Jones Act and environmental regulations protect California refiners market from competition

by Michael Hansen, Hawaii Shippers Council, April 18, 2016

Platts’ The Barrel Blog published on April 18, 2016, the article, “California’s tough rules a blessing and curse for refiners: Fuel for Thought,” reporting that petroleum oil refiners in California find the onerous combination of regulations impinging on the petroleum industry in the state an attractive business opportunity.

The combination of regulations is: California State’s strict gasoline specifications and tough permitting process for new refinery capacity, and lack of product pipelines from outside the region coupled with the federal Jones Act cabotage.

This regulatory environment allows California’s refineries to charge a premium for gasoline meeting strict specifications, protects existing refineries in California from new entrant competition by a tough permitting process that makes it’s virtually impossible to add new capacity in the market region, and without product pipelines from outside the region, rules out ocean shipments of domestic petroleum products to California from other U.S. regions due to the cost of Jones Act shipping.

The article explains this regulatory environment has lead East Coast refiner PBF Energy Inc. (NYSE: PBF) to actively pursue acquisition of the ExxonMobil Corp. (NYSE: XOM) Torrance, California, refinery, which appears to be imminent due to a change in regulators.

The PBF Executive Chairman said, “Southern California is a very attractive market and we are excited to become a supplier in the region.” The article explains that this effect extends to other Western state markets including Washington State and Arizona.

The principles applicable to the California petroleum market without doubt similarly impact Hawaii, with the exception that the two Hawaii refineries represent excess capacity. Contrary to the protestations of the Jones Act industry, cabotage does make petroleum products more expensive.

Key excerpts:

Refiners operating in California expect a tough environmental regulatory permitting process. This has been a bit of a curse at times, causing long delays and restrictions on modifying their plants.

But it has also been a blessing. While the strict rules make the fuels more expensive to make, it also limits the number of suppliers who can supply the fuel to California, giving regional refiners virtually unlimited access to demand in a state where gasoline demand is greater than any other and growing.

Give this backdrop, it was interesting to see what may have been a brief loosening of restrictions in Southern California because of a personnel change open a window of opportunity for the restart of ExxonMobil’s Torrance refinery.

That reopening, which had been slowly moving through the environmental regulatory process before the ouster of the longtime head of South Coast Air Quality Management District, was necessary before ExxonMobil could sell its Torrance plant to East Coast refiner PBF Energy.

The state’s strict CARBOB gasoline and diesel specifications make the fuels more expensive to produce, it also limits the number of suppliers who can sell the fuel to California drivers.

The higher production cost, combined with logistical issues such as lack of pipelines bringing in product from outside the region and the expense of fixing a Jones Act vessel from other US regions, give regional refiners the upper hand in supplying California and surrounding states like Washington and Arizona, who have opted in to using California spec fuels.

And while other refiners have said at various times they want to leave California, it helps explain why PBF’s iconic executive chairman, Tom O’Malley had been on the lookout for a California refinery.

“Southern California is a very attractive market and we are excited to become a supplier in the region,” he said, after the PBF deal to buy Torrance was announced in late September 2015.