Engineering News

West Coast Refiners Ponder Next Steps After Prop. 23 Loss
November 10, 2010

The refining industry spent millions trying to curb California's climate law. Now it will have to spend much more trying to adapt to it.

U.S. refiners operating on the West Coast say California's climate law will force them to spend millions of dollars to update or replace equipment to meet the state's greenhouse gas emission targets, among the strictest in the country.

Valero Corp. (VLO), Tesoro Corp. (TSO) and others spent more than $9 million since April boosting Proposition 23, which would have suspended California's greenhouse gas emissions targets until unemployment in the state--which has been around 12% since August 2009--dropped to 5.5% for at least a year. With the proposition garnering a vote of 61% against it, California continues to call for greenhouse gas emissions to fall to 1990 levels by 2020.

California is a major market for refiners. Valero, the largest independent U.S. refiner, reported third-quarter throughput of 272,000 barrels a day at its two refineries in California, or 11% of its total for the period. Tesoro processed more than half of its third-quarter throughput of 474,000 barrels a day at its two California refineries.

Valero spent more than $5 million backing the measure. Bill Klesse, chief executive of the San Antonio-based company, told investors last week that the company would "work around" the emissions targets if the proposition failed. But the CEO has also said the cost of meeting the clean air rules would force job losses for the industry in California. Valero employs 1,600 people at two refineries and 83 retail outlets it owns in the state.

Market and industry analysts said the proposition's failure probably wouldn't cause refiners to engage in massive layoffs or exit the market--yet. But the defeat could further dampen profits in an already tough business environment and make the state a ripe target for foreign producers.

Dominick Chirichella, a trading analyst with Energy Management Institute, a consultancy, said meeting the emission standards would potentially raise the cost of refining on the West Coast enough to make the region more open to refined product imports from Asia.

"Imported oil would increase, and jobs would in essence be outsourced to refinery centers outside the U.S.," Chirichella said in an email.

Other industry watchers said West Coast refiners are already used to California's relative high cost of business and will find a way to work with emissions targets. But they ponder whether other states--or federal regulators--could take inspiration from California's enthusiasm for greenhouse gas limits. Donors spent more than $30 million to quash the refiners' proposal, according to data from the California Secretary of State--far more than refiners spent. "When the Obama administration sees the strong vote against it, they may use that to push more stringent rules next summer," said Carl Larry, analyst with market research group Oil Outlooks and Opinion.

Sandar Cohan, refining industry analyst for research firm Energy Security Analysis, added that although the refiners lost the ballot fight, they could still see some relief from the incoming state government. Incoming governor Jerry Brown and state regulators could still tweak the state's emission targets to help refiners if they decide the current schedule is unworkable, he said.

The climate laws "affects both alternative fuels and crude oil," Cohan said. "The next state administration could still scale it back or slow it down if it's not sustainable."

Source: Dow Jones Newswires

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