Money for Nothing - RIN Costs and Their Widely Varying Impact on Refiners and Refining

Over the past few weeks, publicly traded independent refining companies reported their latest quarterly results, and nearly all lamented on a common theme: the cost of Renewable Identification Numbers (RINs) is out of control. However, the financial burden is not felt equally across the industry, as companies with integrated marketing operations (refining, blending and retailing) don’t face the same RINs-cost albatross as merchant refiners who don’t have retail operations. Today we review the escalating RIN costs that obligated parties have endured this year and explain how the degree of financial pain depends on the level of refiners’ downstream integration.

RINs have become a leading topic of conversation—and angst—in the refinery sector, and we’ve been exploring the matter in the RBN blogosphere. In our initial blog a few years ago (A Market of Contradictions: Ethanol Mandates, Motor Gasoline and the Blend Wall), we described the evolution of ethanol mandates and the limits on how much ethanol can be blended into gasoline without affecting engine performance. We followed that up with The RIN and Stimpy Show and, more recently, with a two-part series: Magical Mystery Tour - Turmoil in U.S. Gasoline Markets and the Arcane World of RINs and Magical Mystery Tour - Is a Showdown on the RFS and RINs in the Offing?

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The main thing to know about RINs is that they are unique numbers assigned to batches of ethanol and other biofuels used to track compliance, and they are the “currency” of the federal government’s Renewable Fuel Standard (RFS) program. Congress created the RFS program in an effort to reduce greenhouse gas emissions and expand the nation’s renewable fuels sector, while reducing reliance on imported oil. The RFS was authorized under the Energy Policy Act of 2005 and expanded under the Energy Independence and Security Act of 2007 (commonly referred to as RFS2). In simple terms, a RIN is created when a gallon of biofuel is manufactured. Once that biofuel is blended with gasoline or diesel for sale in the U.S., the RIN becomes “detached” from the biofuel, and two things can happen: 1) it can be surrendered to the Environmental Protection Agency (EPA) by an obligated party (a refiner or importer) to demonstrate compliance with the RFS, or 2) if a non-obligated party (i.e., someone who didn’t manufacture or import the gasoline or diesel) generates the RIN, they can sell it to obligated parties who then surrender it to the EPA to meet their obligation. Therefore, refiners who produce more gasoline than they blend and sell domestically end up “short” RINs, and companies with large branded networks and smaller (or no) refining capacity that blend biofuels are “long” RINs.

In order to better understand how the cost of complying with the RFS is impacting the industry, Figure 1 shows the historical RFS compliance cost per gallon of gasoline or diesel produced. As seen from the chart, the RFS compliance cost has increased from 5.5 cents/gal on average in 2015 to 8.4 cents/gal year to date through October 2016, a gain of more than 50%. Note that most of the compliance cost is associated with corn ethanol, the most common of renewable fuels—represented by the blue bar segments in the graph—and the focus of today’s blog. It’s worth noting, though, that the cost of complying with some of the more arcane aspects of the RFS— “advanced biofuels” represented by the green, yellow and red bar segments—has been rising as the rules that mandate the use of these biofuels in gasoline and diesel ramp up.

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