California regulators delayed a vote this week on new refinery resupply rules meant to mitigate retail gasoline price spikes, but refiners are still wary that the state is moving to make the most regulated market in the US even tougher.
The California Energy Commission (CEC) had scheduled a vote on refinery resupply rules at its 24 April business meeting but said the meeting is now postponed to allow for additional feedback and consultation with stakeholders.
The draft rules under consideration would require refiners to submit resupply plans to the state at least 120 days before any planned maintenance in September and October that would cause California specification gasoline production to decline by 20,000 b/d for at least 21 days or a total of more than 450,000 bl. Large spikes in California prices occurred in the fall of 2022 and 2023.
The commission is also planning rulemaking this year on minimum inventory requirements to avoid price spikes in the event of unplanned events, as well as possible rules on setting a refiner margin cap.
The timing of the new regulations is precarious, as two major refineries in the state are planning to shut operations within a year. Independent refiner Valero said on 16 April it is planning to shut or re-purpose its 145,000 b/d refinery in Benicia, California and continues to evaluate strategic alternatives for its other refinery in the state – the 85,000 b/d Wilmington facility. In addition, Phillips 66 is planning to shut its 139,000 b/d Los Angeles refinery later this year.
Effort to stop gasoline price spikes
The California rules stem from two pieces of legislation signed by California governor Gavin Newsom known as AB X2-1 and SB X1-2, part of a multi-year effort to mitigate price volatility in the state, after some of the highest gasoline prices ever recorded in the fall of 2022.
US refiners have long opposed the new regulations seeing them as a political attack on the industry, conflicting with other laws and the latest example of an increasingly difficult regulatory environment in the state.
The CEC has conducted workshops to help draft the rules with the participation of labor groups, the refining industry, environmental justice groups, community advocates, and the public. The industry was largely represented by the Western States Petroleum Association (WSPA).
WSPA told the commission that the resupply rule could conflict with existing statutory requirements for refiners not to withhold fuel from the market and could result in market distortions and undesirable price impacts. The rules could also make it hard for Arizona and Nevada to secure needed supplies in the face of regulations expressly favoring Californians' access to fuel, WSPA said.
The rules could also force refiners to use "uneconomic strategies" to secure non-spot market resupplies and additional capital to guarantee inventories that could potentially lead to higher gasoline prices, the group said.
AB X2-1 forbids the CEC from adopting any regulation "unless it finds that the likely benefits to consumers from avoiding price volatility outweigh the potential costs to consumers."
WSPA said it is concerned that the CEC does not "have the facts in front of it to legitimately support such a finding" with respect to imposing the resupply requirement.
Under the draft resupply rules, refiners must show they can secure sufficient supply to ensure that lost gasoline production anticipated during the maintenance does not adversely affect the California transportation fuels market.
The plan must show a resupply volume of at least 85pc of the anticipated lost gasoline production during the maintenance and the resupply volumes must match the seasonal specification of the lost production. The resupply plans could include imports and each barrel of resupply obtained by imports will count as 1.3 barrels of resupply.
In addition, a plan that includes resupply through the purchase or storage of gasoline blendstocks or gasoline blending components must explain how such materials will result in an equivalent amount of California specification gasoline.
Non-compliance could carry a civil penalty of $100,000-$1mn per day.
Refineries with capacity under 30,000 b/d are exempt from the resupply regulation.
The rules would apply to five major refiners operating in the state — Chevron, PBF Energy, Phillips 66, Valero and Marathon. Phillips 66, however, will be closing its Los Angeles refinery by October and converted a refinery in Rodeo, California, to renewable fuels in 2024.
Since the 1980s, 29 refineries in California have been shut or integrated with other refineries that eventually closed or converted to renewable fuels production, according to CEC data. About half of the shut refineries were smaller operations, producing less than 20,000 b/d.
Looking at options
The CEC caused a stir in August 2024 when it released its Transportation Fuels Assessment, which examined policy options to mitigate price spikes and transition away from fossil fuels including the state of California buying and owning refineries. The assessment said this could range from one refinery to all refineries in the state.
But the document also highlighted problems with such a plan, including the high cost of buying refineries, significant legal issues, and the fact that the state has no experience managing complex industrial processes.
California is not currently pursuing this option, state officials said.
Another idea in the Transportation Fuels Assessment involved state-owned product reserves in the north and south of California to allow rapid deployment of fuel when needed. This could include "up to several hundred thousand barrels."
The CEC and the California Air Resources Board are drafting a formal Transportation Fuels Transition Plan which will serve as a road map to move away from fossil fuels. A draft of the report will be released later this year. The Transportation Fuels Assessment and the Transportation Fuels Transition Plan were mandated under SB X1-2.
