Date: 04-Aug-09
Country: US
Author: Ayesha Rascoe

WASHINGTON - Ailing U.S. oil refiners could face a crippling period of contraction under a House-approved climate change bill, making the country more dependent on imported refined products.

The so-called cap-and-trade bill narrowly passed by the House of Representatives in June would limit greenhouse gas emissions by requiring polluters to acquire permits for the carbon dioxide they spew into the atmosphere.

To soften the blow, industry would initially be granted free permits covering 85 percent of emissions. But the refining industry managed to get only 2 percent of the allowances, leaving them vulnerable to encroaching foreign companies.

The bill is "going to put them out of business," said Phil Flynn, analyst at PFGBest Research in Chicago. "I think you're going to see refiners close down, especially in this environment we're in right now."

U.S. refiners say it is unfair they would receive just 2 percent of permits, while utilities won 30 percent of permits initially, covering most of their emissions.

Huge refining complexes operated by oil majors such as Exxon Mobil Corp or BP Plc are unlikely to go under. But smaller independent facilities, which are likely to be older and more polluting, are at risk.

Sarah Ladislaw, a Fellow in Energy at the Center for Strategic and International Studies, said any bill seeking to combat global warming would probably hurt U.S. refiners.

"The ultimate aim is wring carbon out of the system and the refining industry is all about producing carbon-based fuels, so ultimately ... it will be harder for them to do their job," Ladislaw said. "But that's in essence the goal."

Under the bill, refiners are responsible not only for the 4 percent of emissions released from refineries when processing crude oil but also the gases emitted from use of fuels produced such as gasoline and heating oil.

Altogether, refiners would be accountable for more than 40 percent of emissions, forcing them to purchase the majority of their permits. These additional costs would burden an industry reeling from weak demand and improving fuel efficiency.

"The industry going forward would not be the industry we see now and whether or not it would be able to supply the finished products that American consumers need and want would be highly problematic. This is that serious," said National Petrochemical and Refiners Association President Charles Drevna.

U.S. refineries now are operating at around 83 percent of their capacity to process 17.7 million barrels of oil a day into petroleum products, according to government statistics.

The United States imported about 3.1 million barrels per day of refined products in 2008. U.S. imports of gasoline totaled 302,000 bpd last year.

Companies that import refined products would still have to purchase permits for the emissions released from the fuels. But foreign companies who already have the advantage of weak environmental rules would not have to pay for emissions released from processing oil at their facilities.

U.S. Representative Gene Green of Texas was instrumental in getting the 2 percent permit allocation for domestic refiners included in the House bill. Green said it was vital to have imported petroleum products covered by the legislation, but that refiners would still face some competitive short falls.

"Cap and trade is not an easy one for refiners, so we tried to get some moderation in the bill and we did, but not near as much I would like," said Green, who voted for the bill.

The additional environmental costs for U.S. refiners may make it harder to attract investment dollars to improve aging, less-efficient refineries, said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University in Texas.

"I think you're going to see more capital directed at refineries where the returns are higher, which are the newer, larger refineries overseas," Bullock said.

But some analysts say the legislation will not cripple U.S. refiners because they will be able to pass most costs along to consumers.

As the Senate takes up the climate bill, it is unclear whether major industry groups lobbying to rewrite the bill completely will have more influence in the Senate.

(Reporting by Ayesha Rascoe; Editing by David Gregorio)

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