Pennsylvania s RFS Waiver Request: Separating Fact from Fiction

Transcription

1 Pennsylvania s RFS Waiver Request: Separating Fact frm Fictin On Nvember 2, 2017, Pennsylvania Gv. Tm Wlf submitted a letter t Envirnmental Prtectin Agency (EPA) Administratr Sctt Pruitt asking that the 2017 and 2018 Renewable Fuel Standard (RFS) requirements fr cnventinal renewable fuel be limited t n mre than 9.7% f annual gasline demand. Gv. Wlf s letter asks fr the waiver t prvide relief t refiners in Pennsylvania and elsewhere, expresses cncern abut the high cst f cmpliance, and suggests the RFS threatens t severely harm the ecnmy. 1 The waiver request fllws a letter Gv. Wlf sent t President Trump n Octber 20, 2017, requesting that the President direct EPA t waive the renewable vlume bligatin fr Nrtheast refiners until r unless the market prices [fr RINs] deflate. 2 Gv. Wlf cntinues t verlk a number f imprtant realities regarding RIN credits and the gasline market, factrs affecting prfitability in the Nrtheast refining sectr, and the burden f prf assciated with demnstrating severe harm and securing a waiver f RFS requirements. When these facts are prperly taken int cnsideratin, it is clear that EPA has n chice but t deny Gv. Wlf s request fr a waiver f the RFS requirements. Merchant refiners recup their RIN csts thrugh whlesale gasline prices. Numerus studies including sme funded by the il industry have shwn that merchant refiners recver their RIN csts by slightly marking up the price f gasline blendstck sld int the whlesale market. Accrding t a study by Iwa State University, added refiner csts frm cmplying with the RFS are passed n t blenders thrugh higher [whlesale] gasline prices. 3 Anther study authred by ecnmists frm Harvard University, the University f Michigan, and MIT states that its main finding fr bulk petrleum fuels is that RIN prices were passed thrugh ne-fr-ne in the prices f bulk petrleum fuels. 4 The MIT ecnmist has advised Delta Airlines (wner f the Mnre Energy refinery in Pennsylvania) n RIN markets and the RFS. 1 Letter frm the Hnrable Tm Wlf, Gvernr f the Cmmnwealth f Pennsylvania, t the Hnrable Sctt Pruitt, Administratr, U.S. Envirnmental Prtectin Agency. Nvember 2, Letter frm the Hnrable Tm Wlf, Gvernr f the Cmmnwealth f Pennsylvania, t the Hnrable Dnald J. Trump, President f the United States. Octber 20, RINs are Renewable Identificatin Credits, which are used t demnstrate cmpliance with the Renewable Fuel Standard. (See RINs and RVOs are used t implement the Renewable Fuel Standard, EIA, June 2013). 3 Babcck, Lade, and Pulit (December 2016). Impact n Merchant Refiners and Blenders frm Changing the RFS Pint f Obligatin. CARD Plicy Brief 16-PB 20. Iwa State University Center fr Agricultural and Rural Develpment. 4 Knittel, Meiselman, and Stck (Nvember 23, 2016). The Pass-Thrugh f RIN Prices t Whlesale and Retail Fuels under the Renewable Fuel Standard: Analysis f Pst-March 2015 Data. (Knittel has disclsed that he advised Delta Airlines n the ecnmics f RIN markets and the pass-thrugh f RIN prices t whlesale gasline prices). Nv. 2, 2017 Renewable Fuels Assciatin. All Rights Reserved

