House bill echoes refiners' ethanol concerns

OREANDA-NEWS. May 12, 2016. Lawmakers in the US House of Representatives today filed a bill echoing changes to federal biofuel mandates sought by refiners amid dismal conditions for ethanol blending.

Lead sponsor Bill Flores (R-Texas) filed legislation that would cap federal biofuel blending mandates at 9.7pc of gasoline demand. The bill also proposes automating federal blending levels when the US Environmental Protection Agency misses certain statutory deadlines.

"The ethanol mandate is operating outside the confines of reality," said co-sponsor US representative Bob Goodlatte (R—Virginia).

The premise rang familiar to both sides of the fight over the Renewable Fuel Standard (RFS), a program set in 2007 that requires rising volumes of biofuels and renewable fuels to enter the US transportation supply each year. Refiners, importers and other companies adding to the US fuel supply must ensure the pool reaches the levels each year by submitting blended fuel markers called renewable identification numbers (RINs).

The Renewable Fuels Association, a major trade association for ethanol producers, swiftly criticized the legislation.

"The RFS was made necessary by oil company intransigence," chief executive Bob Dinneen said. "This bill would gut the RFS and send America's energy and climate change policy back decades."

US mandates do not require specific volumes of ethanol blending. But the blendstock's necessity as a gasoline oxygenate makes ethanol an implicit component of the annual federal mandates.

Refiners earlier this year sued over EPA's decision to set total 2016 blending volumes slightly above 10pc of the expected petroleum demand, among other objections to the mandates. Most vehicles and gasoline-powered equipment operating today can accept blends of roughly 10pc ethanol. But higher percentages require newer or specialized equipment or risk voiding warranties. Critics call the tension between rising federal requirements and this practical 10pc barrier the "blend wall."

Ethanol supporters insist that cutting blending to match or fall below 10pc ignores the intent of a program that set out to reduce US dependence on oil imports. The EPA notes obligated companies can use any combination of fuels, not specifically ethanol, to meet their requirements.

"Ultimately the market will determine the extent to which compliance with the annual standards is achieved through the use of greater volumes of ethanol or other, non-ethanol renewable fuels," the EPA wrote in its rule making last year.

Early gasoline demand suggests the US could set a new record for consumption of the fuel with its highest volumes since 2007 — the year the current form of the RFS program began. Higher gasoline consumption should make it easier to hit the outright volumes for 2016. But market conditions continue to stymie use of the fuel.

Blending economics have so far this year fallen to unusually poor levels. Low crude prices pulled gasoline prices down with them, leaving ethanol at a rare, lengthy premium through most of the first quarter. Chicago-area ethanol averaged a 36.94?/USG premium to gasoline during the first quarter, compared to a 6.3?/USG discount during the same quarter last year. Spreads were similarly exaggerated in all regions.

Concerns about an inability to meet the 2016 blending requirements, meanwhile, lifted RIN prices. The cost to acquire the markers shot higher following the EPA's 30 November publishing of the rule, from 51?/RIN to average 70.6?/RIN in the first quarter. The higher costs were a drag for refiners who reported uniformly lower profits for the quarter.

"The higher-cost RINs certainly had an impact on our capture rates," Valero senior vice president of supply Gary Simmons said last week on a conference call to discuss earnings.