California Energy Commission Vice Chair Siva Gunda outlined a series of policy recommendations to help stabilize California’s gasoline and petroleum markets. The recommendations came in response to a letter from Governor Gavin Newsom directing the CEC to “redouble the state's efforts to work closely with refiners…to help ensure that Californians continue to have access to a safe, affordable and reliable supply of transportation fuels, and that refiners continue to see the value in serving the California market…”
The vice chair recommends that California increase imports of refined fuels and maintain in-state refining capacity, support in-state crude oil production, and develop a “holistic transportation fuels transition strategy.” Notably, Gunda recommends prioritizing oil production in Kern County while maintaining the state’s ban on fracking and offshore drilling. The vice chair also recommends pausing the implementation of a profit cap on California's refineries.
The recommendations are as follows:
Strategy 1: Maintain capacity to stabilize fuel supply
The CEC recommends immediately stabilizing in-state supply by working to retain in-state refining capacity and by supporting sufficient imports, storage, and delivery of refined products.
Support imports of refined products: This includes addressing the regulatory and permitting issues to import capacity and efficiency, especially in regions with major refining capacity loss. The CEC recommends establishing an interagency workgroup that includes the CEC, the State Lands Commission, air districts, local governments, and ports to “develop a plan to improve coordination, establish clear lines of communication to prioritize critical energy infrastructure projects, enhance early public engagement, and identify efficiencies and reduce redundancies in permitting.” It also recommends exploring ways to increase the throughput capacity of terminals to receive and distribute gasoline and jet fuel.
Retain in-state refining capacity: The CEC states that “[r]etaining in-state refining capacity while demand for refined fuel persists supports the resilience of the transportation fuels system in California.” Retaining refinery capacity can also “maintain employment and local revenue while giving workers and communities time to plan for the future.” The CEC states that it is “engaging with market players to explore strategies to retain operations at existing refineries.”
Strategy 2: Provide sufficient confidence to industry to invest in maintaining reliable and safe operations to meet continued demand
The CEC notes that “[s]ystem-wide needs must be addressed in the near term to protect consumers and fenceline communities and ensure needed investments are made to safely meet demand while achieving climate goals and public health protective standards.” The CEC has identified a number of measures organized into two tiers: Tier 1 requiring immediate action and Teir 2 requiring further exploration.
Tier 1: Issues to Prioritize for Immediate Action
1. Stabilize In-State Crude Oil Production and Distribution
The CEC recommends that California “take action to achieve targeted stabilization of crude oil production in California to supply in-state refineries while ensuring that production is consistent with critical health and environmental protections.” Production “should be prioritized in existing established, and densely developed oilfields” outside of the state’s Health Protection Zones (HPZs) and not using protected methods, including “well stimulation treatments” like hydraulic fracturing and through new offshore oil and gas leases. This includes:
Increase production in Kern County: The CEC also recommends statutory changes to declare the Kern County Zoning Ordinance Second Supplemental Environmental Impact Report (SCH20130879) in compliance with CEQA. The declaration would allow Kern County’s approval of oil and gas wells with the mandatory mitigation measures identified in the ordinance.
Expand current drilling prohibitions: While recommending increased oil production in established areas, the CEC states that the legislature “may also wish to expand the current limitations on new offshore oil and gas development and codify the ban on well stimulation treatments in statute.”
Implement new oil regulations with well plugging requirement: The CEC also suggests a “targeted regulatory framework that ties crude production and permitting more directly to demand over the transition period.” The goal would be a “ more timely, predictable, and legally durable permitting for crude oil production outside of HPZs in established, densely developed oilfields coupled with a requirement to permanently seal at least two wells for each new well drilled – one located in that same oilfield and the other located in an HPZ.” The CEC believes this would “facilitate a managed production decline that aligns with and adapts to declining demand” to “create more certainty, maintain critical infrastructure investment, and protect consumers, workers, and fenceline communities.”
2. Regulatory
The CEC believes that its available refinery regulatory tools should be implemented holistically and prudently to maximize consumer benefit and avoid unintended consequences.
Pause refinery margin cap: The agency notes the relationship between the “days of supply” in gasoline inventory and retail prices, and “sees value in continuing to assess, in collaboration with the industry, how the resupply and minimum inventory strategies could be implemented to promote market liquidity during refinery outages and stabilize prices.” The CEC, however, notes that “additional analytical work is necessary” to determine a maximum gross gasoline refining margin (GGRM) and to impose an excess profits penalty “that would protect California consumers as intended.” The CEC recommends that the CEC pause the GGRM and penalty implementation for a “reasonable length of time.”
Discuss regulatory barriers with refiners and terminals: The CEC recommends that the California Air Resources Board (CARB) meet with each refiner and terminal covered by the at-berth regulation and “discuss current status and barriers to implementation of all technical tools intended to achieve emissions reductions from tankers at berth to assess the timelines for deployment of those emissions reductions.”
Implement cap-and-trade: The CEC recommends that CARB continue to work on regulation for the implementation of the cap-and-trade program. This includes progress towards required targets, cost containment strategies, and minimizing leakage.
Tier 2: Issues for Further Exploration
3. Local and Regional Authority.
The CEC recommends the formation of an interagency working group to address immediate coordination challenges. The CEC recommends that the administration partner with the legislature to “advance solutions to strategically align regulations and permitting processes across all levels of government that could best support achievement of State policy goals.”
Strategy 3: Holistic Transition Strategy
The CEC report states that “near- and medium-term actions must be part of a holistic transition strategy that is built on shared understanding, collaboration, and development of policies across state agencies and stakeholders.” The report notes that a “managed transition is critical for protecting Californians and will depend on coordination and collective action.”
While concurrently addressing the previous objectives, the state should implement policies and plans to support a successful transition, which could include:
Identify and pursue necessary transition funding to support climate, health, community, and worker priorities.
Protect workers and communities such as through robust process safety management regulations at refineries, which has the added benefit of increasing reliability of the facilities.
Support and protect California’s authority to set emission standards and achieve climate goals.
Further California’s ability to diversify and evolve its transportation sector to comply with federal and state air quality standards and meet climate goals, such as by continuing to expand the availability and reduce the cost of ZEVs.
Identify challenges, opportunities, and strategies for the future of land affected by the transition (e.g. remediation, marketability, and 23 value), such as Asset Retirement Obligations and standards for refinery remediation and decommissioning plans.
Evaluate whether new approaches to California’s fuel specifications could continue to protect public health and meet federally required air quality standards while making the State more resilient to disruptions during its fossil fuel transition.
Continue to evaluate additional options presented in the Transportation Fuels Assessment, e.g. product reserve and production enhancement strategies such as E15 or Reid Vapor Pressure (RVP) modification.
Explore further pathways to increase resilience in the system, such as improving connectivity between Northern and Southern California fuel markets, e.g. through increased marine oil terminal capacity or repurposing of existing fossil fuel transportation infrastructure.
Develop strategies that can support a managed phase-out especially during the late transition phase of the transportation sector, such as state management or ownership of assets.