Oil Industry Infighting Heats up as EPA Weighs Biofuels Rule Change

Oil companies showed deepening divides on the future of the U.S. biofuels program in solicited comments from the Environmental Protection Agency (EPA) over a plan sought by some refiners to shift the program's financial burden to retailers and blenders.

 

All sides are pushing hard, seizing the opportunity to test President Donald Trump's commitment to the program. Trump has supported the program, but top figures in his administration have criticized it.

 

Refiners, integrated oil companies, fuel retailers and biofuels manufacturers flooded the EPA with comments on its plan to deny requests from refiners to tweak the U.S. Renewable Fuel Standard (RFS) by pushing the compliance burden further downstream.

 

Within the oil industry, the fight pits Valero Energy Corp and billionaire Carl Icahn against refiners like Marathon Petroleum Corp. Biofuels advocates are worried about losing progress into the U.S. fuel stream since lawmakers established the RFS program in 2005 under then President George W. Bush.

 

In November, the Obama administration EPA said it was prepared to deny requests from oil refiners to shift compliance obligations, but opened that decision to public comments, due on Wednesday.

 

Some, such as the American Petroleum Institute, have labeled the system broken and urged dramatic overhaul. U.S. Independent refiners such as Phillips 66 (PSX) say the system is financially burdensome and targets the wrong group.

 

The biofuel industry and fuel retailers have asked the EPA to keep the program intact, saying it has achieved its goals of reducing consumption of fossil fuels and creating jobs.

 

"We believe the current structure of the RFS has generally worked to drive expanded production and use of renewable fuels in the U.S. marketplace," Bob Dinneen, president of the Renewable Fuels Association said in a letter to the EPA.

 

The final decision rests with an agency under the oversight of Scott Pruitt, former Oklahoma Attorney General and critic of the RFS who has pledged to scrub unnecessary regulations.

 

Speculation has risen that the EPA might now be more likely to consider the change, especially after Trump announced the installation of Carl Icahn, majority shareholder of CVR Energy Inc, as a special advisor on regulation. Icahn has been an outspoken critic of how the program operates. Shares of CVR have risen 37 percent since the election.

 

Valero and Phillips 66 contend the current program structure distorts the market. Each year, EPA requires fuel companies to blend biofuels into the gasoline and diesel pool. Companies can either blend or buy compliance credits, known as Renewable Identification Numbers (RINs), from those who have.

 

Prices of these credits jumped after EPA set targets for biofuels use in 2017 that were higher than some anticipated. Oil refiners without significant retail arms, including Valero, reported paying a record amount for these credits last year. RIN prices have tumbled since the election.

 

Valero is the country's largest oil refiner and one of the country's largest ethanol producers, but has limited capacity to blend after it sold its retail segment in 2013. It contends that fuel retailers including Casey's General Store benefit unfairly from selling RINs generated from their blending operations.

 

Casey's countered in its comments to the EPA that there was "no explicit connection between Casey's motor fuel profitability and RIN values."

 

Marathon, which has invested heavily in increasing its ability to blend biofuels, in comments to the EPA dated Feb. 21 said it opposed shifting the burden to retailers and blenders, arguing it would create risk for the viability of the RIN market by adding more companies to the list of those required to prove they are using biofuels.

 

"The Renewable Fuel Standard is broken, and changing the point of obligation only pushes these problems to a different group of entities," said American Petroleum Institute Downstream Group Director Frank Macchiarola in prepared remarks on Wednesday.

 

The issue has even divided small and large fuel retailers.

 

The Small Retailers Association told the EPA its members cannot compete with larger ones who can blend gasoline and generate sellable credits that lower their cost.

 

"They are then able to use this profit to roll up small businesses," the group said.