Special Report: Refiner
Valero's secret campaign against U.S. biofuels mandates
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[August 21, 2017]
By Chris Prentice
(Reuters) - U.S. biofuels regulations,
which mandate mixing corn-based ethanol into gasoline, have lately drawn
together a diverse cast of political opponents.
They include an upstart gas station owners' trade group, a former Obama
administration environmental adviser and billionaire activist investor
Carl Icahn, who owns a refiner and served as U.S. President Donald
Trump's special advisor on business regulation - until he resigned
Friday amid allegations of a conflict of interest.
Even the Renewable Fuels Association (RFA), a leading biofuels industry
group, recently dropped its opposition to policy changes sought by this
ad hoc coalition.
These players would seem to have few shared interests, but they share
one key connection – close ties to Valero Energy Corp. <VLO.N>,
America's largest oil refiner.
As part of an extensive behind-the-scenes lobbying campaign, Valero
played a key role in bringing these people and groups together around a
policy proposal that could save the refiner hundreds of millions of
dollars each year in regulatory costs, according to two former Valero
executives with knowledge of the firms' lobbying strategy.
Valero is a big loser under current regulations, which require refiners
to either blend biofuels into their gasoline and diesel or buy
government-issued credits from firms that do such mixing. After selling
off much of its ethanol-blending operations in cash-raising deals in
2006 and 2013, Valero was forced to spend $750 million last year alone
buying the credits, according to Valero's securities filings.
The policy overhaul favored by Valero would free refiners from the
obligation to blend biofuels or buy credits, shifting that burden to
firms further down the supply chain toward retailers.
Such a change would amount to a multi-billion-dollar transfer of wealth
to Valero. It would also benefit Icahn's refining company, CVR Energy <CVI.N>,
and a handful of other refiners that lack blending operations.
Top Valero officials wanted others to act as the public face of the push
to upend renewable fuels policy, the former Valero executives told
"There was an effort to line up people who would support us who were
more palatable to decision makers," said one of the former executives.
"It's easier to support a small business than a big refining company."
In response to Reuters' inquiries, Valero stressed that it has publicly
criticized current regulations. Spokeswoman Lillian Riojas called the
rules harmful to "workers, small business retailers, consumers, the
refining base, energy security and even the drive for more biofuels
Valero has joined petitions to change the law, sued the EPA, and sent
executives to challenge the policy at industry conferences. But its more
extensive and less visible lobbying through proxies served a purpose –
to create a perception of broader support for a change that would
primarily benefit Valero and a small number of other refiners.
The push to change the so-called "point of obligation" for biofuels
blending is opposed by most ethanol producers and large integrated oil
companies with blending facilities. They argue the shift would rope in
thousands of additional companies - from gasoline retailers to shippers
such as FedEx - and undermine the program by complicating enforcement.
The Trump administration has said it is considering the regulatory
changes, but it has not announced a decision.
In early August, three sources familiar with the administration's
biofuels policy deliberations told Reuters that the Environmental
Protection Agency (EPA) was preparing to reject proposals for the
change. The White House declined comment and referred questions to the
EPA, which did not respond to requests for comment.
Valero strategists viewed Icahn as a better public advocate to change
biofuels policy despite his majority ownership of a small refinery, the
two Valero executives said. That's because the famous Wall Street
investor has a diverse array of business interests and unique access to
Trump, a longtime friend.
"Our folks wanted to get him involved," said one of the Valero
executives, who was regularly involved in company discussions on
When Icahn wrote the EPA in August of 2016 to push for the policy change
- arguing current rules create a "rigged market" - representatives from
Valero helped him craft the letter, the executive said.
Valero declined to comment on its role in crafting Icahn's proposal.
Jesse Lynn, a lawyer for Icahn, said the billionaire "sought input from
a number of people" on the letter but declined to name them.
Shortly after being elected, Trump named Icahn his special advisor on
regulation, an informal role.
Icahn stepped down from the post on Friday after facing criticism that
he was advising Trump on policy changes that would enrich his refining
business. Icahn denied any conflicts of interest late Friday in an open
letter to Trump.
