California legislators are considering giving Valero Energy Corp. hundreds of millions of dollars to cover refinery maintenance costs in a bid to prevent the closure of a San Francisco-area fuel plant.
Under such a deal, the state would pay Valero to continue operating its Benicia refinery, according to people familiar with the negotiations who asked not to be identified discussing private deliberations. The plant is slated to close by April, the latest in a string of recent California fuel-plant shutdowns.
Between $80 million and $200 million of state funds would likely be earmarked for routine maintenance work, although the terms of the arrangement could be subject to change, the people said. Maintenance is one of the biggest operating costs for refiners and the expense of major overhauls typically performed every four or five years can be a catalyst for closure. Discussions with lawmakers over keeping the Valero facility open were held as recently as this past weekend. Absent a deadline extension, legislators have until late Tuesday to submit bills for consideration.
Valero shares briefly dropped on news of the talks but have since recovered and were up 2.8% to $161.77 at 1:10 p.m. in New York, making it the day’s best-performing oil stock in the S&P 500.
Valero didn’t respond to requests for comment. California Governor Gavin Newsom’s office declined to comment while representatives for state senate and assembly leaders didn’t respond to inquiries.
Newsom has in recent months taken a new tack with refiners and encouraged regulators to work with the industry to maintain fuel supplies in a state that often has the nation’s highest gasoline prices. The California Energy Commission has since walked back plans to impose a profit cap on refiners, a key factor in spurring recent plant closures.
Guy Mazorati interview with Severin Borenstein and Alex Nieves
A view of oil-well in action during sunset at Elk Hills Oil Field as gas prices on the rise in California, United States on April 14, 2024. (Tayfun Coskun/Anadolu via Getty Images)
California has long gone head-to-head with big oil, leading many of the efforts to curb climate damage caused at the hands of the fossil fuel industry – including spearheading lawsuits against oil companies and pushing fracking bans. But faced with the closure of two state refineries, and rising gas prices, Governor Gavin Newsom has made some major concessions on oil to not only keep the refineries open, but to draft a bill for more drilling in Kern county. We’ll talk about California’s changing relationship with the oil industry, the state’s efforts to phase out fossil fuels, and what’s going to happen to gas prices in the meantime.
Guests:
Severin Borenstein, faculty director, The Energy Institute at UC Berkeley’s Haas School of Business; member, Board of Governors of the California Independent System Operator
Alex Nieves, California transportation reporter, POLITICO
Tim Grayson, California State Senator for District 9 [in a later broadcast]
This partial transcript was computer-generated. While our team has reviewed it, there may be errors.
Guy Marzorati: This is Forum. I’m Guy Marzorati, in for Alexis Madrigal.
During Gavin Newsom’s time as governor of California, he’s had one constant foe — one year-in, year-out rival with whom he seems to relish every single fight — California’s oil and gas industry. But that all might be changing, as oil refineries announce closure plans in Los Angeles and here in Benicia, making California’s complex energy transition even more complicated for the governor and fellow Democrats in the state Capitol.
That’s what we’re going to be talking about this hour with Alex Nieves, California transportation reporter at Politico. Good morning, Alex.
Alex Nieves: Good morning. Thanks for having me.
Guy Marzorati: Great to have you with us. And Severin Borenstein, director of the Energy Institute at UC Berkeley’s Haas School of Business. Good morning, Severin.
Severin Borenstein: Good morning.
Guy Marzorati: Thanks so much for joining us. And later, we’ll talk with Tim Grayson, California state senator representing parts of Contra Costa County, including the refinery community in Martinez.
Alex, I want to start with you. We’ve seen Newsom go to the mat against the oil and gas industry for years. What’s going on now?
Alex Nieves: Yeah. As you mentioned, over the last four years, Governor Newsom has really gone much further than his predecessor, Jerry Brown — who focused on getting folks to transition to EVs and cleaner technologies but didn’t really target the supply side of the equation.
Governor Newsom, on the other hand, has made some strong efforts to target industry priorities. I think of the ban on fracking as one example. We’ve also seen, in a couple of special sessions, lawmakers pass legislation around a price cap and maintaining minimum storage at refineries to prevent shortages when refineries go offline.
