Donald Trump’s victory has provided wings to the small independent oil refiners who have been burdened with the excess cost of buying credits as per the Energy Independence and Security Act of 2007. The shares of the independent refiners such as PBF Energy Inc., Alon USA Energy Inc. and others have found a new lease on life since the Presidential elections.
The Renewable Standard Fuel (RSF) program warrants blending of renewable fuels with that of fossil fuels. This was done in order to reduce greenhouse gasses. Under the law, the Environmental Protection Agency (EPA) decides the quantity of renewable fuel to be blended, also called as the Renewable Volume Obligation (RVO).
While the RVO in 2010 was 12.9 billion gallons, for 2016 it has been increased to 18.1 billion gallons of ethanol and biofuels to be blended with gasoline and diesel. The eventual target was to reach RVO of 36 billion gallons by 2022.
The percentage of ethanol blend in the gasoline mix has increased from 3 percent to 10 percent since the RSF started.
In order to ensure that the required quantity of renewable fuel is blended, the EPA uses a 38-character tracking number, known as RIN (Renewable Identification Number). These are also sometimes called as “credits”.
Each gallon of renewable fuel produced or imported is awarded a RIN, and the number follows the fuel until it is blended with gasoline or diesel. Post-blending the number is separated and the number is then used by the obligated parties as proof of compliance or is traded to other parties. The obligated parties are the refiners and importers of gasoline or diesel.
This is where the small and medium-sized merchant refineries are at a disadvantage. They neither control the blending nor the retail sales of the fuel. Hence, they have to purchase RINs to fulfill their Renewable Volume Obligation.
Blending requires additional investments, which most of these independent refiners cannot afford, and the additional burden of the RIN purchase severely affects their margins.
Bloomberg data shows that the RINs tracking ethanol use has doubled to 91 cents in a year, and RINs tracking biodiesel has jumped 59 percent to 95.5 cents in the same period.
Due to the steep rise in the cost of RINs, the independent refiners are incurring huge costs. Valero Energy Corp. expects the cost for RINs to be $850 million this year, whereas CVR Refining expects the cost to be $250 million.
This additional burden of RINs is squeezing the independent refiners, which are already working in a challenging environment. PBF Energy reported an increased burden of 15 percent for fulfilling the renewable fuels mandate.
“RINs continue to be an egregious tax on our business,” Jack Lipinski, CEO of CVR Refining, said Oct. 27 on a conference call with analysts. “I would predict that small refiners, merchant refiners, will be pushed to the brink and maybe even into bankruptcy in the future,” reports Bloomberg.
But that may soon be changing. During his campaign, in September, Trump’s team had favored abolishing the system of trading RINs, though they later deleted the statement.
“Donald Trump’s victory increases the odds that the Renewable Fuel Standard will be reformed,” Rob Barnett, an analyst at Bloomberg Intelligence in Washington, said. “Trump spoke favorably of the RFS during his campaign, but many Republican lawmakers in Congress have been pushing both repeal and reform bills,” as quoted by Bloomberg.
There is still cause for hope, but traders should be careful about jumping on the bandwagon without any concrete action. It is better to wait for more clarity on the new energy policy of the President-elect.
By Rakesh Upadhyay for Oilprice.com
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