Grassley Releases RFS Memo

OMAHA (DTN) -- There were a number of reasons why East Coast refiner Philadelphia Energy Solutions filed for Chapter 11 protection, and despite the company's claims, the costs to comply with the Renewable Fuel Standard was the least among them, according to a memorandum released on Tuesday by Sen. Charles Grassley, R-Iowa.

The company claimed its financial difficulties were brought on by about $830 million in RFS compliance costs. However, ethanol industry representatives and Midwestern lawmakers have argued that the refiner faces financial ruin for a number of reasons unrelated to the RFS.

RFS compliance requires a renewable identification number (RIN), a 38-digit number attached to a gallon of biofuel. It is used to track production, use and trading. Many refiners pass the costs of buying RINs on to consumers in the price of fuel.

Gasoline refiners and importers must comply with the RFS by buying and submitting credits to the EPA or face potentially heavy fines.

According to the memo released by Grassley, publicly available evidence points to changes in PES' available feedstocks and other management decisions -- not RFS compliance costs -- as the primary reasons for the company's financial difficulties.

"It does face a problem of having to acquire RINs to meet the looming RFS compliance deadline," the memo stated, "but that is due in large measure to its reported decision last fall to sell off the RINs it had acquired, presumably in hopes of being able to buy them back at lower cost before the compliance deadline. Moreover, if PES had taken the sensible approach of other merchant refiners and invested in ethanol blending infrastructure or partnered with a blender, it appears it would have no need to purchase RINs at all."

There has been growing concern in the ethanol industry about how small refiners -- those that produce less than 75,000 barrels per day (bpd) -- have been using a waiver provision in the RFS that may preclude them from meeting their blending obligations.

The concern leveled by biofuels advocacy groups is that if the U.S. Environmental Protection Agency grants waivers to small refiners, it could limit the amount of biofuel volumes blended.

In all, about 15 billion gallons of corn ethanol are produced annually. That ethanol demands about 5.4 billion bushels of corn, making it a major market for U.S. farmers.

EPA did not respond to DTN's request for information as to how many small refiners have received or have applied for waivers.

The loss of blending capacity would be a blow to the ethanol industry, which continues to wait on the EPA's decision on whether to allow the sale of E15 year-round. If refiners are not made to comply with the RFS, then demand for ethanol and other biofuels could suffer.

According to information from Turner, Mason & Company Consulting Engineers, there are 25 refineries across the country that fall below the 75,000 bpd threshold, totaling about 1.1 million bpd in production capacity. In addition, there are seven other refiners that fall within the 75,000 to 85,000 bpd range, totaling about 580 million bpd in production capacity.

GRASSLEY MEMO

The memo released on Tuesday points to a number of what it says were "likely" reasons for Philadelphia Energy Solutions' filing.

"Following a global collapse in crude oil prices in late 2015 and early 2016, producers in the Bakken, which was the predominate supplier of PES crude oil, suddenly found it uneconomic to continue producing in certain higher-cost fields in the region, and as a result, production declined by approximately 25% from over 1.2 million bpd in late 2015 to less than 1.0 million bpd in late 2016," the memo said.

At about that time, the Grassley memo stated, new pipeline capacity was put in service to connect the Bakken region to the U.S. Gulf Coast. That led to the U.S. government lifting a 40-year domestic crude oil export ban in late 2015.

As a result, the memo said, "producers in the Bakken had less crude oil to sell and were now free to export this crude oil to foreign refiners who, unlike PES, were not burdened by higher transportation costs associated with the requirement of the Jones Act." So, it became less expensive to transport crude from North Dakota to "points in Western Europe than it was to transport the same crude oil to Philadelphia."

When the Dakota Access pipeline opened in June 2017, Bakken crude shipments to East Coast refiners ended, "depriving PES of profitable crude oil feedstocks," the memo said.

"For over eight years since RINs were introduced, PES has apparently chosen not to invest in renewable fuel blending infrastructure or strike a deal that enables it to attain RINs at lower prices," according to the memo.

"In 2010, the EPA estimated the cost of blending infrastructure to be roughly 9.6 cents per gallon of ethanol. According to industry experts, PES could have invested around $40 million to build the blending infrastructure needed to secure its required RINs by blending biofuels. Instead, PES spent a reported $832 million buying RINs since 2012."

"PES has stated it is forced to buy RINs to comply with the RFS because it cannot generate them, yet it reportedly sold 40 million RINs in the fall of 2017. That is very odd considering RINs are turned into the EPA in February to comply with the RFS."

The Grassley memo also said the PES facility has had about $2 billion in upgrades in its refinery from 2005 to 2015.

PES had not responded to DTN's request for comment at the time this article was posted.

Read the Grassley memo here: http://bit.ly/…

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @toddneeleyDTN

(BAS/AG)

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