Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

EPA RFS Program Chenanigans

Summary

EPA administrator was busy doing much more important deals with old friends than renting apartments from lobbyist.

EPA announced last wednesday that it granted 25 "economic hardship" waivers to small refiners under RFS.

The EPA public announcement came only after many of the beneficiaries unloaded their obligated RINs onto the market plunging it 30% in less than 2 days.

It is important for readers to understand what RINs are in order to properly consider the subject.  RINs are Renewable Identification Numbers certificates that are issued on every gallons of renewable fuel produced.  These are generated by producers of biofuels who then in turn pass it on to their customers to be used as proof of blending.  The value of these RINs usually represent the additional costs of producing renewable fuel.  The reason why refiners need proof of blending is that they are subject to a mandate under the RFS (Renewable Fuel Standards).  Refiners are obligated to blend renewable fuels but many do not blend and therefore sometimes use 3rd party blenders to blend their products from whom they purchase RINs.  So there is an active paper market of RINs where refiners can buy or sell RINs just like futures. The program is generally not a burden to refiners who are vertically integrated like Andeavor - Andeavor .  Such vertically integrated refiners have direct access to RINs but for some of the small independent refiners who are not vertically integrated it can be expensive to buy RINs. 

For this purpose Congress issued a small refiners (less than 75,000 barrels per day) exemption to lighten any economic burden for the RINs despite the fact that the value of RINs is included in their crack margin.  Waivers or exemptions have been issued by EPA on a case by case basis based on economic hardship. These exemptions were never extended to large refiner groups especially ones that are vertically integrated.

It would appear that the EPA administrator has suddenly decided, after the PES Holdings LLC mess (https://seekingalpha.com/article/4150560-pes-bankruptcy), that he would try to use his waiver authority more broadly after it had been rejected late last year (http://biomassmagazine.com/articles/14929/2017-wrap-up-maintaining-the-status-quo)   

It is hard to imagine that with a screen 3:2:1 crack margin of $20/Barrel that any refiners in the United States would be under any economic hardship!  The PES Holdings case certainly was an exception but certainly not directly related to RINs. However, it would appear that the secretary believes that refiners are currently under economic hardship and he issued such exemptions to refiners simply on the basis of size of any individual refining facilities regardless of economic hardship issues.  This was not the spirit of the law or what congress intended.

What is most troubling in this particular case is how the secretary of the EPA would do such a deal behind closed doors these last few weeks, then advise the beneficiaries of the exemptions directly so they can unload their RINs and only make a public announcement much later this past Wednesday after the RINs market dropped 30% in 1 1/2 day.  It is akin to the secretary of the USDA leaking a scheduled commodity report to a select group of major companies like ADM and Bunge and then letting the public know only a few days later.  Such a case would immediately set off a CFTC investigation because of the impact on futures and private investors.  In this specific case the hardship fell directly upon all biofuels producers in rural America!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.