2 Even merchant refiner Tesr (nw Andeavr) acknwledges that RIN csts are passed thrugh at the bulk finished prduct sales pints and prvide refiners with cverage f their expsure t them. 5 The slightly higher whlesale gasline prices are then equally ffset at the terminal rack when ethanl is blended t make a finished fuel (e.g., E10). This ffset ccurs because the blender s effective cst fr ethanl is reduced by the value f the RIN. In ther wrds, the RIN-induced slightly higher price fr whlesale gasline is cancelled ut by the RIN-induced slightly lwer price fr ethanl. Thus, retail gasline prices paid by cnsumers are unaffected by RIN prices. Accrding t the Iwa State University ecnmists, the net effect n the [retail] price f E10 f high RIN prices is zer: higher gasline prices are ffset by lwer ethanl blending csts and the price f E10 remains cnstant. 6 Similarly, the Harvard, Michigan, and MIT ecnmists fund n statistical evidence linking changes in RIN prices t changes in E10 prices. 7 Mst recently, an analysis by Infrma Agribusiness Cnsulting fund changes in RIN prices did nt cause the changes that ccurred in retail gasline prices in 2013, and this has cntinued t be the case thrugh the summer f Merchant refiners have taken steps t increase their ethanl blending capacity and reduce the number f RINs they purchase n the secndary market. Gv. Wlf s first letter states that merchant refiners with limited blending capacity must purchase RINs n the secndary market. This is incrrect. In fact, rather than cntinuing t nly purchase RINs n the secndary market, a number f merchant refiners including Nrtheast refiners have made investments in ethanl blending capacity t significantly enhance their ability t acquire RINs internally. Accrding t an April 2017 update frm the Oil Price Infrmatin Service (OPIS), Merchant refiner PBF Energy's acquisitin f a prducts terminal in Tled, Ohi, was driven at least in part by the cmpany's desire t increase its capacity t blend bifuels and reduce what it pays t buy Renewable Identificatin Number (RIN) credits t cmply with the Renewable Fuels Standard. 9 In Nvember 2016, OPIS nted that Mnre Energy, the whlly wned subsidiary f Delta Air Lines, will sn begin selling gasline and eventually diesel at rack terminals in the Nrtheast. As Mnre Energy adds rack availability, it will clearly generate its wn RINs Oil Price Infrmatin Service Bifuels Update (Feb. 17, 2017). RFS Cmpliance Csts Are Nt Cause f Refiners' Financial Wes: Tesr. 6 Babcck, Lade, and Pulit (December 2016). 7 Knittel, Meiselman, and Stck (June 2015). The Pass-Thrugh f RIN Prices t Whlesale and Retail Fuels under the Renewable Fuel Standard. 8 Infrma Agribusiness Cnsulting (Octber 2017). Analysis f Whether the Prices f Renewable Fuel Standard RINs Have affected Retail Gasline Prices. Prepared fr the Renewable Fuels Assciatin. 9 Oil Price Infrmatin Service Bifuels Update (April 18, 2017). PBF Energy's Purchase f Ohi Terminal Driven by RFS Csts: Surces. 10 Oil Price Infrmatin Service Bifuels Update (Nvember 22, 2016). Delta Will Begin New Chapter With Trainer Refinery: Prepping fr Rack Sales. Nv. 2, 2017 Renewable Fuels Assciatin. All Rights Reserved

3 OPIS further nted that several Nrtheastern refineries are transitining frm the merchant mdel t a mre integrated dwnstream mdel: PES and PBF, fr example, were nce primarily cnsidered merchant refiners, but nw sell gasline and diesel at very cmpetitive rack numbers, which nminally enhance refining cracks. 11 Western Refining is anther refiner that is evlving frm a merchant refiner t a mdel that allws internal capture f RINs thrugh blending peratins. Accrding t the CEO f Western Refining, We're cntinuing t lk at ur businesses t try t figure ut hw we can capture any RINs that we're nt capturing tday and really the gal is t put urselves in a psitin where we're prducing mre RINs than ur bligatin is. 12 In August 2016, OPIS reprted that merchant refiner Valer is trying t find ways t blend mre bifuels, thus reducing the number f RINs it will have t buy, and is explring such steps as acquiring additinal terminals and by cntinuing t build exprts t ease its RINs burden. 13 RINs are nt the cause f any financial stress sme Nrtheastern refineries may be experiencing. The letter frm Gv. Wlf t Administratr Pruitt suggests RFS cmpliance culd undermine the cntinued viability f the il refining sectr in the Nrtheast. Hwever, any ecnmic stress n the Nrtheast refining industry is largely due t factrs unrelated t the RFS r RINs. Histrically, East Cast refiners have generally had lwer prfit margins than their cmpetitrs in the Midwest and Gulf Cast regins because f their reliance n imprts f mre expensive crude il frm West Africa and the Nrth Sea. These heavier crudes are mre cstly t ship and refine int gasline, diesel, jet fuel and ther refined prducts. Philadelphia Energy Slutins (PES) perates ne f the natin s ldest refineries, characterized by Reuters as a zmbie refiner at risk f being shuttered in the wake f the financial crisis 14 The Carlyle Grup and Sunc rescued the refinery frm bankruptcy in 2012 thanks t a taxpayer-funded rescue package, which included the creatin f a tax friendly zne, $25 millin in grants and envirnmental liability waivers. 15 PES invested in new infrastructure in 2013 t allw the refinery t imprt cheaper Bakken crude frm Nrth Dakta. The investment initially paid ff, with PES turning strng prfits in Hwever, the cllapse in il prices and narrwing spreads between Bakken, WTI, and imprted crude il prices hit PES hard. The cmpany is nw dealing with a substantial debt burden, and Carlyle scrapped plans t take PES public in Carlyle reprtedly tried t sell the refinery in 2016 after the failed IPO bid. 11 Id. 12 Oil Price Infrmatin Service Bifuels Update (Nvember 2, 2016). Oracle Says RINs Here t Stay. 13 Oil Price Infrmatin Service Bifuels Update (August 1, 2016). Refiners Can Cut RIN Csts Withut Changing RFS: RFA s Cper. 14 J. DiNapli, Reuters (August 1, 2017). Exclusive: Philadelphia il refinery taps debt restructuring adviser-surces. 15 Id. Nv. 2, 2017 Renewable Fuels Assciatin. All Rights Reserved

