IRFA: ‘Merchant refiners not paying for RINs’
Earlier this week, the U.S. EPA’s comment period on its proposed denial to change the Renewable Fuel Standard’s point of obligation ended. Among the many arguments for and against changing the type of companies that should be obligated to produce or purchase renewable identification numbers (RINs) was an informative seven-page document from the Iowa Renewable Fuels Association. The IRFA’s comments include strong counterpoints to the claims of petitioners—mostly merchant refiners—that the burden of having to buy RINs is causing them excessive financial harm. The following is an excerpt from the IRFA’s comments, principally authored by the association’s Executive Director Monte Shaw.
Merchant refiners not paying for RINs
The main argument of the petitioners is that they are paying for millions of dollars of RINs to meet their RFS obligations, and that this is somehow unfair and inequitable. Yet, a review of public data will demonstrate that the fundamental underpinning of their entire argument is simply not true.
The petitioners appear to be participating in a bit of RIN magic, attempting to focus the audience’s attention on one hand (the payments for RINs) while seeking to distract them from looking at what’s going on with the other hand (namely the corresponding increase in crack spreads). Any Accounting 101 student is taught to look at both sides of the balance sheet.
When you plot the refiner crack spread against RIN prices, you see that they move in tandem—there is a correlation. So while the petitioners may be accurate in saying they pay for RINs, it is also accurate to note that the RIN value is reflected in the crack spread that sets the price for which they sell their unblended gasoline. When both sides of the balance sheet are taken into account, the merchant refiner is essentially held harmless.
This correlation has been noted by many credible sources. Robert Campbell, with Energy Aspects Ltd., told Bloomberg News that “The crack should adjust to reflect the RIN price.” And in fact, as RIN prices have declined from over $1 in November to around 45 cents today, the profitability of the merchant refiners has not improved—because the crack spread has reduced proportional to the reduction in RIN prices. If the petitioners’ arguments were accurate, the recent dramatic decrease in RIN prices should have proved a boon to their bottom lines, but that was not the case.
As one of the largest independent U.S. refiners, Tesoro had recently noted, RIN costs are passed through at the bulk finished product sales points and, therefore, provide refiners with coverage of their corresponding RIN exposure. Tesoro noted that shifting POO “will not materially impact the finances of petitioners as they believe” and will result in “no net improvement to the financial position of those petitioners who are blaming the RFS for their poor profitability.”
Echoing this point, legal counsel for SIGMA and NACS noted during the 2017 National Ethanol Conference that nearly all refiners use the “linear program” to determine blendstock prices, and that among the approximately 10,000 variables in the calculation are anticipated RIN costs. Therefore, RIN costs are embedded in the wholesale straight gasoline blendstock price.
The unfortunate, but accurate, conclusion is that many of the petitioners who claim that RIN costs are driving them toward bankruptcy are simply looking for a scapegoat. These refiners, with or without the RFS, would be facing severe economic times due to a number of considerations, including pre-existing competitive issues, global crude inventories, and weak refinery margins.
Andrew Clyde, chief executive officer of Murphy USA Inc., noted: “We’ve just got sort of this classic issue of maybe buyer’s remorse on one end and low refining margins. It would be nice to point the finger at the RIN,” but even absent those costs, refiners that are complaining would still be generating poor returns.
Given the fundamental claim of the petitioners does not hold up to cursory scrutiny, the discussion on the “need” to change the point of obligation should end here.