REFINERY MARGIN TRACKER: Rising RINs costs pump up US refinery margins

New York — US refining margins rose last week as higher RINs prices increased the cost of meeting the Renewable Fuel Standard mandate, with RINs for both ethanol and biodiesel breaching the $1/RIN price, an analysis by S&P Global Platts showed Feb. 1.

For the week ended Jan. 29, the price of an ethanol RIN rose almost 11 cents/RIN from the week earlier to reach $1.01/RIN while biodiesel RINs rose over 9 cents/RIN to $1.15/RIN, according to Platts assessments.

While RINs are a cost, refined products prices are inflated by those RINs. Also, US refiners that generate RINs can benefit from the higher cost.

Renewable Identification Numbers or RINs are credits bought obligated parties like refiners to fulfill renewable fuel volumes as mandated by the Environmental Protection Agency under the RFS if they cannot create their own.

Pricier RINs raised Platts' weekly assessed RVO – Renewable Volume Obligation – by 1.152 cents/gal to 12.35 cents/gal for the week ended Jan. 29. The RVO is calculated using a weighted average of all RINs costs spread across transportation fuel production. So when the price of RINs rise, so does the RVO cost and as well as the value of refined products produced.

"2021 RVO values settled at 12 cents/gal Jan. 26, impacting US diesel and gasoline cracks by about $5/b." wrote S&P Global Platts Analytics analysts in a recent research note.

US Atlantic Coast cracking margins for Nigeria's Bonny Light averaged $6.70/b for the week ended Jan. 29, compared with $2.95/b for RIN-less margins, Platts Analytics data shows.

With RINs averaging $3.75/b of the total margin, this puts USAC margins slightly higher than Northwest European margins for Bonny Light, which averaged $2.20/b for the week.

The Biden bump

RINs prices have been rising since the Nov. 3 US presidential election, boosted by the Biden Administration's stated focus in clean energy.

That added to an rise earlier in 2020 following the denial by the Tenth Circuit Court of Appeals for Small Refinery Exemptions (SRE) by refiners HollyFrontier and CVR. The US Supreme Court is expected to hear the refiners' appeal in April, adding more volatility to the price.

"The high court's decision to take this case opened the door for this decision to be reversed, which would immediately put downside pressure on RINs prices," Platts Analytics wrote.

RINs prices are also rising on higher feedstock costs and a fall-off in ethanol production. And further uncertainty remains around lack of 2020 and 2021 biofuel mandates from the EPA which has yet to issue them.

Last week, the EPA did issue two biofuel waivers for 2019, but an agency spokeswoman declined to release the names of which companies received them. According to a research note from Credit Suisse's Manav Gupta, this compares to 31 waivers initially granted in 2018 and 37 in 2017.

Silver lining

Refiners like Valero who have built up renewable fuel production capability can benefit from higher RINs costs.

Valero, a first mover in the renewables space, recently announced another joint-venture Diamond Green Diesel project with Darling Ingredients to be built adjacent to its 335,000 b/d Port Arthur, Texas, refinery, which will increase Valero's renewable diesel production to 1.2 billion gallons by 2023, reducing its need to buy RINS.

In the fourth quarter of 2020, Valero reported its renewable diesel operating income of $127 million and a refining operating loss of $476 million.

Rather than fundamental reasons, "RINs prices right now are probably more influenced by the SRE and Supreme Court and what the EPA is going to do," said Valero's Gary Simmons on the company's Jan. 28 earnings call.

US Gulf Coast cracking margins for WTI MEH crude with RINs averaged $8.99/b for the week ended Jan. 29, compared with the $5.29/b without RINs.

On the US West Coast, Arab Medium coking margins with RINs averaged $13.42/b in the same time period, while Arab Medium without RINs averaged $9.50/b, Platts Analytics margin data showed.

USWC margins are also impacted by California's Low Carbon Fuel Standard credits, which adds value to renewable diesel production. Phillips 66's first renewable diesel output from its 120,200 b/d Rodeo, California, refinery of 8,000 b/d from a converted diesel hydrotreater is expected online in mid-2021.

Plans to convert the whole facility to renewable diesel is expected by early 2024 when renewable diesel output will increase to 50,000 b/d, allowing Phillips 66 to mitigate some of its RFS costs.

Phillips 66 reported Jan. 29 on its fourth-quarter results call its realized margins for the quarter were reduced by $3.08/b by RINs, freight and other factors.