Waiver Wire: Why is the biofuels industry up in arms about oil refinery waivers?

May 21, 2018 |

It’s baseball season and the waiver wire and easy outs are the talk of ESPN and other sports outlets.

But they’re part of the Washington dialogue this month, waivers and easy outs, since reports surfaced in media that the US Environmental Protection Agency granted a Renewable Fuel Standard hardship waiver for CVR Energy’s Wynnewood, Oklahoma oil refinery. One of many such waivers granted, though the exact number is secretive.

What happens with that?

Under the waiver, the refinery does not have to show compliance with the US Renewable Fuel Standard’s requirements to blend biofuels into its gasoline and diesel products or buy what are known as Renewable Information Number credits (known as RINs) from refiners that have excessive inventories of them. 

The blending that is generally required under terms of the US Energy and Security Act to increase domestic supplies of energy. create domestic jobs and reduce domestic CO2 emissions — yet EISA also made provision for hardship waivers for smaller refineries and gave EPA the authority to determine who gets those waivers.

So, why the controversy, and why now?

In part, the controversy hinges on the definition of what makes a small refiner a small refiner — the other part hinges on what constitutes hardship. If a giant industry refiner is making huge profits — can it qualify one of its smaller refineries for a hardship waiver? The Obama Administration said, emphatically and repeatedly, “no”, but the Trump Administration under EPA Administrator Scott Pruitt has changed that policy to a “yes”.

In part, the language of EISA is the problem. The original legislation focused on the size of a specific refinery — hardship waivers can be considered for any refinery making less than 75,000 barrels of fuel per day — and was silent on the overall ownership and profitability of the parent. It creates the potential of a loophole where giant refining portfolios could be constructed out of smaller refineries exempted from RFS compliance and any costs or limits on petroleum share of market that come with compliance.

Specifically, it’s RIN prices. D6 RINs had risen to as high as 50 cents each — up from a few cents back in 2011-2013 — and merchant oil refiners that do blend biofuels have to purchase these credits on the open market, and they’ve been squawking at the cost.

EISA-era legislators from both sides of the aisle who worked on the original legislation have been clear on Congressional intent — that large refiners with huge profits should not receive such exemptions — Republican Senator Charles Grassley of Iowa and former Democratic Senator Byron Dorgan of North Dakota have been quoted in recent days confirming this. But the new leaders at EPA have granted as many as 25 hardship waivers in recent weeks. 

Are High RIN prices inevitable?

Not so, according to the University of Illinois, which found that the conditions that caused high conventional biofuel (D6) RIN prices are changing rapidly and that “…it is not out of the realm of possibility for D6 RINs prices to fall back their pre-2013 level of just a few cents without making any changes to the RFS.”

At issue, the gap between what the Renewable Fuel Standard terms “domestic ethanol consumption (estimated at 14.5 billion gallons in 2017) and the 15-billion-gallon statutory requirement for conventional renewable fuels.” The report finds:

  • “What seems to have gotten lost in all the noise surrounding the political war over the RFS is how rapidly the conditions are changing that created the high ethanol RINs prices in the first place. The key is the “gap” between the ethanol blend wall and the conventional ethanol mandate.”
  • “With the statutory conventional ethanol mandate fixed at 15 billion gallons, the growth in ethanol use has led to a sharp decline in the magnitude of the conventional gap. In particular, the latest ethanol use estimate from the EIA for 2019 implies a conventional gap of a little less than 300 million gallons. This gap is so small that an increase in projected ethanol use for 2019 of just two percent would erase the gap completely.”
  • The bottom-line from this analysis is that the conventional ethanol gap is well on its way to being eliminated in the next few years, even without a large expansion in the use of higher ethanol blends such as E15 and E85. If this does occur, the impact on D6 ethanol RINs prices could be almost as profound as what we witnessed in 2013, but in exactly the opposite direction.
  • “It is not out of the realm of possibility for the price of D6 RINs to go back to their pre-2013 level of just a few cents. Of course, this assumes that the conditions that have been driving ethanol consumption upward do not change. Even if conditions do change, the size of the conventional gap is much more manageable than just a few years ago and opens the door for very modest increases in E15 and/or E85 to close the conventional gap. For example, a 300 million gallon conventional gap could be eliminated with an increase in E15 consumption of just 2 billion gallons, or about 1.3 percent of total gasoline consumption.”
  • “This means it is not out of the realm of possibility for D6 RINs prices to fall back their pre-2013 level of just a few cents without making any changes to the RFS.”

The Recipients and their Hardships

PVS. The controversy exploded in recent weeks because of four waivers. One went to PVS, a smaller refinery based in the Philadelphia area owned by the Carlyle Group — one of the world’s largest and most profitable private equity groups. Carlyle took PVS into bankruptcy, claiming that the refinery could not afford to comply with RFS, successfully jettisoned as much as $500 million IN RFS liabilities going back to 2016 in a Justice Department deal in bankruptcy, and won a hardship waiver from complying for 2017.

