Valero to run new ethanol plants full throttle

Thu Apr 2, 2009 7:35pm BST

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*Valero will trade ethanol and corn in San Antonio

*Refiner will keep 435 ethanol jobs and add a few more

By Timothy Gardner

NEW YORK, April 2 (Reuters) - Top U.S. oil refiner Valero Energy Corp (VLO.N), the recent buyer of seven ethanol plants, said it will run them at full capacity despite poor average margins for making the alternative motor fuel.

"Because of the amount of ethanol we are required to buy for blending in gasoline, it makes sense for us to produce the ethanol," Bill Day, a spokesman for Valero, said in an interview. He did not say exactly when the plants would be at capacity, citing the fact that it has yet to complete the purchase on a few of them.

Valero will also trade corn and ethanol, hoping its experience trading crude oil, gasoline and diesel will help it avoid difficulties that bankrupted the company from which it bought the distilleries.

The refiner bought the plants from VeraSun Energy Corp VSUNQ.OB at an auction last month for about $477 million, and will pay about $537 million in total to cover working capital and other costs.

VeraSun declared bankruptcy late last year after locking in pricey contracts for corn, the main feedstock for U.S.-made ethanol.

Day said Valero will take a fresh approach. "We bought hardware -- not contracts."

Valero will buy and sell corn and ethanol at its trading floor at its headquarters in San Antonio, Texas, alongside its traditional energy dealing. In addition, he said the company would enter new contracts with feedstock suppliers.

The refiner, which will run the plants under a subsidiary called Valero Renewable Fuels, will keep the 435 jobs associated with the plants, and add workers at some of them, Day said. The plants, which are scattered across the Midwest, have a combined capacity of about 780 million gallons a year. That is about 7.5 percent of the total current U.S. operating capacity to make ethanol.

POOR MARGINS

U.S. ethanol producers have suffered months of poor to negative margins for making the biofuel as the economic crisis, which followed record oil prices, has forced motorists to drive less. Capacity in the ethanol industry jumped about 60 percent last year amid generous government incentives given to the industry, which led to a glut of the fuel and helped force many distillers to shut plants.

Still, Valero hopes making the fuel will be profitable in the long-term even though prospects are less certain over the short-term. "We're hopeful with summer coming and overall prices being lower than they were last summer that we can get some people out on the road."

U.S. mandates require blenders to mix 10.5 billion gallons of grain-based ethanol into the gasoline pool this year. The rules require 15 billion gallons by 2015, which ethanol backers say ensures a good market even for traditional ethanol.

Looking ahead, Day said Valero chose to buy VeraSun's plants in part because new technologies could one day be bolted on to them to make more advanced biofuels, like cellulosic ethanol that is expected to be made from non-food crops.

As both a producer of the alternative fuel and a blender of ethanol into gasoline, Valero's integration could give it an advantage over companies that only make ethanol. Valero will receive the 45 cent per gallon blenders credit for every gallon of fuel it both makes and blends. (Reporting by Timothy Gardner, editing by Marguerita Choy)

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