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Biofuel policy boosts big oil, bankruptcy: O'Malley

23 Aug 2016 19:33 (+01:00 GMT)
Biofuel policy boosts big oil, bankruptcy: O'Malley

Houston, 23 August (Argus) — US environmental regulators will bolster oil majors' market power if they do not fix federal biofuel mandates, former independent refining executive Tom O'Malley warned in a letter last week.

The former chairman and chief executive of PBF Energy told the Environmental Protection Agency (EPA) that illegal collusion in the market tied to the Renewable Fuel Standard (RFS) will "lead to a serious government scandal" and "a re-concentration of refining power within the major oil companies if the current program is continued," according to an 18 August letter to the agency.

"Bankruptcy in the independent refining sector is inevitable if the point of obligation is not changed," O'Malley wrote, referring to which companies are held responsible for complying with biofuel blending requirements. "The majors will regain their power over this sector to the detriment of the American consumer."

His comments echo a letter written by investor and major CVR Energy shareholder Carl Icahn earlier this month decrying the market for credits used to show compliance with US biofuel mandates as "rigged" and "the mother of all short squeezes."

O'Malley's specific citing of trade group American Petroleum Institute (API) also highlighted a schism between traditional oil majors and the growing US merchant refining sector.

Trade group American Fuel and Petrochemical Manufacturers (AFPM) and merchant refiners Valero, PBF Energy, HollyFrontier and CVR Energy have pushed for EPA to change regulations that obligate producers and importers of fuel to ensure rising volumes of biofuels enter the US transportation fuel supply.

Merchant refiners generally lack blending infrastructure or deep connections to retail outlets. Such companies must buy credits representing blended fuel from other parties.

The refiners acquired their assets as oil majors divested from the downstream business. But some majors kept blending and retail branding contracts allowing them to meet or exceed their own obligations. And the market for the credits, called Renewable Identification Numbers (RINs), allows trade by parties without any obligations to satisfy. The program leaves the market susceptible to manipulation, merchant refiners have said. The merchant refiners want the EPA to make blenders, rather than just producers, obligated under the program.

API, which draws membership from oil majors including ExxonMobil and Shell, supported that change in a joint letter with AFPM last July. But this year API has opposed the proposal as not going far enough. The industry should instead support repeal of the RFS, something requiring legislation unlikely to move far until a new Congress next year.

The break was not a sign of a larger split within the downstream industry, API's downstream group director Frank Macciarola said.

"I do think the issue is a one-off," Macchiarola said. "We have good unity within the industry on a variety of issues, and, frankly, we have unity on the RFS issue. That's why we view this as a distraction from the larger, more important issue, which is solving the RFS."