Biofuel credit market frustrates refiners

WASHINGTON — Earlier this year, Jack Lipinski, chief executive of the Sugar Land refiner CVR Energy, flew to Washington to plead his case to the U.S. Environmental Protection Agency. His problem: The prices of credits required to meet EPA ethanol and biofuel mandates were spiking and likely to cost his company an extra $100 million this year — double what CVR spent in 2015.

CVR, which owns refineries in Kansas and Oklahoma, is among the many U.S. refiners struggling with the soaring costs of the biofuel credits and training their fire on the shadowy market where credits are traded.

Unlike other commodities and securities, the credits are not sold on public exchanges, such as the New York Mercantile Exchange or New York Stock Exchange, but rather in private transactions that are

vulnerable to manipulation by Wall Street banks and other speculators, refiners say.

“The market is opaque,” Lipinski said in an interview. “If the EPA would allow everyone to see how much everyone owned, it would be like cockroaches when the lights turn on.”

Price squeeze

Nine years after Congress passed a law to decrease the country’s dependence on foreign oil in favor of home-grown ethanol and other biofuels, the government-run marketplace around which the industry runs is again dividing energy companies. Under the law, called the Renewable Fuel Standard, the EPA each year sets how much biofuel will be blended into the fuel stream, either at refineries or fuel depots, before being delivered to filling stations.

Refiners like CVR must buy credits — known as Renewable Identification Numbers or RINs — if they don’t blend all the requisite biofuels with gasoline themselves.

When calculated across a refinery’s entire output, the costs of the credit can mean the difference between a great financial year and a terrible one. Allegations of banks and traders gaining undue influence over the market for biofuel credits stretch back years, as RIN prices for ethanol have risen and fallen from a few cents to more than $1.40 in 2013 and back to 70 cents at the beginning of this year.

Since then, RIN prices have jumped close to 40 percent to around $1, squeezing refiners at the same time profit margins on gasoline production have fallen sharply under the weight of a petroleum glut. The stock prices of refining companies CVR, San Antonio-based Valero, and Dallas-based HollyFrontier, are down 64 percent, 24 percent and 35 percent respectively since the end of 2015.

Their attorneys argue that unlike larger competitors like Exxon Mobil and BP, which blend enough ethanol to make money off the biofuel mandate, companies like CVR and Valero sell much of their gasoline unblended — forcing them to buy RINs at whatever price they can get them.

‘Buy and hoard’

What had been a nuisance was quickly turning into an anchor on refiners’ earnings. In February, Valero, which is forecasting it could spend up to $850 million this year on RINs, sued the U.S. Environmental Protection Agency to force an overhaul of the market.

That case is pending in the D.C. Circuit Court of Appeals. But a month after Valero filed suit, the EPA, which oversees the RIN market, signed a deal with the U.S. Commodity Future Trading Commission, which regulates markets for oil, gasoline, and other commodities, for guidance on “conducting possible investigation into potential fraud, market abuse, or other violations.”

“It’s one of the largest commodity markets in the world, billions and billions of dollars and open to speculators,” said Richard Alonso, a lawyer representing refineries with the law firm Bracewell. “The structure of the RFS program allows people to buy and hoard RINs to increase price and then sell them to refiners, who have to purchase them.”

Both the EPA and the CFTC declined to make officials available for interviews. But an EPA spokeswoman said in a statement the agency, “continues to monitor all facets of the implementation of (the Renewable Fuel Standard) program, including the RIN market.”

The battle over the biofuel credits and how they are traded pits refiners against not only Wall Street, but also U.S. ethanol producers. Ethanol is a $20 billion-a-year industry supporting a vast network of corn farmers, ethanol plants and trucking companies across the Midwest. Any change to the RIN market might theoretically have some ripple effect that could mean job losses in rural areas.

As president of the Renewable Fuels Association, which represents ethanol producers, Bob Dinneen argues that by and large the renewable fuel program works as it should, offering economic incentive for refineries to blend biofuels into the gasoline stream and penalizing those that do not.

“Changing this program now,” he said, “would complicate the enforcement and it would be rewarding the folks who haven’t done what the law said they should do.”

But even Dinneen is concerned about the constant swings in RIN prices, and earlier this week wrote a letter to the EPA requesting an investigation.

In a June report, the investment bank Goldman Sachs predicted a looming shortage in RINs because increases in the concentration of ethanol mandated by the EPA would lead more refiners to buy the credits.

That set off a spike in prices, according to Dineen. He said he believed Goldman Sachs trades RINs and questioned whether it was appropriate for them to simultaneously put out forecasts that influence the market.

“Does that look cool? I don’t know. It raises questions,” he said. Goldman Sachs declined to comment.

Worries of bankruptcy

Refineries are now hoping that Congress can help. Republicans from oil-rich states like Texas have long argued biofuel mandates raise gasoline prices for Americans. Earlier this year Rep. Bill Flores, RWaco, introduced a bill that would cap ethanol production at less than 10 percent of the total fuel supply. With U.S. gasoline consumption stagnant, that would essentially hold ethanol production at current levels.

More than 100 representatives have signed on so far — mostly, but not exclusively Republicans.

At CVR’s headquarters, Lipinski worries that if RIN prices continue to rise it could eventually force independent refining companies into bankruptcy. It’s not the first time that Lipinksi, named CEO a decade ago, has made such a claim. But, he admits, the consequences were not as great when gas prices were higher and oil prices were falling.

“It would have been hard last year to get anyone to pay attention,” he said, “because we were making so much money.”