Photographer: Ty Wright/Bloomberg

The dialectic, big oil and the ethanol mandate

September 14, 2016 Mark Drajem

The First Word Energy team draws on Bloomberg’s worldwide resources to cover all aspects of energy policy. Learn how Bloomberg Government can help your energy lobbying or policy analysis—contact Peter Hsu at yhsu24@bloomberg.net or 202-416-3035.

Today’s Agenda

Oh, Big Oil, you Marxists.

The American Petroleum Institute held a fascinating call to explain why it has shifted positions and now opposes shifting the point of obligation for the Renewable Fuel Standard. Frank Macchiarola, API’s downstream director, indicated the group intends to heighten the contradictions:

“Why try to fix a broken program, and keep the program in place as if everything is fine?” he told reporters. “We have momentum for real reform of the RFS” in Congress.

Macchiarola says he sees a chance for Congress to pass H.R. 5180, sponsored by Reps. Bill Flores of Texas and Peter Welch of Vermont, which would cap the share of ethanol in the fuel supply at 9.7%. Of course, some may argue that API itself isn’t doing enough to bring about the revolution: it says it wants the mandate for ethanol entirely wiped away, yet is willing to settle for legislation that would preserve the mandate in a modified form. How bourgeois.

We can’t get enough of the internecine squabbles among the different parts of the oil industry over this issue. Today in Up for Debate Bill Douglass of the small retailers argues that the RIN obligation gives big retailers and unfair competitive advantage. But there’s also news that EPA is starting to get serious push back on this issue from companies with retail operations, and, even, from some refiners.

Marathon Petroleum wrote Gina McCarthy last week saying changing the point of obligation to the rack “will not solve the ethanol blending limitations in the retail infrastructure, will not increase the amount of advanced biofuels in the marketplace, and ultimately may compromise the integrity of the RIN program.” (Shoot us an e-mail to get a copy of the letter, mdrajem@bloomberg.net)

Meanwhile, Mario Parker has an insightful deep dive today about those winning on the RINs trade. Murphy USA Inc. made $118 million from selling the credits in 2015, and $43.9 million in the second quarter, he reports. In the fiscal year ended April 30, Casey’s General Stores Inc., which operates more than 1,900 stores and gas stations, pocketed $31 million from credits, representing 14 percent of its record profit, a company filing showed.

Andrew Clyde, the chief executive officer of Murphy’s, said the condition of merchant refiners has more to do with their decision not to build their own blending facilities and the fallout from cheap oil than the cost of complying with the Renewable Fuel Standard.

“The folks that are screaming the loudest have also made strategic choices in the past,” Clyde said. “Some people may want to deflect the issue onto something else as opposed to saying, ‘You know what? This is the industry we’re in.’”

Some refiners are adapting. PBF Energy filed an application with regulators to build ethanol-handling facilities at its refinery in Delaware. Tesoro said Sept. 6 it will acquire Virent, a renewable fuels and chemical company based in Madison, Wisconsin.

“Unlike certain other refiners, we prefer to take rational, business-oriented steps to mitigate against risk rather than write to or file meaningless petitions for review with the EPA,” Stephen H. Brown, Tesoro’s vice president and counsel for federal government affairs, said by e-mail.

Faison’s atomic division

Entrepreneur-turned-political activist Jay Faison says he’s focusing his attention on two very wonky subjects: propelling a new generation of advanced nuclear reactors and accelerating the deployment of carbon-capture technology. Faison is looking for ways to encourage Republicans to embrace clean energy and climate goals — not pick a fight with the GOP.

“To be realistic, you do need to consider politics as well as policy” and “find things that are politically doable,” Faison told reporters Tuesday in the Capitol Hill row house that serves as the headquarters for his ClearPath Foundation.

Advanced nuclear reactors and carbon capture already have the backing of bipartisan coalitions both on and off Capitol Hill. Faison is set to tell a Senate Appropriations panel today that NRC needs to change its conservative approach if these non-light water technologies are going to make it in the market. The “reluctance by line reviewers to embrace new concepts and technologies could still scuttle entrepreneurial efforts,” he will say, according to a copy of his testimony. “NRC’s mission needs to be clarified to explicitly encourage advanced reactor licensing.”

Donald Trump on climate change

“There is still much that needs to be investigated in the field of ‘climate change,’ ” Trump said in the answer to a question from Scientific American. “Perhaps the best use of our limited financial resources should be in dealing with making sure that every person in the world has clean water. Perhaps we should focus on eliminating lingering diseases around the world like malaria. Perhaps we should focus on efforts to increase food production to keep pace with an ever-growing world population. Perhaps we should be focused on developing energy sources and power production that alleviates the need for dependence on fossil fuels. We must decide on how best to proceed so that we can make lives better, safer and more prosperous.”

(It’s unclear why we would cut our dependence on fossil fuels if there is no climate change, but maybe that’s too much of a nitpick.)

For more on Clinton’s and Trump’s answers, click here.

Also today

  • The Senate is set to wrap up debate on the Water Resources Development Act reauthorization, with the bill’s managers trying to finish negotiations over a package of amendments.
  • Canadian Prime Minister Justin Trudeau plans to approve at least one new oil pipeline project in his first term, with Kinder Morgan Inc.’s Trans Mountain expansion to the Pacific Coast the most likely candidate, people familiar with his plans said.
  • Southern California Gas Co. will pay $4.3 million for failing to immediately report the 2015 methane leak at its Aliso Canyon natural gas facility California.
  • C2ES is releasing a roundup of analyses on the impact of the Clean Power Plan on power markets and the economy. That’s at 11 a.m.

