Valero petition splits US refiners on RFS

Valero's proposed fix to US biofuel policy has split the refining industry's opposition to blending mandates and could sharply reduce trade of credits associated with the program.

The independent refiner petitioned the Environmental Protection Agency (EPA) this week to consider shifting who bears responsibility for ensuring the country meets annual biofuel blending mandates to rack-level sellers.

But refiners including Tesoro and Marathon Petroleum and industry trade groups Petroleum Marketer Association of America and American Petroleum Institute (API) oppose Valero's petition, preferring to continue fighting the program in other ways.

"Moving the point of obligation is not the kind of meaningful, significant RFS reform that is needed, and this would add complexity and uncertainty to an already broken, outdated RFS program," API downstream director Frank Macchiarola said.

Current EPA policy that makes refiners and importers obligated parties has limited fuel options, spurred spending on export docks instead of corner stores and allowed for a highly questionable commodities trading environment, Valero said in a 45-page petition seeking changes to the rule.

The petition also suggests that some refiners and other businesses are positioned to profit by undermining federal biofuel goals.

"Nothing will change this outcome — bad for RFS goals and bad for consumers — until EPA adjust the point of obligation," Valero said in its petition.

Most refiners, including Valero, would continue to face some obligations under the proposed change. But it would also draw in large retailers and certain midstream companies the refiner said have more direct influence on blending decisions, Valero said.

RFS measures compliance by blended gallons of conventional fuels and biofuels. Blended gallons cannot be shipped by most pipelines and so are mixed close to the point of sale. Companies responsible for blending accrue markers called Renewable Identification Numbers (RINs) to keep, sell or submit to federal regulators. Obligated companies that do not blend themselves must purchase RINs.

Continued increases to biofuel blending mandated by law will require both an investment in infrastructure to handle the fuel and more US drivers inclined to use them. Biofuel groups have said EPA's failure to stand firm on blending volumes have rewarded refiners for not making those investments. But refiners argue they are not in a position to drive up consumption.

Rack sellers who create RINs but currently face no obligations under the mandates have no incentive to encourage more biofuels blending, Valero said. The RFS instead encourages the companies to keep RINs scarce and valuable, driving up prices for obligated parties. Trading of the RINs thrived in a market with little of the regulatory supervision accorded other major commodities, Valero said.

Both HollyFrontier and CVR Energy testified in a public hearing on the program last week that RIN costs would soon or had already exceeded payroll for the independent refiners.

None of the small and independent refiners who produce half of the US fuel supply could survive continued increases in costs, CVR chief executive Jack Lipinski told Argus today.

"The dollar amounts are getting to the point that they're likely to impact one or more refineries to the point where they can't operate," he said, adding CVR was not at any immediate risk. "And when that day comes, it's going to be a clear contradiction to the basic premise of the RFS, which was to increase national energy security."

Moving the obligation point would place mandates in the hands of companies better able to choose between blending or buying their way to compliance, Valero said. Those companies would likely keep RINs instead of selling to non-obligated traders, slashing speculation.

Western Refining and Philadephia Energy Solutions (PES) said they had not read and had no comment on the petition. PES does support EPA fixing the program through a rulemaking, the independent refiner said.

Alon USA, CVR, HollyFrontier and the trade group American Fuel and Petrochemical Manufacturers (AFPM) supported the petition.

"AFPM's preferred solution is for Congress to repeal the program," president Chet Thompson said. "In the meantime, however, AFPM supports EPA moving the point of obligation."

The agency did not respond to requests for comment on the petition. EPA must only respond to the petition "within a reasonable time."