US Biodiesel Producers Navigate Stormy Political Climate

Brian L. Milne, Energy Editor, Product Manager with DTN, February 27, 2018

The bankruptcy filing by a Philadelphia-based oil refinery has again heightened criticism of a federal program in the United States that mandates demand for renewable fuels in the transportation sector, sparking a clash among US Senators and renewed involvement by US President Donald Trump to settle the issue.

Supporters of the Renewable Fuel Standard want no changes to the program that they say has underpinned support for farmers during a difficult time, with grain bins busting at the seams following multiple years with bumper harvests, depressing crop prices. In contrast, many in the oil refining industry deem the federal program a financial burden, and point to the January bankruptcy filing by Philadelphia Energy Solutions as proof.

PES acquired the 310,000 bpd Philadelphia refinery from Sunoco in 2012, and with the help of private equity firm Carlyle Group, invested nearly $750 billion in upgrades in the oldest and largest refinery along the US East Coast. Those investments included rail terminals to ship crude oil from North Dakota that, at the time, was selling well below international crude prices because of a lack of pipeline capacity and restrictions on exporting crude oil. Those restrictions were lifted in December 2015, and oil producers in North Dakota now have ample pipeline capacity. The spread between Brent, the international crude price marker, and West Texas Intermediate narrowed from as wide as $26 bbl in late 2011 to a little more than $3 bbl.

2018-RINs

In its filing, PES blames the cost of buying renewable identification numbers for its current financial hardship, with RINs the credit to show compliance in meeting the RFS. RINs are generated when a qualified renewable fuel is produced or imported, with the RIN moving with the renewable through the supply chain, changing hands to parties obligated under the RFS when blended with a petroleum-based fuel. The RIN can also be traded.

Independent refiners such as PES that don’t have the capacity to blend need to acquire the RIN in open market trading. PES said purchasing RINs were its second highest cost in 2017, above labor, with only crude procurement costs higher than their payments for RFS compliance.

US Senator Ted Cruz, R-Texas, a former 2016 US presidential candidate, teamed up with fellow Republican Pat Toomey of Pennsylvania, to force a change in the RFS program, which included a $0.10 gallon price cap on RINs. Cruz held up Senate confirmation of Iowa’s Agriculture Secretary, Bill Northey, to be Under Secretary of the US Department of Agriculture until he secured concessions.

US Sen. Chuck Grassley, R-Iowa, a long-time stalwart defender of the RFS and Iowa’s junior senator, US Joni Ernst, R, led support for the RFS. These four along with USDA Secretary Sonny Perdue and Scott Pruitt, the administrator of the US Environmental Protection Agency, met with Trump at the White House February 27.

spot-prices

Within two hours of the start of the meeting, Northey was confirmed by the US Senate to the USDA post, and news emerged that no agreement was reached. RIN prices, which were selling off on news of the upcoming meeting, surged in what traders called a relief rally.

There are several nested RIN categories under the federal program that represent and distinguish the varying renewables that can satisfy the RFS depending on their calculated benefit in reducing greenhouse gases, with D6 RINs satisfied by conventional corn-based produced ethanol the baseline. One gallon of corn-based ethanol is equal to one D6 RIN. Biomass-based diesel derives 1.5 D4 RINs for each gallon, and also qualifies as an advanced renewable.

Biofuels traders note RINs are critical for renewable fuels, as they push development in the industry, namely cellulosic, as well as infrastructure upgrades. For biodiesel, they also help bridge the gap with lower cost ultra-low sulfur diesel fuel that incentivizes demand.

RINs are a commodity in the sense that their value is based upon supply and demand, with the demand set by government mandate. There has been a great deal of worry in the industry since Trump became president, with several challenges to the RFS during his little more than 400 days in office. For that matter, courts ruled the EPA erred in setting the RFS volume mandates for 2014 through 2016 too low under the Obama administration, with the court indicating the 2016 shortfall needs to be made up.

volume

These concerns are credited with RIN generation in 2017 that was below mandate. An obligated party can carry over a maximum of 20% of the previous year’s RINs, but this is similar to making a withdrawal from a bank account which leaves a smaller reserve to meet a progressively higher mandate. Moreover, with the court order indicating the 2016 shortfall would need to be backfilled, many analysts were surprised that RIN values didn’t jump in 2017 and remain under pressure so far this year.

The suggestion is bets were made against D6 RINs on expectation that there would be a change in the RFS that also weighed down D4 RIN values. News that PES sold the D6 RINs it accumulated in 2017, shorting the market in its push to escape obligation of the RFS lends credence to this thinking. A similar tactic was deployed early in 2017 by Carl Icahn, with the billionaire hedge fund manager owning a majority stake in the 115,000 bpd Coffeyville refinery in Kansas, also an independent “merchant” refiner lacking blending capacity.

Earlier this year, Congress passed the $1 gallon tax subsidy for blending biomass-based diesel into petroleum products after it lapsed at the end of 2016. Oddly, the subsidy is only for 2017. It’s unclear if the incentive would again be restored for 2018.

Separately, the US Commerce Department in February announced affirmative final determinations in antidumping duty charges against Indonesia and Argentina for their imports of biodiesel to the United States, hitting the two countries with duties of 60% to 70%.

The Commerce Department said Argentina sold biodiesel in the United States at 60.44% to 86.41% below fair market value, and Indonesia 92.52% to 276.65% less than fair value. The US biodiesel industry said imports from these two countries disadvantaged domestic producers.

The Energy Information Administration, the statistical and analytical division of the Department of Energy, said biodiesel imports from Argentina in 2016 totaled 449 million gallons, and accounted for nearly 20% of US biodiesel consumption. Biodiesel imports to the United States from these two countries has stopped.

Indonesia said in late February that it would challenge the tariffs at the World Trade Organization. Argentina is expected to take their case to the WTO, too.

About the Author:
Brian L. Milne is the energy editor with DTN, an independent, trusted source of actionable insights for 600,000 customers focused on feeding, protecting, and fueling the world. Customer-centric and employee-driven, DTN focuses on empowering agriculture, oil and gas, trading, and weather-sensitive industries through continuous, leading-edge innovation. DTN is based in Minneapolis, with offices globally.