Drajem’s Daily Don’t Miss

The House Science Committee will today be debating Chairman Lamar Smith’s subpoenas of the state attorneys general who are investigating Exxon Mobil Corp. Law professors are lined up to argue both that this is a legitimate congressional oversight, and that the AGs are stepping over the line to attack free speech rights, and that this violates important federalism divisions. A letter from Rep. Paul Tonko yesterday says the Congressional Research Service had determined that this is the first time any congressional committee has issued a subpoena to state AGs over an ongoing investigation.

Quotable

“It may well be that the D.C. Circuit writes a convincing enough opinion, and the Supreme Court declines to hear it,” David Doniger of NRDC said at a Federalist Society event on the Clean Power Plan yesterday.

“I don’t think it’s guaranteed that the Supreme Court takes it up,” Scott Pruitt, Oklahoma’s attorney general, who opposes Doniger on just about all aspects of the EPA’s plan.

More Quotable

Jack Gerard on the administration’s decision to halt the Dakota Access pipeline, midstream, so to speak: “To somehow bring that backwards into that authorized, permitted, legally binding activity and bring it to a screeching halt because somebody wants to have a public policy discussion, it’s unprecedented and it’s unnecessary and very improper. That’s the greatest concern here, the precedent. People have ignored the rule of law.”

Industry News

Energy Transfer to Meet With Obama Officials
Energy Transfer Partners LP plans to take the battle to complete the Dakota Access oil pipeline to Washington after the Obama administration’s decision to stall part of the project, the company’s chairman said Sept. 13. Energy Transfer officials plan to meet with federal officials to better understand their position and to reiterate the company’s intention of getting the pipeline operating, Energy Transfer Chairman Kelcy Warren said in a letter to employees.

The pipeline will run at least 90 feet below Lake Oahe and will be built with heavy wall pipe, the letter said. The land abutting the lake and the lake itself were not under tribal control or ownership, he said. “I am confident that as long as the government ultimately decides the fate of the project based on science and engineering, the Dakota Access Pipeline will become operational … So we will continue to obey the rules and trust the process,” he wrote, according to AP.

Up for Debate

Small Retailers Penalized by Renewable Fuels Mess

By Bill Douglass

Our economy thrives on competition. Think up a way to make a better refrigerator, people will buy it. If your local pizzeria’s pies are greasy and overpriced, you can start up another place nearby that’s better. And so it goes in our free-market system: businesses compete to make money, and consumers ultimately benefit. It’s a tried-and-true formula that, even through tough times, has still produced the world’s leading economy.

Now imagine that your small business sells retail gasoline and diesel. Your usual concerns involve location, nearby competitors, what kind of food or drink you offer inside your store. You watch the price of the gasoline you buy wholesale—the stuff that keeps the pumps full and the customers coming in. Your profit margin goes up or down a little depending on all these factors, but in the end you know you’re basically playing on the same field as the folks running a station across the street and on two blocks over.

This is the way it’s been for small gasoline retailers for generations. But over the last few years, our government has changed all that. The trigger was a federal renewable fuels mandate called the renewable fuel standard or “RFS”—an effort to lower imports, increase U.S. energy security and reduce greenhouse gases by requiring that a set amount of renewable fuels be blended into gasoline and diesel every year. Each year, the Environmental Protection Agency (EPA) raises the target: in 2010, it was about 13 billion gallons, in 2016, it was up to 18.1 billion gallons, next year, it will go higher still.

To keep track of how much renewable fuel is actually being blended, each and every gallon of it is given a 38-character tracking number, or credit, called a RIN—short for renewable identification number. These RINs can be used for compliance with the mandate or they can be sold for profit.

Now here’s where EPA decisions tilt the playing field against the small retailer. Currently, refiners and importers are obligated to demonstrate compliance with the program. Because these companies aren’t necessarily blenders, they need to buy RINs to comply. The blending is often done by big oil companies whose names you all know, as well as by large retail convenience store chains who realized they can get in on the action. These retailers have no obligation under the program to hit renewable targets. So instead of having to turn in their RINs to show the government how they’re complying, they’re free to sell them to refiners and importers unable to hit their constantly increasing targets. Given how much renewable fuel blending the government now requires, these RINs are now worth a lot of money.

That’s where guys like me lose out. If you’re an independent retailer, and not part of a big retail convenience store chain with the resources to blend fuels at these big terminals, you gain nothing from the RIN market. Yet my retail competitors who are part of those big chains now benefit from their parent company’s RIN-generated windfall—added revenue that can be used to undercut small competitors, open up more locations, you name it. Small retailers simply can’t come up with the huge capital needed to get in the fuel blending game, so we fall further behind. We’re operating in a rigged market, and we’re slowly getting squeezed out.

There’s one way to fix all this without spiking the whole program. To keep renewable fuels in circulation and safeguard the RIN market from opportunism, the government could use a more equitable approach for deciding who’s obligated to hit the EPA’s targets. The EPA could transfer “the point of obligation” to the “rack” where the renewable fuels are blended. That way, everyone operates under the same incentives, competition returns to the gasoline and diesel market, and consumers are protected.

To me, it is an issue of fairness, the EPA either levels the competitive playing field or smaller, independent service stations will gradually disappear. In a society that values competition, the choice should be obvious.

(Bill Douglass is head of Douglass Distributing, a small retail operation based in Texas. He is a former President of the National Association of Convenience Stores (NACS) and is a member of the NACS Hall of Fame.)

Contact Us

Send us your comments and tips: Mark Drajem is the editor (mdrajem@bloomberg.net or @drajem).Bloomberg Government subscribers can get this and any of our eight other newsletters in their inbox every morning. Click here to modify your subscriptions. Contact Peter Hsu at 202-416-3035 or yhsu24@bloomberg.net for more information or if you have colleagues that would also value access.