What’s wrong with that? As Joelle Simonpietri observed in her Digest analysis earlier this year:

The question is, what is the real story?  How could Philadelphia Energy Solutions (PES) have (mis) managed its business as to accrue an aggregate $832 million in RIN compliance costs in five years, over 3 times the value of the refineries themselves, while others in the independent petroleum refining sector were enjoying record high profits and earnings per share at the same time and under the same regulatory regime?

Looking at PES’s bankruptcy filing from a different point of view, that of a student of private equity finance, it tells a very different story. The non-bankrupt parent company, Philadelphia Energy Solutions LLC, will invest $65 million in exchange for 25 percent of equity in the newly reorganized PES, thereby valuing the newly reorganized company at $260 million. This is less than half the value of the debt that the company took on in Carlyle’s and Sunoco’s original leveraged buyout deal in 2012. In the bankruptcy filing, the company also asks the court to effectively erase the company’s RFS renewable volume obligations, along with its other liabilities. In doing so, they take the highly unusual step of asking the court to approve their walking away from statutory compliance obligations, as well as financial ones.

CVR Energy. This one is owned by billionaire investor Carl Icahn, who served as special regulatory adviser to President Trump through August 2017, when he was forced to relinquish the role after lawmakers cried “conflict of interest” over Icahn’s investment activities. There were reports that his companies were speculating in RIN trading while he was advising the President on actions that would have impacted RIN values. And, the Justice Department has launched an investigation of Icahn over his actions against biofuels during his time with the Administration — though no specific allegations or charges have been made under the probe to date.

Andeavor. Andeavor was one of the nations’ largest oil refining companies with 1.2 million barrels per day of refining capacity, and high profits that we discussed with the company in this report — yet received hardship waivers in recent weeks for two of its smaller refineries from RFS compliance. It was announced this week that Marathon Petroleum will pay a 24 percent premium to Andeavor’s stock price and acquire the company for $23 billion in order to create the largest US-based oil refining portfolio — eclipsing Valero’s domestic US production.

Industry reaction

The US biofuels industry and farm-state lawmakers are up in arms.

Sen. Chuck Grassley of Iowa: “President Trump committed to a 15 billion gallon annual volume obligation for ethanol under the Renewable Fuel Standard. Administrator Pruitt is breaking that commitment. By handing out ‘hardship’ waivers to highly profitable, big oil refining companies, Administrator Pruitt is undermining the integrity of the Renewable Fuel Standard. He’s also breaking his own promise he made to me and several other senators to support the spirit of the law. Hundreds of millions – and in some cases billions – of dollars in profits isn’t my definition of ‘hardship.’ President Trump promised to support home-grown biofuels, and Administrator Pruitt is breaking that promise.” 

Growth Energy CEO Emily Skor added, “Carl Icahn interviewed Scott Pruitt for the job, and now Icahn stands to make millions more from a secret EPA handout. This is just one more example of the EPA taking money out of the pockets of American farmers and undermining President Trump’s promises to rural communities. The EPA is giving refineries everything they want, at the expense of rural families, while refusing to move forward on the President’s pledge to lift barriers against year-round sales of E15.

Meanwhile, the National Biodiesel Board submitted a Freedom of Information Act Request aimed at shedding light on small refiner exemptions requested and issued under the Renewable Fuel Standard.

NBB requested:

•    Any records submitted to EPA in conjunction with a petition for a small refinery exemption pursuant to 42 U.S.C. § 7545(o)(9)(B) for compliance with the 2015, 2016, 2017, and 2018 obligations under the Renewable Fuel Standard.  

•    Any records summarizing information regarding petitions for a small refinery exemption under 42 U.S.C. § 7545(o)(9)(B) for 2015, 2016, 2017, and 2018, including but not limited to:

  • The number of petitions for a small refinery exemption that EPA has received for each year.
  • The number of petitions for a small refinery exemption that EPA has granted for each year.
  • The total volume of renewable fuel that would be exempted under petitions for a small refinery exemption that EPA has received for each year.
  • The total volume of renewable fuel that will be exempted under petitions for a small refinery exemption that EPA has granted for each year.
  • The name of each refinery that submitted a petition for a small refinery exemption in each year.
  • The name of each refinery for which a small refinery petition was granted in each year.

Now, the Advanced Biofuels Association (ABFA) has submitted a petition for review to sue U.S. Environmental Protection Agency Administrator Scott Pruitt challenging EPA’s process for granting exemptions from compliance under the Renewable Fuels Standard (RFS) to small refineries.

