The threat to US refining from misguided climate-change legislation has become chillingly clear. Indeed, the clarification elicits a question: Why would the US, as a matter of policy, swap a large chunk of domestic refining capacity for trivial cuts in emissions of greenhouse gases?
The American Petroleum Institute has released the full report of a study by EnSys Energy, Lexington, Mass., on the effects on refining of climate-change legislation passed in June by the US House. The bill, whose sponsors are Henry Waxman (D-Calif.) and Ed Markey (D-Mass.), would cap emissions and create tradable emission allowances.
API, which commissioned the study, in August published a summary warning that enactment of the Waxman-Markey bill would cut US refinery throughput by as much as 4.4 million b/d by 2030 (OGJ, Sept. 7, p. 26). New details illuminate the nature and extent of the hazard.
The study
The study applies an EnSys model of the global refining industry to three forecasts by the US Energy Information Administration: a baseline from EIA's annual energy outlook, adjusted for federal stimulus spending, and two projections from an analysis of the Waxman-Markey bill. Unlike EIA's, EnSys's analysis accommodates the increased cost of allowances for direct US refining emissions and accounts for interaction between US and non-US refining.
Waxman-Markey makes refiners responsible for emissions by their facilities as well as those associated with use of their products. Under it, the refining industry would have to make 43% of all required cuts yet receive only 2.25% of allocated emission allowances. Refiners thus would be heavy allowance buyers.
Allowance costs, therefore, are crucial. The lower-cost projection by EIA puts the values at $22/tonne of carbon dioxide-equivalent (CO2e) in 2015 and $65/tonne in 2030 (2007 dollars). The higher cost scenario, assuming no international offsets and limited technical development and nuclear growth, estimates allowance costs at $65/tonne of CO2e in 2015 and $190/tonne in 2030. Under the lower-cost assumptions, EIA sees a lowering in US oil consumption from the baseline of 250,000 b/d by 2020 and 900,000 b/d by 2030. The higher allowance costs raise consumption cuts to 330,000 b/d by 2015 and 1.65 million b/d by 2030.
In the EnSys model, cost increases hurt the ability of US refiners to compete in this shrunken market. While falling in the US, the study says, throughput would be rising elsewhere—by 900,000-3.3 million b/d in 2030, necessitating US product import gains of 14-19%.
For refiners, Waxman-Markey's biggest effect would be on variable operating costs. Allowance costs for direct refinery emissions, net of free allowances, would average 50¢-$1.20/bbl in 2015 and $2.70-7.20/bbl by 2030. The higher figure in the 2030 range is nearly three times the operating cost EnSys considers typical. "These increases would be a prime driver of the reductions in US refineries' ability to compete, in their projected reduced throughputs, and the offsetting increases in non-US refinery throughputs and investments," the study says. Annual US refinery investment under Waxman-Markey would fall below 2030 baseline assumptions by as much as $89.7 billion.
With oil demand sluggish and biofuels displacing nearly 1.5 million b/d of oil supply in 2030, refinery capacity utilization will be under strain in any case. Waxman-Markey, according to the study, could push utilization to as low as 67-68% in 2015 and 63% by 2030. Using 85% as the rate below which refineries are assumed to be unprofitable, the study says 1.5 million b/d of US refining capacity is at risk of closure through 2020 under baseline assumptions. Under Waxman-Markey, the at-risk number in 2030 would be nearly 3 million b/d in the lower-cost scenario and 4-5 million b/d under higher cost assumptions.
Emission effects
Because non-US refining would compensate for US capacity losses beyond consumption declines, emission cuts would be minor. While Waxman-Markey would lower US refinery emissions by 20-41% in 2030, net global reductions in refinery emissions would be only 3%, the study says.
For this relatively small payoff, Waxman-Markey would sacrifice a large piece of the US refining industry—and the jobs, incomes, and security that come with it. It's a deplorable deal.
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