Aug. 24--HARTLEY, IOWA -- Texas oil refining giant Valero Energy Corp. last week made its modest and rather unlikely debut as one of the nation's largest producers of corn ethanol.

Company executives, wearing crisp, tan shirts with a teal-colored "V" on the front pocket, arrived in this small farming town from San Antonio for the occasion, a homey ribbon-cutting ceremony at a plant here, one of seven Valero recently purchased in the Corn Belt.

The event was almost quaint, with a popcorn machine and little girls serving cookies and iced tea. But it highlighted the awkward position Valero now finds itself in as a leading producer of petroleum fuels and an alternative fuel that is steadily undercutting it, as well as hinted at how the company will position itself going forward.

"We are in the fuels business, and ethanol we see as becoming a bigger and bigger part of fuels every year," Gene Edwards, Valero's executive vice president of corporate development and strategic planning, told the farmers, civic leaders and local plant employees gathered for the ceremony.

"Not too many oil companies have made this jump as we have," he said, "but we see it as a natural fit for us, and we're happy to be in the business."

Valero's major entry into the renewable fuels business marks a break with a U.S. oil and gas industry that in recent years has rarely missed an opportunity to point out flaws with corn ethanol and government policies that support it. It also signals a shift in strategy for the San Antonio-based company with operations in Houston.

While most U.S. oil refiners have chosen to be "blenders" of corn ethanol rather than producers, Valero said it saw an opportunity to use its refining expertise and scale to lower production costs. It also gains a hedge against commodity price spikes, while satisfying a government mandate to mix more ethanol into its petroleum fuels over time.

Company officials acknowledge biofuels may be one of the few growth businesses left in the U.S. as tougher fuel economy rules, rising biofuel requirements and other factors threaten to eat into sales of petroleum fuels in coming years.

"If you look at overall gasoline, we don't see demand growing in the United States," Edwards said, "but this is a portion of gasoline that's still growing."

Ethanol's enemies

Ethanol is typically blended at low levels with petroleum gasoline to help curb certain tailpipe emissions and is heavily subsidized by the U.S. government to help domestic farmers and ease dependence on oil.