Cost to US refiners over one hundred times more than European counterparts

Proposed US carbon legislation could threaten the sustainability of the US refining industry, potentially costing US refiners US$100 billion per year, and appears to give undue favor to non-US refiners warned Wood Mackenzie in its report ‘US Refining – The potentially disruptive impact of carbon’.

Alan Gelder, Head of Downstream Oil Consulting for Wood Mackenzie said: “The draft US legislation is much more onerous on the US refining sector than its European counterparts. Firstly, 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”.

“Furthermore, the free allocation – or cap - for the US refining sector equates to less than five percent of total carbon emissions from the production and consumption of transportation fuels in the US. We expect US refiners will need to purchase around 2000 million credits in 2015, to the tune of US$100 billion per year.”

Even though the projected costs of credits between the two regions are similar, refiners in North West Europe are expected to only purchase 3 million credits in 2015, around 0.1 percent of the US requirement.

In spite of the cost implications for the refining sector, Wood Mackenzie anticipates that the impact on oil 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 oil products supply: “The current legislation’s provisions on intra-state trade could offer significant advantages to long-haul gasoline exporters, prompting rationalization of the US refining industry. Even if this intra-state 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 stated.

The report by the independent research consultants is a comprehensive comparison of the potential impact on US refiners of the proposed Waxman Markey bill, HR 2454, versus their counterparts in North West Europe where changes to the existing European Emissions Trading Scheme (ETS) – equivalent legislation - will progress into Phase III 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 health care, 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 CO2 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.”