A new study by Wood Mackenzie, the consultancy, confirms what others have warned about in recent months and takes it one step further: The carbon legislation being considered by Congress is more onerous than that in Europe and could threaten the sustainability of the US refining industry. Alan Gelder, Wood Mackenzie’s head of global downstream oil consulting, said, if passed into law, the legislation could cost US refiners US$100bn per year.
That is because they will be required to purchase carbon emission credits for both stationary emissions – from the refineries themselves – but also emissions from the subsequent combustion of the fuels. Gelder says the US draft legislation is much more onerous on the US refining sector than its European counterparts.
He explains that the free allocation of allowances for the US refining sector equates to less than 5 per cent of total carbon emissions from the production and consumption of transportation fuels in the US – or about 100m tons in 2015. The inclusion of consumption emissions, combined with a lower free allocation of credits, will mean US refiners must purchase around 2bn credits in 2015. Given the carbon emissions reduction goals set by both the House and Senate climate bills, Gelder says carbon will have to be priced at $50 a ton, or even higher, in any final legislation.
At those prices, credits will cost refiners $100bn per year, which is equivalent to approximately $20/bbl of crude for a carbon dioxide price of $50/ton. In contrast, he said, refiners in north west Europe are expected to only purchase 3m credits in 2015. He sums it up here:
The costs of carbon increase overall operating costs, so significantly reducing the future cash flows and hence enterprise value of the US refining industry.
That, in turn, means the proposed carbon legislation appears to give undue favor to refining importers. This is the same conclusion reached by EnSys Energy, the global consulting firm, which said production at US refineries would drop if the climate legislation under consideration became law, while production at refineries in countries that do not limit their own greenhouse gas emissions would rise. And that means the impact on global refinining greenhouse gas emissions would be minor as reducitons in US emissions mostly would be offset by increases in emissions in other countries.
Jack Gerard, president of the American Petroleum Institute, the national trade organzation, had this to say:
A deep decline in US refining activity would have a ripple effect throught the economy, affecting jobs in sectors beyond the oil and gas industry. Steelworkers, construction workers, even the shop keepers, school teachers and waitresses working in communities where refineries operate would feel the pinch. Climate legislation should not come at the expense of US economic and energy security. Congress needs to analyze carefully the impact of any climate policy on ordinary Americans, American jobs and American companies.
While it does seem that the refining segment is being unfairly targeted, given all the giveaways to coal and others who have effectively managed to lobby Congress to protect their special interests, there is one big picture issue being sidestepped here. If the US does not take drastic measures to reduce carbon emissions, those shop keepers, school teachers and waitresses will have more to contend with than economic difficulties. All of these carbon emissions, whether one believes in global warming or not, are harmful to people.
The point is that the refining segment should not be the only target, simply because it does not have high level lobbying connections in Washington. The pain should be better spread across sectors and up the entire energy chain, from the producers to the consumers. For, in the end, pain must be inflicted if the US is going to make any impact, however slight, on global warming.
