The U.S. Renewable Fuel Standard Background, Controversies, & Reform, or, This Crisis, or the Next? Argus Global Gasoline Conference May 8-9, 2018 London, UK Max Pyziur Energy Policy Research Foundation, Inc. Washington, DC 20007 1
About EPRINC Founded in 1944 Not-for-profit organization Studies the intersection of energy, economics, public policy & regulations, and trade Provides independent and technical analyses for distribution to the public Funded largely by the private sector, foundations and U.S. government Supports USG projects, e.g. Quadrennial Energy Review, DoD strategic outlook www.eprinc.org 2
Recent EPRINC Downstream Reports, Presentations, and Testimony Available at www.eprinc.org: The Biofuel Mandate: Technical Constraints And Cost Risks Testimony on the RFS on February 24, 2016 by Lucian Pugliaresi (EPRINC s President) before the U.S. Senate Committee on Environment & Public Works CAFE, Gasoline Prices and the Law of Diminishing Returns: A New Agenda for the Midterm Evaluation Presentation at the Energy Information Administration (EIA) 2017 Annual Conference on Octane and the CAFE Standards Understanding California s High Transportation Fuel Prices 3
RFS Presentation Outline Crises Valero Energy s (VLO) & Philadelphia Energy Solutions (PES) RFS Background, Mechanics, Product Market Context RFS Controversies & Crises RFS Proposed Legislative Reforms 4
Recent Events - 1 VLO s Increasing RFS Costs Valero RFS Compliance Costs RIN Cost ($Millions) Direct Operating & SGA Expenses RIN Cost as Percentage of Op & SGA) 2012 2013 2014 2015 2016 2017 $250.0 $517.0 $372.0 $440.0 $749.0 $942.0 $3,513.0 $3,710.0 $3,900.0 $4,243.0 $4,207.0 $4,467.0 7.1% 13.9% 9.5% 10.4% 17.8% 21.1% Analysis based on Company SEC Filings EPRINC 5
Recent Events - 2 PES Bankruptcy On January 21, 2018 PES, the largest U.S. East Coast Refiner (330 TBD), declared Chapter 11 Bankruptcy. It cited RFS Compliance Costs (aka RINs) as being key to their need for financial restructuring. 6
RFS Legislation / History, Rationale, Waiver Authorities - 1 RFS in its original form Introduced through the 2005 U.S. Energy Act (EPAct2005) Expanded by the U.S. 2007 Energy Independence & Security Act (EISA) Sought to Explicitly promote energy security through mandated increases in minimum biofuel consumption Explicitly promote development of 2nd Generation Advanced & Cellulosic Biofuels Explicitly promote fuels with lower Greenhouse Gas (GHG) emissions Implicitly support corn and soybean farmers (continuing) 7
RFS Legislation / History, Rationale, Waiver Authorities - 2 RFS in its original form (continuing) Administered by EPA (the Environmental Protection Agency) because of the GHG criteria Enforced through a compliance mechanism known as RINs (Renewable Identification Numbers) requiring Obligated Parties to acquire them and submit them to the U.S. EPA Assumed that U.S. Gasoline Consumption would continue to increase indefinitely Two waiver authorities one general, one for cellulosic & advanced biofuels in case things do not develop as planned 8
