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EPA's Hardship Waiver News Sends RIN Prices to 3-Year Lows

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The Scott Pruitt-led Environmental Protection Agency (EPA) is facing a backlash from farm groups and ethanol organizations after reports emerged that it granted RIN obligation waiver – typically reserved for smaller refineries – to a large downstream operator.

What Are RINs?

It all started in 2005 when the Congress passed the 'Energy Policy Act' to reduce America's dependence on imports, lower greenhouse gas emissions and enhance the country's energy security. The legislation, among other provisions, created a Renewable Fuel Standard (or RFS) requiring the mixing of renewable fuels (like corn ethanol or other biofuels) into gasoline and diesel.

The U.S. Environmental Protection Agency (or EPA) calls for a blending target known as the Renewable Volume Obligation (or RVO). For example, in 2010, EPA proposed that 12.9 billion gallons of ethanol and other biofuels be blended into gasoline and diesel. By 2017, the amount had jumped to 18.8 billion gallons and the RVO requirement for 2018 is 19.3 billion gallons.

Apart from its efforts to force the use of ethanol in the domestic gasoline mix – the percentage of which has gone up from around 3% in 2005 to roughly 10% now – Congress instructed the EPA to develop a system of electronically tracking numbers that could allow the agency to check whether the assigned blending requirements were being met by the concerned parties.

These 38-character tracking numbers or tradable certificates (sometimes referred to as ‘credits’) are known as RINs (Renewable Identification Numbers). Each physical gallon of renewable fuel produced/imported is assigned a RIN that follows the fuel’s journey to a blender. Post blending, RINs are separated from the blended gallons of petroleum-based fuels, and they are used as proof by obligated parties that they have complied with the federal program.

A Burden on Smaller Operators

Interestingly, the so-called RFS point-of-obligation are not the actual parties engaged in blending gasoline with ethanol or other biofuels, but refineries and gasoline-diesel importers. That means, all oil refiners – big and small – are required to shoulder the burden for mixing ethanol into gasoline, even if they do not possess the blending terminals to do so.

For most of the smaller players, investing in a new ethanol blending and distribution infrastructure is not financially viable. So, the only option for them is to buy RIN credits that they require to meet the RFS standard. Most independent refiners have to purchase them from integrated majors and biofuel producers who sell their excess credits.

EPA’s ‘Secret’ Exemption to Refining Giant Andeavor Criticized

Per recent media reports, the EPA granted an RFS obligation exemption for 25 oil refineries last year. While the move to award so-called ‘hardship exemptions’ is not unusual, the amount is up significantly from the 12-15 handed out in a typical year. But more than the larger-than-usual number of hardship exemptions, what raised concern was the name of Andeavor’s (ANDV - Free Report) three units among the beneficiaries.

Under the RFS provisions, smaller refineries (producing less than 75,000 barrels per day) may apply for waivers with the agency on grounds of ‘disproportionate economic hardship.’ However, Zacks Rank #3 (Hold) Andeavor – which generated $1.5 billion in profits last year – hardly fits the bill to receive an exemption from the country's biofuel regulations, feels industry observers. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Agriculture Industry Up in Arms

Though the EPA refused to comment on the issue citing ‘confidential business information,’ the decision has angered several agriculture industry bodies who believe these waivers significantly lower the quantity of fuel to be mixed with ethanol, thereby effectively reducing the demand for biofuels in U.S. and adversely affecting domestic corn producers. Moreover, these ‘secret handouts’ basically lets the refiners get out of their obligations to blend ethanol fuels.

Finally, the alleged exemption (intended for small, financially weak refiners) granted to a profitable energy giant like Andeavor has been condemned as being an unfair and illegal practice, apart from undermining the federal mandate.

The agricultural groups have demanded the EPA immediately stop issuing waivers and halt reviewing any such applications that are under consideration, pending a transparent public debate.  

RIN Prices Tumble

The facilities of independent refiners can process just petroleum products and not ethanol. Consequently, these entities have to either buy or build special ethanol blending terminals or purchase RINs to comply with the RFS.

Originally sold for a few cents a gallon under EPA supervision, the ethanol RIN price soared to $1.50 per gallon in 2013 as an unregulated trading market emerged. Subsequently, it fell below 25 cents only to top $1-a-gallon recently. This translates into an additional operating cost of $3-4/barrel of crude processed for refiners.

Now, the EPA’s decision to exempt dozens of refiners from RFS compliance has given rise to expectations about more such waivers and significant reduction in ethanol demand. This sent RIN biofuel credit prices tumbling to around 30 cents, the lowest since September 2015.

In particular, the bailout of Andeavor has raised hopes that the scheme might be (or had already been) extended to large integrated energy conglomerates like Exxon (XOM - Free Report) , Chevron (CVX - Free Report) , as well as big independent refiners like Phillips 66 (PSX - Free Report) .   

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