Ethanol Love-In: Valero Energy Snaps Up Another Plant

Valero Energy has gone from zero to 1.1 billion gallons in the ethanol production business in less than year. And with the EPA issuing its final regulations for the National Renewable Fuel Standard program, expect Valero's lovefest with ethanol to continue.

As of today, Valero owns 10 ethanol plants and has a combined production capacity of 1.1 billion gallons per year. The San Antonio-based oil refiner closed Thursday on its purchase of a 110-million gallon ethanol plant in Jefferson, Wis. Valero paid $72 million for the plant, according to the company. The Jefferson, Wis. plant purchase follows two other deals that closed last month. Valero bought two plants, which were previously owned by VeraSun Energy Corp. These three plants were purchased for about 41 percent of their estimated replacement cost, according to Valero.

Valero got into the business last year after buying five plants and a development site from VeraSun Energy, which auctioned off the assets in bankruptcy court. Valero paid $477 million or about 30 cents on the dollarfor the plants. At the time, Valero bought the plants as a "cheap" way to access the ethanol it needed for its Renewable Fuel Standard E-10 gas. It has since sold some ethanol into the market place.

The U.S. oil refiner's bottom line has been punished by a combination of weak demand for oil, rising crude prices and high inventories. Except, for its ethanol business. Valero reported last month a loss of $155 million in the fourth quarter compared with a profit of $795 million in the same year-earlier period. Its ethanol unit earned $94 million in the fourth quarter and $165 million in less than three quarters of operations.

Will there be another ethanol plant purchase in Valero's future? I wouldn't doubt it for a minute. The company has its hands full with its refining business. But the newly finalized Renewable Fuel Standard guarantees a federally backed (subsidized) future in ethanol. If the EPA responds to industry pressure and ups the blend wall limit from 10 percent to 15 percent ethanol, Valero will be even more committed to its new identity as major U.S. ethanol producer.