Trends noted in this report—recently falling US capacity and utilization and rising Asian and Middle Eastern capacity—come at a difficult time for US refiners, as the US Congress prepares to craft climate-change legislation for debate in 2010.
A recent analysis by industry consultancy Wood Mackenzie, Edinburgh, compared the impact on the US refining industry of the US House of Representatives' HR2454 (Waxman-Markey) with the impact starting in 2013 of Phase III of the European Union's Emissions Trading Scheme (OGJ, Nov. 2, 2009, p. 30).
Key conclusions of the study are the following:
• The US allocation of free credits is much less generous than its European counterpart, which is the primary driver for the US industry being "materially disadvantaged."
• Higher fuel costs (projected for the near term) will not materially affect oil-product demand; other legislative measures (auto fleet efficiency and low-carbon fuels standards) will be much more significant.
• Waxman-Markey threatens to disrupt the US refining industry through its provisions on intrastate trade. This could offer significant advantages to long-haul gasoline exporters and thus prompt rationalization in the US refining industry. "That would be contrary to US interests of improving its security of supply," said the report.
Even if this intrastate provision in the bill is removed, said Wood Mackenzie, the "costs of carbon increase overall operating costs and thus significantly reduce future cash flows and hence enterprise value" of the US refining industry.
Allocation effects
The analysis further noted that the proposed Waxman-Markey bill allocates the refining industry 2% of total emission credits for the entire US economy. The refining allocation thus equates to "about 100 million tons in 2015, less than 5% of carbon emissions from the production and consumption of transportation fuels" in the US.
The legislation makes the refiner responsible for buying the additional credits associated with the stationary (refinery) sources and also "the emissions associated with consumption of the various transportation and commercial fuels by end-users (vehicle drivers, residential consumers, industry, etc.)."
Moreover, emissions allocated to US refining only provide around 30% of its stationary emissions, if the additional burden of credits on transportation fuels is entirely passed to the end-user.
Wood Mackenzie concluded, therefore, that US refiners will need to purchase more than 2 billion tonnes of credits in 2015, based on expectations of US oil-product demand and refinery utilization.
The report correctly cautions that US climate legislation has a long road ahead of it and will be taken up only after contentious health-care and financial regulations debates. Nonetheless, the report also correctly notes the US Environmental Protection Agency is moving ahead with regulations governing CO2 emissions from mobile sources, soon to be followed by rules for stationary sources.
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