Refiners Get 270-Day Deadline

Attention! If you own energy stocks, be on alert. The first warning shot has been fired in a brewing war over liability for polluting the nation's groundwater. Fingers will be pointed at both refiners and oil companies, and litigation will affect companies industrywide.

Here's the update: Congress passed and President Bush signed a 1,700-page new energy bill.

One of the most interesting facets of the bill is that refineries such as Valero (NYSE:VLO) have only 270 days from the moment President Bush signed the legislation to replace the additive MTBE (methyl tertiary butyl ether) in all refined gasoline. Valero has already announced that it will stop using MTBE, which will reduce gasoline output by approximately 60,000 barrels per day. Refiners such as Chevron (NYSE:CVX) should soon follow suit. While prices will rise, all is not well for big oil.

What is MTBE?
Methyl tertiary butyl ether was first used in gasoline in 1977 as a replacement for lead additives. That year, Jimmy Carter's Congress mandated that MTBE or other additives (ethanol, for instance) be added to gasoline to reduce smog emissions in the nation's air.

Scientists, however, have claimed that MTBE leaks from underground storage tanks. The irony, of course, is that MTBE was added to the nation's gasoline to clean the air. Unfortunately, MTBE is blamed for making underground water in springs and wells taste like turpentine. MTBE has also been shown to cause cancer in laboratory mice.

Some states have already banned MTBE as an additive in gasoline, and those states are drawing up plans to find money to pay for the huge cleanup of underground waters contaminated by MTBE. States aren't the only ones looking to sue refineries and Big Oil. Many water utilities are now hiring lawyers on a contingency basis to sue those liable for allowing MTBE to be used for so many years -- even as scientific evidence mounted that the additive was dangerous and a carcinogenic.

California, for example, is looking to sue not only oil companies and the Environmental Protection Agency (which is said to have sat on insider information that MTBE was dangerous to underground water back in the 1970s) but also refiners. We're talking about hundreds of millions of dollars in cleanup funds every year until all MTBE spills are cleaned.

This scenario could take years to play out, but you can bet that ExxonMobil (NYSE:XOM), BP (NYSE:BP), Total SA (NYSE:TOT), and other big players are planning vigorous defenses at this very moment. And lasting litigation could put a drag on shares that have been very rewarding recently.

Potential winners
The obvious winners here are ethanol producers: Dow Chemical (NYSE:DOW) and Archer Daniels Midland (NYSE:ADM), to name two. I'm not a fan of either company, but I'd be remiss if I did not point out their potential. As MTBE is removed from refinery stockpiles, expect the non-polluting ethanol to be bought in futures contracts by retrofitting refineries as soon as President Bush signs the new energy bill.

Given the potential of litigation on the horizon, it is prudent that shareholders start monitoring positions more closely. Although oil prices will continue to rise, litigation could prove to be a drag on market performance just as the tobacco lawsuits proved to be a hindrance for Altria and competitors.

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Richard "DJ Rock" Yates has not bought or shorted any shares of companies named in this article. He loves the disappearing coral reefs in the Florida Keys that have been damaged by global warming. The Motley Fool has a disclosure policy.