California's Proposition 23 Loss Could Burn Refiners In Future

HOUSTON -- While the refining industry spent millions trying to curb California's climate law via Proposition 23, it will spend much more trying to adapt to it, Dow Jones reported.

California's climate law will force U.S. refiners to spend millions of dollars to update or replace equipment to meet the state's greenhouse gas emission targets, which are among the strictest in the country, according to the those who operate on the West Coast.

Valero Corp., Tesoro Corp. and others spent more than $9 million advocating the merits of Proposition 23, which would have suspended California's greenhouse gas emissions targets until unemployment in the state -- which has been around 12 percent since August 2009 -- dropped to 5.5 percent for at least a year. Californians voted 61 percent against the measure. The state is aiming to reduce greenhouse gas emissions to 1990 levels by 2020, according to the report.

Valero, the largest independent U.S. refiner, reported third-quarter throughput of 272,000 barrels a day at its two California refineries, 11 percent of its total for the period. Meanwhile, Tesoro said it processed more than half of its third-quarter throughput of 474,000 barrels a day at its two California refineries, Dow Jones reported.

Valero spent more than $5 million backing Proposition 23. Bill Klesse, chief executive of the San Antonio-based company, told investors last week that the company would "work around" the emissions targets if the proposition failed. But the CEO has also said the cost of meeting the clean air rules would force Valero to lay off some of the 1,600 people it employs at the two refineries and 83 retail outlets it owns and operates in the state.

Market and industry analysts said the proposition's failure probably won't cause refiners to engage in massive layoffs or exit the market yet. But the defeat could further dampen profits in an already tough business environment and make the state a ripe target for foreign producers.

Dominick Chirichella, a trading analyst with consultancy Energy Management Institute, said meeting the emission standards would potentially raise the cost of refining on the West Coast enough to make the region more open to refined product imports from Asia.

"Imported oil would increase, and jobs would in essence be outsourced to refinery centers outside the U.S.," Chirichella told Dow Jones.

Other industry watchers said West Coast refiners are accustomed to California's relative high cost of business and will find a way to work with the emissions targets.

One question, though, is whether other state or federal regulators will look to copy California's greenhouse gas limits. Donors spent more than $30 million to quash the refiners' proposal, according to data from the California Secretary of State, far more than refiners spent.

"When the Obama administration sees the strong vote against it, they may use that to push more stringent rules next summer," Carl Larry, an analyst with market research group Oil Outlooks and Opinion, said in the Dow Jones report.

Sandar Cohan, a refining industry analyst for research firm Energy Security Analysis, told the news organization that refiners could still see some relief. State regulators could tweak the state's emission targets to help refiners if they decide the current schedule is unworkable, he said.