Big Oil’s Answer to Carbon Law May Be Imports, Idle Refineries
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By Joe Carroll and Edward Klump
June 26 (Bloomberg) -- America’s biggest oil companies will probably cope with U.S. carbon legislation by closing fuel plants, cutting capital spending and increasing imports.
Under the Waxman-Markey climate bill that may be voted on today by the U.S. House, refiners would have to buy allowances for carbon dioxide spewed from their plants and from vehicles when motorists burn their fuel. Imports would need permits only for the latter, which ConocoPhillips Chief Executive Officer Jim Mulva said would create a competitive imbalance.
“It will lead to the opportunity for foreign sources to bring in transportation fuels at a lower cost, which will have an adverse impact to our industry, potential shutdown of refineries and investment and, ultimately, employment,” Mulva said in a June 16 interview in Detroit. Houston-based ConocoPhillips has the second-largest U.S. refining capacity.
The same amount of gasoline that would have $1 in carbon costs imposed if it were domestic would have 10 cents less added if it were imported, according to energy consulting firm Wood Mackenzie in Houston. Contrary to President Barack Obama’s goal of reducing dependence on overseas energy suppliers, the bill would incent U.S. refiners to import more fuel, said Clayton Mahaffey, an analyst at RedChip Cos. in Maitland, Florida.
“They’ll be searching the globe for refined products that don’t carry the same level of carbon costs,” said Mahaffey, a former Exxon Corp. refinery manager.
Prices Seen Rising
One in six U.S. refineries probably would close by 2020 as the cost of carbon allowances erases profits, according to the American Petroleum Institute, a Washington trade group known as API. Carbon permits would add 77 cents a gallon to the price of gasoline, said Russell Jones, the API’s senior economic adviser.
“Because it’s going to be more expensive to produce the stuff, refiners will slow down production and cut back on inventories to squeeze every penny of profit they can from the system,” said Geoffrey Styles, founder of GSW Strategy Group LLC in Vienna, Virginia. “We will end up with less domestic product on the market and a greater reliance on imports, all of which means higher, more volatile prices.”
U.S. motorists, already facing the steepest jump in gasoline prices in 18 years, would bear the brunt as refiners pass on added costs, Exxon Mobil Corp. Chief Executive Officer Rex Tillerson told reporters after a May 27 meeting in Dallas.
Democrats in the House plan to bring the climate bill to a vote as soon as today. House Speaker Nancy Pelosi, a California Democrat, stopped short of predicting victory at a press conference yesterday, saying she was making progress in building support for the bill.
Carbon Allowances
“U.S. refineries get 2 percent of allowances to cover any increases in costs they may incur,” said Drew Hammill, a spokesman for Pelosi.
Drivers, airlines and trucking companies would pay an additional $178 billion annually, or about $560 for each man, woman and child in the U.S., according to the API, whose 400 members include Irving, Texas-based Exxon Mobil and the U.S. unit of Royal Dutch Shell Plc, Europe’s largest oil company.
“That kind of price impact would significantly hurt the competitiveness of U.S. refiners versus importers,” said Glenn McGinnis, chief executive officer at Arizona Clean Fuels Yuma, a Phoenix-based company that’s attempting to build the nation’s first new refinery in three decades.
Such estimates and talk of rising imports are scare tactics that oil companies are using to wheedle concessions from lawmakers, said John Coequyt, the Sierra Club’s chief lobbyist in Washington. Refiners are trying to gain relief on carbon- permit costs that’s meant for manufacturers such as steelmakers that are threatened by foreign competition, he said.
‘Saber Rattling’
“It’s definitely saber rattling, and it’s a hell of a threat,” Coequyt said. “The strategic value of this is pretty obvious. They want to qualify for rebates under the competitiveness test, which of course they do not.”
GSW’s Styles, a former Texaco Inc. refinery and trading manager, said the risks are real. Plants unable to turn a profit under the new rules would be closed, he said.
The permit-cost imbalance would open the door for overseas refiners, such as India’s Reliance Industries Ltd., owner of the world’s largest crude-processing complex, to ship more fuel to U.S. oil companies, said Bill Holbrook, spokesman for the National Petrochemical and Refiners Association in Washington.
“It’s going to give domestic refiners a distinct disadvantage,” said Holbrook, whose trade group represents such fuel makers as Chevron Corp. and Valero Energy Corp.
Acquisitions Possible
Companies such as San Antonio-based Valero, the biggest U.S. refiner, will respond by stepping up efforts to acquire overseas plants that can ship fuel to their home market, said Brian Youngberg, an analyst at Edward Jones & Co. in Des Peres, Missouri. Valero said last week that it will continue to seek acquisition opportunities after Total SA bought the stake it had agreed to purchase in a Netherlands refining venture.
Carbon costs will stress fuel makers already coping with slumping fuel demand and higher costs to meet a federal mandate for increased ethanol use, said Roger Ihne, an energy client portfolio leader at Deloitte Consulting in Houston. Stricter mileage standards that take effect in 2011 will squeeze demand further, he said.
About 2 million barrels of daily U.S. refining capacity will shut down because carbon costs will be several times the operating profits for some plants, Ihne said. That’s equivalent to 12 percent of the nation’s fuel-making capacity. Jones, the API economist, said there could be as much as 3 million barrels of idled processing capacity.
Plants at Risk
“There’s no question there are some marginal refiners that probably will not survive,” said Exxon Mobil’s Tillerson, whose company has the largest worldwide refining capacity. “They may go out of business.” Exxon Mobil derived 18 percent to 24 percent of its profit from refining in the past five years.
Neither Tillerson, 57, nor ConocoPhillips CEO Mulva, 63, said how their companies would respond to climate rules like those in the Waxman-Markey bill. The legislation would cap emissions and create trading of allowances that polluters would need to meet their requirements.
Chevron CEO David O’Reilly, 62, said in a June 11 speech that the bill is “unnecessarily complex” and would be more damaging and less transparent than a carbon tax.
Chevron, based in San Ramon, California, has fallen 9.6 percent this year in New York stock trading. Exxon Mobil has dropped 12 percent, and ConocoPhillips is down 19 percent. Valero has tumbled 23 percent.
Reliance on Imports
Refiners and brokers already import 3.12 million barrels of gasoline, diesel and other fuels each day, enough to supply every car, truck, train, airplane, boat and oil-burning power plant in Africa, U.S. Energy Department figures showed.
Those cargoes are in addition to the 9.76 million barrels of raw crude delivered to U.S. ports daily to supply refineries and chemicals plants. Foreign shipments of crude, gasoline and other fuels provide 66 percent of the petroleum burned in the world’s largest economy, according to the Energy Department.
Carbon prices will soar as U.S. refiners compete with each other and other industrial companies for a limited number of allowances, said Bill Durbin, head of carbon research and global energy markets at Wood Mackenzie.
Durbin, a former policy official in the Energy Department during the George H.W. Bush administration, said permit prices may top $100 a ton. Oil companies and their products emit more than 2 billion tons of carbon dioxide a year in the U.S., according to the Energy Department.
“If you can import fuels without the same carbon costs as domestic refiners, you will have an advantage,” Durbin said. “Does that open the door for offshore refiners? I think it does.”
To contact the reporters on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net; Edward Klump in Houston at eklump@bloomberg.net.
Last Updated: June 26, 2009 00:00 EDT
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Is there any doubt left that Obama and Pelosi want to cripple our economy???