“We have seen reports that the number of small refinery exemptions recently granted for compliance years 2016 and 2017 have doubled compared to previous years,” said Michael McAdams, president of ABFA. “ABFA members are concerned that Administrator Pruitt is granting these exemptions in an arbitrary and capricious manner to undisclosed parties behind closed doors with no accountability for its decision-making process.” ABFA submitted the Petition with the U.S. Court of Appeals for the D.C. Circuit given its national implications for the RFS program and its members.

The Hardship Standard

Congress did not establish a specific standard for hardship.

As Wyoming Senator John Barasso noted in a letter to EPA Administrator Pruitt, the historic standard was a fuzzy two step procedure.  First, the Department of Energy recommended to EPA that it grant a 50 percent waiver to small refineries who could show a high cost of compliance relative to industry average and significant impairment of the refinery operations viability.

What constituted “significant impairment” and ‘ a high relative cost of compliance’ was left to EPA to determine.

It can lead to a spiral. By definition, 99 percent of any industry group could have a “high compliance cost” relative to the average — that’s the nature of an average. Just in the same way that 99 percent of people have a lower average income than Warren Buffett. And what makes an impairment of viability “significant”? $1 in costs, $1 million, something that tumbles a refinery into operating losses — and over what period, and to what extent would other factors be considered such as high oil prices or low gasoline prices?

Even the strongest of biofuels supporters, Senator Charles Grassley of Iowa, declined to offer a working definition of hardship when asked by the Digest.

Here’s a letter that Senator John Barasso (R-WY) and Shelley Moore Capito (R-WV) sent the U.S. Environmental Protection Agency (EPA) last August on hardship exemptions for small refineries under the Renewable Fuel Standard (RFS).  Barasso and Moore Capito followed up on this request with this letter on March 5, 2018 reaffirming their support on the waivers. 

And just to make things even more fuzzy, changes appeared in Consolidated Appropriations Act for Fiscal Year 2016 instructing the Department of Energy to recommend to EPA that it grant a 50 percent waiver to small refineries with a high cost compliance relative to industry average or significant impairment of the refinery operations viability. Note that the two step standard has become an either/or.

Sort of like changing the standard for Major League batting from “can hit major league fastballs and breaking balls” to “can hit either fastballs or breaking balls”. That is to say, what sounds like a very small change would be a disaster for a major league baseball team, potentially leading to a roster stacked with players who are easy to get out.

And, just in case your head was not already beset with pain, the changes applied to DOE’s recommendations, not the EPA’s decisions. Plus, the language appears in a conference report language rather than the bill itself. Not to mention that EPA is required under law to consult with DOE, it does not have to ask for specific recommendations or accept them. 

OK, you can swallow some Tylenol now. 

Disclose or not disclose?

Now, what exactly constitutes confidential business information. Confidential business documents relating to a petition or lawsuit, the fact that a petition or suit exists, or an agency’s standard or rationale for granting a waiver?

Senators Barasso and Moore Capito also weighed in on this one this letter on March 5, 2018 reaffirming their support on the waivers. And then, this one to EPA and DOE on April 24 to keep the issuance of the small refiner waivers confidential.

In a letter to Administrator Pruitt and Secretary Perry, Barasso said:

Historically, EPA and DOE have protected the confidential business information – which includes the identities – of small refineries petitioning for hardship relief. Disclosing this information would give entities selling refined products in the same market as a small refinery a competitive advantage over that refinery. Disclosing this information would also give entities selling RINs to a small refinery an opportunity to extract a higher price from that refinery. This information can even move the entire secondary RINs market, which is measured in billions of dollars.

But a bipartisan group of 13 US Senators disagreed with Barasso and Moore Capito.

U.S. Senators Amy Klobuchar (D-MN) and Chuck Grassley (R-IA) led a bipartisan group of 13 senators in urging Environmental Protection Agency (EPA) Administrator Scott Pruitt to cease issuing so-called “hardship” waivers exempting obligated parties from the Renewable Fuel Standard (RFS). The senators also requested that the Agency provide topline information about the waivers already issued, disclose whether or not the agency redistributed the waived volume obligations among the non-exempted obligated parties and outline the agency’s plan to make the waiver process more transparent. S

Klobuchar and Grassley were joined in the letter by Senators Tina Smith (D-MN), Joni Ernst (R-IA), Debbie Stabenow (D-MI), Deb Fischer (R-NE), Dick Durbin (D-IL), John Thune (R-SD),  Roy Blunt (R-MO), Claire McCaskill (D-MO), Tammy Duckworth (D-IL), Heidi Heitkamp (D-ND) and Joe Donnelly (D-IN).

According to recent reports, the EPA has already issued 25 “disproportionate hardship” waivers to large, multi-billion-dollar refining companies reporting billions of dollars of profits since 2016. Such action would represent a clear violation of your commitments and clearly undermine the President’s long-standing support of the RFS.

