than a quarter of the total system capacity of 3721 MW.

Q.9. What types of oil does LILCO use at these plants?

l. A. About ninety-nine percent of the oil burned by LILCO at

-these plants is residual oil, with the remainder being

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middle distillates. Residual oil is that portion of the crude oil left over after the higher valued prod-ucts such as gasoline, middle distillates including diesel oil, and petrochemicals are refined out of it.

Residual oil (resid)' is normally an unavoidable and unprofitable by-product of petroleum refining, and refiners -- particularly those in the United States --

are investing billions of dollars and developing the

technology to convert residual oil to higher-valued t

f products. Chemically, residual oil is a colloidal sus-

[ pension of carbonaceous materials in very high boiling point hydrocarbons, and is not fluid without the appli-

) cation of external heat.

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Q.10. -Is LILCO predominately dependent on foreign countries for.the residual oil used in generation?

A. Yes. .Almost all of LILCO's oil is imported. Although precise numbers are not available, about 90% of LILCO's residual oil is derived from crude oil produced in for-eig"n countries.

About eleven and a half million barrels of high sulfur resid and about three and a quarter million barrels of low sulfur resid are burned yearly by LILCo. The high sulfur resid is essentially all derived from foreign crude oil and essentially all manufactured in foreign

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. 's) refineries. Between 80%.and 90% of this crude oil comes from Venezuela with most of the remainder coming from Mexico. Some Saudi Arabian crude oil is also used to derive the high sulfur resid burned by LILCO.

The situation with regard.to low sulfur resid is not as clear cut, and not susceptible to precise quan-

, tification. In' general,.the principal refining: regions I

supplying this low sulfur resid to LILCO are the U.S.

Gulf Coast and South American countries such as

. Venezuela, Brazil and Argentina. Essentially all for-eign refined resid is derived from foreign crude oil, and some of the resid manufactured in U.S. Gulf Coast

() refineries is also derived from foreign crude oil.

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V More than a quarter of the crude oil processed by U.S.

refineries-is foreign. Based on these factors, I esti-mate that about half of LILCO's low sulfur resid is de-rived from foreign crude oil.

'Since LILCO's oil is approximately 80% high sulfur re3id, esse.ntially all of which is foreign oil, and 20%

low sulfur.resid, approximately one-half of which is foreign oil, overall LILCO's estimated dependence on

' foreign oil is 90%.

Q.11. Is LILCO's dependence on foreign oil unique or are other utilities in New York also dependent on foreign

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s_ ' countries for the residual oil used in power genera-tion?

A. It is my understanding based on a recent letter from

-Secretary of Energy, Donald Hodel, to Governor Mario M.

Cuomo that New York State burns more oil to produce

, electricity than any other state (Attachment 2). Sec-retary Hodel's assessment is not inconsistent with my.

own experience in the industry.

Q.12. ~Are the availability and price of the domestic crude oil derived resid burned by LILCO affected by events' related to foreign oil?

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Yes, to a very great, if not total, extent. Crude oil is.fungible, although there is some variation in price

-as a fonction of quality and transportation costs.

. Furthermore, the U.S. contains just 6% of the world's oil reserves, produces just 15% of the world's crude oil, and imports about 30% of its own oil requirements.

With such a n.inor proportion of the world's crude oil reserves and production and such a major dependency on imported oil, the United States has little leverage in controlling world oil markets and in insulating itself from disruptions in world oil markets. And this situa-tion is growing worse! For 1982, the latest year for

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which data is available from the Department of Energy (DOE), U.S. proven oil reserves' declined 5.3% to reach their lowest level in 30 years. Furthermore, the Unit-ed States recently suffered a major setback in efforts to slow down the depletion of its oil reserves. In December 1983, the billion dollar plus Mukluk explor-atory. effort off Alaska turned out to be a dry hole.

With estimated potential reserves as high as five bil-lion barrels,. Mukluk had been the most promising oil L

, prospect in the United States since the discovery of l

Prudhoe Bay, the nation's largest oil field, in 1968.

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V Q.13. Will LILCO become increasingly dependent on foreign crude oil for its low sulfur resid requirements?

A. Yes. Structural and irreversible changes in American crude oil production and the American refining industry will make LILCO's dependency increasingly severe.

