Photographer: Luke Sharrett/Bloomberg

The oil industry is split over the Renewable Fuel Standard program

August 31, 2016 Mark Drajem

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Today’s Agenda

There once was a simpler time, filled with a hot new gadget called the iPhone, the British pound at a record high — and a debate over the Renewable Fuel Standard that pitted the oil industry against ethanol producers. But as fast as you can say Ratatouille, 2007 is gone and things are changing. Now the oil industry itself is split over the RFS, or more specifically how the EPA applies it.

It’s no mystery what’s inspiring the discord: money.

Refiner CVR Energy, in which billionaire investor Carl Icahn owns an 82 percent stake, has picked a very public fight with the Obama administration, ethanol producers and even the American Petroleum Institute over the RFS. We called CVR’s CEO Jack Lipinski yesterday, and he explained why his company is in such a bind over the ethanol mandate.

“All of the pipelines and infrastructure is owned by someone else,” he told us. “I have no way of blending it.” EPA should shift the obligation for the RFS from refiners to fuel blenders, who actually control how much ethanol is used, he said. At 70 cents a RIN, the price early in the year, it would cost CVR more than $150 million to buy credits for its ethanol obligation, he said.

API has weighed in, and opposes that change, with downstream director Frank Macchiarola dubbing it a “distraction form the real issue.” Lipinski argues that’s part of the problem, as the big, integrated companies are able to profit from the refiners’ bind.

This isn’t the first we’ve highlighted this issue. Icahn wrote EPA’s Gina McCarthy two weeks ago, arguing that the agency had created a “rigged” marketplace. Then last week, Brooke Coleman, executive director of the Advanced Biofuels Business Council, responded by saying that smart refiners can get into the blending business, or prepare for the costs of program by buying RINs. Why should EPA reward companies that refused to prepare for the RFS mandate while other companies invested billions of dollars into biofuel production based on the promise of that requirement? Coleman wrote in a piece we published last week.

Lipinski wrote a response to Coleman, which we received yesterday and are running in Up for Debate below.

Another point to consider

While reading Lipinski, however, it may be useful to think about the last point Coleman made: EPA regulations impose obligations on companies, and RINs — just like credits under a cap-and-trade program — are meant to make complying cost effective. Just as under the RFS, the Clean Power Plan imposes an off-sight requirement: power plant owners will need to find a way to get renewable energy or energy efficiency to offset their emissions.

“If regulators don’t want the program to work this way, they should throw out the entire Clean Air Act,” Coleman told us. “If they bail out on this program because an obligated party says it doesn’t want to change its behavior, then the whole thing falls apart.”

Also today

  • Conservative groups say tax credits for small wind projects, geothermal heat pumps and other energy sources should be allowed to expire.
  • Obama is addressing Sen. Harry Reid’s clean energy conference today. Here’s what else is on tap.
  • 50,000 acres in Texas’ choicest drilling field is up for sale, WSJ reports.

Quote of the Day

Bob Flexon, the CEO of Dynegy, read our story about First Energy and its bid to get aid to ensure its headquarters stay in Akron. Through a spokeswoman he e-mailed to confirm aColumbus Business First story that Dynegy would take over FE’s headquarters for half the cost.

“This is a serious offer. If FirstEnergy requires $9 billion for them to stay in Ohio, we are willing to relocate Dynegy’s headquarters to Akron for half that amount.”

Tweet of the Day

Ari Natter ‏– Florida Voters Pass Amendment Providing Tax Breaks for Homeowners Who Install Solar Panels

Chart of the Day

Explorers in 2015 discovered only about a tenth as much oil as they have annually on average since 1960. This year, they’ll probably find even less, spurring new fears about their ability to meet future demand, Mikael Holter reports. With oil prices down by more than half since the price collapse two years ago, drillers have cut their exploration budgets to the bone. The result: Just 2.7 billion barrels of new supply was discovered in 2015, the smallest amount since 1947, according to figures from Edinburgh-based consulting firm Wood Mackenzie Ltd.

