More RFS Exemption Requests

By Todd Neeley
DTN Staff Reporter

OMAHA (DTN) -- Pennsylvania's governor and state refining interests are putting pressure on EPA to grant additional small refinery waivers to the Renewable Fuel Standard, just ahead of the agency's Nov. 30 deadline to finalize new biofuels volumes for the upcoming year.

Monroe Energy, LLC, requested a waiver on Tuesday, claiming the RFS program is causing "severe economic harm" to refiners in the state and on the East Coast.

On Nov. 2, 2018, Pennsylvania Gov. Tom Wolf filed a broad petition for a waiver for refiners in the state. Wolf also filed the same petition last year on Nov. 2, 2017, and said in a letter to EPA Acting Administrator Andrew Wheeler this month that the agency had not responded to the first request.

According to EPA's own data, the agency granted RFS waivers in 2016 and 2017, totaling 2.25 billion gallons of biofuels. That includes about 300 million gallons of biodiesel.

In making the new request, Wolf provided a study completed by Craig Pirrong, professor of finance and director of the Global Energy Management Institute, Bauer College of Business at the University of Houston, which documents the effects of the RFS on East Coast refiners.

Pirrong suggested in the study if EPA set back the renewable volume obligations for 2019 to 2012 levels, "this would reduce the financial strain on East Coast refiners" and avoid potential job losses from shutdowns.

"Using standard economic analysis and extensive data on the production and refining of motor fuels and biofuels," Pirrong wrote, "I quantify the impact of moving from a mandate where the price of RINs are zero, to the mandate proposed by the EPA for 2019. This impact is large, on both consumers and producers.

"The impact will fall particularly heavily on refiners on the East Coast of the United States. I estimate that refining margins (the gross profit per barrel) will fall by 12.5% in this region as a result of the 2019 EPA proposal as compared to a mandate level at which the price of RINs is zero. This decline in gross margin is large enough to make many refineries on the East Coast unprofitable, and thereby, is large enough to cause some refineries to shut down, with a consequent loss of jobs."

ETHANOL MARGINS DOWN

In the ethanol industry, lower ethanol prices in recent months have pressured net-profit margins into the negative for many companies. As a result, ethanol producers have scaled back production and some companies are looking at potential shutdowns.

On Thursday, for example, Green Plains Inc. announced the permanent closure of its 60-million-gallon ethanol plant in Hopewell, Virginia.

The RFS only allows refiners that produce 75,000 barrels per day or less to qualify for waivers. Marathon's smallest refinery produces about 93,000 barrels per day. Other large refiners have filed for waivers.

Yet, some of the largest refining companies in the world were granted small refiner waivers despite reporting multi-million-dollar profits.

In a Nov. 2, 2018, letter to Wheeler, Wolf said the new biofuels volumes set for finalizing on Nov. 30, are likely to "substantially exacerbate the financial difficulties" facing East Coast refiners.

"For three East Coast refiners -- Monroe Energy, United Refining Company, and PBF Energy -- had the proposed 2019 standards been in effect in recent years, it would have reduced profitability significantly, even to the point that refiners could lose money on every barrel of production," Wolf said in the letter.

"For example, had the proposed 2019 standard been in effect in 2017, Monroe Energy, which made a profit of $1.03 a barrel that year, would instead have taken a loss of $4.78 per barrel. The dynamics created by the RFS standard are proving unsustainable for refiners operating on tight margins, and the report concludes that the impact is large enough to cause some refineries to shut down, with a consequent loss of jobs."

Closing a large refinery in Pennsylvania, Wolf said, could lead to a loss of more than 8,800 jobs and $539 million in employee income.

"To ensure that these facilities can remain vital and these jobs are protected into the future, I again request that you exercise the waiver authority granted to you in the Clean Air Act to avoid the severe economic harm that implementation of the proposed 2019 standard will have on the economy of my state and the region," Wolf said.

MONROE CITES RIN PRICES

In its request for a waiver on Tuesday, Monroe said the costs of RINs are hurting the company. Waivers granted by the EPA in 2016 and 2017 led to RINs prices plummeting.

"In some years, Monroe must spend more on RINs than the amount it paid in 2012 to purchase its refinery and more than its annual costs for labor and capital investments," Monroe said in its petition.

"Last year, Monroe's RIN expenses exceeded every category of expenses other than the crude oil it purchased to refine into fuel. Monroe is not alone in struggling under the weight of its RIN obligations. Even when RIN prices are low, the unpredictability of those prices still makes it extremely challenging for refiners to plan for future RIN compliance obligations."

Renewable Fuels Association President and Chief Executive Officer Geoff Cooper said in a statement to DTN that Wolf's request is "an insult to America's biofuel producers and farmers, who are truly suffering economic harm as a result of the demand destruction caused by former EPA Administrator Scott Pruitt's RFS compliance bailouts for refiners."

Cooper said Pruitt's EPA allowed Philadelphia Energy Solutions to "ignore a huge portion of its RFS biofuel blending obligations. Pruitt also covertly abused EPA's waiver authority to let dozens of other refiners out of their legal responsibility to blend biofuels."

Less than one year ago, Cooper said, refiners in Pennsylvania claimed economic harm from elevated RIN prices "even though all the evidence showed that they were recouping their RIN costs through higher gross margins. Now, with RIN prices at a six-year low, those refiners are still complaining about economic harm even though the 'high RIN price' boogeyman no longer exists."

Conversely, Cooper said the price of ethanol has fallen to a 13-year low and RINs are cheap, while corn farmers have seen prices fall below the cost of production.

"Just today, the owners of the lone ethanol plant in Virginia announced they are shutting their doors for good, with dozens of jobs lost," he said. "These are the companies and workers facing economic hardship due to EPA's management of the RFS -- not highly profitable refiners."

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @toddneeleyDTN

(BAS/CZ)

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