New York — US refinery margins have been rising this year as the lifting of coronavirus restrictions has boosted demand for transportation fuels, although that demand increase has been offset for some smaller refiners by the rising costs of adhering to the Renewable Fuel Standard.
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So far in the second quarter, RINs prices have averaged $1.33/RIN and $1.42/RIN for ethanol and biodiesel RINs, respectively, according to S&P Global Platts assessments, compared with the 62 cents/RIN and 88 cent/RIN in the fourth quarter of 2020.
Refining margins have also risen, with US Gulf Coast WTI MEH cracking margins averaging $13.61/b so far in the second quarter of 2021, compared with $10.54/b in the first quarter, according to S&P Global Platts Analytics data.
Uncertainty over how the Environmental Protection Agency under the Biden Administration will handle the RFS mandates have boosted prices for Renewable Identification Numbers, which are renewable fuel credits that refiners and other obligated parties must buy if they cannot meet their annual Renewable Volume Obligations under the RFS by blending enough biofuels into the gasoline, diesel and jet fuel they sell.
And by missing its November deadline to set 2021 mandates, the EPA has created uncertainty about the ability of parties to achieve their volume obligations, sparking a boost in RINs buying, even though it has extended the deadline to comply with the yet to be released mandate to Jan. 31, 2022.
"Policy is such a huge factor that must always be considered when looking at RINs," said Corey Lavinsky, biofuel analyst with S&P Global Platts Analytics. "It's when the perception that mandates will be hard to achieve is when RINs prices escalate."
RINS prices have also risen on higher prices for soybean oil, the primary feedstock for D4 RINs, and corn, the primary feedstock for D6 RINs, and on uncertainty ahead of a Supreme Court ruling on the EPA's handling of small refinery exemptions from the RVO.
Those exemptions were a lifeline for smaller refiners like CVR Energy with plants under 75,000 b/d, which lacked the ability to create RINs through biofuels blending.
CVR Energy, a small refiner with two plants in the Midwest, said in a recent Securities and Exchange Commission filing that including its open obligation of about 221 million RINs for 2020, 2021 RINs costs will range from $260 million to $280 million, net of the $95 million to $105 million from the company's renewable diesel project due online in mid-2021, which will create RINs.
In 2020, CVR's RINs costs were $190 million, up from $43 million in 2019.
Larger integrated refiners with renewable fuel production capability, blending, and retail outlets have been able to sell excess RINs they generate on the open market, thus benefiting from the higher RINs prices.
Supreme Court ruling
On April 27, 2021, the Supreme Court is set to hear on appeal the Jan. 24, 2020, ruling by the Tenth Circuit Court of Appeals which said the SRE exemption could only be applied to refineries which had received them continuously for each year going to 2011.
A brief filed with the Supreme Court by the Small Refineries Coalition notes that while RFS statute's minimum volume blend targets rise annually, reaching 36 billion gallons in 2022, gasoline consumption is trending lower, particularly last year due to coronavirus lockdowns, creating an untenable situation for their members.
"The RFS renewable fuel targets and therefore small refineries' compliance obligations become more difficult for small refineries to achieve with every passing year," according to brief amicus curiae filed by the coalition in the suit against the Renewable Fuel Association trade group.
A decision is expected by June or July. If the Supreme Court affirms the ruling, only seven or fewer refineries will remain eligible for exemptions. Some refineries unable to bear the expense of RINs at the current price levels may seek bankruptcy relief like Philadelphia Energy Solutions did in 2018 or they may cease operations. Others may follow the path of Marathon and CVR and convert their facilities to produce renewable diesel.
Lavinsky expects the EPA will propose volume mandates for 2021 and 2022 around the time of the Supreme Court decision in July.
"We are forecasting that the actual mandate will be less in 2021 than it was in 2020," he said, a move which would also cause RINs prices to ease.