Prop. 23 is a money saver, Valero contends

The Valero oil refinery sprawls over 140 acres beside the Port of Long Beach, a treeless tangle of steel pipes, smokestacks, boilers and storage tanks fenced in by chain link and razor wire.

Austere and utilitarian, it seems an unlikely launching pad for a high-profile political revolt.

But the sign in front of the Wilmington refinery, in bold black and red letters, says: “On November 2d, Vote Yes on Prop 23.�

Bill Klesse, chief executive of Valero Energy Corp., the nation’s biggest independent refiner and the principal backer of Proposition 23, has a simple explanation for why his San Antonio-based company has contributed more than $5 million to push the ballot initiative to suspend California’s ambitious global warming law.

“It’s really an anti-fossil fuel law,� he told Wall Street analysts on a recent conference call. And Valero’s business is fossil fuels.

In the most closely watched environmental election fight in the country, national conservation groups, Silicon Valley moguls, Hollywood celebrities and California politicians have waged a scorched-earth campaign against Valero and its smaller ally Tesoro Corp., also headquartered in San Antonio, the initiative’s second-biggest funder with more than $2 million contributed.

“The opposition has been able to characterize this issue as Texas oil companies …dirty companies and dirty polluters,� Klesse said.

Critical service

Lost in the hubbub is a basic issue: What would it take for Valero to comply with the current law?

The 40-year-old Wilmington refinery supplies about 15% of Southern California’s gasoline and asphalt, along with considerable amounts of diesel and jet fuel — a critical service to the economy.

To be sure, the boiling, cracking and chemical treating of those petroleum products comes at a price. For decades California authorities have regulated the plant’s air pollution, water pollution and hazardous waste, including such health-damaging substances as nitrogen oxides and sulfur oxides, along with toxic soot known as particulates.

Now California is taking aim at the plant’s annual emissions of 951,913 tons of carbon dioxide. In 2006, the state became the first in the country to enact a comprehensive global warming law, a measure that environmentalists see as a template for national policy.

The law, known as AB 32, or the Global Warming Solutions Act, would slash emissions of greenhouse gases to 1990 levels by 2020. Its regulations will lay out a timetable for energy-intensive industries such as refiners, utilities and cement plants to curb their output of carbon dioxide and other planet-heating gases — or pay millions of dollars in penalties.

Casting doubt

Colorless and odorless, greenhouse gases don’t attack the lungs or hearts of local residents as traditional pollutants do. Rather they trap heat in the atmosphere, disrupting the global climate. The burning of fossil fuels is the main culprit behind global warming, according to leading scientific academies and organizations worldwide.

However, over the last decade, the oil industry has underwritten efforts to cast doubt on the science and fend off carbon curbs. If you want to control global warming, Klesse joked in a keynote speech to the 2008 National Petrochemical & Refiners Assn. convention, “hold your breath.�

At the Wilmington plant, public affairs director Stephen Faichney likes to show visitors a video of Valero workers planting trees on Earth Day, donating Christmas stockings to children and sponsoring the Long Beach Symphony.

“We do thousands of hours of volunteering, but we are being demonized,� he said.

Indeed, Gov. Arnold Schwarzenegger has stumped the state attacking the “black oil company hearts� and “self-serving greed� of Valero and Tesoro. Los Angeles Mayor Antonio Villaraigosa, citing “dirty tricks,� urged: “Go home, Texas oil companies.�

New regulations

Opponents released a report on the companies’ environmental record titled “Toxic Twins,� and environmentalists have staged scores of protests at Valero gas stations around the state.

Boasting the world’s eighth-largest economy, California has an outsized impact. It has already begun adopting regulations under the act, including a mandate that one-third of the state’s electricity come from solar, wind and other renewable sources within a decade, phasing out coal-fired electricity from out-of-state power plants.

Another rule would cut by 10% the carbon intensity of gasoline and other fuels. Carbon intensity is a measure of the amount of carbon emitted over a fuel’s life cycle, including extraction, refining, transport and combustion. The new limit would discourage Valero and other refiners from using crude that comes from Canada’s oil sands, extracted in an energy-intensive process, and ethanol that comes from plants using coal-fired power. Operating costs — and therefore gasoline prices — could increase.

“In a way, the low-carbon fuels [standard] is an electric car mandate,� Klesse said.

