Ethanol battle escalates amid rumors of RFA-Icahn deal

In Washington, as the advanced bioeconomy’s leadership headed into town for the annual Advanced Bioeconomy Leadership Conference, rumors of a deal surfaced between the Renewable Fuels Association and Carl Icahn, shifting renewable fuel obligations away from oil refiners, in return for Icahn’s support for a Reid Vapor Pressure waiver for E15 ethanol that has been holding up efforts to expand the market for ethanol.

Was there a quid pro quo? RFA is not commenting directly. However, RFA CEO Bob Dinneen told POLITICO that he had been informed by a Trump Administration official that the President planned to sign an executive order shifting the point of obligation from oil refiners. Dinneen said that his association would support the move if the EPA would, in turn, support the E15 waiver.

Growth Energy, the rival ethanol trade group formed several years ago by RFA rebels led by POET, blasted the move in forceful language.

“If true, this proposal would eviscerate America’s progress under the RFS and impose indefensible costs on consumers,” said Emily Skor, CEO of Growth Energy. “Neither RFA nor Carl Icahn have the authority to strike a ‘deal.’ Mr. Icahn does not work for the U.S. government; he owns CVR Refining, which would profit directly from this change.  RFA does not represent a majority of the biofuels industry; RFA’s largest member is an oil refiner, which would also profit directly from such a change. They’re negotiating for the same side – and that is not the side of the ethanol industry or the American farmer.”

However, Brian Jennings of the American Coalition for Ethanol was splaying down the panic.

“Despite rumors, this is not a done deal and not a take-it-or-leave-it scenario,” Jennings said. “Changing the RFS point of obligation and providing RVP relief will both require EPA rulemaking and public comments.  ACE has long pursued a fix to the burdensome RVP regulation which currently prohibits the year-round sale of E15, but doing so in a tradeoff which would reward Carl Icahn and help refiners like Valero avoid their legal responsibilities under the Clean Air Act would backfire on our industry because some of the marketers and retailers we rely on to sell E15 and higher blends today would be saddled as obligated parties under the RFS tomorrow.  Even EPA has said shifting the RFS point of obligation away from refiners to downstream parties “would more likely result in a decrease in the production, distribution, and use of these fuels (E15, E30, E85), particularly in the near term.”

A Reid Vapor Pressure deal

“In exchange for getting his company an exemption for its responsibility under current law,” said Skor, “Mr. Icahn has allegedly promised support for a Reid Vapor Pressure (RVP) waiver from the EPA, a change that already has strong bipartisan support because it is a common sense solution that would increase summer sales of higher ethanol blends.”

In remarks last week at the National Ethanol Conference, Renewable Fuels Association CEO Bob Dinneen said that “until EPA provides volatility parity for E10 and higher ethanol blends, growth in these fuel options will continue to be incremental. That’s why the top priority of the RFA is to secure RVP parity for all ethanol blends.”

What is the Reid Vapor Pressure problem?

Fuels vaporize – that’s why you can smell gasoline at the pump. Too much vaporization during hotter months — and you can get vapor lock where the fuel won’t pump, and the car can stall. Too little vaporization in colder months, and there’s difficulty in starting the vehicle. More about that here.

Adding ethanol to gasoline increases Reid vapor pressure and  E10 fuel received a Reid Vapor Pressure waiver in 1990. But E15 doesn’t have a waiver, despite numerous bills introduced in Congress to extend the current waiver to E15.

Without the waiver, as we reported here, EPA refuses to allow E15 in conventional gasoline areas of the country from June 1 to September 15.  As a result, most gas station owners are handcuffed from selling the cleaner and lower cost fuel to motorists year-round.

Last summer seven governors sent a bipartisan letter to EPA asking that the Agency “remove a significant regularly obstacle that is preventing large-scale availability and use of E15 and mid-level ethanol blends.” Governors Terry Branstad (R-Iowa), Sam Brownback (R-Kansas), Mark Dayton (D-Minnesota), Jay Nixon (D-Missouri), Pete Ricketts (R-Nebraska), Jack Dalrymple (R-North Dakota), and Dennis Daugaard (R-South Dakota) sent the letter to EPA Administrator Gina McCarthy Tuesday asking her to “correct the unfair Reid vapor pressure (RVP) treatment of E15.”

“A Self-serving Insider deal”?

“This move would be a slap in the face of rural America, its representatives in Congress, and the president,” added Skor. “This is precisely the sort of self-serving insider deal the American consumer rejects. The administration must reject any such proposed deal and protect the program that has been working for 11 years to deliver better, cleaner, and more affordable choices at the pump.

