Inland U.S. oil refiners stung by renewable energy credits
Landlocked U.S. oil refiners short on capacity to blend ethanol are bracing for a spike in costs, unable to export their way out of a sudden rise in the price of renewable energy credits needed to comply with government requirements.
CVR Energy Inc and HollyFrontier Corp, inland refiners with limited capacity to blend biofuels into the pipeline, are suffering from a jolt to investor confidence while stocks of their coastal peers continue a two-year upward march.
Along with some East Coast refiners like PBF Energy Inc , they are at the sharp end of the uneven distribution of pain resulting from a hundred-fold surge in the cost of ethanol credits.
Refiners are caught between the U.S. ethanol mandate, which requires ever-higher volumes of ethanol to be blended into the domestic gasoline pool, and the limited amount of the corn-based fuel that some cars can safely run.
To offset the difference, refiners must either export gasoline to markets not requiring the blend or buy up ethanol credits that can satisfy government requirements without forcing higher volumes of ethanol into gasoline.
The price of these credits, or Renewable Identification Numbers (RINs), has spiked to more than $1 in recent weeks from 1 cent in December due to concerns of a looming shortfall.
That price rise may prove a serious drag on the bottom line of CVR Energy, for example, whose refineries in Oklahoma and Kansas have neither easy access to foreign markets nor integrated systems to blend ethanol into gasoline themselves.
"If you are in the middle of the country with no access to waterborne markets, and don't own any blending component of the value chain, it could be a disadvantage," said John Williams, investment analyst at T. Rowe Price in Baltimore, Maryland.
The ethanol mandate was conceived during the administration of President George W. Bush, when domestic gasoline demand was projected to grow steadily, increasing the need for foreign oil.
Since then, however, the U.S. shale boom has seen domestic production boom, while gasoline demand has been in decline.
Refiners are therefore obliged to blend more ethanol into a smaller gasoline pool. Older cars face possible engine damage if fuel contains more than 10 percent ethanol, creating a "blend wall" that refiners are loath to exceed for fear of incurring liabilities.
The ethanol requirement is set to grow every year until 2022. Many oil companies have complained about the mandate, and warned that more costly RINs will drive up prices at the pump.