"I never sought any special benefit for any company with which I have
been involved, and have only expressed views that I believed would
benefit the refining industry as a whole," he wrote.
The White House has said there is no conflict of interest between
Icahn's refining business and his biofuels policy advocacy because he
was not paid as a presidential advisor.
'REGULATORY HAIL MARY’
The Renewable Fuel Standard (RFS) was adopted in 2005 during the
presidency of Republican George W. Bush as a way to bolster U.S. energy
independence, reduce pollution and support Midwest corn farmers. Today,
about 10 percent of U.S. motor fuel comes from vegetation.
The law's critics - which cover a broad ideological spectrum, from
fossil-fuel firms to environmentalists - argue variously that it is
essentially a farming subsidy; that ethanol hurts gas mileage and does
little to help the environment; and that its impact in reducing foreign
oil dependence has been dwarfed by booming U.S. oil production.
Jack Lipinski, chief executive of Icahn's CVR Energy, told Reuters that
the current rules create a "contrived and manipulated marketplace." The
law provides a windfall to major integrated oil companies - who profit
from selling the credits - and unfairly punishes certain refiners for
not investing in costly biofuels blending facilities, he said.
Lobbying against the mandates became more urgent for CVR and Valero in
2013, when prices for biofuels credits soared as energy firms worried
about an impending increase in required biofuels blending volumes.
By then, major refiners such as Tesoro Corp <TSO.N> and Marathon Corp <MPC.N>
were investing in blending facilities to lower regulatory costs.
But Valero, looking to focus on its core refining business, had been
selling off its already limited blending operations as part of larger
deals. It sold a pipeline and logistics unit in 2006 to raise $880
million and spun off its retail unit in 2013 in transactions that
brought it $1.4 billion.
Valero has said it now has little ability to blend ethanol and biodiesel
into the more than 2 million barrels of petroleum products it produces
each day in the United States. As a result, the firm is forced to spend
hundreds of millions of dollars annually on biofuels credits.
By 2015, Valero CEO Joseph Gorder was convinced that lobbying the EPA to
change regulations was a better strategy than operating blending
facilities, one of the former Valero executives told Reuters.
The second former Valero executive described the tactic as a "regulatory
SIGNING UP AN OBAMA ENVIRONMENTAL ADVISOR
In 2015, Valero's external lobbying firm - Bracewell LLP, a
Houston-based law and government relations outfit - hired Ron Minsk, a
former advisor to President Barack Obama on energy and the environment,
as a consultant.
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Corn is seen in a field in Indiana, U.S. September 6, 2016. To match
USA-BIOFUELS/VALERO REUTERS/Jim Young/File Photo
Bracewell never announced the high-profile hire, made months after Minsk left
the White House, and Minsk never registered as a lobbyist, according to U.S.
In February 2016, Minsk testified before Congress as an expert on biofuels
regulation, citing his experience as an Obama advisor and arguing in favor of a
shift in the point of obligation for blending.
Minsk did not disclose his relationship with Valero in his written testimony but
acknowledged it when a lawmaker pressed him about industry ties.
"I have been retained by a law firm to consult on issues related to the RFS, and
Valero Energy Corporation is one of their clients," Minsk said, referring to
Asked why he didn't disclose the Valero connection before testifying, Minsk told
Reuters: "I was sharing my own views, and not anyone else's."
Minsk also filed public comments to EPA in February 2017, urging the same policy
change – again without noting his Valero connection.
Scott Segal, a Bracewell partner in Washington, said in a statement that Minsk
"provides technical advice to us on a variety of topics" and that he was
"certainly not testifying or writing on behalf of the firm or its clients."
'RETAILER OF THE YEAR'
Throughout 2016, Valero cultivated allies that would ultimately mobilize around
the same policy proposal to the White House.
The refiner helped one of its retailers, Bill Douglass, launch a grassroots
organization of small gas station owners that would argue biofuels mandates hurt
their mom-and-pop businesses.
Douglass said he contacted all of his fuel suppliers for help in starting the
organization, but only Valero provided assistance, giving him a list of its
retailers to recruit.
