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US Energy Bill Good For Biofuels; Refiners, Automakers Hit

DOW JONES NEWSWIRES
December 14, 2007 5:00 p.m.


By Ian Talley
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--Biofuel companies are clear winners in the major energy bill the U.S. Senate passed late Thursday, while the auto industry and refiners will be required to invest billions of dollars to meet new federal standards.

The new energy legislation sets a rising mandate for renewable energy up to 36 billion gallons a year by 2022 and establishes higher fuel economy standards for passenger cars and light trucks for the first time in more than three decades. Cars and light trucks - minivans and sport utility vehicles - will have to average 35 miles per gallon by 2020, a 40% increase from current levels.

House Speaker Nancy Pelosi, D-Calif., said Thursday the chamber would pass the bill next week; the White House said President George W. Bush would sign the bill into law.

Biofuels stocks jumped on the news, particularly two of the largest ethanol producers. VeraSun Energy Corp. (VSE) rose 6% Friday and Archer Daniels Midland Co. (ADM) was up 2%. The Senate passed the bill after the markets closed Thursday.

"Absolutely, this will give a boost to the industry," said Matt Hartwig, a spokesman for the Renewable Fuels Association.

Renewable energy companies specializing in wind turbines, such as Vestas Wind Systems (VWSYF), or solar cells, such as Renewable Energy Corp. (REC.OS), will likely bemoan the loss of extended production and investment tax credits from the bill. This sector also lost out, since lawmakers failed to include requirements that utilities produce up to 15% of electricity from renewable sources by 2020.

Southern Co. (SO) and American Electric Power Co. (AEP) - both of which have powerplants in the U.S. Southeast - lobbied hard against the renewable electricity standard. These companies didn't want to make the costly investments in states that naturally lack significant solar or wind generation capacity.

But many analysts believe there's enough political momentum within the Democratic-controlled Congress to insert the renewable tax credits - many of which expire at the end of 2008 - into other legislation in the new year. Also, key proponents of the renewable energy mandate have vowed to bring up the bill in the next Congress.

Both major, integrated oil companies such as ExxonMobil Corp. (XOM) and Chevron Corp. (CVX) and independents such Apache Corp. (APA) and Murphy Oil Corp. (MUR) can also claim a victory. Their strong lobbying effort motivated Republican senators to block the revenue-raising items that could have cost the large oil companies more than $13 billion over the next 10 years.

But under the renewable fuel mandate, refiners such as Tesoro Corp. (TSO) and Motiva Enterprises LLC will have to make billion-dollar investments to make sure a growing percentage of their output is blended with ethanol. They also may have to pay a fee for every gallon of advanced biofuel under the mandate that isn't produced.

"We're going to have to make investments now to get ready to be able to deliver the blend stock required...throughout the nation," said Charlie Drevna, president of the National Petrochemical and Refiners Association.

He said many refiners feared that uncertain production of biofuels in the years ahead - in the case of drought, or if planned advanced biofuel technologies didn't deliver - would mean multi-billion-dollar investments would leave stranded assets.

The auto industry will also be required to make multi-billion-dollar investments in retooling their manufacturing plants to build more fuel-efficient cars and light trucks.

In the long run, however, some experts believe the U.S. carmakers could see profits rise more than their Asian competitors as a result of the new fuel efficiency standards.

According to Walter McManus, director of the Automotive Analysis Division at the University of Michigan's Transportation Research Institute, Ford Motor Co. (F) and General Motors Corp. (GM) could see their profits rise between $4 billion and $5.5 billion over the next decade, compared to Honda Motor Co.'s (HMC) $1.3 billion and Toyota Motor Corp.'s (TM) $2.2 billion in the same period.

"With product portfolios that are more concentrated in vehicle segments with lower fuel economy and higher prices (SUVs and pickups), Detroit automakers will be making improvements that have higher market value and higher profit margins," McManus said in a recent report.