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Valero, Refiners Reluctant to Sell Higher Ethanol-Blend Gas

Valero Energy Corp. and other refiners may be unwilling to sell gasoline blended with higher amounts of ethanol, even after the U.S. government allows its use.

Valero, the largest U.S. refiner, and Marathon Oil Co., the largest refiner in the Midwest, are concerned selling gasoline with more of the corn-based fuel additive may leave them liable for engine damage, according to company spokesmen.

The U.S. Environmental Protection Agency is expected this week to raise the limit on how much ethanol can be blended with gasoline to 15 percent from the current 10 percent, said Christine Tezak, an analyst for Robert W. Baird & Co. Inc., a Milwaukee-based asset management fund. Refiners aren’t obligated to blend so-called E15, and use of the fuel may be limited to cars built in 2007 or later.

“It’s going to take time before the industry buys into it,” said Fadel Gheit, an analyst at Oppenheimer & Co. in New York who doesn’t own energy company shares. “They’re going to look at the potential financial impact if E15 causes damage to any automobiles.”

Refiners could be sued if E15 damages cars because the government hasn’t offered the companies liability protection, said Ann Kohler, an analyst at Caris and Co. in New York who doesn’t own energy stocks and has a “hold” rating on Valero and Marathon.

The Environmental Protection Agency sets a base amount of biofuels that must be blended each year into U.S. fuel supplies. The new ruling would raise the ceiling for how much ethanol can be included in each gallon of gasoline.

Blend Rate

The government has twice before delayed a decision on a March 2009 request to increase the maximum blend rate by a group co-chaired by Jeff Broin, chief executive officer of Poet LLC, the largest ethanol producer in the U.S.

The Energy Department has tested the fuel blend’s use in cars from the model year 2007 forward. It’s expected to complete further testing of E15 on 2001 to 2006 model-year cars in November and the EPA may amend a decision to include those vehicles under the waiver, Tezak said.

“We would be hesitant to sell a fuel that does not have some sort of warranty protection or has been accepted by engine manufacturers or equipment manufacturers,” Bill Day, a spokesman for San Antonio-based Valero, said in an Oct. 8 interview.

In addition to concerns about engine damage, U.S. refiners are biased against higher blends of ethanol because it encroaches on the amount of petroleum in gasoline, said Mark Gilman, an oil and gas analyst at Benchmark & Co. in New York who doesn’t own any energy stocks.

Ethanol Makers

Even refiners that have recently acquired ethanol plants, such as Sunoco Inc. and Murphy Oil Corp., produce far more petroleum-based product than the corn-based additive, he said.

U.S. ethanol production was 863,000 barrels a day for the week ended Oct. 1, the Energy Department reported. Production of conventional gasoline blended with ethanol declined 0.7 percent to 4.89 million barrels a day, according to the report. Refiners receive a 45-cent tax credit for every gallon of ethanol blended into gasoline.

In addition to being a refiner, Valero is also the third- largest U.S. ethanol maker, with 10 plants capable of making 1.1 billion gallons of the biofuel a year, according to a Sept. 29 company presentation. The largest manufacturers of the fuel additive are Poet and Archer Daniels Midland Co.

“Valero’s kind of on both sides of the fence, but much more strongly on the refining side than on an ethanol manufacturing side,” said Gilman.

Engine Damage

General Motors Co., Ford Motor Co. and Chrysler LLC have said the government should be cautious about increasing the ethanol percentage in gasoline. AAA, the nation’s biggest motoring organization, said in July 2009 the EPA should reject the Growth Energy request, because higher blends may damage exhaust systems, engines and fuel pumps and destroy catalytic converters.

Marathon, which has stakes in two ethanol plants, will be cautious about selling E15, said Shane Pochard, a spokesman for the Houston-based company.

Valero rose 20 cents, or 1.1 percent, yesterday in composite trading on the New York Stock Exchange. The stock has gained 8 percent this year.

Marathon fell 22 cents yesterday to $35.26. It’s up 13 percent this year.

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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