On Friday, Valero picked up some of bankrupted VeraSun’s ethanol plants for $280 million. The plants are available for relatively cheap, which is a good deal for Valero as the government is pushing mixed ethanol and gasoline standards.
The Wall Street Journal’s Environmental Capital blog explains the logic behind the move:
In past years refiners fiercely fought ethanol mandates, arguing that the corn-based fuel doesn’t neatly fit into the existing network of refineries, pipelines and pumps, which were designed for an oil diet. Ethanol, they said, creates all sorts of logistic headaches. That is a battle they lost, however, and every year refiners are required to blend more and more gallons of ethanol into gasoline. Even though some are still resisting—the refiners’ trade group is pleading Congress not to increase the ethanol-blending cap as part of the stimulus package – rules are rules. And those rules aren’t going anywhere.
So it’s no surprise that Valero wants to become an integrated corn refiner. Instead of buying truckload after truckload of the ethanol it needs to fulfil government rules, it can produce its own. And it claims it is buying the production equipment on the cheap. Savvy observers expect more matches between oil and ethanol.
The question is: will the oil industry succeed where pure ethanol producers failed? VeraSun sank partly because it made the wrong bet on corn prices, committing to buy the crop at peak prices only to see them collapse months later. Although refiners have ample experience with volatile oil markets, they are not immune from making mistakes. Tesoro Corp. lost more than $80 million last year on bad hedges.