“Any assertion that this tradeoff would ‘greatly expand the market opportunities for ethanol’ is simply untrue,” Broin contended. “An RVP waiver means little if retailers no longer have an incentive to sell higher ethanol blends. This would halt and likely reverse all the progress we’ve made with hundreds of gasoline retailers who now offer consumers higher blends of ethanol.

Details of any actual trade-off have yet to appear. But Bob Dinneen put the US biofuels industry on notice last week, when he said in San Diego that all moves to expand the market for ethanol would have to be made “with a new President, new leadership throughout the government, and a political climate less than welcoming to expanded corn ethanol. Success will depend on our ability to build partnerships with new allies and a coalition reflecting today’s political reality.”

Chaos in fuel markets?

Brent Erickson, executive vice president of BIO’s Industrial & Environmental Section said that the proposed change was the wrong way at the wrong time to alter the Renewable Fuel Standard.

“Changing the point of obligation,” Erickson said, “would…increase program complexity, impose a set of new administrative and compliance costs and risks that would adversely affect a significant range of new entities, and undermine investor confidence in the broader renewable fuels industry just as cellulosic and other advanced biofuels are coming online. As EPA rightly noted in its draft analysis of the Proposed Denial, market data does not justify changing the RFS point of obligation.”

POET blasts the move

“It’s a bailout,” said POET CEO Jeff Broin. “This was a back-room ‘deal’ made by people who want out of their obligations under the Clean Air Act, and frankly, it’s not a surprise. Carl Icahn has long been a self-interested, vocal critic of the program. We have been expecting this from the RFA as they have casually backed away from their support since an oil refiner became their largest member.”

“This ‘deal’ is absent leading voices in the biofuels industry, including its largest producer, POET. Bob Dinneen does not have the authority to negotiate on behalf of the biofuels industry, and Icahn does not have the authority to negotiate policy on behalf of the U.S. government. Icahn found a willing partner in the RFA, whose largest member is an oil refiner in a similar situation to Icahn’s.

Blenders, fuel retailers, marketers and end users in opposition

Not surprisingly, more than 35 companies and trade groups have “united to urge the EPA to keep the current compliance requirements under the Renewable Fuel Standard,” according to NATSO, the national trade association representing truckstops and travel plazas.

NATSO’s leaders said that if the proposed shift in compliance occurs, “Class I railroads would need to expend between $112.5 million and $214 million just to acquire Renewable Identification Numbers (RINs) to comply with 2016 Renewable Volume Obligations (RVOs) – based on 2016 numbers. California’s enactment of the Low Carbon Fuel Standard is a cautionary tale. In light of the market’s experience in California, it would not be implausible for the railroads to have to pay between $260 and $447 million more for fuel.”

Tesoro: moving point of obligation will “jeopardize efforts…to commercialize new technologies”

“Those parties seeking to shift the point of obligation,:” said Tesoro in detail comments to the EPA (which can be downloaded in full, here) would have us believe that pushing responsibility for compliance via RINs away from them would alleviate their respective financial hardships while simultaneously (and somewhat miraculously) functionally easing their compliance burden. While Tesoro seriously doubts the latter would occur from this one change, the broader economics currently impacting the domestic refining sector strongly suggest the former would fail to happen as well.

“If the point of obligation were moved from refiners and importers to downstream blenders, EPA would vitiate both of its stated desires since it is foreseeable that a change in the point of obligation would result in thousands (1000s) of Obligated Parties – many of whom are likely to be smaller in size. These smaller Obligated Parties likely have limited resources to facilitate compliance and lack familiarity with a complex system they would now be responsible in which to demonstrate compliance.

“Changing the point of obligation could materially disrupt Tesoro’s renewable fuels strategy and jeopardize efforts…to commercialize new technologies that meet stakeholders’ expectations and regulatory requirements by producing renewable fuels that do not compromise product quality.

Petitioners blithely ignore that many in the sector have (including Tesoro), in reliance on the existing regulations, made significant, strategic and long-term decisions, financial commitments and investments in renewable fuel development and research for infrastructure and technology in order to satisfy future obligations from the RFS program. Petitioners, who could also have made such choices and chose not to, now seek, substantially after-the-fact, to move the obligation further downstream away from them.”

The Bottom Line: A House Divided

In his State of the Industry address at the National Ethanol Conference last week in San Diego, RFA CEO Bob Dinneen said, “we must remember that our most important partnership is with each other. The surest path to failure is with a house divided. I am committed to presenting a united and unbreakable front so there is no ambiguity as to where the entire ethanol industry stands.”

For sure, whether rumors regarding an RFA-Icahn deal are true or not, the comments by Growth Energy are evidence that the ethanol house is dividing, and very publicly so.