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Ethanol Credits’ Drop Scant Relief for Refiners: Energy Markets

Ethanol Credits’ Drop Scant Relief for Refiners
Gasoline consumption is expected to be 133.2 billion gallons this year and 132.9 billion in 2014, the U.S. Energy Information Administration forecast in the latest Short-Term Energy Outlook yesterday. Photographer: Daniel Acker/Bloomberg

Even after yesterday’s 14 percent decline, the price U.S. refiners are paying to adhere to a 2007 law that requires companies to blend ethanol with gasoline is at least 10 times more than at the start of the year.

Renewable Identification Numbers, or RINs, tradable credits tied to each gallon of ethanol to show compliance with the law, tumbled to 89 cents yesterday after President Barack Obama’s administration responded to criticism by allowing four extra months to reach this year’s mandate and signaled an adjustment may come next year. RINs traded at $1.43 on July 17, compared with 7 cents at the start of the year.

The price increase is refocusing attention on the cost to refiners from Valero Energy Corp. to PBF Energy Inc. in adhering to a law enacted under President George W. Bush before America’s energy-production boom. While gasoline consumption has fallen to the lowest level since 2001, the mandate calls for refiners to blend increasing amounts of ethanol this year and next. Congressional hearings on revising the law have failed to bring any relief.

“It’s an unnecessary burden to the marketplace,” Peyton Feltus, president of Randolph Risk Management in Dallas, said yesterday by phone. “You can make the case that it was needed when it was mandated back in ’07, but we’ve got plenty of fuel now. That’s not a problem.”

Corn-based ethanol RINs fell as much as 18 cents to 85 cents before yesterday’s announcement on speculation that the EPA would lower the targets, data compiled by Bloomberg show. They dropped 15 cents, or 17 percent, to 74 cents at 3:44 p.m. in New York. Advanced RINs, which cover biodiesel and Brazilian sugarcane-based ethanol, fell 14 cents, or 14 percent, to 83 cents. Ethanol futures settled at $2.185 a gallon today, down 0.5 cent this year.

EPA Action

The Environmental Protection Agency announced yesterday that U.S. refiners should use 13.8 billion gallons of ethanol this year, a 4.5 percent increase from 2012 levels, under the 2007 Renewable Fuels Standard. The agency extended the deadline to show 2013 compliance to June 30, 2014, from Feb. 28, 2014, and said that it expects to adjust volume requirements for 2014. The mandate will increase to 14.4 billion gallons next year unless the EPA makes an adjustment.

Most gasoline in the U.S. is sold in a formula of 10 percent ethanol to the rest of the motor fuel, a mix known as E-10, and petroleum interests argue that the law would force them to exceed that threshold, a phenomena known as the blend wall.

While EPA has approved blends of as much as 15 percent ethanol in gasoline for vehicles made after 2001, oil companies haven’t marketed the higher concentration, citing liability and engine-damage concerns.

Fuel Consumption

Gasoline consumption is expected to be 133.2 billion gallons this year and 132.9 billion in 2014, the U.S. Energy Information Administration forecast in the latest Short-Term Energy Outlook yesterday. Gasoline will average $3.52 a gallon this year, down from $3.63 in 2012, according to the report. Pump prices averaged $3.60 a gallon nationwide yesterday, Heathrow, Florida-based AAA said on its website.

“EPA does not currently foresee a scenario in which the market could consume enough ethanol sold in blends greater than E-10, and/or produce sufficient volumes of non-ethanol biofuels to meet the volumes of total renewable fuel and advanced biofuel as required by statute for 2014,” the agency said yesterday.

That isn’t enough to lower RINs prices to the levels that they were trading at earlier this year, said Aakash Doshi, an analyst at Citigroup Inc. in New York.

EPA Impact

While EPA’s announcement was acknowledgment that the renewable fuel requirement is “infeasible” for 2014, the impact that it’ll have on RINs prices remains to be seen, Bill Klesse, chief executive officer of Valero, the world’s largest independent refiner, said by e-mail yesterday.

“RINs have become a market all to themselves, which was never the intention of the law, and that continues to cost consumers money and increase gasoline costs,” he said.

