Complying with US renewable fuel mandates is getting more expensive for refiners, as higher Renewable Identification Number costs are cutting more deeply into already anemic refining margins.
Faced with trying to meet higher-than-expected Renewable Fuel Standard requirements due to surprisingly robust gasoline demand earlier in the year, refiners and other obligated parties are buying RINs to meet 2016 renewable fuel quotas as well as to meet higher future RFS requirements.
Gasoline consumption in 2016 is on track to reach a record 9.3 million b/d, revised Energy Information Administration forecasts showed, up 1.7% from 2015. However, demand growth has been slowing recently and has been outpaced by supply.
Recent weakness in refined product prices for transportation fuels has exacerbated the impact on refiner margins in complying with the EPA's requirements.
In 2016, the EPA requires renewable fuels to make up 10.10% of all transportation fuels, breaching the 10% level of ethanol considered acceptable in the gasoline pool, based on regulatory and car performance issues.
So in addition to blending, every US refiner has to buy some RINs to meet their RFS requirement. Refiners without blending or retail outlets have to buy a greater percentage of RINs because they don't create their own.
US Gulf Coast inland refiner Delek USA said in its first-quarter Securities and Exchange Commission filing that if the price of refined products is too low, the company is unable to recover the cost of RINs, which reduces profit margins.
For example, Delek said it blends USGC CBOB with biofuel and markets it as regular 87 unleaded. In the second quarter, S&P Global Platts' Houston CBOB assessments averaged $1.38/gal, while ethanol averaged $1.58/gal. The regular USGC 87 unleaded gasoline sales price averaged $1.42/gal during the quarter, Platts assessment data showed. Adding in 10% ethanol to CBOB would put the blending cost at $1.40/gal, cutting into the profit margin.
Even though Delek is both a user and creator RINs, through ethanol blending at its two refineries and a biodiesel plant, it still needs to buy RINs to satisfy its RFS obligations.
Delek paid on average 78 cents/RIN for biodiesel RINs and 71 cents/RIN for ethanol RINs to meet its first-quarter RINs obligations of $42.6 million. Through its blending and retail outlets, Delek was able to blend $12.5 million worth of RINs.
RISING CALL ON RINS
In volume terms, the EPA mandates that 18.11 billion gallons of renewables be added to the transportation fuel pool this year. This rises to 18.80 billion gallons next year.
While renewable fuel standards are expressed in absolute volumes, they are enforced as a percent of the blend mandate by the EPA. This year, the EPA requires renewable fuel to comprise 10.10% of all transportation fuels. Because it breaches the 10% level of ethanol considered acceptable in the gasoline pool, in theory this disparity forces refiners to buy RINs.
And next year's proposed standards call for a higher percentage of renewables -- 10.44% of the transportation fuel pool.
Expectations of higher future RINs demand have refiners and obligated parties looking to buy more RINs to meet future obligations.
As demand for RINs has driven higher, so has the cost of RINs, particularly for biodiesel. Biodiesel RINs have averaged $1.02/RIN so far this month, up from 78 cents/RIN during the same period last year.
The increase has coincided with higher biodiesel prices. Biodiesel delivered into Houston has averaged $3.117/gal so far this month, according to Platts assessments, compared with $2.962/gal during the same period last year.
With a surplus of refined product inventories already weighing on refining yields, the extra cost of RINs is cutting even deeper into margins. So far this month, WTI cracking margins on the US Gulf Coast are averaging 85 cents/b, down from $10.15/b for the same period last year, Platts margin data showed.
Platts margin data reflects the difference between a crude's netback and its spot price. Netbacks are based on crude yields, which are calculated by applying Platts product price assessments to yield formulas designed by Turner, Mason & Co.
Turner, Mason estimates that current higher RINs are costing refiners about $3/b, up from $2.50-$2.75/b earlier this year.
Refiners without blending facilities or wholesale outlets for their fuel are the ones most at risk because they must purchase RINs to meet their requirements. For this reason, smaller refiners like HollyFrontier, Western Refining and CVR will feel most sharply the pressure on earnings from higher RINs costs.
Refiners like Marathon Petroleum and Tesoro, which have blending facilities and outlets for their products, are more sheltered from having to go on the open market and buy RINs.
HollyFrontier, which owns and operates five refineries in the western half of the US, meets about half of its RFS requirements by purchasing RINs. During the first quarter of 2016, the refiner said that RINs costs totaled about $45 million, $5 million higher than in the first quarter last year.
Tesoro Petroleum, with a retail system of 2,400 service stations, saw no material impact from higher RINS costs in the first quarter of 2016, although CEO Greg Goff said that the costs were about double the first quarter of 2015.