Inside the Beltway

Briefing in challenges to the Environmental Protection Agency carbon dioxide standards for new and modified power plants now will extend through February 2017 under a revised schedule. The U.S. Court of Appeals for the District of Columbia Circuit issued the revised briefing schedule Aug. 30 after it agreed to set aside the prior schedule to allow additional lawsuits to be consolidated with the ongoing litigation over the EPA carbon dioxide new source performance standards for new and modified power plants. Parties in the lawsuit agreed to the new briefing schedule earlier this month. The new format requires petitioners, including states and utilities, to file opening briefs by Oct. 13, with an EPA response due by Dec. 14. Final briefs are due Feb. 6, 2017.

FERC Ordered to Reassess Pricing for Oil Refiner, Court Says
The Federal Energy Regulatory Commission was ordered by a federal appeals court today to reconsider the formula it uses to price crude oil along the Trans Alaska Pipeline, according to a ruling in Petro Star Inc. v. FERC. Rebecca Kern reports that a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit Court ruled that FERC failed to respond meaningfully to a complaint from Petro Star Inc., an Alaska-owned refining and fuel marketing operation, that the agency’s formula for valuing crude oil undervalues a heavier component of crude oil called “resid.”

Walk-In Coolers to Use Less Energy Under Proposed Rule
Walk-in coolers and freezers used by restaurants and grocery stores would be required to use an average of 24 percent less energy under a proposed rule made public Aug. 30 by the Obama administration. The rule, which the Energy Department estimates will save businesses as much as $4 billion in energy costs, is expected to be finalized later this year and will become effective in 2019. The proposed rule comes after the refrigeration industry successfully challenged a version of the rule finalized in 2014 on grounds the cost of the rule outweighed its benefits and that the Energy Department had failed to properly assess small-business impacts.

Up for Debate

The Real Issue with the RFS is the Blender Loophole

By Jack Lipinski

I read with great interest the opinion column written by Brooke Coleman, executive director of the Advanced Biofuels Business Council, which was published on Aug. 24, 2016.

What surprises me most is the lack of understanding of the great damage that is being caused by flaws in the Renewable Fuel Standard (RFS) compliance program. Furthermore, rather than factually stating the problem, Coleman uses innuendo and inaccuracies to promote the status quo. Windfall profits are like manna from Heaven – once you have tasted it, you do not want to ever let it go.

There are a few major points that I want to correct:

First, Coleman’s comment that our majority shareholder, Carl Icahn, is anti-RFS is a complete fabrication. What Icahn has objected to is the massive RIN market distortion caused by the blender loophole.

Second, he also pointed out that the super majors are the beneficiaries of the current RFS program. We absolutely agree. That is why the American Petroleum Institute is fighting our effort to change the point of obligation. The RFS is doing for the super majors what the U.S. antitrust enforcement agencies would not let them do for themselves — destroying their competition. When merchant and small refiners can no longer compete, the super majors will be only too happy to snap them up or let them shut down.

Third, Coleman’s suggestion that all refiners should own retail operations is like suggesting every biofuel company should own a refinery. A giant swap of ownership in infrastructure is not the solution.

To set the record straight, CVR Energy has no quarrel with the RFS. We see both sides of the issue. While we own oil refineries, we also own fertilizer plants that supply fertilizers for corn biofuel production. Our facilities supplied critical products to the agricultural community long before the RFS was enacted.

The EPA has required refiners and importers, but not blenders, to be the parties legally obligated to comply with the RFS – creating a giant loophole that is discouraging the increased use of biofuels. If the blender loophole were closed, blenders would have both a legal obligation and a financial incentive to increase biofuel use, the same as refiners and importers.

Independent merchant refiners do not control blending of the substantial majority of their fuel, yet they constitute roughly half of the country’s refining capacity. It is irrational to think that imposing an obligation on this segment will somehow incentivize the entire industry to blend renewables.

Downstream blender/retailers are bragging to their investors about their windfall profits from selling compliance (RINs) to obligated parties and the EPA has admitted that these blender/retailers are “maximizing” their profits, rather than increasing biofuel use.
We, along with many others in the Small Retailers Coalition and the American Fuel & Petrochemical Manufacturers, are simply asking EPA to close the blender loophole, making blenders invest their windfall profits in increasing biofuel use, rather than buying back stock and paying huge dividends.

(Lipinski is CEO of CVR Energy.)