Icahn-Hated Fuel Mandate Makes Profit for Gas-Station Owners

Source: By Mario Parker, Bloomberg • Posted: Thursday, September 15, 2016

Listening to oil-refinery owners like billionaire Carl Icahn, you’d think the entire fuel industry opposes a mandate for more renewables in U.S. gasoline. But few complaints are coming from the likes of Murphy USA Inc. or Casey’s General Stores Inc. They’re making a lot of money from it.

Filling-station operators and suppliers who mix their own gasoline with ethanol or biofuel are enjoying a profit bonanza by selling renewable-fuel credits to refiners struggling to comply with federal standards. Transactions this year are set to reach a record $1.8 billion. It’s an obscure corner of the petroleum business that companies like Icahn’s CVR Energy Inc. say is “rigged” against them.

Refiners are required to add increasing amounts of plant-based fuels, and when they can’t find enough, they buy credits from blenders who aren’t covered by the mandate or have a surplus. The credits are created when a company mixes ethanol or biofuel with gasoline, which then gets a Renewable Identification Number that can be bought or sold. RINs prices have soared as demand increased and are now so costly that refiners including Tesoro Corp. and PBF Energy Inc. are investing in their own blending facilities.

“When you have regulations, it’s almost inevitable that you’ll have winners and losers,” said Wallace Tyner, an economist at Purdue University in West Lafayette, Indiana.

El Dorado, Arkansas-based Murphy’s is a big beneficiary. The company operates more than 1,300 filling stations across the Midwest and South — usually connected to Wal-Mart stores. Murphy also has access to fuel distribution and blending facilities that generate RINs, but aren’t subject to the federal mandate. In 2015, the company earned $117.5 million by selling the credits, or 67 percent of net income, according to regulatory filings. This year is even better, with a record $43.9 million from RINs in the second quarter.

For a discussion of RINs, click here.

Fuel blending created an added bonus for Casey’s General Stores, which operates more than 1,900 stores and gas stations mostly in small, rural communities. The Ankeny, Iowa-based company mixes gasoline and ethanol in tankers to generate RINs, which it sells. In the fiscal year ended April 30, Casey’s pocketed $31 million from credits, representing 14 percent of its record profit, a company filing showed. In the quarter ended July 31, RINs earnings reached an all-time high of $14.7 million.

Some fuel retailers say they use the RINs windfall to help lower pump prices. That means consumers like Christina Matthews are also coming out winners. Every week, Matthews goes out of her way to fill up at the Murphy’s station in south suburban Chicago. It’s easy to see why. On Aug. 24, a gallon of regular gasoline sold for $2.07, well below the $2.25 charged at the Amstar station down the street and $2.49 posted price at a nearby Shell.

“It’s a great, big deal,” said Matthews, 69. “It’s worth the trip.”

Refining Costs

But for many independent refiners who have to buy the RINs, the fuel credits are pure cost. RINs prices more than doubled in the past year to almost $1 a gallon as the federal government expanded the mandate for biofuel use in gasoline and supplies of ethanol and biodiesel tightened. While fuel retailers can generate RINs by blending biofuel with gasoline, many independent refiners don’t have the infrastructure. They just refine crude oil and have to purchase RINs.

Sugar Land, Texas-based CVR Energy, owned 82 percent by Icahn, saw the cost of RINs at its two refineries in Kansas and Oklahoma surge to $94.1 million in the first half of the year, up from $74.1 million in the same period a year earlier, a company filing shows. Philadelphia Energy Solutions, which operates a 335,000-barrel-a-day refinery, cited $250 million in RINs costs and low fuel prices as reasons why it must reduce its payroll and delay capital projects.

Since passage of a 2005 law, refiners have been mandated to use escalating amounts of biofuels under standards set by the Environmental Protection Agency. Compliance is tracked by the 38-digit RIN, and the supply of those credits will tighten as demand grows faster than supply of biofuels, according to analysts including Goldman and Jefferies LLC.

Under the law, biofuels should account for about 10.1 percent of what refiners produce this year and 10.44 percent next year. To meet that obligation, they have to blend more ethanol and biodiesel or purchase the RIN from someone else. Gasoline consumption this year will total 9.33 million barrels a day and will be little changed in 2017, the U.S. Energy Information Administration said Sept. 7.

More Players

As the market expanded, so did the number of participants. Costco Wholesale Corp., Alimentation Couche-Tard Inc.’s Circle K, 7-Eleven Inc. and Wawa Inc. are among retailers registered to sell RINs, an analysis of government data show. In 2014, EPA data show 60 percent of the 50 billion RINs transactions were by companies not obligated to participate under the law, Bernard Weinstein, an economist and director of Southern Methodist University’s Maguire Energy Institute in Dallas, wrote in a report last month.

The jump in the value of RINs prompted allegations of price manipulation and calls to repeal or alter the law. Icahn warned regulators last month of mass bankruptcies from what he called a “rigged market,” which has been inflated by speculators outside the fuel industry who are permitted to buy and sell RINs.

“Some form of RINs reform or elimination would make sense,” said Carl Casale, chief executive officer of CHS Inc., a farmer cooperative based in Inver Grove Heights, Minnesota, that has two oil refineries and two ethanol plants. The system created almost a decade ago “creates an artificial marketing force that really is kind of past its intended useful life,” Casale said by telephone on Aug. 31.

Industry Infighting

The Renewable Fuels Association, a Washington-based trade group, asked the EPA and the Commodity Futures Trading Commission to investigate allegations of price manipulation. The American Fuel & Petrochemical Manufactures, a lobby for oil, along with Valero, the largest U.S. oil refiner, asked EPA to move the onus of acquiring RINs down the supply chain to fuel distributors and retailers. The American Petroleum Institute, typically in lockstep with the fuel manufacturers on most issues, opposed the petition, arguing that a shift in the obligation would create even more uncertainty in prices.

Andrew Clyde, the chief executive officer of Murphy’s, said the condition of merchant refiners has more to do with their decision not to build their own blending facilities than the cost of complying with the fuel standard.

“The folks that are screaming the loudest have also made strategic choices in the past,” Clyde said. “Some people may want to deflect the issue onto something else as opposed to saying, ‘You know what? This is the industry we’re in.’”