Week in Oil & Gas: Climate Bill Hurdles and Refining Blues

A key Senate panel — along with environmentalists, oil and gas industry folk and government energy officials — squared off last week in a round of hearings aimed at hashing out the details of a climate bill.

The initial hearings, as the WSJ notes, took on a familiar political shape as advocates and the opposition issued praise or critical jabs of the Senate’s version of a climate change bill. The hearings, while combative at times, apparently progressed enough to warrant an official markup by the Senate panel. Although they may be missing a few Senators when it happens.

The Senate Environment and Public Works Committee, led by Barbara Boxer, D-Calif., is expected Tuesday to try and begin a markup of the bill — despite a planned boycott by the panel’s seven Republicans.

But a possible boycott of the bill’s markup is a small hurdle compared to the No. 1 obstacle facing climate legislation: the cost. Meaning, who will shoulder the cost of reducing greenhouse gas emissions and how much will it amount to?

U.S. refiners will be particularly battered by climate change legislation, according to a new report by Wood Mackenzie. The energy consultant company found cap-and-trade legislation will cost U.S. refiners about $100 billion a year by 2015 and gives foreign refiners and producers a competitive advantage. Wood Mackenzie analyzed the House version of climate change legislation. The Senate version, as the WSJ notes, has even tougher rules for refiners right now.

Why so much? The climate bill doles out emissions credits to a variety of industries to help lessen the burden and the cost of reducing their greenhouse gases.

U.S. refiners receive a paltry portion of free emissions permits compared to say, the coal industry. And refiners must buy permits for not only what they emit at their facilities, but holds them accountable for emissions from their fuel products after they reach consumers as well.

Of course, the Wodd Mackenzie report is nothing new to the refining industry, which has been lobbying against the bill for months. The latest push came from Bill Klesse, CEO of Valero Energy, the largest U.S. refiner.

Klesse, speaking last week before the Senate Environment and Public Works Committee, said the climate bill is a threat to national security because the penalties for U.S. refiners are so great that foreign companies will be able to increase its fuel imports.

The stakes for the industry are already high as the refining business has suffered for several quarters.

A slew of oil companies reported their third-quarter earnings last week and their results all tell the same story: weak demand, high inventories and rising crude prices are squeezing margins.

Chevron’s profits in its downstream business fell 89 percent to $194 million compared with the same period last year. ExxonMobil and Royal Dutch Shell’s downstream segments also were hit by shrinking margins.

And it doesn’t look like it’s going to get better anytime soon. At least that was the message from Chevron Chairman and CEO David O’Reilly late last week, who told investors during a conference call “I would expect 2010 and 2011 to be pretty sloppy before we see this begin to come back into better balance.” 

And finally, last week the New York Mercantile Exchange took a hit, after Saudi Arabia — the world’s biggest oil exporter — decided to drop the West Texas Intermediate contract as the benchmark for pricing its oil.

The price of WTI separated from the global oil market this year — a development that created some discontent in Saudi Arabia and its U.S. refinery customers, the FT reported.

The WTI is the world’s most heavily traded oil futures contract and is the main one traded on the Nymex, the FT notes, making the development troublesome, to say the least.

BNET Energy coverage from the week:

• Chevron CEO O’Reilly: Refining Outlook Looks Sloppy Through 2011
• Clean Coal, a Global Failure in the Making
• First Solar: Knocked Off Course by an Acquisition
• Cow Burps OK: House, Senate Block EPA From Regulating Livestock Emissions
• Valero CEO: Climate Bill threatens U.S. National Security
• China’s Big Bet on Rail Transportation