Why Aren’t Refiners Recovering Stationary Source Cap & Trade Costs?
September 20, 2019
by Jeff Kennedy
“The more things change, the more they stay the same.” I’m sitting here on a Friday afternoon, contemplating just how true that old adage is. More than 25 years ago, before Stillwater was launched and before the ExxonMobil merger, I was with Mobil West Coast Supply in Long Beach working with many of the same colleagues that I work with here at Stillwater today. Some genius (a current Stillwater Associate) had converted Mobil’s California upstream and downstream departments into one giant integrated business unit focused on profit, cash, and return. That doesn’t sound like a big deal today, but 25 years ago it was a groundbreaking, game-changing strategy.
I learned that there are certain self-evident truths if you refine and sell at the rack:
- The market giveth and the market taketh away;
- Refining is a highly competitive business – if you are standing still, you are falling behind;
- Cost increases are like death and taxes – inevitable. And regulatory authorities, boards of directors, shareholders, and investors are not interested in logical explanations as to why returns suffer.
California refiners should keep these truths in mind when developing their Stationary Source Cap & Trade (SSC&T) compliance strategies.
California’s Global Warming Solutions Act of 2006 (AB 32) addresses climate change with a variety of programs – cleaner cars, renewable energy, energy efficiency, and Cap & Trade (C&T) – designed to collectively reduce greenhouse gas (GHG) emissions to 1990 levels by 2020. AB 98, passed in 2017, extends the C&T program to 2030 and pushes the emission reduction goal to 40% below 1990 levels. The C&T rule applies to large “stationary” sources like oil refineries.
Stillwater has been monitoring SSC&T costs for some time (click here for Stillwater’s SSC&T benchmark). For 2019, California GHG emitters received “free” allowances that reduced their aggregate cost to $197 million annually. But the California Air Resources Board is phasing out the freebie – the full nut is more than a $500 million per year. But that’s not even the sum of it; the $500-million figure assumes the auction price for carbon allowances stays the same while demand more than triples. If GHG emitters need enough allowances that they bid up the carbon allowance price to mandated reserve price levels (reserve prices start at $41.40 and $53.20 per ton in 2021), SSC&T will bleed $1.4-1.8 billion from California refiners’ bottom lines.
Other GHG fees in California – like the Low Carbon Fuel Standard (LCFS) and C&T – are passed along to the consumer, to the tune of 30 cents per gallon, all told. Meanwhile, strangely, refiners pay for SSC&T out of their own pockets rather than passing that expense along to consumers. Smart refiners will get out in front of this, unless they have an extra billion and a half in cash laying around.
Do you have questions about how to recover your SSC&T costs? Stillwater Associates brings together the most unique blend of real-world downstream experience, building competitive advantage and delivering results. Our team has been accountable for results in just about anything that you might be challenged with. This experience enables us to see the things no one else does, get the questions right, then craft the right answers and solutions for our clients. We’re already asking the question no one else is: Why aren’t refiners passing SSC&T costs through the downstream supply chain? Contact us if you’d like help with a solution.