These waivers fall well outside the bounds of the letter or spirit of this provision in the law, which sought to provide flexibility for the smallest of U.S. refiners, and only in cases of genuine hardship. Worse, EPA’s actions are already hurting biofuel producers and farmers across the United States at a time when farm income is at the lowest levels since 2006 and retaliatory trade measures from China threaten to deepen the crisis.

In 2015, 37 Senators wrote to the EPA requesting that the agency issue a strong Renewable Volume Obligation (RVO), citing the RFS’s success in driving economic development, strengthening agriculture markets, and creating hundreds of thousands of clean energy jobs in rural communities. Early reports indicate that the small refinery waivers you have granted could effectively cut biofuel demand by 1.5 billion gallons, thus effectively lowering President Trump’s commitment to seeing 15 billion gallons of ethanol blended to 13.5 billion. Additionally, once these select refiners are no longer responsible for complying with these 2016 requirements, they are able to sell excess Renewable Identification Numbers (RINs) back into the market, increasing supply and lowering the price.

This further reduces incentives for blending, slashing demand for biofuels and feedstocks, and hurting farmers and biofuels companies.  These waivers could cripple the market for years to come, holding back homegrown biofuels while creating a windfall profits for large oil refiners — the exact opposite of this administration’s promise to voters.

Perhaps most concerning, these lucrative waivers have reportedly been issued behind closed doors, outside of the public process, while the EPA has simultaneously been working with refineries to pressure President Trump to sign off on a RIN cap that would wreak further havoc on the RFS.

Also, the House Biofuel Caucus has sent a letter to EPA Chief Scott Pruitt objecting to secretive RFS waivers, noting destruction of demand for more than “the entire annual harvested corn acres in the state of Michigan.” They demand Pruitt “immediately cease all waiver activity under the RFS” and provide lawmakers a “full list” of details on existing waivers. The letter was signed by caucus co-chairs Rodney Davis (R-Ill.), Collin Peterson (D-Minn.), Kristi Noem (R-S.D.), and Dave Loebsack (D-Iowa). 

What did Congress originally intend?

Former Senators Byron Dorgan (D-ND) and Jim Talent (R-MO), who played key roles in developing the RFS, called for Congress to investigate the EPA’s recent waivers to major refiners and failure to follow the law.

“Lawmakers from across the heartland have already demanded the EPA stop abusing these waivers, but Congress can and should do more. The public deserves real answers from Administrator Pruitt about handouts granted under cover of night,” said the two Senators.

“The waiver provisions established by Congress provide flexibility in dealing with the smallest refining companies, producing fewer than 75,000 barrels per day, and only in unique cases presenting disproportionate economic hardship. But the EPA has warped those provisions to grant tens of millions of dollars in regulatory handouts at the expense of farmers, biofuel workers, and American consumers.”

“The EPA’s actions not only undermine the intent of Congress, they undermine a renewable energy industry that supports hundreds of thousands of American jobs. Congress has a right and an obligation to investigate the approval process for each and every handout.”

Demand Destruction for domestic energy production

Geoff Cooper, executive vice president of the Renewable Fuel Standard, writes:

Recent actions by EPA have effectively reduced the Renewable Fuel Standard conventional renewable volume obligation (RVO) for 2016 by more than 1 billion gallons, and the agency appears poised to take similar actions to effectively reduce the 2017 and 2018 conventional RVOs by comparable amounts. These cuts have resulted in significantly lower prices for Renewable Identification Numbers, reduced corn and ethanol demand, avoided legal obligations for highly profitable businesses, and windfall profits for certain small oil refiners. In total, nearly 2.4 billion gallons of ethanol demand and 860 million bushels of corn demand have potentially been lost over the past two compliance years due to EPA’s recent actions.

RFA adds:

EPA’s recent actions in exempting small refineries from their Renewable Fuel Standard blending obligations for 2016 and 2017 have effectively lowered the volumetric obligations by at least 1.6 billion gallons, according to an analysis of the agency’s own monthly compliance data by the Renewable Fuels Association. The volume of lost blending obligations for these two years is 10 times the collective volume of lost volume from 2013-2015.

In recent weeks, it’s been widely reported that EPA has exempted as many as 25-30 small refineries from their RFS blending obligations in 2017, and as many as 20 refineries from their 2016 obligations. Despite numerous requests from industry stakeholders, including RFA, and lawmakers for additional information, EPA has not disclosed the exact number of exemptions granted or the volume of required renewable fuel blending that was effectively erased.

The Bottom Line

There’s a crisis on in Washington all right. There are significant market impacts on the prices of Renewable Identification Numbers for the biomass-based diesel (D4) and the overall renewable fuel (D6) pools.”

ABFA president Mike McAdams said that EPA’s moves are “dropping RIN prices disincentivize blending, causing economic harm, and posing a threat to the integrity of the RFS program at large.” That’s the pithiest version what what the entire industry is saying.

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