Refiners on Track to Spend Record on US Clean Fuel Standards

Major refiners like Valero Energy Corp are on track to pay record amounts this year for credits to comply with U.S. renewable fuel rules, corporate filings show, a trend that hurts profits and has some looking to export more to avoid the cost.

 

Refiners and fuel importers are required to meet a U.S. biofuel quota of roughly 10 percent through blending products like ethanol into gasoline and diesel. If they fall short, they can buy credits generated by companies in compliance. But the cost of the credits, known as Renewable Identification Numbers (RINs), has jumped.

 

The rising costs have hurt a sector already struggling with huge global fuel stockpiles. The S&P 1500 index of refining and marketing companies has fallen 18 percent so far in 2016, compared with a 6.5 percent gain for the broader market .

 

In the first half of 2016, a collection of 10 refinery owners including Marathon Petroleum Corp, spent at least $1.1 billion buying RINs, a Reuters review of their filings showed. This puts them on track to surpass the annual record of $1.3 billion the same group spent in 2013.

 

Refinery executives sharply criticized the regulations during recent earnings calls, saying the burden helped bring about the weakest profits in five years.

 

"RINs continue to be an egregious tax on our business and have become our single largest operating expense, exceeding labor, maintenance and energy costs," CVR Refining Chief Executive Jack Lipinski said last month.

 

Marathon Chief Executive Gary Heminger said on a call last month that demand for RINs are going to outpace supply and the company wanted to see renewable fuel standards eased.

 

Refiners without blending or retail outlets, such as Delta Air Lines (DAL) and CVR, have to buy a greater percentage of RINs because they don't create their own. Delta is part of a refiner group challenging fuel standards through the courts.

 

Supporters of the existing policy, including the influential corn lobby, said the regulations have produced the desired effect: more renewable fuels in the nation's gasoline and diesel. They noted refiners can avoid the cost of RINs by investing in blending operations.

 

"Companies that refuse to blend more renewable fuel will end up paying a premium to other market participants, including speculators, but this is a choice," said Emily Skor, CEO of Growth Energy, which represents ethanol producers.

 

ESCAPE THROUGH EXPORTS

 

Renewable fuel credits averaged about 78 cents apiece in the second quarter, about 25 percent above the same period a year ago, according to Oil Price Information Service data analyzed by Reuters.

 

Prices for the credits have rallied on more ambitious targets from U.S. regulators on the volumes of ethanol required to be blended with gasoline, traders and industry sources said.

 

The price of credits has fuel makers like PBF Energy Inc and Valero looking to increase exports, which are not subject to the regulations, as a way to escape the costs.

 

PBF Chief Executive Thomas Nimbley said on an earnings call last month that it was "very important" that they expand their refined product export operations, citing RINs as a driver.

 

Refiners are also lobbying to shift the responsibility of compliance from their industry to blenders and distributors who mix gasoline with ethanol for delivery to filling stations.