Production from the U.S. Gulf Coast, which supplies essentially all the domestic crude oil from which LILCO's resid is derived, is declining. This region has been producing oil since early in the century.

.There is small potential for large new oil discoveries or the economic application of enhanced oil recovery im 1 ). methods beyond those currently being employed. The-East Texas-Field, the largest ever discovered in the lower 48fstates, has been producin'g oil since 1930 and is already more than three quarters depleted. Latest available data show that-March 1984 Texas oil produc-tion has already declined 30% from its March 1957 peak.

Furthermore, structural changes in the-U.S. refining

-industry will decrease the amount of U.S. produced resid available to LILCO. During this decade U.S. re-finers have invested-billions of-dollars in processes which convert resid to higher-valued products such as gasoline and diesel oil. They also have closed more j( than two million barrels a day of less profitable

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-refining capacity. In general, these shutdown refin-eries were the older.and less sophisticated ones which yielded a' greater. percentage of residual oil than the j refineries kept in operation. Through the first five

' month's of 1984, Gulf Coast refineries reduced their av-erage resid yield percentage by almost half when com-pared.with the first five months of 1980. Within the next few years, . additional major resid conversion in-vestment will come on stream and unprofitable refining ,

i capacity will be shut down, further reducing the per-centage yield of low sulfur resid derived from the-declining supplies of domestic crude oil.

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.Q.14. Please give examples of foreign oil market disruptions causing major price increases for American consumers.

JA. During the'1967 Mideast War, Arab oil producers also.

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attempted an oil embargo; however, the United States

.still-had enough spare oil production capacity to abort it.. By 1973, however, the United States had lost.its

. ability to control world crude oil markets and insulate itself from disruptions in world oil markets. The Arab

' Oil Embargo in 1973 quadrupled oil prices. The Iranian Revolution in-1979 further tripled oil prices. Despite

, the'three-year-long current oil glut, prices are still closer to the. level reached during the Iranian

i. O.. Revolution than the level before that disruption.

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M Should the current hostilities in the Persian Gulf Re-Egion'between Iran and Iraq result in a cutoff of sup-plies from all the Persian Gulf oil producers, it would cause a major worldwide oil shortage. Persian Gulf

[ countries not only contain half of the world's entire

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oil reserves, they also contain about three quarters of the world's spare installed production capacity and produce aboat 20% of the entire world's output. The

world will become increasingly dependent on the Persian Gulf Region. This will occur, in part, because produc-tion will be declining in many of the world's major oil

. producing regions including the U.S.S.R., the world's ks) largest producer, and the U.S., the world's second largest producer. In addition,' production will in-E crease substantially in the Persian Gulf Region since t'

.its oil is the world's least costly to produce ($1 per barrel 1for Saudi Arabia vs $5-$25 per barrel for the

't United States and the North Sea).

Q.15.

. What'effect would_a major cutoff of oil supplies from the Persian Gulf oil producers have on the price of oil?

A.- It would increase the price of oil, but the amount and duration of the increase is subject to great uncertain-ty. I have seen~ references to estimates of prices as 5

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high as $100 per barrel, as well as references to esti-mates in the $40 per-barrel range. Subject to the great uncertainty involved, I estimate that a $10 per barrel price increase to the $40 per barrel range would be the likely outcome of a major cutoff of oil supplies from the Persian Gulf oil producers.

A myriad of unpredictable factors would determine the exact price increase. These include: the completeness of the cutoff; the duration of the cutoff; the possi-bility of military confrontation between the U.S. and U.S.S.R. in the Persian Gulf Region; the extent of jet panic buying and opping off of tanks; the effec-A/

tiveness of the Strategic Petroleum Reserve in damp-ening panic. buying psychology; the degree to which oil producers outside the Persian Gulf such as Libya, Nigeria and Mexico _show pricing restraint in the face of a booming seller's market; the effectivenss of con-servation measures; the ability of governments to re-sist pressures to impose politically appealing but counterproductive oil price control and allocation mea-sures; the extent of the resulting economic contraction and consequent reduction in oil demand; and the degree to which OPEC and other large oil exporters can suc-cessfully restrain production to defend the increased

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Q.16. If there is a major disruption in foreign oil markets,-

would LILCO likely be able to buy domestic oil?

.A. LILCO would find it very difficult, if not impossible,

.to buy residual oil derived from domestic crude oil.

