RFS loophole poses threat to refiners

Source: By George J. Damiris, The Hill • Posted: Friday, October 21, 2016

What happens when the best of intentions leads to flawed governmental regulations?  In most cases, the answer is loss of jobs, higher costs for consumers and the failure ofthe regulation to meet its objectives. These unintended consequences should be expected if the U.S. Environmental Protection Agency (EPA) does not amend its Renewable Fuel Standard (RFS) mandate.

Under the RFS, petroleum refiners and importers of petroleum products are required to blend biofuels with their gasoline and diesel fuel, regardless of their ability to do so. Refiners that do not meet the minimum blending requirements must purchase Renewable Identification Number (RIN) credits to satisfy compliance with the EPA.

Unlike other credit systems overseen by the EPA – in which companies pay the EPA directly – RINs must be purchased on the open market or from other companies that blend biofuel. This significant loophole in the RFS has created an estimated $20 billion unregulated market that provides windfall profits for Wall Street hedge funds, large integrated oil companies, and large retail gasoline station owners (retailers) while jeopardizing the future of independent refiners and small retailers.

As a result of speculation in this unregulated and thinly traded market, the cost of RINs has skyrocketed. Today, other than the cost of acquiring crude oil, RINs are now the largest expense for most independent refiners – exceeding labor, maintenance and even energy costs to run refineries. At HollyFrontier we expect to spend more on RIN credits than on payroll for our 2,700 employees this year. Combined, based on year-to-date expenditures, independent refiners are expected to pay at least $1.8 billion purchasing RIN credits.

While independent refiners would of course prefer to increase blending rather than pay for RIN credits, the fact is we cannot due to the purchasing power of our customers.  To bring product to market, independent refiners depend on common carrier pipelines that do not permit biofuels in the pipes. Moreover, the vast majority of blending occurs at common carrier third party pipeline terminals. HollyFrontier’s customers – primarily large retailers – use their market power to blend at these locations, thereby generating RINs to sell into a captive market at a tremendous profit. These RINs were intended as a certificate of compliance, not as a trading instrument to create windfall profits for non-obligated parties who do not have to reinvest the profits in renewable fuel production or biofuel blending infrastructure. It is no surprise then that the integrated oil companies that have benefited from this rigged system are spending significant resources to ensure it does not change.

The unintended consequences of the RFS mandate are real. Today, independent refiners process more than 5.5 million barrels of crude oil daily and meet approximately one third of our nation’s demand for motor fuel. Left uncorrected, the RINs loophole may put some independent refiners and small retailers out of business, resulting in job losses, lower supply and reduced competition that will ultimately drive higher prices at the pump for consumers.

This complex problem has a simple solution: change the point of obligation under the RFS. If the refiner is the also fuel blender, the refiner should remain the obligated party. But if the retailer wants to blend, the obligation should pass to the retailer. This action – which the EPA can accomplish unilaterally through rulemaking – would create a level playing field while still achieving the program’s objectives. In fact, changing the point of obligation would also incentivize blending, thereby advancing the goals set forth by the RFS mandate. The resulting increase in the supply of RINs generated from increased blending would reduce the skyrocketing costs that threaten independent refineries, refinery workers, and consumers.

Refining is and always has been a fiercely competitive business, with dozens of suppliers across markets, imported production, high capital and operating costs, and margins that change with the winds. At HollyFrontier, we are not afraid to compete, so long as the rules of the game are fair. That is why we are calling on the EPA to shift the point of obligation and create a level playing field, to ensure that Wall Street speculators and the largest oil companies in the world don’t continue to reap windfall profits to the detriment of smaller businesses and ultimately, Americans at the gas pump.

George J. Damiris is the President and CEO of HollyFrontier Corp. based in Dallas.