Top U.S. refiner Valero Energy Corp. jumped into the ethanol business with a big splash last week. The San Antonio-based refiner successfully bid to buy ethanol plants from bankrupt ethanol maker VeraSun Energy, edging out Archer Daniels Midland for the former U.S. BioEnergy assets that VeraSun acquired in the spring of last year.

Valero said that its bid has been accepted by the bankruptcy court overseeing the VeraSun auction. In addition to the former U.S. BioEnergy assets—five plants and a sixth site under development—in its original bid, the court also approved Valero’s purchase of two additional ethanol plants from VeraSun.

Together, the ethanol plants purchased by Valero have an annual production capacity of 780 million gallons. The purchase of those plants will give Valero a dedicated supply of ethanol, the company said.

The sale of assets in the original bid—plants in Charles City, Fort Dodge and Hartley, Iowa; Aurora, S.D.; Welcome, Minn.; and the site under development in Reynolds, Ind.—are expected to close on April 1.

The deal for the additional plants—in Albion, Neb. and Albert City, Iowa—is expected to close shortly after, subject to regulatory approval. Valero plans to operate all of the plants through its subsidiaries.

The aggregate purchase price of $477 million represented about 30 percent of the plants’ replacement cost, Valero said. But that purchase price excludes working capital and inventory currently estimated at about $75 million.

Valero professes to remain an oil refiner, but its latest move could be just the start of an expanding involvement in the ethanol market longer term.

“You are right that this is a start,” said company spokesman Bill Day. “Valero will continue to explore opportunities in alternative energy. For now, we’re concentrating on integrating these plants into our system and welcoming new employees into the Valero family.”

Valero’s operating mantra has long been to use its economies of scale to streamline costs, so the refiner’s decision to become an ethanol producer instead of holding an inherent market short position makes sense. But it was the current economic uncertainties that have made ethanol assets dirt cheap and attractive for the refiner that triggered their acquisition, which fits well into Valero’s growth strategy.

Day told DTN that under the Renewable Fuels Standard, Valero buys a significant amount of ethanol, “so we figured it might be a good business to get into—especially since there are distressed assets available for low prices relative to replacement costs.”

He added, “Valero believes that ethanol will be an important part of the fuel mix in this country going forward. We expect the RFS and demand for ethanol to increase, so it made sense for us as a gasoline producer to also become an ethanol producer.”

Yet, even with the new ethanol production line, Valero will still need to buy more ethanol cargoes from the open market for its blending needs.

“Valero has satisfied its ethanol needs in the past by making purchases, and we’ll continue to do some purchasing even after we have taken over these plants,” said Day.

Valero has a refining throughput capacity of approximately 3.1 million bpd, some of which are in Canada and in Aruba, producing gasoline, diesel, jet and other refined fuels.

There are other benefits Valero hopes to reap from the purchase of those assets. Valero markets oil products in 5,800 retail and wholesale stores, which are spread out across 44 states in the U.S., as well as in Canada, Latin America and the Caribbean region. These downstream facilities provide established infrastructure for ethanol marketing.

“We believe there will be synergies with our existing businesses, and advantages related to the fact that Valero is a large international company, but we haven’t quantified those synergies yet,” added Day.

While the deal represents its first foray into ethanol production, Valero has been looking for how to harness alternative energy for a while. Valero formed the Alternative Energy and Product Development group at its San Antonio headquarters last year to explore opportunities in these areas.

The company also has made investments in small biofuels companies and has also constructed a wind farm at its McKee Refinery in the Texas Panhandle that will eventually generate 50 MW of electricity, Day said.