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US refiners seeing huge savings from lighter regulatory approach to biofuels

During their first-quarter earnings calls, U.S. refiners outlined more than $550 million in benefits to their businesses as the Trump administration's light approach to enforcing biofuel blending mandates has lowered compliance costs and provided the industry with another tailwind.

The Renewable Fuels Standard program, administered by the U.S. Environmental Protection Agency, requires U.S. refiners to blend an increasing volume of biofuels such as ethanol into the transportation fuels they produce each year, escalating to 36 billion gallons by 2022.

The EPA sets annual renewable volume obligations, or RVOs, each year based on overall volume requirements and projections of domestic gasoline and diesel production.

Those companies that cannot meet the blending requirements must purchase credits, known as renewable identification numbers, or RINs, in order to meet their blending obligations.

Under the program, refineries with a capacity of less than 75,000 barrels per day can seek "hardship" waivers from the EPA. Under the leadership of Scott Pruitt, the agency has been more liberal in granting these exemptions and has reportedly approved at least 25.

In addition to the exemptions, the details of which are not publicly disclosed, the EPA entered into a settlement with PES Holdings LLC that allowed the bankrupt Philadelphia, Pa. refiner to shed a substantial portion of its RVOs and paved the way for PES to re-emerge from bankruptcy.

Together, the PES settlement and news reports of the EPA's more liberal waiver policy have sent RINs prices tumbling. In a May 11 report, Moody's said the price for conventional ethanol RINs has fallen by 50% since mid-February to about 35 cents after having approached $1.00 in 2017.

"It seems increasingly likely that RFS is here to stay, but the Trump administration and EPA could take measures such as approving waiver requests to help limit RINs prices without announcing an official cap," the Moody's analysts wrote. "This posture would likely keep prices from approaching the high levels of earlier periods, preventing deep stress on refiners' profitability from RFS compliance, and would therefore be credit positive for the U.S. refining industry."

U.S. refiners disclosed $251.5 million in benefits related to the RFS program during the first quarter. Delek US Holdings Inc. reported a $79.8 million benefit from waivers granted at its El Dorado, Ark., and Krotz Springs, La., refineries for the 2017 calendar year. Andeavor reported an approximate $100 million benefit from a reduction in RINs costs. HollyFrontier Corp. disclosed a $71.7 million reduction to its RINs cost from the EPA's having granted the company's 52,000 barrel-per-day Cheyenne facility a small refinery exemption for the 2015 and 2017 calendar years.

In addition to the benefits reported during the first quarter, other refiners have lowered their 2018 RIN expense guidance.

PBF Energy Inc senior vice president and CFO Erik Young said during a May 3 conference call with investors that the company's full-year 2018 RIN expense could be $100 million lower than 2017 at $200 million, while Valero Energy Corp. lowered its 2018 RIN expense guidance by $200 million to between $500 million and $600 million.

"Obviously, the waiver program that's been sort of uncovered is helpful," PBF President Matthew Lucey said May 3. "It's incredibly helpful if you're getting a waiver. … But it's absolutely helpful to the entire program because when you talk about 30-some small refiners, it's not an insignificant portion of the RVO."

Despite the waivers, the refining industry continues to push for significant legislative and regulatory changes.

"Our view is that … the system's broke. We need to fix it. … But I don't hold out a lot of hope for 2018," Phillips 66 Chairman and CEO Greg Garland said during an April 27 earnings call.