The battle between U.S. farm interests and oil-refining advocates such as Carl Icahn is heating up again as the two sides fight over whether the ethanol mandate is to blame for the bankruptcy of the U.S. East Coast's largest refinery.
Philadelphia Energy Solutions LLC blamed its woes on the cost of complying with the Renewable Fuel Standard when it filed for bankruptcy last month. The refiner said the biofuel mandate cost it more than $800 million since 2012, and now the industry is seizing on that as fresh evidence that changes to the regulation are urgently needed.
The bankruptcy is a proxy for a much deeper conflict over the future of the Renewable Fuel Standard, with both sides trying to persuade Washington policymakers -- and President Donald Trump -- to see the program their way.
The debate spilled onto the Senate floor last week as Sen. Charles Grassley, R-Iowa, a top ethanol industry advocate, challenged Texas Republican Sen. Ted Cruz's decision to stall a U.S. Agriculture Department nomination over the issue. In a Feb. 1 interview with Fox News, Environmental Protection Agency Administrator Scott Pruitt rattled the biofuel industry when he pointed at Philadelphia Energy and said that there was a need for "reform." The issue also could dog Trump during a Feb. 21 campaign rally in Philadelphia.
"The conversation on the [Renewable Fuel Standard] struck a new tone early this year following Philadelphia Energy Solutions' bankruptcy announcement at the end of January," Katie Bays, senior energy analyst at Height Securities in Washington, wrote in a report Friday. "We expect the [standard] will undergo significant changes this year through legislation, regulatory measures, or both."
The law forces refiners to use biofuel -- and prove they have satisfied annual quotas with tradeable credits known as Renewable Identification Numbers. But refiners are affected unevenly by the mandate. Independent refiners that lack infrastructure to blend biofuel, such as Philadelphia Energy Solutions, must buy those Renewable Identification Numbers instead. Icahn, Trump's former regulatory adviser who holds a stake in refinery CVR Energy Inc., pushed for changes to the fuel standard program that the billionaire called "rigged."
The ethanol industry says the program is working as intended by forcing refiners to invest in infrastructure to comply with the law -- a regulation that benefits the sector by making biofuels more widely available.
Both sides have circulated memos -- including one written by Grassley's energy policy staff -- and analysis to buttress their arguments. While oil interests largely blame the Renewable Fuel Standard, biofuel proponents say Philadelphia Energy Solutions is harmed more by losing affordable access to cheap domestic crude from North Dakota than it is by the biofuel mandate that applies to refineries nationwide.
Philadelphia Energy Solutions chief executive Gregory Gatta joined the fray on Monday, issuing a joint statement with the head of the United Steelworkers International arguing that there is room for both biofuel producers and oil refiners "to thrive." Gatta and Steelworkers head Leo Gerard said they would keep advocating "for reform of the flawed [Renewable Identification Numbers] compliance mechanism that threatens thousands of well-paying jobs and the independent refineries that provide critical energy supply to the United States."
Philadelphia Energy is bidding to shed some $300 million in compliance obligations tied to the Renewable Fuel Standard. The EPA already said it would give the refiner an extra 31 days to satisfy its Renewable Identification Numbers obligation for 2017. But the company has asked the agency to go further and forgive its burden entirely.
If the refinery is successful in shedding its obligation under the standard -- a move that could lower Renewable Identification Numbers prices -- it would effectively be shorting the market for those compliance credits, Grassley's energy policy staff said in a memo circulated Feb. 6.
"[Philadelphia Energy] could buy [renewable credits] back at a cheaper price before the compliance deadline and may profit from this short strategy," the memo said.
Pruitt already ruled out a number of changes to the Renewable Fuel Standard last year, under pressure from farm-state senators who stalled an EPA official's confirmation over the issue. But he may have more latitude to make changes in response to formal waiver requests filed by four states and a narrower request from the leading refiner trade group.
The EPA is also considering exemption requests from small refiners, which could help them compete against larger facilities while paring overall program costs, potentially dampening the drumbeat for broader changes.
"A lot of people are interested in exploring what is possible under waiver authority," said Neelesh Nerurkar, an analyst at ClearView Energy. Pruitt "may see the small refiners' hardship exemption as the only lever he has left," he said.
Business on 02/14/2018