Valero Energy Corp., whose renewable fuels arm is expanding, signaled Thursday that the most efficient way to reduce U.S. emissions could be via a carbon tax.

CCS

The San Antonio-based global refining giant’s management team shared a microphone to discuss first quarter performance and the outlook for the year. Valero has plenty of skin in the game as it operates 15 refineries in the United States, Canada and the UK with combined throughput capacity of 3.2 million b/d. It also operates 13 ethanol plants in the Midcontinent with total production capacity of 1.69 billion gallons/year. 

Executives were quizzed on a variety of topics during the call, including their view of implementing a carbon tax for U.S. emissions. Carbon taxes are in place around the world but have never gotten the green light in the United States, despite support by Fortune 500 CEOs and prominent Democrats and Republicans. 

Carbon taxes proposals have “various discussion points out there,” said Senior Vice President Rich Lashway, who oversees Corporate Development and Strategy. “You’ve got some trade groups…other folks talking about carbon tax…Generally speaking, in terms of best ways to reduce carbon emissions, the most efficient way to do that in the economy is with a tax. 

“We would say the key components of this is the tax has to be applied broadly and brought across the entire economy,” Lashway said. “You need to make sure…it doesn’t resolve if we’re exporting the emissions outside the country. So you’re going to have to have some kind of border adjustment process around it.

“But yeah, I think a carbon tax is an efficient way to address some of these issues and to help lower carbon. I point out that we do quite well…in this low-carbon fuel environment.. And so we think we would be advantaged under that regime as well.”

Interest In CCS

Valero has been working to reduce its emissions and expand its market base with renewable diesel via its partnership in Diamond Green Diesel. A plant in Norco, LA, is North America’s largest biomass-based diesel facility.

Last month Valero agreed to partner with a unit of BlackRock Inc. and Navigator Energy Services to develop an industrial-scale pipeline to gather, transport and store carbon dioxide (CO2) emissions from Valero ethanol sites in five Midwest states. 

Valero agreed to anchor the carbon capture and storage (CCS) system, which would traverse more than 1,200 miles of Illinois, Iowa, Minnesota, Nebraska and South Dakota.

BlackRock is the financial sponsor while Navigator is leading the engineering, construction and operations for CCS, Lashway said. The goal is to reduce carbon intensity (CI), he told analysts.

“We’re estimating that by doing this we’ll lower the carbon intensity of the ethanol that we produce from kind of a 70 CI down to a 40 CI,” he said. “Today the CI ethanol carries a premium into the California market,” and the economics also are supported by the tax credits. “We expect that further markets will develop for the low-carbon fuel, increasing demand for this premium product.”

Navigator has launched a nonbinding open season to test support for the CCS system so it can “right-size the project and optimize on the routing,” Lashway said.

“The open season is going very well, and we’re seeing strong interest from ethanol producers and other industry players. But we’re especially surprised by the strong interest from the fertilizer plants.” Given the strong interest to date, Navigator plans to begin a binding open season this summer.

CEO Joe Gorder told analysts the 40 CI reduction in ethanol is worth about 47 cents/gallon today. Out into the future, “it stays right in that range of about 50 cents/gallon at a $200/ton carbon price.”

California and Oregon already have ethanol incentive programs, with “New York, New Mexico, Washington” to advance “legislation in place for low carbon,” Gorder said. “We expect those to happen over some time in the next few years…We expect no slowing down on  low-carbon mandates or clean fuel standard mandates.”

Said Gorder, “We have a clear recognition here that low carbon fuels are going to be in much greater demand going forward…We believe that liquid fuels are going to be part of the energy mix going forward. It’s infeasible to think that they wouldn’t, and we just want to do our part and continue to provide low-carbon products.”

Pent-Up Demand

Gorder also expects to see higher demand for gasoline heading into the summer.

“As we head into summer, we believe that there’s a pent-up desire among much of the population to travel and take vacations, which should drive incremental demand for transportation fuels,” he said. “We’re already seeing a strong recovery,” with gasoline and diesel demand at 93%. “Since March air travel has also increased,” per federal data, “which shows that passenger count is now nearly double of what it was in January.”

In addition, Valero is “seeing positive signs in the crude market with wider discounts for sour crude oils and residual feed stocks relative to Brent,” Gorder said. “All these positive data points coupled with less refining capacity as a result of refinery rationalizations should lead to continued improvement in refining margins in the coming months.”

Net losses totaled $704 million (minus $1.73/share) in 1Q2021, versus a year-ago loss of $1.9 billion (minus $4.54). Operating losses in 1Q2021 included estimated excess energy costs of $579 million ($1.15/share) related to impacts from Winter Storm Uri.