When Refiners Cry Wolf, Who Will Be Fooled?

May 26, 2014 |

ericksonEPA’s proposed rule went too far in correcting a problem largely of the refiners’ own making.

It’s in the nation’s interest to put the final RFS rule back on course.

By Brent Erickson,
Executive Vice President; Head, Industrial & Environmental section
Biotechnology Industry Organization (BIO)

Last year, it appears that the Philadelphia area oil refiners had some role in convincing the White House to weaken or dismantle the Renewable Fuel Standard so they could save millions of dollars in compliance costs, a recent Reuters article alleges.

Yet just last month, in early April, the same refiners failed to convince a U.S. Court of Appeals that the RFS places any undue financial burden on them. In fact, the Court case revealed that the refiners’ own actions brought on some of the financial costs. Meanwhile, the changes that the administration proposed for the RFS could undercut advanced biofuel producers and the potential jobs they would create.

Some government officials forget that when the RFS was written, the refiners asked that a credit trading system be put in place to provide flexibility in compliance. A few refiners now have chosen to buy RINs instead of blending biofuels, while howling in mock pain as if this was forced on them. When Sunoco decided to shut down its Philadelphia area refineries in 2011 and 2012 due to their age and inability to compete, state and federal officials rode in to save the day. Gov. Tom Corbett (R) and other state policymakers worked with new buyers – Delta Airlines, PBF Energy and the Carlyle Group – and local unions as well as with help from the White House to save the refineries and the jobs there.

sheep-wolfs-clothing

The officials even worked with EPA to grant Sunoco – which entered into a joint venture with the Carlyle Group – a $10 million reprieve on prior violations of the Clean Air Act. Once they had this state and federal aid in hand, the new “merchant refiners” (as they called themselves) immediately set out to undo the Renewable Fuel Standard.

When the price of D6 RINs began to rise in the first quarter of 2013, the national and Philadelphia area refiners began aggressively lobbying against the RFS. The Philly refiners complained bitterly to their Members of Congress that the increasing compliance costs would force them to cut hundreds of local union jobs – the ones everyone had just spent two years working to save. Monroe Energy (a segment of Delta Airlines) publicly accused other refiners of “hoarding RINs” and PBF Energy insinuated that Wall Street traders (presumably, the Carlyle Group among them) were manipulating the RIN market for profits. The irony is that API had previously issued a report on why Sunoco’s refineries were in trouble, in which they mentioned the RFS only as an afterthought, not a major reason.

The refiners’ story got some Congress members to rally once again to their aid. But it proved unconvincing to the U.S. Court of Appeals for the D.C. Circuit.

Monroe and PBF filed suit against EPA late in 2013, claiming that RINSanity was the result of EPA setting the 2013 Renewable Volume Obligation (RVO) at an unattainable level. The blend wall, they told the Court, would prevent the oil industry from obtaining sufficient RINs to meet the 2013 RVO. In reality, RINSanity was the result of the delay in the 2013 RVO. While the 2012 compliance period ended in February – resulting in billions of RINs being retired in a short amount of time – there was no 2013 obligation in place until August, leaving all stakeholders in a state of uncertainty for six months.

But Monroe apparently created an even tighter situation for itself. The Court record reveals that Monroe elected to defer its 2012 obligation, carrying it forward to 2013. That action foreclosed some of its flexibility for meeting the 2013 RVO; Monroe will be required to retire sufficient RINs in each category for both 2012 and 2013 by the end of June this year.

Further, Monroe’s financial records show that it was inexplicably scrambling for RINs at the height of RINSanity. According to Delta Airlines’ public earnings statements, filed with the SEC, Monroe Energy purchased $64 million worth of RINs during 2013. Nearly $50 million of that purchase occurred in the second quarter of 2013, when RIN prices were climbing. The rest were bought in the third quarter of 2013, when RINs reached their highest price. Monroe bought no RINs at all in the first and fourth quarters of the year when RIN prices were lowest, according to the company’s financial statements. PBF’s financial filings show similar behavior. That refiner purchased $50 million worth of RINs in the second quarter of 2013 and $39 million in the third, with relatively smaller purchases in the first and fourth quarters.

The Court rightly found Monroe’s and PBF’s arguments “meritless” just one month after the case was argued. One relevant factor in the decision was that in 2013, the advanced biofuel industry generated more than enough RINs to meet the RVO – indeed with some extra to be carried forward to 2014. The Court upheld EPA’s authority to set the RVOs at the statutory level, “so long as sufficient RINs exist for obligated parties to meet the fuel standards.” BIO has long argued that the RFS gives our industry an assurance that if we can produce commercial volumes of advanced biofuels, the transportation fuel market will remain open to them.

Another relevant factor in the Court decision is that Monroe had plenty of time and notice to establish its compliance strategy. Monroe itself made the decision not to blend any biofuels and instead rely solely on purchasing RINs. The Court had no sympathy for Monroe’s complaint that RIN prices are higher than it would like, since the refinery set itself up long after the RFS rules were put in place. And further, EPA made promises to reduce the uncertainty in the rulemaking process that caused RIN prices to spike last year.

Nobody would win if the union jobs in Philadelphia and the surrounding states are lost. But clearly, they would be lost as a result of the business decisions made by Monroe, PBF, and others, not because of the renewable fuel standard or RIN prices. And construction and startup of new advanced biofuel biorefineries are creating thousands of new jobs, many of them also union jobs, for others in different regions of the country. One new cellulosic biorefinery has had as many as 1,000 workers on site as it nears the start of production this year. That means welders, boilermakers, pipe fitters and more are finding new jobs. Jobs like those would be lost in the twists and turns of parochial politics over setting the RFS rule for 2014.

The Obama administration’s OMB, NEC and EPA should take careful note of the Court’s rejection of Monroe’s and PBF’s story. And it should ensure that the RFS remains a bedrock policy for accelerating the emergence of new biofuel technologies and cleaner fuels. The proposed rule went too far in correcting a problem largely of the refiners’ own making. It’s in the nation’s interest to put the final RFS rule back on course.

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