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VOL. 124 | NO. 108 | Thursday, June 4, 2009

Valero, State Tension Eases

By Andy Meek

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It’s too soon to say the danger has passed for Valero Energy Corp.’s Memphis refinery, which officials had been worried would be forced to shut down if state legislation with an expensive new mandate stays on track.

But Valero spokesman Bill Day told The Daily News company officials believe a final agreement on compromise language will be coming in a matter of days. The bill pending in the Tennessee General Assembly would have compelled the Memphis refinery – which processes about 190,000 barrels per day – to start making finished gasoline available to wholesalers without ethanol.

Day discussed the situation the same morning Valero said it expects to post a second-quarter loss of about 50 cents per share, prompting a drop in premarket trading Wednesday morning.

Valero, the only oil refinery in the state, already is following a federal mandate to blend ethanol into its finished gasoline. The pending state bill would mean

Valero has to make its product available to wholesalers who can blend it themselves and then take advantage of tax benefits for doing so.

Valero officials have said that requirement would force the refinery into a position that’s not financially viable.

“We’ve said that forcing us to do that would mean so much money going out the door (to make that happen) we might have to close the Memphis refinery,” Day said. “Since then we’ve worked with the bill’s sponsors and supporters, and we believe we’ve come to an agreement on language that would alleviate our concerns on having to spend so much money.”

Meanwhile, early concern about the San Antonio, Texas-based refiner’s Q2 numbers came partly from downtime at some refiners, lower diesel margins and sour crude oil discounts, according to the company. The expected drop was a sharp departure from analysts’ average estimate for quarterly profit of 74 cents per share, according to a Thomson Reuters poll.

Deutsche Bank analyst Paul Sankey cut his full-year profit estimate for the company to 94 cents per share, down from an earlier estimate of $2.22 per share, in response to Valero’s news.

“Obviously, these are tough times for the refining business, and we’re as affected by the downturn as anybody else,” Day told The Daily News. “Demand for our products – diesel, jet fuel, gasoline – all depends on economic growth. And when the economy is not growing, demand for those products drops off dramatically.”

Day said Valero’s Memphis facility is one of 16 refineries in Valero’s system, and it was built in 1941. Its daily processing capacity makes it smaller than many other Valero facilities, some of which can process as many as 300,000 barrels per day.

The Associated Press contributed to this story.

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