Those are all things refiners say will backfire and cause refineries to close, leave the state, or change their business strategies. Those are threats we’ve seen for years, and they haven’t always materialized.
But there’s a big change this time around.
Phillips 66 last October announced it would be closing its facility in Wilmington in the Los Angeles area. Valero announced the pending closure of its Benicia facility in April — and that’s caused a real threat of a decline in refining capacity.
Whenever you lose capacity, you constrain supply. That means an increase in prices — and no lawmaker wants to be in power when gas prices go up.
So recently, we’ve seen the governor change course. The California Energy Commission has issued a slate of recommendations aimed at keeping these refineries open, and Newsom’s office is floating a draft bill that would do a number of things — most notably, streamline permitting for oil-rich Kern County.
Guy Marzorati: Do you have the sense that Newsom was caught off guard by the refinery closure announcements?
Alex Nieves: I do — maybe less so for Wilmington, which is one of the older facilities in the state and had signs this could happen. But Benicia is a facility that I’ve heard from sources wasn’t really on the table for immediate closure.
You could see it in the state’s messaging after the Wilmington closure was announced. Ty Milder, the governor’s oil czar, kind of pushed it aside and said the state could survive — it wasn’t an immediate concern.
Immediately after the Benicia refinery announcement, I think the state went into panic mode.
Guy Marzorati: And how much of this is about the result of last year’s election too? Because we saw Democrats come back to Sacramento this January with, like, a vow renewal on the cost of living — it was going to be a top priority. How do you see that playing into this conversation?
Alex Nieves: Yeah, and it’s not just in California. Nationally, we’re seeing the Democratic Party on a course correction — a focus on cost of living and affordability.
Notably, at the beginning of this session, Assembly Speaker Robert Rivas announced that anything that doesn’t fall within this affordability frame is something the state shouldn’t consider. And I, as a climate reporter, took that to include climate action.
Take a step back a couple of years — the governor and Attorney General Rob Bonta were spearheading a lawsuit to hold companies liable for climate-change-related damages. And as recently as last October, we were writing stories about how the oil industry’s influence was waning in the state.
That’s completely changed. And I do think it’s because Democrats are looking toward 2026 and trying not to seem tone-deaf. Every gubernatorial candidate we’ve seen so far has committed to keeping refineries open.
So yes — I think it’s a reflection that the Democratic Party feels like they may have missed where voters were in November.
Guy Marzorati: Severin Borenstein, do you see this as a major policy pivot by the Newsom administration?
Severin Borenstein: Oh yeah. It’s definitely a pivot.
The direction over the last few years has been to go after the refineries as a major source of high gasoline prices. And that was never really accurate.
If you look at how much money refineries are making — separate that from the profits made downstream in distribution, marketing, and retailing — the big differential, what I call the “mystery gasoline surcharge,” this extra amount Californians pay beyond the higher taxes and fees, is not at the refineries.
If you look at the spot price — the wholesale price of gasoline in California — it’s really not out of line with the rest of the country once you account for the cost of making our cleaner-burning gasoline.
We do have a real gasoline price problem, beyond the higher taxes and environmental fees, and that’s happening downstream.
So I think it’s unfortunate that a lot of people in Sacramento were saying the problem is these refineries are making too much money. The closure of these refineries now suggests that was clearly wrong — that, in fact, they don’t think they can make enough money.
Both of the refineries that are closing faced real environmental costs. They likely did the calculation: is it worth making the huge capital investments necessary to stay in business? Are we going to make enough money over the long run to pay for that?
All of this is happening in the context of California’s major push to reduce gasoline consumption — which has finally started to take hold.
The increase in EVs and higher-mileage hybrid vehicles has been reducing California’s gasoline demand. And as it drops, these refineries are rethinking whether it makes sense to invest.
Benicia was a particular point of pressure because they were under penalties for recent pollution emissions. They were also facing increased scrutiny, and the city was forming a new committee to oversee the refinery and enforce environmental restrictions.
