US refiners are leaping more into physical biofuels blending, even as the US government appears to be pondering a cut in renewables mandates.
This month PBF Energy and Alon USA both told analysts they had new plans to blend renewables like ethanol and biodiesel with gasoline and petroleum-based diesel as a way to fend off high prices for renewable credits, known as RINs.
Refiners are relying more on RINs as growing renewable mandates fail to match weaker-than-expected gasoline demand. Those that can physically blend renewables into fuel like gasoline and diesel can cut their RINs purchases and save money by entering into long-term contracts with biofuels producers at better prices.
“You have more control over your ethanol costs with long-term contracts,” said John Auers, refinery specialist at Dallas-based consultants Turner, Mason & Company about the trend of in-house refinery blending. ”There is a lot of logic in that,” he added, saying he expected other refiners to begin blending or blend more to try to keep pace with the larger market players.
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The price of ethanol RINs has rocketed in 2013 to more than $1 and the price of 2013 ethanol RINs hit a record Platts assessment of $1.44/RIN in July. Up until early this year, they traded at a few cents per RIN.
A RIN, or Renewable Identification Number, is generated when a gallon of biofuel is made. When the renewable fuel is blended with gasoline or diesel, the blender gets that RIN, which can then be used to meet its federal renewables targets or traded for cash. Refiners that physically blend renewables can cut the amount they spend on RINs purchases, and even gain a $1/gal credit on blending biodiesel.
Some market sources said that sellers, especially big market players in the gasoline market, are “slamming the racks” by offering mostly conventional gasoline, blended with ethanol, at lower prices.
They agreed with analysts that the high cost and shrinking availability of RINs is really hurting merchant refiners, who may not have access to long-term biofuels contracts that the larger players have.
“The majors are passing RINs on, trying to blend out as much product as they can to reduce the times they have to go out and buy RINs on the open market,” a gasoline trader said.
Blending is a good move for the independent refiner, said one major jobber who asked not to be identified. He said that in particular majors who blend are discounting their wholesale rack prices of gasoline by 7 to 10 cents, or about 10% per RIN, just to ensure that their product is sold, undercutting the smaller merchant refiner who is paying for the RIN and does not have that flexibility.
PBF and Alon, as merchant refiners without a rack system, are the type of refiners who would get hit by that sort of pricing. So during Q2 earnings calls, their executives sketched out their response plans to analysts.
PBF has taken possession of some tankage along Buckeye’s Laurel products pipeline, which runs from Philadelphia to Harrisburg, Pennsylvania, as well as in central New York, to be able to supply products like gasoline and diesel already blended with renewables.
(Important aspect to ethanol: you can’t blend ethanol into gasoline at the refinery, because of difficulties transporting it in pipelines. Putting it in a terminal that delivers product via truck direct to the retailer doesn’t have that issue.) PBF also hired a marketing staff to administer the selling of the blended products.
When contacted, a PBF spokesman would not provide no further details, such as a timeline for the project to begin.
Alon USA plans to begin blending biodiesel at its 70,000 b/d Big Spring, Texas, refinery in September, CEO Paul Eisman said during the Q2 conference call, after sharp increases in Q2 RINs costs cost the company $8 million for the quarter.
Big Spring has the capacity to make 23,000 b/d of ULSD at the plant, according to government data. (Biodiesel doesn’t have the same pipeline transport limitations that ethanol-blended gasoline does.)
It’s the East Coast where a lot of the difficulties are front and center. “Merchant refiners on the East Coast have the most risk for RINs costs. They are totally exposed,” said Auers.
East Coast refiner Philadelphia Energy Solutions is looking to hire its own products trading team for its 300,000 b/d refinery, but it is unclear whether that is related to plans for blending or concerns over its current crude supply/product offtake deal with JPMorgan Chase, which has said it wants to exit physical commodities.
A spokeswoman from PES was not immediately available to comment. Nor was a Monroe Energy spokesman from nearby the 185,000 b/d Trainer refinery. Trainer has very small blending capacity at its facility, the spokesman said last week.
Experts say these refiners should take a look at the actions taken by neighboring PBF, with two East Coast refineries and no retail outlet access to sell gasoline, when scouting out locations with access to pipelines and blending terminals.
This would give them an advantage over any other merchant refiners who lack the access to a rack distribution system. And long-term ethanol contracts gives them control over costs in selling their blended product, often at a discount to other wholesale suppliers or jobbers.
The mad rush to create a RINs strategy comes as the US approaches the so-called “blend wall” for renewables use. The blend wall has been created as renewables targets rise and gasoline demand has flattened out, with most cars only taking a 10% ethanol-gasoline blend called E10.
In finalizing its long-overdue 2013 Renewable Fuel Standard earlier this month, the Environmental Protection Agency forecast that the blend wall would be breached in 2014.
The agency added it would “use flexibilities in the RFS statute to reduce both the advanced biofuel and total renewable volumes” in its forthcoming 2014 RFS proposal. That set off speculation that further increases in RFS requirements would be moderated.
The 16.55 billion gallons of renewable fuels required for 2013 will represent 9.74% of the US transportation fuel supply, the agency said. The amount of renewable biofuels, mostly ethanol, rose to 13.8 billion gallons up from 13.2 billion gallons in 2012.
“The move toward more and ethanol blending into gasoline, now at virtually all terminals, means the day of reckoning is quickly coming when the industry can no longer force ever increasing amounts of ethanol into less and less gasoline demand” said Mark Routt, senior refinery analyst with KBC Advanced Technologies, said in an email response to questions.
“When that physical constraint is reached, the price of artificial ’compliance credits,’ or RINs, will soar and with them, the cost of making gasoline,” he added.