Creating incentives

Regulators acknowledge as much: As gas prices rise, cars driven with electricity derived from renewable sources become more economical. The standard “invites electricity to go toe-to-toe with gasoline,� said Stanley Young, spokesman for the California Air Resources Board.

And it creates powerful incentives for alternatives to the fuels Valero makes at its Wilmington plant. Shortly after California approved its low-carbon standard, Exxon Mobil Corp. announced that it would invest $600 million with a La Jolla biotech firm to create fuel from algae. Even Valero has purchased 10 corn ethanol plants in the Midwest.

AB 32’s most expansive program is to be adopted in December: a cap on the emissions of large industrial facilities such as Valero’s. As in Europe’s cap-and-trade market, California would issue emission permits, which companies would then be free to buy and sell on the open market as a way to cut costs.

The design of California’s cap-and-trade system is still under debate, with various industries lobbying intensely over the details. But officials say it will likely begin by granting free permits and phase in auctioned permits over the next decade.

Cost of compliance

But to cut their carbon footprint, “refiners will have to use less energy to make the same product,� Young said.

That makes Valero’s Faichney bristle.

A 28-year veteran who has served as both operations and environmental chief at the Wilmington plant, Faichney said refineries have to burn huge amounts of natural gas and guzzle enormous quantities of electricity to operate high-temperature furnaces and other equipment. The plant’s electricity bill is $25million a year.

“Scrubbers can reduce nitrogen oxides, sulfur oxides and particulates,� he said. “But there is no scrubber for greenhouse gas.�

As for improving the refinery’s energy efficiency, “We replaced an aging boiler two years ago,� Faichney said. “We’ve put insulation in every application where it’s necessary to retain heat. Any increase in energy efficiency would be very small.�

In fighting AB 32, Valero officials had suggested in the past that the cost of complying with the law could total $170 million a year for its two California refineries, in Wilmington and Benicia.

But in the conference call with analysts, Valero acknowledged that the annual cost might be closer to $80 million. “We don’t have the rules or regulations or how it’s all going to work,� Klesse said.

Those estimates don’t take into account California regulators’ pledge to introduce new rules slowly in the early years, and give breaks to firms that face out-of-state competition from unregulated competitors, such as Asian oil refiners.

Higher pump prices

But whatever the cost, Klesse said, “it will all be passed through to the consumer. The companies aren’t going to able to absorb this or they’re going to go out of business.�

In fact, a rise in the price of fossil fuels, leading to a drop in consumption and combustion, is exactly what the state’s global warming law is designed to accomplish. But that won’t necessarily mean higher bills for consumers, Young said.

If a slew of AB 32 regulations accomplish their goals, Californians will drive more fuel-efficient cars, live in greener homes, use more energy-efficient appliances, live closer to public transit and use more electricity from renewable sources. That would drive down the need for fuel, along with the greenhouse gas emissions from Valero’s Wilmington plant.

It could also hammer Valero’s profits. Unlike integrated oil companies such as Chevron Corp., Royal Dutch Shell and Exxon, which drill and distribute crude oil as well as refine it, independents such as Valero and Tesoro cannot spread costs across other operations.

Through the first nine months of 2010, Valero has posted a profit of $762 million on revenue of $63.6 billion, after two calendar years of losses.

‘Let the voters vote’

But with gasoline demand still in a slump because of the recession, “independent refiners are fighting for their lives,� said Doug Leggate, a senior analyst at Bank of America Merrill Lynch. Valero owns 13 refineries outside the state, but “AB 32 puts companies with California refineries at a gross disadvantage,� Leggate said. “They would have to incur additional costs.�

Proposition 23 is trailing badly in the polls, and Klesse was pressed in his call with analysts to explain how his company would deal with the reality that California is getting tough on carbon emissions.

“How does Valero respond to the cap-and-trade and low-carbon fuel provisions of AB 32?� one caller asked. “And how do you see the situation playing out in the state?�

After all the drama of the Proposition 23 campaign, all the inflammatory TV spots on both sides, all the political consultants and news conferences, all the tens of millions of dollars poured into the fight, Klesse’s response was notably matter-of-fact.

“We’ll let the voters vote,� he said.�We’re in business in California and it’ll just continue. And we’ll see what the actual regs look like, and then we’ll take actions around them.�

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