"CALIFORNIA'S GREENHOUSE GAS REDUCTIONS PROGRAMS: CONCERNS, IMPACTS, AND MARKETER PERSPECTIVE"
PACIFIC OIL CONFERENCE
GRAND SIERRA RESORT, RENO, NEVADA, SEPTEMBER 17, 2012

We are in the bullseye. This area of climate change regulation is bound up in a public policy goal of reducing petroleum consumption. You could achieve tremendous greenhouse gas reductions through energy consumption reduction. You could achieve it through the use of diesel. But that's not what the state wants. They want the reduction of the use of petroleum.

About 6 months ago, at a Board meeting where CARB was continuing to put forward regulations to put the low carbon fuel standard in place — they've been doing that for years — as the regulations are being put into paper, we're able to start to assess the likely impacts of these regulations. CARB noted they hadn't looked at the cumulative impact of all these regulations. WSPA agreed to look at the cumulative impact of the regulations and hired The Boston Consulting Group to look at the impact from the perspective of a refiner.

Cap and Trade says there is a baseline CO2 emissions level and you have to reduce it every year. If you can't do that, you have to buy credits to make up the difference. For stationary sources, the cost for compliance would be 2 cents to 8 cents per gallon.

In 2015, refiners will be responsible for fuel emissions from all the cars in California. That will be 14 cents to 69 cents per gallon to comply.

Then you have the low carbon fuel standard. The cost to comply will be 33 cents to $1.06 per gallon.

Boston Consulting Group believes this will be analogous to the electricity marketplace. There could be spikes in the cost of carbon, and therefore, compliance.

What is your trade exposure? Are you likely to move out of state? CARB believes refiners are not. So they are going to have to purchase allowances that will allow them to comply.

What CARB has done through their trade designation categories is not just a cost — it's an energy tax. Refineries are going to have to pay close to an additional $600 million annually due to these fees.

Everybody in the state of California knows this is a problem. It's going to be passed along to the consumer and it's going to hit the marketplace like a ton of bricks.

Mary Nichols came to one of our board meetings and acknowledged that these were difficult problems for us. She asked us to not just show her problems but to show her solutions. So we commissioned a consulting group to come up with other scenarios. And they did. One of them was a straightforward carbon tax.

It's a big problem and 2015 is not far away.

What happens under the low carbon fuel standard? Boston Consulting estimates you're going to lose 50% of your refinery capacity in the state. The remaining refiners are going to produce the majority of their gasoline in California and export it to Latin America. Why? It destroys the demand for gasoline in California. Diesel, not as much. You have 14 refineries for gasoline now in California. They'll saturate Arizona, Nevada, and the Southwest. The rest is exported to Mexico and Central America. You've got the emissions from production in California if you care about such things, by the way, and none of the fuel produced.

CARB has no idea what it's doing in terms of what the market is doing. Right now, the market is basically in balance. That market will get completely turned upside down under the low carbon fuel standard.

That assumes it is feasible. That assumes there is enough of this low carbon biofuel to meet the standard. And there is not enough low carbon biofuel available to meet this standard within its time frame.

Brazil — the only location that makes "low carbon" fuel ethanol — made 360 mbpd in 2011 and they used it all. But by 2020, low carbon fuel standard targets will require 85% of gasoline sold in California to be E85. It would work if there is cellulosic ethanol. There is not sufficient cellulosic ethanol. CARB's solution to this problem? Pay us.

Our members don't want to become hydrogen people. They don't want to become electric car salespeople. They want to refine petroleum.

New regulations requires oil companies to build, maintain, and supply hydrogen fueling stations at service stations they do not own or operate. The initial cost for refiners is $1.25 billion. This does not include costs of supplying, maintaining, and operating facilities. A refinery would have to buy and fuel a hydrogen fueling station in someone else's station. How would that work? Who would run the site? Who would have the liability if something went wrong?

CARB would like to see hydrogen fueling stations because they have a deal with the vehicle manufacturers and they've promised hydrogen fueling stations will be available. It doesn't really show an understanding for how markets work.

In the past, CARB would pursue policies that we didn't like, but there was always the opportunity to sit down and talk with them and we would see an attempt to work with the regulated community. We haven't seen that for the last 3-5 years.

CARB has made a lot of decisions about how many allowances you're going to get for free and how many you're going to have to pay for. That has nothing to do with reducing carbon emissions. It's about the price of admissions to play in the state. It's about helping to balance the state budget on the backs of the businesses in California. It is going to make California's economic recovery even more distant.

Let CARB know that people are paying attention, that they get it.

The Sacramento Legislative Analysts Office had a report a week ago that said you don't need an auction. You don't need to charge businesses to have a cap and trade program. You don't need to sell allowances at auction. So that's added some weight to the argument and brought to light what they're trying to do.

Mary Nichols said the Boston Group study was a constructive study. They haven't been able to tear it down. They understand the state looks crappy after the impact of this thing hits and there are some concerns.

One thing you're not hearing any more is how this is going to be a benefit, the market is going to embrace these changes, alternative fuels are going to be available for cheaper than traditional gasoline, and it's going to be a beautiful world. We used to hear about benefits of the program. Now we're hearing about how they're going to manage the negative impact.

CARB is in the process of turning the market upside down.

The Governor in Oregon has said he likes this idea — he calls it his Clean Fuels Program — and there was a hearing on adopting a low carbon fuel standard in December. They have keyed it to the availability of the biofuels and they have created off-ramps. They say if the price of fuel in Oregon rises a certain level above the national standard, then the program is suspended.

Oregon is a perfect example. People really want to do the right thing. They want to do something about climate change. They're okay with their state being environmental leaders and they're prepared to pay a price to do it. The problem is, we don't think they're being told in an honest way how much more they are likely to pay.

In the last 3 months, we've begun to see numbers emerge from CARB for the first time.

We've seen CARB at every one of Oregon's hearings about this issue. CARB desperately wants another state to go down this path, to engage in the experiment they're engaging in.

We have one more legislative session, in our view, to fix the low carbon fuel standard. The Boston Consulting Group study found that we are literally talking about fuel shortages. If there is insufficient fuel to blend with gasoline, they will not sell the fuel. There could be fuel shortages. There could be fuel rationing.