Guy Marzorati: Right. There was local pressure as well. But Newsom has said, look, refineries across the globe are struggling. Is that true?
Severin Borenstein: Yeah. I think a lot of refineries, particularly the older ones, are not making a lot of money.
Going back to the 1970s, refining was not considered a great business. The big, vertically integrated companies made money extracting oil — they sort of broke even or worse on the refining side.
That changed in the ’90s when demand for gasoline took off, and for a while, refineries were making good money — even the less efficient ones.
But as demand has plateaued — and in California, started to decline — they haven’t been able to keep up those profits. So now we’re seeing pressure on them and some decisions to close.
And that’s going to happen. If California reduces gasoline consumption, these refineries will start to close. We need to plan for that — manage the closures, ensure a smooth supply of gasoline, even as we gradually lose refineries.
Guy Marzorati: Yeah. Alex, what are you hearing in the legislature about that planning? Are those plans being made? How is this transition unfolding?
Alex Nieves: We’ve heard the discussion for years, but I think what this episode has shown is that the state just hasn’t put in the time and effort to develop a fully fleshed-out transition plan.
The governor framed his pivot not as a departure from the state’s climate policies but as a recalibration — a slowdown so we can actually put plans in place.
How do you protect workers — including unions that largely support Democrats — as you close these facilities? How do you help a city like Benicia, built around this industry, or a place like Richmond with the Chevron refinery, avoid collapse if a refinery picks up and leaves?
I’ve heard ideas floated — maybe requiring a four-year instead of one-year warning for closures, or requiring some relationship between refiners and the state to create a worker transition plan. But those are things we just haven’t seen yet.
In the immediate term, the state seems to be aiming for policies that keep supply up — increase in-state crude, increase imports. But the actual planning behind a transition? I think that’s the next step — and we’re still quite a ways from a solidified plan.
Guy Marzorati: Yeah. And we’ve got about thirty seconds before the break — but it’s also, you know, Newsom is still trying to hold this mantle of climate leadership, right? He’s still battling with the federal administration while all this is happening in California.
Alex Nieves: Yeah, absolutely. We’ve seen the state file dozens of lawsuits — many of them in the climate, energy, and environmental space.
I think it’s fair to say that California is still a leader in some ways on the federal landscape. But I know that within the state, environmental groups are quite livid. They really see this as a departure from the past.
Guy Marzorati: Yeah. That’s Alex Nieves, California transportation reporter at Politico.
We’re talking about whether California is reconsidering its stance on oil production as two refineries are slated to close. And we want to hear from you.
What would you like to see as these refineries make plans for their future?
Do gas prices affect how you think about the state’s oil production?
Give us a call at 866-733-6786. Or get in touch with us on social @kqedforum or by email: forum@kqed.org.
The Valero refinery in Benicia on Sept. 21, 2023. The potential closure of the massive Benicia oil refinery by next April would have a huge impact on both the city’s economy and the state’s oil supply. (Martin do Nascimento/KQED)
A week after Valero announced plans to “idle, restructure or cease” operations at its massive Benicia oil refinery by next April, company executives said that while the plant’s closure was more than likely, it was not yet a foregone conclusion.
In an earnings call Thursday, Valero executives left open the possibility of a Hail Mary, saying they had plans to meet with state and local officials to discuss potential options.
“I do think there’s a genuine interest in California to avoid the closure,” Richard Walsh, Valero’s executive vice president, said during the call. But he quickly added, “Our current intent right now is to close the refinery.”
A week after Valero announced plans to “idle, restructure or cease” operations at its massive Benicia oil refinery by next April, company executives said that while the plant’s closure was more than likely, it was not yet a foregone conclusion.
In an earnings call Thursday, Valero executives left open the possibility of a Hail Mary, saying they had plans to meet with state and local officials to discuss potential options.
“I do think there’s a genuine interest in California to avoid the closure,” Richard Walsh, Valero’s executive vice president, said during the call. But he quickly added, “Our current intent right now is to close the refinery.”