Bracewell helped connect the fledgling Small Retailers Coalition with a website
developer, the firm said. The site is devoted largely to arguing for the same
regulatory changes Valero supports. Douglass also sent a letter to the EPA and
spoke personally with an EPA official to urge adoption of the policy.
Bracewell was happy to help a political ally of its client Valero, Segal said.
"It should come as no surprise that groups with which we are allied, we help,"
Segal said, while noting the firm did not control the website's content. "We
share information and frankly we're glad to do it. We are not opposed to
providing assistance when it's appropriate."
Valero's spokeswoman denied the company had played a significant role in setting
up the SRC and declined further comment on the firm's relationship to the group.
Valero did, however, name SRC founder Douglass its "Retailer of the Year" in
For a graphic on Valero's $750 million bill for biofuels credits click http://tmsnrt.rs/2i9w5Yx
'TRYING TO SPLIT THE INDUSTRY'
Valero also sought to join biofuels industry groups and persuade them to back
its policy position, according to the former Valero executives and three
biofuels industry sources.
Valero had reason to join one of those groups. Although it lacked sufficient
ethanol-blending facilities, it was one of the nation's top five ethanol
Still, Valero was seen as an outsider by many biofuels producers because the
refiner had opposed regulations they supported, two oil and four biofuels
industry sources told Reuters.
Michael McAdams, President of the Advanced Biofuels Association, said he
received a phone call in May or June of 2016 from Valero's Richard Walsh – a
senior vice president and corporate counsel who led the refiner's push to change
biofuels policy, the former Valero executives said.
Walsh said Valero wanted to join the biofuels organization - but first wanted
the chance to convince the group to support its proposed regulatory change.
"My board said, 'No, thank you. We can't align with you,'" McAdams said, adding
that it seemed Valero was "trying to split” the biofuels industry, McAdams said.
Walsh did not respond to requests for comment.
NEUTRALIZING AN OPPONENT
The refiner, however, did end up joining the Washington-based Renewable Fuels
Association (RFA), among the most prominent biofuels producer groups and a
powerful lobbying force.
The RFA had previously criticized proposals to shift the biofuels blending point
of obligation, arguing it would discourage production of blends with higher
ethanol content and complicate enforcement.
Valero and RFA President Bob Dinneen declined to discuss how and why Valero came
to join the group but said it had nothing to do with the RFA's position on the
refiner's policy priorities.
The RFA, however, ultimately did agree to drop its opposition to the policy
change sought by Valero – a clear victory for the refiner.
In February, Valero representatives and Icahn held a meeting with the RFA's
Dinneen. Icahn told Dinneen he believed Trump would support the refiners'
biofuels policy proposal – and that the RFA should lend its political support.
Dinneen told Reuters at the time that the RFA decided not to oppose what it
believed was a done deal. He also said Icahn assured the group that it could win
concessions from the Trump Administration in return, including support for a
different regulatory change that would encourage production of fuel blends with
higher ethanol content.
Other biofuel industry groups slammed the RFA's policy shift. Fuels America, a
coalition of renewable fuel and farm groups, dropped the RFA as a member of
their alliance in response.
LOBBYING A LOBBYIST AT THE WHITE HOUSE
In March, Valero's Walsh, CVR's Lipinski and representatives from other refiners
went to the White House to pitch their case to Trump's top aide on domestic
energy policy, Michael Catanzaro, a former energy industry lobbyist.
Trump had banned former lobbyists hired by his administration from participating
in issues on which they lobbied for two years – but the White House later
granted Catanzaro a waiver from that rule.
Catanzaro is advising on the same issues that were recently the focus of his
lobbying for clients such as Koch Industries - a diversified conglomerate with
major energy assets - and groups including the American Fuel and Petrochemical
Manufacturers, which petitioned the EPA for the biofuels change last year.
Catanzaro declined to comment.
Valero's Walsh invited Douglass to join the meeting to represent the Small
Retailers Association, Douglass said.
As in other forums, Valero representatives let others take the lead in carrying
the message, mainly Douglass and a union representative for workers at a
"They let me do most of the speaking," Douglass said. "They let me hold the
floor because I think they regard my dilemma as being more critical."
(Additional reporting by Erwin Seba in Houston; Editing by Richard Valdmanis and
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