Smaller US refiners unable to blend their own gasoline are facing higher RIN costs which are eating into refinery operating costs, as the renewable fuels volumes breech the E10 blendwall.
The US Environmental Protection Agency (EPA) in November mandated the amount of renewable fuels to be used in 2016 to 18.11 billion gallons, which is 10.10% of the year’s expected transportation fuels production.
“Since the new volumetric announcement on November 30 last year RINs prices have almost doubled,” said CVR CEO Jack Lipinski on the first quarter earnings call April 28.
As the majority of gasoline sold in the US is 10% ethanol, it leaves smaller refiners or those without blending capability on the hook to buy RINs, or Renewable Identification Numbers, which are credits which will allow them to make up the difference.
CVR has two refineries, a 115,000 b/d refinery in Coffeyville, Kansas, and a 70,000 b/d plant in Wynnewood, Oklahoma. During the first quarter, the two plants produced 105,878 b/d of gasoline.
Ethanol RINs for 2016, which traded at 54.5 cents/gal on November 30, jumped to 85 cents/gal on December 1, Platts assessments showed. Last week, they were trading in the range of 74.75 cents/gal.
CVR’s first quarter ethanol RIN cost was $43.1 million as compared to $36.6 million in the first quarter of 2015.
So far second quarter ethanol RINs have averaged 73.38 cents/gal, compared with the 61.52 cents/ gal average last year when refiners were mandated to use only 16.93 billion gallons of renewable fuels.
“The RINs market is very opaque, it creates winners and losers and it’s doubtful that it incentivizes additional blending as the EPA has said on many of occasions,” he added.
Refiners are given on a yearly basis individual volumes of renewable fuels they have to blend into the gasoline and diesel they produce, as mandated by the Energy Policy Act of 2005.
RINS A CONCERN FOR 2016
Inland refiner HollyFrontier had $46 million of RINs expense in the first quarter of 2016, and is likely to go into the $50 million/quarter range as their carryover from last year dries up.
HollyFrontier reported first quarter income of $21.3 million, considerably below the $226.9 million earned in the first quarter of 2015, with lower refining margins and costs associated with blending ethanol and purchasing RINs to comply with the RFS mandate as major reasons for the drop.
“RINs are a concern,” said HollyFrontier CEO George Damiris on the first quarter call May 4.
HollyFrontier has five refineries located in the Midcontinent and Rockies regions. These include a 115,000 b/d El Dorado, Kansas, refinery; a 155,300 b/d Tulsa, Oklahoma, refinery; a 102,000 b/d Artesia, New Mexico, refinery; a 47,000 b/d Cheyenne, Wyoming refinery; and a 25,500 b/d Wood River, Utah, refinery.
“During the quarter, costs associated with blending ethanol and purchasing RINs to comply with the RFS mandate had a significant impact as a proportion of earnings,” Damiris said.
“The EPA’s intending to hit if not exceed the blend wall. But also their desire is to dry up the pool of RINs that are available for refiners to carry over from year to year,” he added.
This will force refiners like HollyFrontier to pay more for RINs going forward the the pool of available RINs will shrink or blend more ethanol. Refiners are able to carry over a percentage of RINs from a previous year to apply to the current year’s liability.
“Ethanol this quarter was a big deal, as you can imagine with the lower crude price in the quarter” he said.
During the first quarter, ethanol in the mid-continent was priced at 30 cent/gal premium gasoline, which resulted in a $36 million negative impact on HollyFrontier’s first quarter earnings.
Rising demand from increased driving is narrowing the spread between ethanol and gasoline.
In Chicago, pipe ethanol was priced at $1.53/gal on Wednesday, while unleaded 87 was $1.52/gal, Platts assessment data showed.
Ethanol blending was lower last week, Energy Information Administration data showed.
EIA data shows that conventional gasoline blended with fuel ethanol fell across the nation by 47,000 b/d to 5.753 million b/d for the week ended May 6, while reformulated gasoline blended with ethanol fell 120,000 b/d to 3.187 million b/d.