Blowing Smoke

Could Valero empty the coffers of Texas schools?

One such moment had to do with stricter requirements for low-sulfur diesel and gas the U.S. Environmental Protection Agency rolled out in 2000. Under these "Tier II" standards, sulfur in gasoline would have to drop from 300 parts per million to 30 ppm by 2004. Diesel sulfur limits would need to be slashed from 500 ppm to 15 ppm by 2006.

For the last three years, Valero lawyers have told the Texas Commission on Environmental Quality that the company only bought hydrotreaters to meet the Tier II standards.

As Valero spokesman Bill Day says, "Those are expensive pieces of equipment that Valero would not have purchased if it was not required to under this EPA requirement...It makes it actually more expensive to make the fuel — it adds to our costs."

HCAD lawyer Bernardo Garcia says Valero's case could set a dangerous precedent.
Chris Curry
HCAD lawyer Bernardo Garcia says Valero's case could set a dangerous precedent.

Which, if true, means Valero meets one of the tax-exemption requirements. The thing is, the company historically told its shareholders something different.

While news of stricter sulfur standards may have caused many refiners to cross their arms and pout, Valero was nothing but stoked. Or at least that's the way it was spun in the 2005 summary: "To meet the new low-­sulfur specifications for fuel, many refiners are relying on sweet crudes, which has further widened the sweet/sour price differential." At the same time, because of "limited refining capacity of upgrading" medium and heavier sour crude, those supplies were high. For a company that depended largely on cheap sour crude, the field was wide open. Or, as Valero put it: "These bullish fundamentals have played right into Valero's hands!"

The language in its full financial report filed with the U.S. Securities and Exchange Commission may not have contained as many side-splitting puns, but it reflected a nonchalant attitude toward the expenditures required to meet Tier II. "Valero expects that most of the required capital improvements or changes in operating parameters will be consistent with many of Valero's existing or forecasted strategic capital projects or emission reduction projects already planned for the next several years."

And in its 2007 financial report summary, Valero touted the $1.2 billion it spent on refinery equipment for low-sulfur product in Texas, Louisiana and California: "Reflecting the significant projected growth in U.S. and global demand for diesel, as well as the move towards cleaner-burning fuels, Valero marked 2007 with the completion of major projects focused on increasing production of ultra-low-sulfur diesel."

The summary used words like "strategy" to describe these expensive improvements, as in: "Together with its planned future investments, are examples of the company's strategy to convert low-cost feedstocks into premium, cleaner-burning fuels, particularly [ultra-low-sulfur diesel]."

While Valero may have imagined a bright future overflowing with rivers of sour crude that other refiners turned up their noses at, it, like every other company in 2006, had no way of knowing the good times would come to a crashing halt. By April 2010, the refiner reported its fourth consecutive quarterly loss.

At the same time, the counties where its refineries were located were experiencing the strains of recession. Although Texas was faring better than the rest of the country, cities and school districts still suffered budget shortfalls.

Day suggests it's only because of the recession that taxing districts have brought exaggerated claims to the attention of the media.

To which Bernardo Garcia of the Harris County Appraisal District half-jokes, "Thank God for the recession."

A big, energetic man with an inexplicable passion for tax law, Garcia is HCAD's general counsel and de facto mouthpiece when it comes to Valero. He says Day might be right, in a way — if the economy were chugging along and taxing districts didn't have to look under couch cushions for every extra penny, HCAD might not have ever noticed that Valero was gunning for such a big tax break. Garcia says that, if Valero gets the exemptions, state law would force taxing districts to refund the three years' worth of disputed taxes. He estimates this to be about $11 million for the Houston Independent School District and about $5 million for the county and city. (Because Valero originally submitted its request in 2007, it might technically be eligible for a three-year refund — but it's the only refinery in that position. While other refineries can apply for 2010 and subsequent years, they are not entitled to retroactive exemptions. According to TCEQ, there are eight pending refinery applications and another 12 are expected to file.)

Garcia is flabbergasted that two TCEQ commissioners even entertained Valero's "at the site" argument, which is this: Everyone gets the concept of a scrubber on a smokestack reducing levels of emissions a refinery belches into the air. That is clearly a site-specific environmental benefit.

Same with extracting sulfur from diesel and gas: The process itself obviously occurs in the refinery, and the low-sulfur product is sold to drivers who live around the refineries. Thus, everyone gets to drive through a low-sulfur life, thanks to Valero. (This, despite the fact that the hydrotreating process actually increases air pollution at the site.)

Whether or not Garcia buys gas from Valero stations, he definitely doesn't buy the company's argument. No one living in Harris County benefits environmentally from what goes on in Valero's refineries.

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