Refiners would use their conversion units to convert as much resid as possible to urgently needed transporta-

. tion fuels such as diesel oil and gasoline. Because the United States refining industry is the world leader in the technology for conversion of residual oil to higher-valued products, such as diesel oil and gaso-line, much more of this emergency-caused conversion of resid to transportation fuels would occur in the United u

States than'elsewhere. It is probable that little or

-no resid derived from domestic crude oil would be available to LILCO.

Q.17. Will operation of the Shoreham Station reduce LILCO's

.use of foreign oil?

A. Yes. The exact reduction in LILCO's oil consumption will depend on many factors. For 1986, the first full year of'Shoreham operation, the reduction could be in the neighborhood of seven million barrels assuming the

'Suffolk County Special Limitations are not renewed, no

' natural gas is available for electric generation and no

/'l electricity is available from Nine Mile Point 2. More V-

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than half this reduction will probably be foreign oil.

1The remaining reduction in domestic oil is also a great benefit as the availability and price of domestic oil is affected to a very great, if not total, extent by events related to foreign oil.

Q.18. In your opinion, would LILCO and the public benefit from early operation of Shoreham?

-A. Yes. Shoreham will improve LILCO's ability to protect its ratepayers from the impact of oil shortages and price increases that would result from a major dis-

-ruption in, oil markets. Given the extreme volatility

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.; 's / in the Persian Gulf Region and Middle East, including but not limited to an ongoing major war, such a dis-ruption could happen at any time. In contrast, uranium to fuel.Shoreham is in plentiful supply, and a major uranium supply disruption having an equivalent impact on LILCO ratepayers as a major oil supply disruption is very unlikely.

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ATTACHMENT 1 PROFESSIONAL QUALIFICATIONS Cornelius A. Szabo Manager, Resource Evaluation b LONG ISLAND LIGHTING COMPANY My name is Cornelius A. Szabo. My business address is

'Long Island Lighting Company, 175 East Old Country Road, i: 1

' Hicksville, New York 11801. As-the Manager of Resource Evalua-tion for the Long Island Lighting Company, I am responsible for

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forecasting oil and coal prices and availability. Since

, ' joining LILCO in 1981, I have testified as the Company's expert l witness on fuels in two hearings before the New York Public-

-C Service Commission and in twoihearings before the New York -

Department of Environmental Conservation. I received my Bache-lor ofLChemical Engineering Degree'from Manhattan College in 1962:and was awarded the Prutton Medal for the outstanding

-chemical engineering' graduate.

I earned a Master of Science LDegree:in chemical-engineering from Columbia' University, where I I:was a National Science Foundation Fellow. I was elected into-the nationaluhonor. societies for'. Scientific Research; Chemis-l*

try;fand Engineering.

- From 1963 to 1971, I was employed in the petroleum indus-try:with Mobil, Exxon and Shell in both marketing and planning h related functions. The former. included: customer technical

-service, market research, and sales. The latter included: new I[V /#'Y  : business-venture analysis and implementation of process linear L

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. programming, income projection, and supply-demand marketing

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, . planning.models. During the eight yetrs that I was employed in

- th~e petroleum industry, I gained valuable insight into petrole-

. um industry planning, and the market strategies and tactics em-

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. ployed by the.world's fuel suppliers. Furthermore, in,1977

.uhen employed'as a management consultant by Deloitte Haskins &

Sells, I conducted a special management audit for the board chairman of the Arabian American Oil Company (ARAMCO), the world's largest' oil producing company. Saadi Arabia is the world's-' largest oil exporter as well as one of the largest sup-pliers of imported oil to the United States and ARAMCO produces over 90% of Saudi: Arabia's ~ oil. As the world's largest oil ex-

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. porter and holder of.up to 10 million barrels per day of spare oil production capacity, Saudi Arabia is the world's oil price setting leader.

During my ARAMCO assignment., I gained detailed knowledge'of both' Saudi Arabian oil operation's and the problems

-involved in pricing fuel and in-assuring a continuous, reliable supply of oil from the Middle East to world oil markets.

