New Biofuel Exemption Prospects Spur Oil Giant Concern

Source: By Brian Dabbs, BNA/Bloomberg • Posted: Wednesday, August 30, 2017

An era of relaxed biofuel blending requirements may be dawning for small oil refineries nationwide following a watershed court decision and new congressional direction for regulators.

That prospect is cheered on by many companies that operate small refineries, such as Silver Eagle Refining Inc. Refiners often complain of the high costs involved with complying with the blending requirements. Exemptions from those requirements, which are granted only to companies financially damaged by compliance, could provide them a windfall.

But the emergent trend is likely to put the Environmental Protection Agency, which has remodeled itself as an ally of the energy industry, in a tough position. Representatives of larger refiners are warning against the fallout tied to a wave of new exemptions, which would shift some of the burden of complying with the aggregate annual biofuel mandate.

That’s because exemptions don’t affect the EPA’s annual blending requirements, so exemptions result in an uptick in the compliance obligations for those that still have to comply with the program.

“The exemptions take that obligated volume out of the stream, and you can’t wave a magic wand and take that biofuel out of the total requirement,” Suzanne Murray, a Haynes and Boone LLP attorney who represents refiners, told Bloomberg BNA. “Maybe with a couple of guys on the margins, it’s OK, but when you start getting more and more folks, sooner or later it adds up to real volume.”

Congress put the blending mandate, known as the renewable fuel standard (RFS), into law more than a decade ago. Proponents at the time said greater use of biofuels would cut down on greenhouse gas emissions and bolster U.S. energy independence.

The mandate requires refiners and importers to blend biofuels, such as traditional ethanol and advanced fuels like cellulosic ethanol, into gasoline or purchase credits to comply. The EPA decides on individual exemption petitions in consultation with the Energy Department.

Spreading the ‘Burden’

Large refineries like ExxonMobil Corp., Chevron Corp., and Marathon Petroleum Co. LLC, as well as nonexempt small refineries, have to step in for those exempted. That puts them in an unfair position, Mike Tadeo, a spokesman for the American Petroleum Institute, which represents all the industry heavyweights, told Bloomberg BNA.

“EPA should take measures that reduce the overall RFS requirement when a refiner is exempted as to not spread that burden across the rest of the industry,” Tadeo said.

Refineries are required to comply with the RFS based on the amount of petroleum processed, but the industry writ large must meet the aggregate annual mandate. A change like the one the American Petroleum Institute supports will likely require new legislation or a regulatory revamp. The EPA is accepting comments on the exemptions as part of its 2018 RFS proposal.

Some refineries say they already struggle to meet their current quotas.

Relief in the Pipeline

A federal appeals court shot down an EPA rejection of an exemption request Aug. 15, and now some small refineries will likely push the agency for more exemptions, according to Murray and Monte Shaw, executive director of the Iowa Renewable Fuels Association.

Those pleas are likely to fall on friendlier ears at the agency than in years past, Murray, Shaw, and a former EPA official told Bloomberg BNA. EPA Administrator Scott Pruitt, a past biofuel critic and oil industry ally, generally supports the exemptions, the former agency official, who worked directly with Pruitt, said, speaking on condition of anonymity.

A refinery must process 75,000 crude barrels a day or less to qualify for an exemption. Nearly 60 percent of all refineries operate under that threshold, according to the Energy Information Administration.

To qualify under the hardship criteria, a refinery must incur disproportionate cost or face the threat of insolvency linked to compliance.

Jerry Lockie, manager at Silver Eagle Refining Inc. refinery in Woods Cross, Utah, told Bloomberg BNA that his company now sees an opportunity for an exemption in the wake of the Sinclair decision.

“We’re evaluating our options for filing for the exemption because it does create an economic disadvantage for us,” said Lockie, who told Bloomberg BNA his refinery hasn’t received an exemption to date. “We just transferred the information to our counsel and it’s in review.”

The EPA declined Bloomberg BNA requests for information on the small exemption policy, as well as a list of exemptions requests, denial and approvals. According to the 2018 RFS proposal, which the EPA released last month, the agency evaluated a dozen exemptions requests. But the rule doesn’t discuss the decisions.

Those interviewed said they weren’t aware of any exemptions approved in 2016. Bloomberg BNA reached out to dozens of companies that operate small refineries and most declined to comment or didn’t respond.

But Keith Johnson, a spokesman for the refinery operator Delek Group Ltd., told Bloomberg BNA that he’s aware of some recent exemptions. The EPA waived RFS obligations last year for a Delek facility at El Dorado, Ark., and an Alon Israel Oil Co. Ltd. facility at Krotz Springs, La., Johnson said.

Delek absorbed Alon in recent weeks. The company aims to apply for exemptions at both facilities again this year, Johnson said.

More Energy Department Clout?

On top of the impact of the decision and Pruitt’s position, the agency also is constrained by a new directive that could encourage exemptions.

A report that accompanied the 2017 funding law directed the EPA to follow Department of Energy recommendations on the exemptions. The Energy Department recommended exemptions in the past, but the EPA disregarded its views, according to some of those interviewed by Bloomberg BNA.

The 2018 RFS proposal suggests that new language may have teeth.

“This directive could impact how EPA evaluates small refinery hardship petitions and the number and magnitude of exemptions granted,” the EPA said in its 2018 RFS proposal, which released last month.

But despite that language, Thomas White of the Energy Department’s Office of Energy Policy and Systems Analysis said the department’s “influence has not changed,” adding that the DOE “has always provided EPA an evaluation of a petitioner.”

Those interviewed said increased exemptions are likely but not guaranteed.

“You can’t necessarily expect EPA to grant all these. They may listen to the bigger refiners,” Shaw, the Iowa Renewable Fuels Association leader, told Bloomberg BNA. “I’d say there’s a smoother path now, but that doesn’t make any of them a slam dunk.”