Biofuels interests lauded yesterday’s EPA decision as a signal that the Obama administration won’t yield to calls from oil and food industry interests to repeal the program.

“By setting the 2013 targets as such, the EPA is fully utilizing the flexibilities incorporated within the RFS,” Fuels America, a Washington-based coalition of biofuel groups, said in a statement. “It also provides evidence that the RFS works, it adjusts to market conditions.”

Extended Deadline

Once refiners blend ethanol into gasoline they are able to maintain the RIN to submit to the EPA or they can trade it to another party that may not have enough to show compliance.

Oil advocates and biofuel proponents last month testified at a hearing by the U.S. House of Representatives’ Committee on Energy and Commerce on the impact of the standard. Lawmakers signaled that there weren’t enough votes to repeal the program and that it may be altered.

The extended deadline for refiners to show compliance should help ease RINs prices, Brooke Coleman, executive director of the Advanced Ethanol Council, said in a telephone interview yesterday.

The American Petroleum Institute, a Washington-based lobbying group, said it was a mistake for Obama to not adjust the standards immediately.

“While the administration acknowledges that higher ethanol mandates are unworkable by suggesting a new approach for the 2014 standards, EPA missed an opportunity to fix the problem this year,” the group said in a statement yesterday.

Charles Drevna, president of the American Fuel and Petrochemical Manufacturers, which represents Exxon Mobil Corp. and Valero, said he was “disappointed” that the EPA didn’t change the 2013 targets, though he’s “encouraged” that it acknowledges the challenges in meeting next year’s requirements.

Falling Short

The EPA fell short of offering a “clear price direction” for the RINs market, Dustin Haaland, CHS Inc.’s director of renewable fuels and additives supply, said by e-mail yesterday. The move could at least curb some trading that’s “more speculative in nature,” he said.

“It could also take some of the bid support out of the market as obligated parties reassess how to address RIN needs in 2014,” he said. CHS is the largest farmer-owned cooperative in the U.S.

Haaland declined to comment on how yesterday’s decline in RINs prices could help the company cope with its RINs exposure.

Shell ‘Disappointed’

Kim Windon, a spokeswoman for Royal Dutch Shell Plc in Houston, said by e-mail yesterday that the company was “disappointed that EPA didn’t make meaningful adjustments” to the 2013 standards. Windon said Shell was encouraged by the agency’s recognition of blend-wall limitations and its plans to change the 2014 requirements.

“Shell believes that ultimately Congress must act to revise the RFS to reduce blend-wall impacts, avoid limiting supplies of gasoline and diesel to U.S. consumers, and increase regulatory certainty for investments in cellulosic biofuels,” Windon said.

RINs prices are set to decline as it becomes clearer that regulators will act on changes to the program, Philip Rinaldi, chief executive officer of Philadelphia Energy Solutions, which runs a 355,000-barrel-a-day refinery in Pennsylvania, said by telephone yesterday.

“It’s pretty clear to people to whom it matters here that the EPA is in fact going to address this issue,” he said. “I believe people think it’s going to happen, and if you don’t have a market that’s impossible to satisfy, then the speculative value of the RINs begins to disappear.”

Revisions Needed

Doshi said rather than tweaking the law and adjusting the targets, the U.S. should revise it to reflect the advances made in shale oil drilling and the effectiveness of Obama mandates that forced automakers to make vehicles consume less fuel.

The U.S. met 87 percent of its energy needs in the first four months of 2013, on pace to be the highest annual rate since 1985, according to EIA.

Drilling techniques including hydraulic fracturing, or fracking, helped push crude oil output last month to the highest level since December 1990, EIA data show.

“2007 was the peak of U.S. oil consumption, peak of U.S. gasoline consumption, the peak of the economic growth outlook,” said Doshi. “Everything was up, up, up.”

Janet Grothe, a Phillips 66 spokeswoman in Houston, described the renewable fuel standard as an “unworkable mandate” that should be repealed in its entirety.

“Fuels should compete in the market place rather than be legislated,” Grothe said by e-mail yesterday. “Phillips 66 supports an ‘all of the above’ energy policy while allowing free-market mechanisms, not regulators, to determine the solutions, technologies and products needed to meet the world’s growing energy needs.”

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