RFS Basic Mechanics (Legislated ThreeDimensional Chess) Original Biofuel Statutory Requirements/Targets Revised/Adjusted Biofuel Requirements Renewable Volumes Obligation (RVO) Percentage Determination Nested Obligations Obligated Parties & the EMTS - RIN Compliance Mechanism 9
RFS Basic Mechanics Original Biofuel Statutory Requirements - 1 RFS In Billion Gallons per year (Original Mandates) Total RFS of which: Conventional Renewable Biofuel (Corn Ethanol) Advanced Biofuel Year of which: Cellulosic Biofuel Biomassbased Diesel Undifferentiated Advanced Biofuel 2008 9.0 9.0 0.0 0.0 0.0 0.0 2009 11.1 10.5 0.6 0.0 0.5 0.1 2010 13.0 12.0 0.1 0.7 0.2 2011 14.0 12.6 1.4 0.3 0.8 0.3 2012 15.2 13.2 2.0 0.5 0.5 2013 16.6 13.8 2.8 0.8 2014 18.2 14.4 3.8 1.8 2015 20.5 15.0 5.5 3.0 1.5 2016 22.3 15.0 7.3 4.3 2.0 2017 24.0 15.0 9.0 5.5 2.5 2018 26.0 15.0 1 7.0 3.0 2019 28.0 15.0 13.0 8.5 3.5 2020 30.0 15.0 15.0 10.5 3.5 2021 33.0 15.0 18.0 13.5 3.5 2022 36.0 15.0 2 16.0 4.0 Analysis based on EPA Data EPRINC 10
RFS Basic Mechanics Revised Biofuel Requirements - 2 RFS In Billion Gallons per year (Last Revision) November 2017 Total RFS of which: Conventional Renewable Biofuel (Corn Ethanol) Advanced Biofuel 12.0 12.6 13.2 13.8 13.6 14.1 14.5 15.0 15.0 1.4 2.0 2.8 2.7 2.9 3.6 4.3 4.3 Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 13.0 14.0 15.2 16.6 16.3 16.9 18.1 19.3 19.3 of which: Cellulosic Biofuel 0.0 0.8 1.3 0.0 0.1 0.2 0.3 0.3 Biomassbased Diesel 1.2 0.8 2.0 2.8 1.6 1.7 1.9 2.0 2.1 2.1 Undifferentiated Advanced Biofuel 0.0 0.0 0.0 0.0 1.5 2.0 1.9 Analysis based on EPA Data EPRINC 11
RFS Basic Mechanics Renewable Volumes Obligation (RVO) Percentage Determination - 3 Renewable Volumes Obligation (RVO) Percentage Determination 2012 2013 2014 2015 2016 Mandated Rev. Proposal Rev. Proposal Rev. Proposal Rev. Proposal Cellulosic biofuel 0.01% 0.01% 0.02% 0.07% Biomass-based diesel 0.91% 1.12% 1.41% 1.49% Advanced biofuel 1.21% 1.60% 1.51% 1.62% Renewable fuel 9.23% 9.63% 9.19% 9.52% 0.13% 1.59% 2.01% 10.10% Analysis based on EPA Data EPRINC 12
RFS Basic Mechanics Nested Obligations - 4 13
RFS Basic Mechanics Obligated Parties & the EMTS / RIN Compliance Mechanism 5a 14
RFS Basic Mechanics Obligated Parties & the EMTS / RIN Compliance Mechanism 5b 15
RFS Technical Constraints Energy Density Distribution Problems Compatible vehicles Blend Wall 16
