KAG Issues Position on ULSD
May 5, 2006
Dear Valued Customer:
With the introduction of Ultra Low Sulfur Diesel (ULSD) right around the corner, we would like to take this opportunity to communicate KAG’s official position on handling this new product. It is important that we preface the information provided below by emphasizing our current plans are based on the assumption that conductivity concerns associated with loading ULSD behind gasoline or other flammables will be completely addressed prior to June 1st. It is our understanding that several industry initiatives are currently underway, including the introduction of conductivity additives and enhanced trailer grounding at loading racks, that will ensure safe loading of ULSD behind gasoline and other low sulfur flammables. If, however, it is determined prior to ULSD introduction that safety risks still exist, we will issue a revised operating plan.
After significant research and discussions with industry experts, we feel very confident that ULSD can be successfully loaded behind tier two gasoline, ethanol, and bio-diesel with only a minimal impact on sulfur parts per million (ppm) readings – even if we are not allowed to drain dry prior to loading at the rack. Although the maximum allowable sulfur content in gasoline today is 80 ppm, most gasoline averages between 30-40 ppm. Therefore, it would take a significant product heel to substantially raise the sulfur ppm content of ULSD loaded behind gasoline. In fact, we contend the flash point of the diesel would be pushed out of specification well before sulfur contamination would occur. Since ‘hot diesel’ is not an issue in our industry today, it would only make logical sense that ULSD would also stay within the 15 ppm limit under this operating scenario. Our position is further supported by the fact that our drivers successfully and consistently unload the products we transport daily without trailer product retains. For other products beyond ULSD, gasoline, ethanol, and bio-diesel, our intent would be to segregate trailers hauling higher sulfur products such as aviation gasoline, jet fuel, low sulfur diesel, high sulfur diesel, and kerosene. Jet and av-gas trailers for the most part are already in dedicated service in our industry. Low sulfur diesel and high sulfur diesel tanks that need to be converted can simply haul a load of gasoline prior to introduction into ULSD service. For this operating plan to succeed, we will need to be provided the opportunity to load ULSD behind the approved products listed above without restrictions.
We will also implement detailed procedures and thoroughly train all of our drivers on the successful handling of ULSD. I have attached a copy of our prior products loading matrix for your review. Any restrictions at loading racks prohibiting the loading of ULSD behind gasoline will result in our having no choice but to place dedicated ULSD trailers in service – a costly alternative that will have to be passed along to our customers. At this point, we estimate the need for a 5% increase in our diesel linehaul rates to cover the costs associated with additional capital expenditures, lost utilization, and mid-shift trailer switching. Additionally, we expect dedicated ULSD ‘milk runs’ to further increase customer costs due to additional stop off charges, minimums, and other applicable accessorial charges. Customers providing us with fully utilized dedicated units in ULSD would not be subject to the 5% charge. Please note and respect the fact that KAG could easily take the easy route and only offer dedicated service for ULSD. However, as the leader in the petroleum transport industry, we are trying to step up and offer an alternative that minimizes cost increases and ensures continued successful delivery execution of your products. Simply put, we are taking a calculated risk on behalf of our customers. However, please note that we will be monitoring the situation very closely and reserve the right to implement a ULSD surcharge should we encounter additional costs related to EPA fines or other unexpected costs related to our non-dedicated/switch loading operating plan option. If that happens, you will have the option to help us absorb that cost through the surcharge or switch to our dedicated service option outlined above. An important issue that needs to be addressed by our customers prior to June 1st is the proper identification (color-coding) of ULSD unloading sites at your facilities.
Whether we operate under the non-dedicated/switch loading plan or the dedicated trailer plan, unloading sites must be color-coded properly to ensure our drivers deliver ULSD in the correct tank. If you anticipate an issue related to identifying your tanks, please contact us immediately. I have attached a color-coding guide for your review. Note that our drivers will be instructed to refuse delivery unless the tank is properly identified. Another request is for your suppliers to provide KAG with daily access to ULSD sulfur ppm readings at racks prior to loading. We have received information recently that many racks may just state their ULSD is at 15 ppm and not provide the actual reading. This approach severely limits our ability to make practical decisions related to our non-dedicated/switch loading plan. We feel many racks will provide product in the 12 ppm – 14 ppm range, which works well with our non-dedicated approach. If actual readings at a particular rack are truly 15 ppm, we may opt to only offer the dedicated trailer option at that particular facility or market area.
Please lobby your suppliers to provide actual information to assist us in making our less costly, less disruptive non-dedicated/switch loading plan succeed. We will be contacting you in the near future to finalize your choice on how we will handle your ULSD movements. In the meantime, we invite your calls or e-mails regarding any questions you may have on our ULSD plans. Please contact your KAG representative or e-mail us at sales@thekag.com. As you know, these are unprecedented times in our industry and yours. We have called on our customers numerous times over the past few years seeking assistance as we successfully navigate the many challenges we face. We are very grateful for the support you have shown and hope you will continue to respect and appreciate our sincere efforts to provide you with safe, responsible, and value-delivering service at the lowest possible cost.
Sincerely,
Bruce Blaise
Vice President,
Sales & Marketing
Enclosures