Valero CEO Lane Riggs cited California’s tough “regulatory and enforcement environment” as the main driver behind the company’s intent to cease operations at the sprawling North Bay facility. The sixth-largest refinery in the state, it currently produces up to 145,000 barrels of crude oil a day, accounting for about 9% of the state’s production.
“California has been pursuing policies to move away from fossil fuels for really the past 20 years,” Riggs said, calling the state’s regulations “the most stringent and difficult of anywhere else in North America.”
Benicia Mayor Steve Young doesn’t disagree with the assessment, but said he wishes the company had provided more lead time.
“We need to get moving on this quickly because 12 months is not a long time given the severity of the economic impact,” said Young, noting that nearly 20% of Benicia’s $60 million budget comes from the refinery. “I think that’s part of my frustration, is how little time we have to try to plan for some kind of an alternative.”
Shutting down the facility, he added, would also be a major blow to the hundreds of residents who work there, not to mention the scores of restaurants, hotels and other businesses that provide services to those workers in this city of some 27,000 residents.
The Valero refinery is also the exclusive supplier of jet fuel to nearby Travis Air Force Base, which it delivers through a direct pipeline.
“If that is stopped, what does that mean to the base?” Young said. “Travis uses an amazing amount of fuel to fly all their planes, much more than can be easily replaced, and certainly not replaced within a year. So I think that this becomes a matter of real concern to the Defense Department and it’s potentially a national security issue.”
Valero dropped its bombshell April 16 announcement roughly six months after regional and state air regulators fined the company a record $82 million for secretly exceeding toxic emissions standards for at least 15 years. And last month, city leaders voted unanimously to impose moderate new safety regulations on the facility.
Map by Matthew Green/KQED
“I suspect that compared to other refinery operators, they’re a pretty good business operator. But they’ve also had a pretty bad track record on public safety,” said Terry Mollica, who leads a group of residents that pushed for the city’s new safety rules to increase oversight of the refinery.
But Mollica said that he doesn’t think anybody in his group is particularly excited about the possibility of the facility closing altogether.
“There would be long-term and short-term impacts on the community,” he said. “People would lose their jobs. None of us want to see that happen particularly.”
Valero has owned and operated the Benicia refinery since 2000. The refinery was originally built in 1968 for Humble Oil, later called Exxon, and began operations the following year.
Its possible closure comes amid a growing exodus of traditional oil refiners in California. Phillips 66’s refinery in Rodeo and Marathon’s facility in Martinez both recently converted operations to biofuel production. Phillips 66 also plans to close its Los Angeles-area refinery — the seventh largest in the state — later this year.
And Valero executives, in this week’s earnings call, hinted that they may also soon consider “strategic alternatives” for the company’s only other California refinery, located near Los Angeles, which accounts for more than 5% of the state’s crude oil supply.
“California is phasing out its gasoline consumption and refiners see that coming,” said Severin Borenstein, a UC Berkeley energy economist. “We should be seriously concerned about how all that gasoline supply is going to get replaced.”
California has dramatically reduced its reliance on fossil fuels in recent decades, but most residents still drive gas-powered cars and will continue to do so for years to come, Borenstein said, even though the state already has some of the highest gas prices in the nation.
Gov. Gavin Newsom underscored that sense of urgency this week in a letter (PDF) to California Energy Commission Vice Chair Siva Gunda. He urged the commission to “redouble” its efforts to ensure refiners “continue to see the value in serving the California market, even as demand for fossil fuels continues its gradual decline over the coming decades.”
“I am directing you … to reinforce the State’s openness to a collaborative relationship and our firm belief that Californians can be protected from price spikes and refiners can profitably operate in California — a market where demand for gasoline will still exist for years to come,” Newsom wrote.
A customer prepares to pump gas into his truck at a Valero gas station on July 22, 2013 in Mill Valley. (Justin Sullivan/Getty Images)
Almost immediately after Valero’s announcement, Newsom was lambasted by state Assembly Republicans, who said the potential closure was among the growing number of “real-world consequences” of [his] war on California energy producers that was “becoming clearer by the day.”
