CSP Magazine

RIN, Lose or Draw?

Every regulation has its winners and losers. When it comes to the Renewable Fuel Standard (RFS), the federal program that mandates an ever-increasing amount of biofuels to be blended into the fuel pool, whoever holds the RINs right now is winning.

The prices of renewable identification numbers (RINs), credits that obligated parties such as refiners use to demonstrate their compliance with RFS blending quotas, have escalated to their highest point in nearly three years. The most widely traded RIN—D6 ethanol—even flirted with the pivotal $1 mark this past summer.

A combination of factors has triggered the RIN price increase, led by the Environmental Protection Agency’s (EPA) decision to increase renewable volume obligations (RVO) for 2016 and 2017. Meanwhile, the amount of ethanol blended in the U.S. motor-fuel pool has already exceeded 10%, hitting the “blend wall,” or the point at which current biofuel demand is unable to absorb additional supply. And some charge that the RIN market is being manipulated by speculators.

But whether increasing RIN prices are good or bad news depends, of course, on whether one is a buyer or seller.

“Retailers who are doing their own blending love it,” says Bill Compitello, president of WCC Consulting Services LLC in Orlando, Fla., and former senior director of fuel for Wawa. Think large unbranded chains such as Wawa, Murphy USA and Casey’s General Stores, which buy in bulk and blend at the truck rack. As non-obligated parties under the RFS, they earn a RIN with each gallon of petroleum fuel and biofuel blended, which they can turn around and sell to obligated parties.

“Merchant refiners doing no blending simply hate it,” Compitello says, referring to refiners with insufficient blending capabilities for meeting their RFS obligations. In 2016, they will pay an estimated $1.8 billion for RINs, according to a Bloomberg report. “To them, it’s just a big lead weight at the end of the economic chain.”

Jack Lipinski, CEO of CVR Refining, Sugar Land, Texas, referred to RINs during a recent earnings call as “an egregious tax,” and the company’s single largest operating expense. This comes at a time when refining margins have already dropped to their lowest point since 2010 thanks to a gasoline supply glut. CVR has joined other independent refiners such as Valero and HollyFrontier in asking the EPA to move the point of obligation downstream, to the “rack sellers”: large retailers earning millions from RIN sales.

And the refiners have a new ally: a coalition of small fuel retailers who say those large chains have an unfair profit advantage thanks to RINs. Meanwhile, fuel industry advocates counter that moving the point of obligation would completely undermine the RFS.

The debate has pitted refiners, retailers and petroleum industry advocates against each other, with a flurry of letters to the EPA and the future of one of the fueling industry’s biggest regulatory forces in question.

Point of Obligation

In June, the United States’ largest-capacity refiner submitted a petition for rulemaking asking the EPA to move the point of obligation downstream to rack sellers.

In its petition, Valero Energy Corp. argued that with the current obligation point at the refinery level, fuel blenders are not incentivized to fully pass RIN savings down to the end user, nor to increase their biofuel blending capability.

“By moving the obligation from the point of refining to the place where blending actually

occurs and where renewable fuel is purchased and delivered, EPA would incentivize rack sellers to maximize blending and marketing of renewable fuel,” the petition argues. “The parties with the greatest market power would then be fully compelled by the obligation to promote increased use of renewable fuel.”

Carl Icahn, the billionaire owner of CVR Refining, sent his own letter to the EPA in August charging that the RIN market is “rigged” by speculation and would cause independent-refiner bankruptcies, triggering a domino effect in which big oil would snap up the refineries, creating an oligopoly and ending in “skyrocketing” gas prices for the consumer.

“Moving the point of obligation would only add complexity to an already complex program.”

The American Fuel & Petrochemical Manufacturers (AFPM), an association that represents refiners, filed its own petition asking the EPA to move the point of obligation downstream. In a statement, president Chet Thompson said AFPM would prefer a full repeal of the RFS. In the meantime, to ensure the program is working as efficiently as possible, the point of obligation should be moved, he argued. The RIN system was designed as a compliance mechanism, Thompson said, and was not intended to “compel refining companies to subsidize gasoline marketers and retailers for midlevel ethanol blends or E85 sales.”

And merchant refiners are feeling the pinch as biofuel demand lags the mandate.

“With any regulation, there are beneficiaries and victims,” says Compitello. “The merchant refiners, in my opinion, have become victims because of the way overall U.S. demand has developed. It’s unfortunate but it’s just the way the regulation works.”

Continued: Adding It All Up

Adding It All Up

Proponents of moving the point of obligation cite the amount of money large unbranded fuel retailers generate from selling the RINs, a figure that can swell with the state of RIN prices.

For example, a Bloomberg analysis of Murphy USA’s regulatory filings found that the retailer earned more than $117 million in 2015 from selling RINs, or 67% of its net income. Casey’s General Stores earned $31 million, or 14% of its profit, from selling RINs in its fiscal year ending April 30.

