Big Oil Companies Reap Windfall From Ethanol Rules

Source: By Bradley Olson, Wall Street Journal • Posted: Friday, October 28, 2016

Environmental regulations designed to boost the amount of ethanol blended into the U.S. gasoline supply have inadvertently become a multibillion-dollar windfall for some of the world’s biggest oil companies.

Companies including  Chevron Corp., Royal Dutch Shell PLC, and BP PLC could reap a total of more than $1 billion this year by selling the renewable fuel credits associated with the ethanol program, according to an analysis commissioned by CVR Energy, a refinery operator controlled by billionaire Carl Icahn, a vocal critic of the rules.

For other companies, especially smaller refiners, the rules have had the opposite effect, forcing them to spend hundreds of millions to buy credits to comply.

Some large oil companies acknowledge they are reaping revenue from the regulations, but say their advantage stems from large investments they made to comply with it, and stress that not all of the money translates into profit.

“Because a few other companies made different business decisions and are now living with the consequences is not a reason to suddenly change the rules,” said  Geoff Morrell, a senior vice president for BP.

Spokesmen for Chevron and Shell said they couldn’t immediately comment. A spokesman for Citgo, the U.S. arm of state-owned Petróleos de Venezuela SA, disputed it was profiting from the credits as the analysis claims, saying that it buys more than it sells annually to comply with its obligations.

The ethanol and biodiesel program, created during President George W. Bush’s administration, was aimed in part at reducing U.S. dependence on foreign oil. But those concerns have waned as a result of the abundant new U.S. oil and gas supplies unlocked by shale drilling. The rules require refiners to either blend ethanol with the gasoline they produce or buy credits.

Valero Energy Corp. disclosed when it reported third-quarter earnings Tuesday that it incurred $198 million in costs to meet biofuel blending rules during the period. It has said it will have to shell out as much as $850 million this year for the credits. PBF Energy Inc. has estimated costs will reach $300 million.

The top 10 U.S. refiners spent $1.1 billion on biofuel credits in the first half of this year, according to Moody’s Investors Service. Some refiners have warned they could be forced to conduct mass layoffs, or file for bankuptcy, because of the soaring costs of compliance.

“The consumer is paying more and it’s ending up in the pockets of retailers, major oil companies or speculators,” said George Damiris, the chief executive of HollyFrontier Corp., a Midwestern refiner. “Over time, if this goes uncorrected, people will basically be put out of business.”

The price of the credits has skyrocketed this year, amid complaints from fuel suppliers that they are being forced by the Environmental Protection Agency to blend more ethanol than consumers or car makers are willing to accept.

The EPA has raised the required ethanol amount to 10.5% of total fuel as required by legislation. But auto makers argue that anything above 10% is potentially damaging to some engines, and consumers have been slow to embrace the more ethanol-heavy blends.

Another area of dispute is the step in the fuel supply chain at which the credits are created. It takes place at the point where ethanol and gasoline are blended. That favors companies that control vast networks of gasoline stations and thus reap more credits than the amount of oil they actually refine into fuel, while disadvantaging smaller refiners without as much of a retail presence.

Shell, which controls gasoline stations in the U.S. that sell about 1.6 million barrels of fuel a day, appears to be one of the biggest beneficiaries of the program, according to the CVR analysis, conducted by refining consultant Baker & O’Brien Inc. The retail stations it controls exceed its U.S. refining capacity by about 1 million barrels a day, according to the study.

The cost of ethanol credits this year has ranged between $3 and $4 a barrel, according to refining analysts. That suggests Shell is structured to rake in as much as $1.5 billion annually from selling the credits.

Citgo’s potential haul, according to the analysis, exceeds $900 million. BP and Chevron have the ability to sell between $200 million and $300 million in credits annually.

Valero, which spun off its retail stations in 2013, CVR and other refiners have suggested changing who is obligated to account for blending, making it retailers and wholesalers instead of refiners.

But the dispute over how to fix the program has created a rift in the oil industry, pitting some of the world’s biggest oil companies against smaller refiners. BP and the American Petroleum Institute have opposed the change, saying it could introduce significant uncertainty and do little to create incentives to blend ethanol.  Exxon Mobil Corp. has argued the best solution would be repealing the entire program.