~From 1971 to 1981, I was a management consultant with Deloitte Haskins & Sells (1971-77), Management Systems Develop-ment: (It'77-78),- and Theodore Barry & Associates (1978-81). In 1981, I was designated- as Certified Management Consultant by

-the. Institute of Management Consultants. As a consultant, my A

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clients included utilities in thirteen states, federal energy agencies, andLinvestment bankers involved in the financing of coal and petroleum projects. I also served as a consultant to

'the state public service commissions of Connecticut, Delaware,

. Georgia, Massachusetts, New York, and Pennsylvania in the areas of fuel procurement, supply, and fuel prices. In 1980, I testified in the capacity of a staff member to the Delaware

'c' Commission in the Delmarva Power and Light Electric Fuel Ad-

justment hearings and Gas Production Cost Adjustment hearings.

I conducted eight utility fuel-related management audits.

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THE SECRETARY OF ENERGY WA$mGTON, D.C.20$88 ,

l ATTACHMENT 2 l

I]I June 29, 1984 Honorable Mario M. Cuomo r

Governor of New York l

Albany, New York 12224

Dear Governor-Cuomo:

I The five. nuclear power plants now in service in New York State l

have saved an estimated 315 million barrels of oil since they began operating. They are currently saving oil at the rate of

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33 million barrels a year. This is a significant contribution to reducing our dependence on foreign oil to meet our energy l needs. In spite of this, New York State still burns more oil l to produce electricity than any other State, and is, therefore, l In greater jeopardy from a potential cutoff of supply of oil from the Persian Gulf. And while America is dependent on

' imported oil for about 30% of our requirements, the Soviet Union is energy independent. ,

! In my last letter to you, I pointed out that the Shoreham l nuclear power plant could replace 7 to 9 million barrels of oil now used annually to produce electricity. Additionally, the

. (]) Nine Mile Point $2 plant would roughly double that figure.

These plants are vital to our nationdl security because they i can help reduce dependence on foreign oil.

There is also an econemic incentive to these plants. Over the long term, nuclear power which replaces oil generation can potentially_save the ratepayers money. We believe that rate-

- payers, especially on Long Island, will and up paying more --

not less -- if Shoreham never operates. These citizens have already suffered rate increasse of over 100 percent since 1970 L as a result of overdependence on foreign oil. ,

Decades of operation have shown that commercial nuclear power j plants are safe. In fact, these plants have the finest record l of safety of any form of power generation.

We share your concern for the health and safety of people

-- inside and outside the plant. We all value human life-and

. will not condone nor support any action which jeopardizes the safety of any of our people.

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(3 We do not believe that the Shoreham Nuclear power plant is a v hazard to the people of Long Island; nce do we believe that It I will jeopardise the safety of those people. We do believe, however, that they are jeopardized in both supply and price by continued dependence on oil generation. Furthermore, continued use of high sulphur oil has a potential negative impact on their environment. We recognize, however, that the Nuclear I

Regulatory Commission requires that as an extra margin of safety there must be an effective, workable emergency 1 evacuation plan for Shoreham. J Your statements indicate that you do not believe that an  !

adequate evacuation plan can be developed for Shoreham. What is more, you have made it clear that you are unwilling even to t test such a plan. We have indicated our willingness to par-ticipate in a test of an appropriate plan, but you have refused

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i even that. Instead, you have challenged the proposed plan and test in the courts and questioned our authority to try to help.

We have not suggested that you change your opinions, only that

[ you go along, in the spirit of cooperation, and allow us to join with FEMA to run a full-field exercise of a plan, jointly developed, and to then place it before the Nuclear Regulatory i Commission for evaluation.

Needless to say, v disarvoines and alour refusal as ittodoes e' en manypermit toa, a r test land greatly rest-i O rms =s, dents, judging by the mail we've been receiving. We have made our offer and remain open to working with you to test an evacuation plan. Our position is clear. We do not favor the imposition of Federal Government authority over any State in matters such as this.

! Our national security, our economic security and our energy security are each dependent upon the other. New York and t

this Nation must continue to reduce their reliance on oil.

America's energy future affects us all, not 'just one county I

in one State, but all. Accordingly we would continue to seek to work together with you to seek appropriate answers  :

l to the critical issue facing us today.

l This Administration wants to work with New York and all of the i l

States to solve the problems facing America. Our joint efforts l can accomplish much. I continue to offer to work with you toward this end. The people we serve deserve nothing less.

- Si erely, .

DONALD PAUL HODEL i

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