“For a large retailer, or someone who does a lot of their own blending at the rack, it’s just a windfall,” says Compitello. “The amount of RINs they are generating each and every year contributes substantially to the fuel bottom line of each of those companies.”

For smaller, branded competitors, this can feel like a bulletproof advantage.

Bill Douglass, founder and chairman of Douglass Distributing, Sherman, Texas, has been in the brand business for 35 years, as a foodservice brand such as Burger King or Subway, or a fuel brand such as Exxon, Shell or Mobil. But recent heavy competition from Douglass’ RIN-flush competition has him second-guessing this stance.

Douglass’ company recently was paying $1.80 per gallon for regular gasoline, then selling it for $1.79 to match Murphy USA’s aggressive street price, made possible partly by a cushion from selling RINs. And at times, he has been pressured to go even lower.

“You just sell at a loss,” he says. “The cost isn’t an issue if you’re getting a 10-cent ethanol RIN and a 15-cent biofuel RIN. That’s all the margin you need. So they can just sit there and beat you to death.”

Douglass has complained to his branded fuel suppliers. At least one insisted it was passing on the benefits of the RINs it had earned, although Douglass claims not to see the cost savings. So in July, he established the Small Retailers Coalition in an attempt to get the attention of the EPA.

“The big driver is, frankly, survival,” says Douglass on his decision to create the group and write a letter to Janet McCabe, acting assistant director for the EPA’s Office of Air and Radiation. In the letter, Douglass asks the EPA to shift the point of obligation to the rack.

“The current system needlessly tilts the playing field toward large retailers,” the letter states. “RFS-generated market distortions amount to a huge subsidy for some and a lost business opportunity for others.”

“You’re talking about some people having a normal margin, and some people having no margin,” Douglass says. “The no-margin people have to move, to sell, roll up, or they’ve got to move the point of purchase if the government doesn’t level regulations and treat everyone the same.

“I’m trying to get it done without moving, but none of us can stay here.”

Bigger Voices

While Douglass is a former chairman of NACS, the association does not support moving the point of obligation. “Where it’s at with the manufacturer and importer of fuel is the appropriate place,” says Paige Anderson, director of government relations for NACS, Alexandria, Va.

The Small Retailers Coalition does not represent the viewpoint of all small retailers, including many NACS members, says Anderson: “The only small retailers we have heard on this [issue] tend to be branded with companies that want to change the point of obligation. We feel moving the point of obligation would actually harm retailers and could lead to problems with fuel supply, therefore leading to higher costs to the consumer.”

Tim Columbus, partner with Steptoe & Johnson LLP, Washington, D.C., the legal counsel for NACS and SIGMA, penned his own letter on behalf of the groups to EPA director Gina McCarthy arguing to keep the point of obligation where it is.

“SIGMA’s and NACS’ members are able to use RIN value to sell products blended with renewables at a price that is competitive with unblended products,” Columbus wrote. “Because consumers are hyper-price-conscious, they do not normally want to purchase

a renewable fuel blend that costs more than an unblended alternative. Thus, if fuel retailers were unable to price blended product competitively, U.S. consumption of renewable product would decrease, ultimately frustrating the goals of the RFS.”

Large unbranded retailers that benefit from high RIN prices have made an investment to be in that business, he says. They became position holders long before the RFS was established because it gave them access to lower, bulk prices, which in turn enabled them to be more competitive in street pricing, passing their savings on to the consumer.

Merchant refiners such as Valero could choose to sell more fuel at the rack, “but that would involve moving product, taking risk in the line, transportation and throughput costs and, by the way, being a competitive force at the wholesale rack,” Columbus says.

He says some refiners complaining about RIN costs actually increased their exposure when they spun off their retail businesses, where they could do additional blending—namely, Valero, which spun off CST Brands; and Delek, which sold Mapco Express.

SIGMA and NACS are far from alone in their preference to keep the point of obligation as is. Other industry groups include the Petroleum Marketers Association of America, NATSO, the Renewable Fuels Association and the Advanced Biofuels Association, and even one of the most vocal RFS critics, the American Petroleum Institute.

Lacking Leverage

While believing that the RIN market could use some “balance,” Compitello also does not agree with moving the point of obligation.

“If they want to move the obligated parties further downstream to retailers … the value of the RINs would go to nothing,” he says. “Part of the RIN system was to incentivize folks to blend biofuels into fossil fuels. If they moved it ... further downstream in the process, clearly the value of RINs would decline. The RIN market itself would basically be a net neutral market after a while.”

In the meantime, midsize retailers—those with, say, 80 to 90 sites, with substantial volume but not in the bulk business themselves—could have enough leverage to negotiate with their supplier on sharing RINs.

“You’re buying for your store at a truck rack. The supplier is capturing all of the RINs. Some deals that have been negotiated [are] where they share RINs 50/50 or at least get some percentage of RINs,” Compitello says.

Small mom-and-pops, however, will likely not have the same leverage, says Compitello: “If I’m a major supplier and have a company that buys five truckloads a week, it’s not worth the aggravation of going through the paperwork.”

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