4 Even labr leaders representing emplyees at the PES refinery acknwledge that RINs are nt the surce f the cmpany s financial trubles. Ryan O Callaghan, f the United Steelwrkers Lcal 10-1 (which represents nearly 700 wrkers at the refinery), said he questins the cmpany s allegatins regarding the impact f RINs n prfitability and added, We have infrmatin that the RINs might nt be impacting them as stated. 16 In an attempt t better cntrl its jet fuel csts, Delta Airlines purchased a 90-year-ld il Trainer, PA, refinery frm CncPhillips fr $180 millin in early The purchase was subsidized by the state f Pennsylvania, which prvided a $30 millin grant t the airline. Delta s plan was t retl the Mnre Energy facility s that it culd prcess a wider variety f crude il surces and maximize jet fuel utput. As a result f high crude il prices and high maintenance csts, the refinery reprted steep financial lsses in five f its first six quarterly filings with the Securities and Exchange Cmmissin (SEC). It is als likely that Delta s inexperience in managing an il refinery cntributed t the pr financial perfrmance initially. But, similar t PES, the Mnre Energy refinery s perfrmance underwent a cnsiderable turnarund in Mnre Energy recrded remarkably strng prfits, as facility upgrades allwed prcessing f lwerpriced Bakken crude. But similar t PES, Mnre Energy has been affected by reduced availability f Bakken crude il by rail and the narrwing spread between Bakken, WTI and imprted il. Still, Mnre has been prfitable in the mst recent three quarters, accrding t SEC filings. As shwn in the chart belw, there is abslutely n discernable relatinship between RIN prices and quarterly perating incme fr Mnre Energy and PBF Energy (PES is nt a public cmpany and thus des nt publicly reprt its quarterly earnings). Mnre Energy experienced its wrst quarter financially in late 2012 when RIN credits averaged just 4 cents. Cnversely, the refiner has its strngest financial perfrmance in quarters when RIN prices were in the cent range in 2014 and Similarly, PBF Energy saw strng perfrmance in several quarters when RIN prices were elevated and lsses in quarters when RIN prices were relatively lwer. This prvides further evidence that RIN csts are recuped by merchant refiners thrugh higher crack spreads. 16 K. E. Carey, USW wrkers mull strike against Philadelphia Energy Slutins refinery. July 1, Delaware Cunty Daily Times. Nv. 2, 2017 Renewable Fuels Assciatin. All Rights Reserved

5 Mnre (Delta) and PBF Quarterly Operating Incme/Lss vs. RIN Credit Prices Mnre Energy/Delta (Left Axis) PBF Energy (Left Axis) Average RIN Price (Right Axis) $ Operating Incme/Lss (Millin $) $250 $200 $150 $100 $50 $- $(50) $(100) $(150) $(200) Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q Average RIN Price (Cents/Credit) There is n evidence that the RFS and RINs are causing severe harm t the ecnmy f Pennsylvania r the Nrtheast. As Gv. Wlf s letter pints ut, EPA may waive RFS bligatins if it is demnstrated that implementatin f the requirements wuld smehw cause severe harm t the ecnmy r envirnment f a state, a regin, r the United States. Cngress established and EPA has crrectly reinfrced a narrw and rigid standard fr prving RFS vlumes will cause severe harm. In denying a waiver request frm the Gvernr f the State f Texas in 2008, EPA interpreted the statute s general waiver prvisins t require petitiners t prve three things: 1. that the surce f severe harm is the RFS prgram itself..., nt ther precipitating r related factrs 17 ; 2. that the harm rises t a level that is severe in nature 18 ; and 3. that severe harm is being experienced by the ecnmy f a state, a regin, r the United States, nt a narrw sub-sectr r specific industry. 19 Using the same criteria that guided the denial f the 2008 waiver request, EPA subsequently denied general waiver requests claiming severe harm in 2012 and Neither Gv. Wlf nr the Nrtheast refiners have prvided any evidence that the RFS requirements, as administered by EPA, are causing (r will cause) severe harm t the ecnmy f Pennsylvania r the Nrtheast regin. Nne f the three required cnditins fr prving severe harm has been satisfied Fed. Reg (emphasis added) 18 Id. (emphasis added) 19 Id. (emphasis added). 20 See, 77 Fed. Reg (Nv. 27, 2012); and 80 Fed. Reg Nv. 2, 2017 Renewable Fuels Assciatin. All Rights Reserved