Fight Over Ethanol Escalates as Bankruptcy Refuels Debate
(Bloomberg) -- The battle between U.S. farm interests and oil-refining advocates such as Carl Icahn is heating up again as the two sides fight over whether the ethanol mandate is to blame for the bankruptcy of the U.S. East Coast’s largest refinery.
Philadelphia Energy Solutions LLC blamed its woes on the cost of complying with the Renewable Fuel Standard when it filed for bankruptcy last month. The refiner said the biofuel mandate cost it more than $800 million since 2012, and now the industry is seizing on that as fresh evidence that changes to the regulation are urgently needed.
The bankruptcy is a proxy for a much deeper conflict over the future of the Renewable Fuel Standard, with both sides trying to persuade Washington policymakers -- and President Donald Trump -- to see the program their way.
The stakes have never been higher. The debate spilled onto the Senate floor last week as Senator Chuck Grassley, an Iowa Republican and top ethanol industry advocate, challenged Texas Senator Ted Cruz’s decision to stall a U.S. Agriculture Department nomination over the issue. In a Feb. 1 interview with Fox News, Environmental Protection Agency Administrator Scott Pruitt rattled the biofuel industry when he pointed at Philadelphia Energy and said that there was a need for “reform.” The issue also could dog Trump during a Feb. 21 campaign rally in Philadelphia.
“The conversation on the RFS struck a new tone early this year following Philadelphia Energy Solutions’ bankruptcy announcement at the end of January,” Katie Bays, senior energy analyst at Height Securities in Washington, wrote in a Feb. 9 report. “We expect the RFS will undergo significant changes this year through legislation, regulatory measures, or both.”
The law forces refiners to use biofuel -- and prove they have satisfied annual quotas with tradeable credits known as Renewable Identification Numbers, or RINs. But refiners are affected unevenly by the mandate. Independent refiners that lack infrastructure to blend biofuel, such as PES, must buy those RINs instead. Icahn, Trump’s former regulatory adviser who holds a stake in refinery CVR Energy Inc., pushed for changes to the RFS program that the billionaire called "rigged."
The ethanol industry says that the program is working as intended by forcing refiners to invest in infrastructure to comply with the law -- a regulation that benefits the sector by making biofuels more widely available.
Both sides have circulated memos -- including one written by Grassley’s energy policy staff -- and analysis to buttress their arguments. While oil interests largely blame the RFS, biofuel proponents say that PES is harmed more by losing affordable access to cheap domestic crude from North Dakota than it is by the biofuel mandate that applies to refineries nationwide.
Philadelphia Energy Solutions Chief Executive Officer Gregory Gatta joined the fray on Monday, issuing a joint statement with the head of the United Steelworkers International arguing that there is room for both biofuel producers and oil refiners "to thrive." Gatta and Steelworkers head Leo Gerard said they would keep advocating "for reform of the flawed RINs compliance mechanism that threatens thousands of well-paying jobs and the independent refineries that provide critical energy supply to the United States."
Shedding the Obligation
Philadelphia Energy is bidding to shed some $300 million in compliance obligations tied to the RFS. The EPA already said it would give the refiner an extra 31 days to satisfy its RIN obligation for 2017. But the company has asked the agency to go further and forgive its burden entirely.
If the refinery is successful in shedding its RFS obligation -- a move that could lower RIN prices -- it would effectively be shorting the market for those compliance credits, Grassley’s energy policy staff said in a memo circulated Feb. 6.
“PES could buy RINs back at a cheaper price before the compliance deadline and may profit from this short strategy,” the memo said.
Pruitt already ruled out a number of changes to the Renewable Fuel Standard last year, under pressure from farm-state senators who stalled an EPA official’s confirmation over the issue. But he may have more latitude to make changes in response to formal waiver requests filed by four states and a narrower request from the leading refiner trade group.
The EPA is also considering exemption requests from small refiners, which could help them compete against larger facilities while paring overall program costs, potentially dampening the drumbeat for broader changes.
“A lot of people are interested in exploring what is possible under waiver aurthority,” said Neelesh Nerurkar, an analyst at ClearView Energy. Pruitt “may see the small refiners hardship exemption as the only lever he has left,” he said.
Renewable Fuels Association Chief Executive Officer Bob Dinneen, speaking at the National Ethanol Conference in San Antonio on Tuesday, said that the industry can’t allow “demand destruction” to be the “cornerstone” of discussions.
Biofuel supporters have “got to pull out all the stops,” said Wallace Tyner, an agricultural economist at Purdue University in West Lafayette, Indiana, who’s testified to Congress about the RFS. “It’s about survival at this point. They’re really scared now. They don’t trust the administration” to follow through to protect the mandate, he said.
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