California cap-and-trade extension to fuels worries refiners

14 March 2014 23:10 Source:ICIS News

Focus story by Jessie Waldheim

HOUSTON (ICIS)--The impending inclusion of transportation and other fuels into California's carbon cap-and-trade programme is generating concern that it will raise already high pump prices and production costs.

"The last thing California needs is higher gas prices," Valero spokesman Bill Day said on Friday.

Valero operates two refineries in the state, processing a combined 310,000 bbl/day – translating to about 6.76m gal/day of gasoline. Both have been part of the cap-and-trade programme since 2013, but it is too early to tell the full effect it has had on them, Day said.

"Generally we are worried that it's going to end up costing a lot of money," Day said, adding that Valero's west coast refineries lost $27m in 2013.

The programme, part of AB 32, sets a greenhouse gas (GHG) cap and allows businesses to trade California carbon allowances (CCAs), generating a market for emission reduction. It has been in effect for electric plants and large stationary producers of greenhouse gasses (GHG) since the start of 2013, and it extends to fuel emissions at the start of 2015.

Refineries and wholesalers would be obligated to purchase CCAs to cover 100% of the tailpipe emissions from their products. The programme does not grant free CCAs to fuel suppliers, Tupper Hull, spokesman for Western States Petroleum Association (WSPA), said.

Given the amount of fuel sold in the state, the average carbon dioxide emissions from vehicles and the price of CCAs at about $12-$13/tonne for stationary sources, WSPA estimates the inclusion of vehicle fuels in the programme will add about 12-13 cents to a gallon of gasoline at the pump, Hull said.

Unless there is a regulatory change, the additional costs could have a substantial impact on the market and be a "very disruptive development in the state's climate change programme", Hull said.

"Anything that affects our consumers or makes the price of gasoline go up would affect us," Day said.

California already has the highest gas prices in the US due to a unique formula, high taxes and the general cost of doing business in the state.

Valero's operating costs are $7.70/bbl in California, compared with $5.38/bbl for the rest of its refineries, Day said.

If the higher gas price drives down demand, many refineries will not turn to exports due to those high production costs. In sending fuel to Japan after a tsunami shuttered some of the country's refineries, Valero found it cheaper to ship product made in the Gulf Coast through the Panama canal than to produce it in California.

"California is in a position where it really cannot compete globally and exports are not going to help," Day said.  

California-based Chevron has expressed concerns about AB 32 and its effect on the state's economy, production costs and future refining capacity.

"While it's a little early to predict exactly how the regulations will evolve, I expect they will. As consumers, business and economics will demand it," Mike Wirth, Chevron executive vice president of Downstream and Chemicals, said during an investor meeting on Tuesday.

Chevron operates two refineries in the state, processing a combined 516,000 bbl/day. With an efficient refining system, the company has less exposure over the early years of AB 32's implementation than some of its competitors.

"When first introduced, these rules tend to create uncertainty. In time the markets and companies adapt and the stronger competitor succeeds," Wirth said.

The programme has evolved in the past. In its first incarnation, free CCAs were not going to be granted to refineries. But as regulators and the industry worked together to better understand how the programme would function, that inequity was revised, Hull said.

But over time the programme will reduce the number of CCAs available, eventually resulting fewer than are needed to fully serve the market, likely driving up costs, Hull said.

One legislator has proposed a change.

California Senate president pro tempore Darrell Steinberg in February introduced a bill to remove transportation fuels from the cap-and-trade programme and instead place a carbon tax on fuels.

The goal is to remove volatility risks from fuel and to generate revenue to mitigate the impact of the policy on poor and low-income Californians. The bill could come before a committee within three weeks, Rhys Williams, a spokesman for the senator said.

While some in the refining industry are keeping an eye on the proposal, it is not sure to pass or to help lower refiners' costs if it does.

"It's difficult to choose one costly programme over another," Day said.

By Jessie Waldheim