Prop. 23: Why did Valero launch a campaign against California's climate law?
In the most closely watched environmental election fight in the country, national conservation groups, Silicon Valley moguls, Hollywood celebrities and California politicians have waged a scorched-earth campaign against Valero Energy Corp., the nation's biggest independent oil refiner and the principal backer of Proposition 23, a Nov. 2 ballot measure to suspend California's ambitious global-warming law.
"The opposition has been able to characterize this issue as Texas oil companies … dirty companies
and dirty polluters," says Valero Chief Executive Bill Klesse.
Few major oil companies have joined Valero's ballot fight against California's effort to curb greenhouse gases, apart from Wichita, Kan.-based Koch Industries and Tesoro Corp., which is based in San Antonio, as is Valero.
So what do refineries such as Valero have at stake when voters take to the polls on Tuesday? "It's really an anti-fossil fuel law," Klesse told Wall Street analysts on a recent conference call. And Valero's business is fossil fuels.
But lost in the uproar over the initiative, which has attracted more contributions for and against than any measure on the ballot, is a basic issue: What would it take for Valero to comply with AB 32, California's Global Warming Solutions Act?
Would it cost the company hundreds of millions of dollars? Would it force the closure of California refineries? Would it mean passing huge costs onto the consumer? Would it mean shipping in gasoline to the West Coast from Asian refineries?
With the world's eighth-largest economy, California has an outsized impact. It has already begun adopting regulations under the act, including a mandate that one-third of the state's electricity come from solar, wind and other renewable sources within a decade and phasing out coal-fired electricity from out-of-state power plants.
Another rule would cut by 10% the carbon intensity of gasoline and other fuels. Carbon intensity is a measure of the amount of carbon emitted over a fuel's life cycle, including extraction, refining, transport and combustion. The new limit would discourage Valero and other refiners from using crude that comes from Canada's oil sands, extracted in an energy-intensive process, and ethanol that comes from plants using coal-fired power. Operating costs — and therefore gasoline prices — could increase.
Regulators acknowledge as much: As gas prices rise, cars driven with electricity derived from renewable sources become more economical. The standard "invites electricity to go toe-to-toe with gasoline," said Stanley Young, spokesman for the California Air Resources Board.
And it creates powerful incentives for alternatives to the fuels Valero makes at its Wilmington plant. Shortly after California approved its low-carbon standard, Exxon Mobil Corp. announced that it would invest $600 million with a La Jolla biotech firm to create fuel from algae. Even Valero has purchased 10 corn ethanol plants in the Midwest.
AB 32's most expansive program is to be adopted in December: a cap on the emissions of large industrial facilities such as Valero's. As in Europe's cap-and-trade market, California would issue emission permits, which companies would then be free to buy and sell on the open market as a way to cut costs.
The design of California's cap-and-trade system is still under debate, with various industries lobbying intensely over the details. But officials say it will likely begin by granting free permits and phase in auctioned permits over the next decade.
To cut their carbon footprint, "refiners will have to use less energy to make the same product," Young said.
In fighting AB 32, Valero officials had suggested in the past that the cost of complying with the law could total $170 million a year for its two California refineries, in Wilmington and Benicia. But in the conference call with analysts, Valero acknowledged that the annual cost might be closer to $80 million. "We don't have the rules or regulations or how it's all going to work," Klesse said.
Those estimates don't take into account California regulators' pledge to introduce new rules slowly in the early years, and give breaks to firms that face out-of-state competition from unregulated competitors, such as Asian oil refiners.
But whatever the cost, Klesse said, "it will all be passed through to the consumer. The companies aren't going to able to absorb this or they're going to go out of business."
In fact, a rise in the price of fossil fuels, leading to a drop in consumption and combustion, is exactly what the state's global warming law is designed to accomplish. But that won't necessarily mean higher bills for consumers, Young said.
If a slew of AB 32 regulations accomplish their goals, Californians will drive more fuel-efficient cars, live in greener homes, use more energy-efficient appliances, live closer to public transit and use more electricity from renewable sources. That would drive down the need for fuel, along with the greenhouse gas emissions from Valero's Wilmington plant.
It could also hammer Valero's profits. Unlike integrated oil companies such as Chevron Corp., Royal Dutch Shell and Exxon, which drill and distribute crude oil as well as refine it, independents such as Valero and Tesoro cannot spread costs across other operations.Through the first nine months of 2010, Valero has posted a profit of $762 million on revenue of $63.6 billion, after two calendar years of losses.
But with gasoline demand still in a slump because of the recession, "independent refiners are fighting for their lives," said Doug Leggate, a senior analyst at Bank of America Merrill Lynch. Valero owns 13 refineries outside the state, but "AB 32 puts companies with California refineries at a gross disadvantage," Leggate said. "They would have to incur additional costs."
Proposition 23 is trailing badly in the polls, and Klesse was pressed in his call with analysts to explain how his company would deal with the reality that California is getting tough on carbon emissions."How does Valero respond to the cap-and-trade and low-carbon fuel provisions of AB 32?" one caller asked. "And how do you see the situation playing out in the state?"
After all the drama of the Proposition 23 campaign, all the inflammatory TV spots on both sides, all the political consultants and news conferences, all the tens of millions of dollars poured into the fight, Klesse's response was notably matter-of-fact. "We'll let the voters vote," he said."We're in business in California and it'll just continue. And we'll see what the actual regs look like, and then we'll take actions around them."
So was Prop. 23 worth the trouble? Read more here on why Valero seeks to suspend AB 32
RELATED: Support for Prop 23 drops sharply
PHOTO: Valero's Wilmington refinery, near the Port of Long Beach, in October 2010. The company is the main funder of Proposition 23, a ballot initiative to suspend California's global-warming law. The law would require companies to slash their greenhouse gas emissions. Christina House /Los Angeles Times