WoodMac: Carbon bill could be costly to US refiners

Nov. 2, 2009
Proposed legislation on carbon capture and sequestration potentially could cost US refiners $100 billion/year, threatening the sustainability of the domestic refining industry and giving undue favor to non-US refiners, said analysts at Wood Mackenzie Ltd., Edinburgh, in a recent study.

Proposed legislation on carbon capture and sequestration potentially could cost US refiners $100 billion/year, threatening the sustainability of the domestic refining industry and giving undue favor to non-US refiners, said analysts at Wood Mackenzie Ltd., Edinburgh, in a recent study.

"The draft US legislation is much more onerous on the US refining sector than its European counterparts," said Alan Gelder, head of downstream oil consulting for WoodMac. "US refiners will not only be required to purchase emission credits for both the stationary emissions (from the refinery) but also the emissions from the subsequent combustion of the fuels."

Moreover, he said, "The free allocation—or cap—for the US refining sector equates to less than 5% of total carbon emissions from the production and consumption of transportation fuels in the US. We expect US refiners will need to purchase around [2 billion] credits in 2015, to the tune of $100 billion/year."

Although the projected costs of credits between the two regions are similar, refiners in northwest Europe are expected to purchase only 3 million credits in 2015, around 0.1% of the US requirement.

In spite of the cost implications for the refining sector, WoodMac anticipates that the impact on product demand will be low compared to other initiatives such as the US vehicle efficiency and Low Carbon Fuel standards. Depending on the interpretation and implementation of the current legislation, the greatest disruption could be to products supply.

"The current legislation's provisions on intrastate trade could offer significant advantages to long-haul gasoline exporters, prompting rationalization of the US refining industry. Even if this intrastate provision is closed, which we anticipate, the costs of carbon will increase overall operating costs, significantly reducing the future cash flows and enterprise value of the US refining industry," Gelder said.

The report, "US Refining—The potentially disruptive impact of carbon," by the independent research consultants includes a comprehensive comparison of the potential impact on US refiners of the proposed Waxman-Markey climate bill, HR 2454, vs. their counterparts in northwest Europe where changes to equivalent legislation, the existing European Emissions Trading Scheme (ETS), will progress into Phase 3 in 2013.

Gelder said, "It is important to note that the proposed Senate climate change and energy legislation has even more stringent emissions targets than the hotly debated Waxman-Markey bill. Although the Senate's goal is to progress the legislation to committees by Thanksgiving, we believe other priorities with healthcare, financial regulatory reform, and the economy will push movement on the bill into next year. That said, the issue will continue to take center stage as the Environmental Protection Agency continues to move forward developing carbon dioxide regulations for mobile sources followed by stationary sources."

Gelder concluded: "The refining industries on both sides of the Atlantic are in the grip of low utilization rates as a result of the economic downturn and severely reduced demand. While carbon legislation will have a modest impact on European refiners, this legislation is significant to US refiners at a time when many of them are under severe financial pressure."

More Oil & Gas Journal Current Issue Articles
More Oil & Gas Journal Archives Issue Articles