Senate Biodiesel Tax Credit Could Dramatically Change Outlook For The Industry

by: Robert Wagner

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I wrote an article earlier regarding the Senate's new Biodiesel Tax Bill. The article is very bullish on the likely impact on the biodiesel industry if it gets passed. I have no idea how big an "if" that is. I noted that the bill reinstated the $1/gallon tax credit, and that it also extended it for 3 years so it would no longer expire at the end of each year. Those are tremendously positive changes to the bill and it demonstrates that Washington is rapidly moving along the learning curve. Unfortunately the source I used was woefully incomplete, and I failed to include some critical information.

The bill is actually far more bullish than my original article would have one to believe. It is as if people in Washington have been reading articles on SA. The new bill not only reinstates the $1/gallon tax credit, it also changes who gets the tax credit. The tax credit no longer goes to the blender, it now goes to the producer. Additionally, smaller biodiesel plants get a $1.10/gallon tax credit, a 10% increase over their larger competition.

The bill would provide a $1 per-gallon tax credit for the production of biodiesel, renewable diesel and aviation jet fuel that complies with fuel standards and Clean Air Act requirements. It would also increase the tax credit from $1 to $1.10 for the first 15 million gallons of biodiesel produced by small producers with an annual production capacity of less than 60 million gallons.

Previously the $1/gallon tax credit would go to the blender, and part of it would be "shared" with the producer. The producer ended up collecting around $0.50 if they were lucky, and during years where the tax was reinstated retroactively they may have gotten $0.00 if they didn't properly negotiate for it. It will be interesting to see how the economics work out with the reversal. The blenders may end up paying $0.50 less for their biodiesel, which would basically be the same as the previous situation, or biodiesel producers may simply be able to keep the full $1/gallon tax credit. I would imagine the greater the pricing power the producers have the greater the percent of the $1/gallon tax credit they will be able to keep. Because the D4 Biodiesel RINs have a specified RVO, the EPA's decision on leaving it at 1.28 billion gallons or increasing it to 1.7 or more billion gallons for 2014 will have a large impact on the pricing power the producers will have. The greater the excess capacity that exists in the industry, the less pricing power the producers will have.

The proposed legislation would also aim to eliminate potential abuses and simplify how the tax is administered by restricting the credit to fuel producers and excluding fuel blenders from eligibility. By focusing on production, the bill would eliminate any remaining opportunity for abuse known as "splash and dash" in which oil companies add a few drops of biodiesel to petroleum diesel to qualify for the tax credit.

In the comment section of a previous article I mentioned how counterproductive it was to allow foreign companies to participate in the RFS2. I even contacted some people that I thought would pass my concerns on to Washington.

I'm going to fire off a letter to my congressman pointing out how counterproductive that system is? Why is the US allowing companies to participate in the RFS2 if they are using those resources to undermine US companies? The whole purpose of the RFS2 is to create a DOMESTIC industry and Neste works to undermine that objective while gaining revenues from the RFS2? That should trigger a congressional investigation, especially if SYNM wins the lawsuit.

Well, my efforts may or may not have helped, but sure enough, the concern I expressed in my articles is addressed in the bill.

The change also ensures the credit benefits domestic producers. The old law allowed blenders to receive the credit for blends that included foreign-imported biodiesel.

The bill also addresses another "beef" of mine, it simplifies and clarifies the process. Syntroleum (NASDAQ:SYNM) is a renewable diesel company that produces renewable diesel, naphtha and LPG. It gets RINs for their renewable diesel and naphtha, but not for its LPG even though it comes from the same feedstocks and process. That however isn't the worst of it. SYNM gets D4 RINs for its renewable diesel when it uses corn oil as a feedstock, but not for the naphtha. I literally have to have a separate calculation for my "blended rate" when SYNM uses corn oil. The regulations simply made no sense what so ever. If the person writing the law forgot to include corn oil as an appropriate feedstock for naphtha, you didn't get a RIN if you used corn oil, even though you get one for the renewable diesel made out of corn oil. A simple oversight like that could cost companies millions.

That is how the EPA does things. Fortunately the Senate looks to address some of the unnecessary complexity the EPA introduces into the system. I'm not sure if the Senate Bill will allow companies like SYNM to collect the tax credit for their naphtha made of corn oil, but this quote implies they are moving in the right direction. Ideally, they should include natural gas as an allowable feedstock and stimulate a gas-to-liquids or GTL industry. Allowing coal would protect and create jobs as well. This would help counter the job killing regulations being imposed by the EPA that are harming the gas and coal industry.

In addition, the bill would simplify the definition of "biodiesel" to encourage production from any biomass-based feedstock or recycled oils and fats.

Most important of all however is that this bill is designed to bring certainty and stability to the industry. All I can say about that is "it's about time!"

The bill would also extend the tax credit for three years to give added financial predictability so more biodiesel facilities could be brought online in the United States.

Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.

Disclosure: I am long SYNM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own calls on REGI.

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