In his letter, Newsom defended two different laws he signed in the last two years that give the state more oversight of the oil industry and regulate backup supply when refineries go offline in order to prevent market irregularities. He also asked state energy and environmental officials to produce a report by July 1 on “any changes in the State’s approach that are needed to ensure adequate supply during this transition.”
“The California Energy Commission continues to be committed to working with stakeholders to explore options to ensure an affordable, reliable, and safe transportation fuel supply,” Sandy Louey, a spokesperson for the commission, said in an email in response to Newsom’s letter.
Young, whose city has long felt the health impacts of the refinery’s toxic releases, said he understands the motivation behind California’s ambitious regulations.
“I think certainly [California’s] done them for lots of good environmental reasons, and that obviously climate change is a real thing and burning fossil fuels is a direct contributor to it,” he said. “Did they go too far? I don’t want to say that. But it certainly has created an environment where oil companies feel that either they’ve been unfairly targeted or they are just seeing this as perhaps a way to negotiate some rollbacks of some of those things.”
Young acknowledged that the refinery’s closure would yield some “net benefit” to the health and safety of his community.
“And so from an environmental point of view, sure, it’s certainly possible to look at it as a silver lining,” he said. “But overall, given how quick this is unfolding, I’m certainly not celebrating it by any means.”
[Note from BenIndy: Please take a minute to tell Governor Newsom to sign AB 1167. Here is his phone number: (916) 445-2841, and here is a phone script, provided by 350 Bay Area Action:
Phone script: Hello, my name is ____________. I live in ____________, California and I’m a climate supporter of 350 Bay Area Action. I am calling to ask the Governor to sign AB 1167, the bill requiring adequate bonding for plugging oil wells. I want our state to do everything we can to protect the health of impacted communities and address the climate emergency.
Click this image to go to the governor’s contact form page. You will be redirected to a new site.
Prefer activism by email? You can urge Gov. Newsom to sign AB 1167 using his contact web form (clicking these links will redirect you to his contact page). There will be a drop-down menu where you can select the topic as “An Active Bill” and then another drop-down menu where you can select “AB 1167.” Follow the instructions to write a message. Please also note that our elected state representatives, Senator Bill Dodd and Assemblymember Lori Wilson, neglected to vote on this important bill.]
“A Setup for Disaster”: California Legislation Requiring Companies to Pay for Oil and Gas Well Cleanup in Limbo
The bill, which awaits a decision by Gov. Gavin Newsom, follows ProPublica’s reporting on the multibillion-dollar cost to clean up California’s oil and gas industry and the exodus of major companies shifting ownership of thousands of aging wells. | Uncredited image.
The California Legislature recently passed a bill that would provide the state’s taxpayers some of the strongest protections in the nation against having to pay for the cleanup of orphaned oil and gas wells. But Gov. Gavin Newsom has not indicated if he will sign it.
AB1167 would require companies that purchase idle or low-producing wells — those at high risk of being left to the state — to set aside enough money to cover the entire cost of cleanup. Assemblymember Wendy Carrillo, a Los Angeles Democrat who authored the bill with the support of the Natural Resources Defense Council and Environment California, said it’s needed to “stem the tide” of orphaned wells.
Newsom has until Oct. 14 to make a decision. A spokesperson declined to comment, saying the governor would evaluate the bill “on its merits.” The state’s Department of Finance released a two-page analysis opposing it.
It costs more than $180,000 to clean up an average orphan well in California, the state told the U.S. Department of the Interior in 2021, according to documents ProPublica obtained via a public records request. This includes plugging the well with cement, removing aboveground infrastructure like pumpjacks and decontaminating the site. But bonds, which are financial instruments guaranteeing to pay for cleanup, cover only a tiny fraction of that cost. A ProPublica analysis of state data found that oil and gas companies have set aside only about $2,400 per well. (State oil regulators are currently reevaluating companies’ bonds to increase them within existing law, which does not mandate that they cover the entire cleanup cost.)
Left unplugged, many wells leak climate-warming methane, brine and toxins that were used in the drilling process.
