Ethanol 'blend wall' cost refiners at least $1.35 billion
Last year's spike in the price of ethanol blending credits cost independent refiners at least $1.35 billion, more than three times as much as the year before, according to a Reuters' review of securities filings.
The tally, which has not been previously reported, is a conservative estimate as it includes only nine refiners that disclosed the figures. Others affected did not specify the cost of buying Renewable Identification Number (RINs), paper credits used to meet quotas for blending biofuel into gasoline and diesel.
While it has long been clear that refiners lacking the facilities to blend their own fuel would end up footing a billion-dollar-plus RINs tab last year, the data may give the companies more firepower as they urge regulators to stick to a proposal to cut back ethanol requirements for this year.
A final rule is due to be completed in the coming months, and some analysts say the U.S. Environmental Protection Agency (EPA) could alter the proposal after outcry from the biofuel lobby.
The review also highlights how the impact was unevenly distributed, with independent refiners CVR Refining and LyondellBasell alone shouldering more than a fifth of the cost although they only account for 2.5 percent of the nation's daily refining capacity.
Gina Bowman, CVR's vice president of government relations, called the market for the credits "volatile and unfair" and pointed to it as evidence for why the biofuel blending regulations need to be reformed.
Valero Energy Corp, the biggest U.S. refiner with 10 percent of capacity, spent about $517 million on RINs in 2013.
"We were clear that Valero could not bear that cost alone, so much or all was passed on to consumers," said Valero spokesman Bill Day. The company estimates that it will spend another $250 million to $350 million on RINs in 2014.
Some biofuel proponents say the tab is not as large as it sounds when compared with the overall profits the industry is making. In 2013, the refiners that disclosed RIN costs made $9.4 billion in net profits, according to their filings, excluding one refiner whose parent company is an airline.
Still, the data highlights the burden that many refiners face under U.S. environmental regulations that require them to mix increasing amounts of ethanol into their gasoline output.
In 2012, before an unprecedented price spike sent the credits up as much as 2,900 percent, six of the refiners that disclosed their RIN costs put the tab at $427 million.
Some that did disclose them in 2013 did not do so in 2012, when the credits' cost was not as material an expense. RIN prices rose as high as $1.45 each in July 2013, up from about 5 cents each at the end of 2012. They traded for 52.5 cents each on Friday.
The regulatory burden is at the heart of a fierce lobbying battle between refiners fighting to ease the rules and ethanol proponents hoping to keep them in place. Saddled with hundreds of millions in additional costs, refiners turned up the ante in Washington last year, successfully convincing environmental regulators that ethanol blending capacity had hit its peak.
In November, the EPA explicitly recognized the so-called "blend wall," proposing to cut corn ethanol blending quotas from 14.4 billion gallons to about 13 billion gallons for 2014. The proposal caused RINs to fall as low as 22 cents each.
But in recent months, RINs have risen anew, largely on uncertainty over whether the proposed cuts will stay in place. The EPA's proposal is not yet finalized, and since it was unveiled in November, the biofuel industry has redoubled its efforts lobbying the White House and the EPA to change course.
In February, EPA administrator Gina McCarthy caused a stir in the RINs market after telling state agricultural officials that the final rule will be "in a shape that you will see that we have listened to your comments."
The American Fuel and Petrochemical Manufacturers, which represents the refining industry, said the RIN bill showed the need for the EPA to keep its proposed cuts in place.
"What was supposed to be a transaction cost has become this artificial commodity that is obviously costing fuel producers," said Brendan Williams, senior vice president of advocacy for the group. "What it does is it shows you the blend wall's here."
Proponents of the blending regulations say the higher compliance costs should incentivize refiners to do what they should under the law: blend more ethanol into their fuel output to avoid paying the higher costs.
But only a handful of them, such as Marathon Petroleum Corp , the No. 5 refiner, said in its filings that the company curbed the cost rise by investing in blending infrastructure.
A Marathon spokesman said the company began investing in its terminals several years ago to allow for gasoline to be blended with up to 10 percent ethanol at all of its facilities.
Many others simply paid the costs. Delta Air Lines Inc , which bought a 185,000 barrel-per-day (bpd) refinery in Trainer, Pennsylvania, in 2012, said it paid $64 million for the credits because the plant does not blend biofuels.
The company said in an annual U.S. Securities and Exchange Commission filing that it was "pursuing legal, regulatory and legislative solutions to this problem."
Others refiners, such as Tesoro Corp said it dipped into reserves of the credits built up the previous year to meet compliance obligations. The so-called "banked RINs" could be in short supply if mandates go higher in 2014.
Meanwhile, a handful of smaller operators, including CVR and Delek US Holdings, said they have applied for exemptions from the blending rules for some plants. The EPA has granted the so-called hardship exemption to at least one refinery, Alon USA Energy's Krotz Springs, Louisiana, plant.
There are currently 14 active exemption requests under consideration by the EPA, according to the agency's website.
The total tally in RIN costs is likely more than $1.5 billion including refiners such as Philadelphia Energy Solutions (PES), owned by the Carlyle Group, which operates the biggest plant on the East Coast.
The firm is not required to disclose the company's financial details, but last October Chief Executive Officer Philip Rinaldi said RIN costs could be as much as $250 million for 2013. A spokeswoman declined to provide an updated figure, saying only that last year's costs were "very substantial."
"Did merchant refiners take a hit? Yes, but that affected their shareholders, not the American public," said Todd Becker, chief executive officer of Green Plains Renewable Energy, a Nebraska-based ethanol producer.
He said that looking at both sides of the market, the run-up in RIN costs had not driven up gasoline prices, as some refiners have said.
"It was a zero-sum game. The blenders had a windfall."
The Long of It
Conspicuous by their silence are large oil majors, such as BP Plc and Royal Dutch Shell Plc, which operate U.S. refineries as well as biofuel blending operations. Last July, BP's top refining executive said the company did "quite well" trading its surplus RINs for a profit.
Some pipeline operators, such as Kinder Morgan Energy Partners, also said in its filings that the company made money selling RINs, though they did not provide exact figures.
The biggest known beneficiary, according to a search of public SEC filings, was Murphy USA Inc, a gasoline station chain, which said it sold 171 million RINs in 2013 for a total of $91.4 million - a windfall compared with the company's $8.9 million of sales the prior year.
Vitol S.A., the world's largest oil trader and a leading importer of Brazilian ethanol, has been one of the biggest traders in the market and is believed to have done well in the run-up in RIN prices. It is unclear how it has fared lately.
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