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Because of the Blend Wall, Rising RVOs, RIN Prices Rise... Or Putting It All Together RIN Compliance Costs For A Hypothetical 100 MB/d / 1.533 BG/y NonExporting Refinery 2012 Mandated 2013 2014 2015 2016 Rev. Proposal Rev. Proposal Rev. Proposal Rev. Proposal Cellulosic biofuel 0.01% 0.01% 0.02% 0.07% Biomass-based diesel 0.91% 1.12% 1.41% 1.49% Advanced biofuel 1.21% 1.60% 1.51% 1.62% Renewable fuel 9.23% 9.63% 9.19% 9.52% 0.13% 1.59% 2.01% 10.10% D3 Requirement 91,980 122,640 291,270 1,057,770 1,962,240 D4 Requirement 13,950,300 17,169,600 21,615,300 22,841,700 24,374,700 D5 Requirement 18,549,300 24,528,000 23,148,300 24,834,600 30,813,300 D6 Requirement 141,495,900 147,627,900 140,882,700 145,941,600 154,833,000 D3 Price $0.78 $0.42 $0.64 $1.36 $1.69 D4 Price $1.43 $0.73 $0.56 $0.76 $0.92 D5 Price $0.72 $0.64 $0.53 $0.72 $0.90 D6 Price $0.02 $0.64 $0.48 $0.56 $0.82 D3 Cost $71,744 $51,509 $186,413 $1,438,567 $3,316,186 D4 Cost $19,948,929 $12,533,808 $12,104,568 $17,359,692 $22,424,724 D5 Cost $13,262,750 $15,697,920 $12,268,599 $17,880,912 $27,731,970 D6 Cost $3,395,902 $94,481,856 $67,623,696 $81,727,296 $126,963,060 $36,679,325 $122,765,093 $92,183,276 $118,406,467 $180,435,940 $0.02 $0.08 $0.06 $0.08 $0.12 Per Barrel Cost $0 Analysis based on EPA, OPIS, Reuters Data $3.49 $2.42 $3.59 Total RIN Cost Per Gallon Cost $3.89 EPRINC 25
Three Perspectives on Costs Within the RFS 1 Value of U.S. Corn Crop In Excess of E10 Blending Requirements 2017 U.S. Corn Crop Details Billion Bushels of Corn Harvested: 15.1 Harvested Corn Acreage Yield per Acre: 86.7 174.4 Allocated for Corn Ethanol Acreage Requirement: 31.1 Percentage of Total: 35.9% According to EIA Data Finished Gasoline Consumption (Billion Gallons): Implying Ethanol Consumption Based on E10 Blends (Billion Gallons): Corn Ethanol RVO in Billion Gallons Difference RVO-E10 in Million Gallons (+/-): Difference RVO-E10 in Million Bushels: Difference RVO-E10 in Million acres of U.S. Corn Production: USDA Estimate of Average Corn Price Per Bushel: Total Implied Revenue of Corn Feedstock for Ethanol Production in Million Dollars in excess of E10: Analysis Based on USDA Data 142.9 14.3 15.0 713.8 285.5 1.6 $3.40 $970.8 EPRINC 26
Three Perspectives on Costs Within the RFS - 2 2017 % 2012 $480.1 $219.5 Direct Operating & SGA Expenses Less Cost of Sales, Dep & Amort, Interest & Taxes 2013 2014 2015 2016 $455.9 $451.8 $455.7 $355.4 $301.6 $432.7 $352.1 $367.3 39.6% 31.6% 38.2% 34.9% $58 $705.5 $538.0 $569.3 $703.0 $624.8 $754.0 $683.7 $742.0 $650.9 $774.0 $713.7 190,000 185,000 195,000 11.7% 13.5% 21.1% 18.5% $1,123.1 $1,218.8 $1,259.5 $1,181.2 $1,144.5 $1,559.1 443,000 5.9% 13.6% 5.1% 13.9% 6.2% 11.3% 8.8% 16.0% 10.8% 22.6% 16.5% 16.1% $1,773.0 $1,945.0 $2,270.0 $2,419.0 $2,679.0 $2,767.0 $859.2 $908.4 $1,023.3 $1,071.4 $1,540.2 $1,825.8 1,700,000 540,000 $218.0 2.8% 23.5% 22.4% 18.5% $126.0 $366.0 5.2% 4.5% 4.3% 9.3% $1,702.0 $2,248.0 $2,762.0 $2,620.0 $2,942.0 $3,924.0 875,000 $440.0 $35.5 $749.0 $942.0 7.1% 13.9% 0.6% 4.3% 9.5% 2.5% 10.4% 3.1% 17.8% 21.1% $3,513.0 $3,710.0 $3,900.0 $4,243.0 $4,207.0 $4,467.0 $644.7 $71 $1,125.1 $1,129.0 2,769,000 151,000 $1,456.8 $1,604.9 $2,724.1 $3,284.2 4.7% 13.4% 9.6% 10.3% 18.6% 19.4% $12,063.5 $13,100.9 $15,135.5 $15,578.1 $14,628.3 $16,945.5 7,780,000 $3,370.5 $3,713.1 $6,302.5 $7,598.4 RIN Cost ($Millions) Refiners Alon / Delek Calumet Cenovus Energy / WRB CVR Energy Delta Airlines/Monroe RIN Cost as Percentage of Op & SGA) 2012 $0.0 $3.8 2013 $14.9 $29.6 2014 $27.1 $9.4 2015 $35.1 $38.8 2016 $40.4 $41.3 2017 $32.0 $2 $153.0 $180.5 $123.0 $127.2 $200.0 $123.9 $294.0 $205.9 $296.0 $249.0 $75.0 $11 $64.0 $159.0 171 $100.0 $137.5 $146.8 $160.0 $242.0 $105.0 $43.7 $264.0 $126.4 $14 $115.7 $212.0 $171.6 $13.0 $116.3 $130.4 $116.0 Valero Western Refining $250.0 $4.0 Total Reported HollyFrontier Marathon Petroleum PBF Energy Philadelphia Energy Tesoro, now Andeavor Total Implied 2013 3.3% 9.8% 2014 6.0% 2.2% 5.5% 28.4% 3.0% 31.7% 17.5% 20.4% 26.5% 18.1% $288.4 8.9% 11.3% $288.0 $347.5 $457.0 $293.7 $124.0 $23 $125.0 $517.0 $30.5 $372.0 $28.2 $572.5 $1,760.7 $1,324.6 $4,073.6 3.1 2012 0.0% 1.7% 2015 2016 7.7% 11.4% 1% 11.2% $462.3 $494.8 $583.3 Nameplate 2017 Bbl/CalDay $598.8 217,000 316.1 180,000 $668.9 335,000 Total Implied RIN Expense based on 18 million U.S. refining capacity Notes Alon / Delek Calumet Western Small Refiner's Exemption in 2017 Received several Small Refiner's Exemptions in 2017 Merged into Tesoro Analysis based on Company SEC Filings EPRINC 27
Three Perspectives on Costs Within the RFS - 3 Renewable Fuel Standard Implied Economic Cost D3 - Cellulosic Ethanol RIN Price* 2013 2014 2015 2016 0.42 0.64 1.36 1.69 RIN Retirements ('000s) 2013 2014 2015 415 32,984 139,021 2016 157,984 D4 - Biomass Diesel 0.73 0.56 0.76 0.92 D5 - Advanced Biofuel 0.64 0.53 0.72 D6 - Conventional Ethanol 0.64 0.48 0.56 0.82 13,237,335 14,056,166 14,634,360 13,352,381 D7 - Cellulosic Diesel 0.42 0.64 1.36 1.69 0.9 2,636,806 2,599,603 2,745,670 3,142,463 551,121 142,517 145,356 93,464 384 45 190 481 Total Annual Implied Economic Cost ('000s) 2013 2014 2015 2016 $174 $21,110 $189,486 $266,994 0.0% 0.3% 1.8% 1.9% $1,924,868 $1,455,778 17.9% 17.5% $352,717 3.3% $75,534 0.9% $8,471,894 $6,746,960 78.8% 81.3% $161 0.0% $2,086,709 19.7% $2,891,066 20.4% $104,657 % $84,118 0.6% $8,195,242 $10,948,953 77.5% 77.1% $29 0.0% $259 0.0% $813 0.0% * Average Annual Unweighted RIN Price Total of which: Cellulosic Advanced Combined $10,749,815 $8,299,410 $10,576,352 $14,191,942 $335 $352,717 $353,053 $21,139 $75,534 $96,673 $189,745 $104,657 $294,402 Analysis based on PFL, EcoEngineers, and EPA Data $267,806 $84,118 $351,924 EPRINC 28
RFS Reform First Attempt: Moving the POO (Point of Obligation) (chortling is allowed here) Crises: PES & VLO Current Proposed Legislation Senator Cornyn (Texas) Congressmans Shimkus (Illinois) & Flores (Texas) Senator Udall (New Mexico) & Congressman Welch (Vermont) Others EPA Administrator Scott Pruitt's Maneuvers & Waivers 29
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