Jane Van Ryan
Posted November 3, 2009
In this episode, I interview Alan Gelder of Wood Mackenzie, who recently conducted a study on the potential impact of climate change legislation on refiners.
Use the audio player below to listen to the conversation and follow along with the show notes. I hope you find the podcast informative.
00:17 Much of the political discussion in Washington these days involves the climate bills being considered in Congress. Multiple studies suggest that the cost of the bills could be enormous, especially for the refining industry. A recent study was conducted on the potential impact of climate change legislation on refiners.
00:54 The independent study is part of Wood Mackenzie's ongoing research analysis of the energy sector and was not commissioned by any particular company, including refiners. It is something that is covered for Wood Mackenzie clients, which include oil companies, financial institutions and people interested in the energy sector.
01:22 The costs that refiners face could be enormous, mostly because of two aspects of the proposed legislation. The first aspect is the requirement for refiners to pay for their stationary emissions--the carbon dioxide they emit by processing the crude oil. The second aspect, and the more significant one, is that the refiners will need to pay for the carbon emissions associated with fuels they produce, which means they could be looking at a potential bill of nearly $100 billion dollars per year. That figure is based on an assessment of numbers developed by the Energy Information Administration (EIA) and Environmental Protection Agency (EPA) in which it was calculated that the refiners would need to purchase two-thousand-million credits. The estimated cost of the credits could be nearly $50 a ton.
03:07 In comparison, the European Union is currently the only region in which refiners will bear similar costs. When looking at overseas refiners, we have to be conscious that a limited part of the international refining landscape is exposed to similar costs. In the European Union there is a legislative process that is ongoing and evolving, but they are likely to only need to pay towards their stationary emissions and are not exposed to the carbon content of the transportation fuels that they produce. Furthermore, it is expected that they will receive a significant portion of their credit requirements as part of a free allocation. Relative to the U.S., they will have limited exposure to carbon legislation.
04:18 If we look at U.S. refiners and their competitive landscape, which comprises Europe and other overseas refiners, Europe will have some exposure to carbon legislation whereas refiners elsewhere, such as Latin American countries, will have none--giving them a competitive advantage.
05:03 The work that we have done forecasts to 2015, where we came up with the expectation of $50 a ton carbon costs. Considering those costs, the impact on price is not sufficient, we do not think, to have a huge impact on demand. Looking towards 2030, some speculate there will be higher carbon costs, which could have a greater impact on demand.
06:00 The impact on oil supplies could be more disruptive, primarily because the refining landscape is a global, competitive environment. There are two issues with the current bills; the first is that the provisions only cover interstate trade, so it is not clear if the intrastate provision has been eradicated. It could be possible that a legal entity could import a product into a state, in turn sell the product within the state, and they could be exempt. If this is the case, it could be hugely disruptive to the U.S. refining industry. However, if that provision is closed and all U.S imports carry the carbon credits associated with the carbon content of the fuels, then U.S. refiners will still be disadvantaged because they will need to purchase credits for the majority of their stationary emissions, whereas the overseas refiners will not. This will create a greater degree of competition by potential imports from overseas refiners.
07:51 The Waxman-Markey and Kerry-Boxer bills are very similar in terms of the credits that they are allocating to the industry and the overall reductions they are targeting. For the outlook for 2015, there is very little difference between the two bills. 08:06 But these bills aren't the only threats to the U.S. refining industry--the U.S. Environmental Protection Agency is considering its own carbon emission regulatory actions.
08:21 The threat of the EPA's involvement would entail managing or constraining demand because they're likely to require the best available technology to be deployed, which would promote the efficiency of various equipment or vehicles, eventually putting downward pressure on demand. The downward pressure would have implications on the refining industry, reducing the amount that they need to supply.
09:22 All of this is taking place at a time when the economic downturn already has hurt the refining sector. Demand for fuels is down and third-quarter earnings indicate that refiners are hurting.
09:38 For the industry, the legislation could not have come at a worse time because their ability to finance or invest to mitigate these additional costs is very challenging under the current environment.
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