Newsom has until Oct. 14 to make a decision. | Uncredited image.
“It’s a setup for disaster,” said Ann Alexander, a Natural Resources Defense Council senior attorney.
The bill follows ProPublica’s reporting on the exodus of oil majors from the state’s declining industry — one sale last year saw more than 23,000 wells move from Shell and ExxonMobil to a little-known German asset management group called IKAV — and on the multibillion-dollar cost to clean up the industry. ProPublica’s work was repeatedly cited by the Legislature and the bill’s supporters.
“It’s too easy for them right now to offload those unproductive oil wells to newer or less-resourced companies that may turn around and go bankrupt and that don’t have the adequate financial capacity to do the job of cleaning up,” said Laura Deehan, director of Environment California.
The Western States Petroleum Association and California Independent Petroleum Association industry trade groups warned state lawmakers that “this misguided bill will increase the number of orphan oil wells in California.” The organizations argued that requiring bonds that cover the full cleanup cost would dissuade sales to companies hoping to enter the market. This, in turn, could lead to well owners getting stuck with the expensive cleanup, causing insolvency and ultimately leaving the wells with the state.
Dwayne Purvis is a petroleum reservoir engineer who authored a study that estimated it would cost as much as $21.5 billion to clean up California’s oil industry. He pointed out that the most common type of bond — a surety policy — is similar to insurance guaranteeing a well will be plugged, so oil companies wouldn’t have to set aside the full cleanup cost in cash to comply with AB1167. Federal regulators recently found these bonds are relatively cheap.
If that stops companies from buying wells in California, Purvis said, then there’s a bigger problem: “This admits — implicitly but almost inescapably — that the cost of plugging exceeds the value of remaining production,” he told ProPublica via email.
A Western States Petroleum Association spokesperson did not address questions about its claims. The California Independent Petroleum Association did not respond to requests for comment.
In negotiations over the bill, according to people present, the trade associations pointed to one example in particular to highlight why the legislation would create more orphan wells — the sales of some of the more than 750 wells orphaned following bankruptcy filings by multiple entities in the Greka group of companies. The sales, the industry argued, presented an opportunity for the wells to be plugged by an oil company, not the state.
However, hundreds of the wells remain on the orphaned list to this day, only they’re now associated with a new company: Team Operating.
Greka’s CEO and Team Operating didn’t respond to emails requesting comment.
The bill does carry a potential loophole, experts cautioned: whether the increased bond requirements in the bill would apply to wells transferred through shell companies, as is often the case.
The state Department of Finance’s opposition to the bill relied on three arguments.
The agency’s report claimed that large companies with enough resources to plug wells are coming into the California market. But research shows these producers are exiting the state and handing off their aging, unprofitable wells to smaller companies that are less likely to be able to afford cleanup.
Its analysis also suggested that bond underwriting companies are “becoming hesitant” to do business in California. Purvis said that if these companies believe the situation is too risky to guarantee cleanup costs will be paid, “then the taxpayers of California probably should not extend producers the same credit.”
Finally, the report argued the bill is unnecessary because California regulators already have the authority to recoup plugging costs from wells’ previous owners.
While existing law gives the state this authority, it only applies to wells transferred after Jan. 1, 1996. Oil drilling in California dates back to the 1860s, and many thousands of wells were sold prior to the law’s cutoff, meaning the state can’t go after the wells’ former operators.
ProPublica reviewed the state’s list of orphaned wells and found numerous examples of well cleanups being left to taxpayers despite the wells being sold after 1996. In those cases, the state either hasn’t used its authority or has otherwise failed to secure plugging funds.
Department of Finance analysts referred questions to the state’s oil regulators, who were the source for much of the report. A spokesperson for the California Geologic Energy Management Division said state regulators have obtained money from previous owners on occasion.
But going after older operators is difficult, said Rob Schuwerk, a former New York assistant attorney general and the North American executive director of the energy finance think tank Carbon Tracker Initiative, and bonds are guaranteed money.
“There’s no better substitute for having the cash,” he said.
ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.
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