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The RINs fight is far from over, say US refiners

A key aim of the Renewable Fuel Standard was to reduce US dependence on foreign oil while increasing the use of renewable fuels when it was passed in 2005.

Yet today it could be poised to have the opposite effect on imports, as some US refiners say they are being crushed by the high cost of compliance which, in turn, could lead to closure of some refineries — and increased dependence on foreign oil.

Particularly at risk are refineries on the US Atlantic Coast. If they close due to RFS costs, the unintended consequence would actually be more imports of oil, in the form of gasoline and diesel.

When Congress passed the Energy Policy Act of 2005, through which the RFS was born, the US shale revolution was nascent. At that time, US crude imports topped 10 million b/d, because domestic production averaged just 5.18 million b/d. Total US gasoline imports topped 600,000 b/d.

Fast forward to today. Thanks to the technological change that allows production of oil from tight shale formations, market flows have changed as US crude production has ramped up.

US crude output averaged 9.55 million b/d the week ended October 27, according to EIA data. This was enough to allow US E&P companies to export 2.1 million b/d of light, sweet crude to as far away as China. Crude imports averaged 7.57 million b/d, and gasoline imports were 544,000 b/d, with 510,000 b/d or about 93% going to the East Coast.

So while the US oil supply and demand balance has changed, legislation put in place to address issues that have gone by the wayside has not changed fundamentally.

And that includes the use of blending mandated volumes of renewable fuels into gasoline and diesel.

Today, US refiners have mostly accepted that biofuels are here to stay, despite initial pushback against what they saw in the early days of the RFS as a corporate welfare check handed to farmers at the expense of oil.

But as ethanol usage in US gasoline is at saturation, the inability to blend enough biofuel to meet their mandated volumes means they have to buy RINs. This has created problems for those refiners whose RINs needs outstrip what they can sustainably afford.

And any change they have proposed in the RFS to make the cost of RINs less onerous has been shot down. This includes moving the point of obligation to the blenders and allowing exported volumes of ethanol and other biodiesels to generate RINs, as outlined in a recent letter from four refiners to President Donald Trump.

Refiners had their hopes dashed when EPA head Scott Pruitt decided, after meeting with Midwestern senators, that he would no longer consider changing the RFS. They saw this as capitulation to the high-pressure tactics of the corn lobby.

“What I cannot understand is how the Trump administration capitulated to the senators from Iowa,” said Jack Lipinski, CEO of CVR Refining, on a Q3 earnings call.

However, Texas Senator Ted Cruz and eight Republican senators from five other oil-refining states — Arizona, Oklahoma, Pennsylvania, Utah and Wyoming — have sent a letter to President Trump requesting a meeting with him about the RFS.

And the governor of Pennsylvania is seeking a waiver from the EPA to mitigate the rising costs to comply with the RFS that are threatening the region's refineries.

In an October 20 letter to Trump, Governor Tom Wolf said: “By this letter, I specifically request that you ask Administrator Pruitt to waive the renewable volume obligation for Northeast refiners until or unless market prices deflate.

"According to Philadelphia Energy Solutions, the cost of purchasing sufficient RINs to comply with the RFS now exceeds its total payroll costs," Wolf said.

That company’s 310,000 b/d refinery — the largest on the US Atlantic Coast — is one facility under threat. PES’ corporate credit rating was cut by S&P Global Ratings October 17 on lack of an agreement to refinance a large debt maturing in 12 months. (The ratings agency is part of the same company as S&P Global Platts.)

PES spokeswoman Cherice Corley said it is working to resolve these issues in light of "current market and regulatory challenges, including the significant financial burden imposed by renewable energy obligations [RINs]."

The PES plant and Monroe Energy’s 190,000 b/d Trainer, Pennsylvania, plant employ about 1,200 and 500 people, respectively.

A Pennsylvania Department of Labor study showed these direct jobs support about 30,000 indirect jobs in the southeastern corner of the state.

“The first time a refinery goes bankrupt because of RINs, the outcry will be enormous,” said CVR’s Lipinski.

“Because regardless of how many farmers you have and how many jobs you have, when you start losing refinery jobs with a multiple of 15 jobs per refinery job, you lose thousands of jobs,” he added.

The oil industry says the fight is from over.

Cruz’s letter reminded President Trump that “while his support of the corn lobby is welcomed by the corn lobby,” when it comes down to electoral votes, they fall far short, said PBF CEO Tom Nimbley, noting Iowa has six electoral votes and Pennsylvania has 20.

And those 20 went for a “Republican candidate based on the promise to make America great again, manufacturing jobs, and he [Trump] has been reminded of that,” said Nimbley.

“I personally believe that Congress will take up the mantle and try to get a legislative fix,” he added.