The mandates for blending renewables into US transportation fuels have been a contentious issue for refiners from their inception, when Congress enacted ethanol mandates in 2005, citing national energy security as a reason.
Refining icon Tom O'Malley, the then recently retired CEO of PBF Energy, railed against ethanol blending on PBF's Q1 2013 earnings call, dubbing it the "Food for Fuels Program," a subsidy for farmers at the expense of refiners.
"Let's convert all the food to fuel, that way we can drive and starve to death while we are driving," he said.
But times and circumstances have dramatically changed. The shale revolution turned the US into an oil exporter, neutralizing issues around energy security, which have given way to concerns about climate change and greenhouse emissions. But the issue of renewables remain a bone of contention as refiners chafe at the loss of market share and high price of compliance.
And while the program administering the use of renewables in hydrocarbon-based fuel has also evolved over time under the Environmental Protection Agency's more sophisticated and complex Renewable Fuel Standard, some industry participants think it is time for an overhaul to make the RFS more in tune and responsive to current reality.
The RFS sets blending mandates not just for ethanol, but for advanced biofuels, biomass-based diesel, and cellulosic biofuel, considered a unicorn fuel by some since it has never met its RFS volume requirements and is rarely seen.
Renewable Identification Numbers, or RINs, are the currency of the RFS. If a refiner cannot meet its EPA-assigned annual blend target, they must buy RINs credits on the open market to make up the shortfall to meet their obligation.
While individual refiner RVOs are closely guarded, S&P Global Platts assesses the RVO as a value calculated using daily RINs prices and biofuel mandates for per-gallon compliance costs.
The RFS's RVO by design rises annually based on the assumption that fuel demand will rise.
However, pandemic lockdowns had a deleterious impact on transportation fuel demand in 2020, pushing it far below that of 2019. It also pushed most refiners' earnings into negative territory for much of 2020 and Q1 2021, while laying bare the flaws of the RFS' renewable volume obligation on refiners, trying to meet non-existent demand.
"As fuel demand destruction increased [throughout 2020] ... the 'RIN basket,' or the price of all RINs refiners must obtain for RFS compliance, rose over 500% on the year," PBF wrote in a Feb. 18 letter to the EPA.
"This occurred as refining crack spreads remained weak—and even turned negative at one point," the letter said.
Volatile RINs markets fueled by uncertainty
RINs prices, particularly D6 ethanol RINs and D4 biodiesel RINs, have skyrocketed over the past few quarters as lower gasoline and diesel demand in 2020 led to lower blending and less RIN creation, making less RINs available.
So far in Q2 2021, D6 ethanol RINs are averaging $1.62981/RIN, while D4 Biodiesel RINs are averaging $1.710254/RIN, compared with 2020 annual average values of 43.20 cents/RIN and 64.15/RIN, respectively, Platts assessments show.
And the RVO, which averaged 13.146 cents/gal in Q1 2021, is now averaging 19.485 cents/gal in Q2 2021.
One factor adding to the volatility of RINs prices is the delay by the EPA in setting 2021 blending mandates. This delay was exacerbated by waiting for the US Supreme Court ruling on small refinery exemptions. On April 27, the Supreme Court heard on appeal the small refinery exemption case brought by HollyFrontier after it was denied an exemption by the Tenth District Court.
But news June 16 from the Office of Budget Management that the EPA, which had missed its Nov. 30, 2020, deadline for 2021 mandates, will set preliminary levels in July to be finalized in December sent D6 ethanol RIN prices to three-month lows.
The OMB news jibes with market sentiment that the EPA is not expected to release its 2021 renewable volume obligations until after the Supreme Court decision on the small refinery exemption case is reached, according to a refining source familiar with the situation.
"There's a lot being discussed, and the EPA has no direction," he said. "They are paralyzed by the small refinery case."
"They will wait for the SCOTUS decision on the SRE before they release the biofuel mandate," he added, which could potentially be delivered in late June or early July.
The EPA wants to see "where the pieces land" before they come out with an RFS mandate for 2021, the source said, to ensure it takes into account all stakeholders, including refiners and biofuel producers.
Small refiners sidelined
Despite a slight fall in RINs prices recently, most small refiners are sitting on the sidelines to buy RINs they need, many with expectations of receiving the small refinery exemption which will negate the need. The SRE was built into the RFS program as a safety valve for refineries with capacity less than 75,000 b/d that faced hardship when complying with RFS mandates.
CVR Energy, which has submitted SRE waiver applications for 2019 and 2020 for its Wynnewood, Oklahoma, refinery, said the ruling is important from its standpoint because if that ruling went for them it would "consume most of our short position" of about 110 million-120 million RINs each for those two years
And they are getting ready to submit an SRE waiver for 2021.
Some stakeholders, both policy makers inside Washington and those in the refining industry, expect refiners to see lower mandates in 2021 on the RFS from the Biden Administration because of the disaster that was 2020. And they expect to see these lower mandates tied to RVO percentages rather than outright volumes, a methodology which proved untenable during the drastic refined product demand drop in 2020 due to coronavirus lockdowns.
As an appeasement to the biofuel industry and the green energy lobby, biofuel producers are seeing a spate of new legislation introduced in Congress as a way to even the playing field following President Biden's proposed blending incentive in his April tax plan.
The Sustainable Fuel Act would give producers of sustainable aviation fuel a blenders' tax credit between $1.50-$1.75/gal, while the Sustainable Skies Act would provide a $1.50/gal tax credit for SAF that reduces emissions by 50%, and an additional 1 cent/gal for every percentage point to $2/gal.
If you can't beat them...
As climate change issues are now being pushed to the forefront of group consciousness by investors and governments alike, US refiners are increasing capital spending geared toward renewables.
Given that transportation fuels account for over 80% of greenhouse emissions, many refiners have created renewable fuel projects to get a foothold into the renewable diesel and SAF space.
Some have repurposed entire refineries.
Phillips 66's Rodeo Renewed is being transformed to make renewable diesel and SAF at the California plant. Some refiners have converted existing units, like CVR's conversion of a hydrocracker at its Wynnewood, Oklahoma, plant to make renewable diesel and naphtha. By doing this, refiners not only are eligible for the $1/gal federal blender tax credits, but also for California's Low Carbon Fuel Standard credits. And the added benefit in meeting their RFS blending requirements includes making RINs.
PBF Energy, the latest entrant into the renewable space, said recently it is planning to use an idled hydrocracker at its Chalmette, Louisiana, plant to make 20,000 b/d of renewable diesel to supply its two California plants, despite its lingering concern about the efficacy of the RFS.
"The RFS is a broken program," CEO Tom Nimbley said on the April 20, 2021 earnings call, adding the company is "engaged in discussing immediate steps as well as long-term solutions" with the EPA.