U.S. oil companies will likely pay close to $1 billion this year to put more ethanol and renewables in gasoline and diesel and face even higher compliance costs in 2016 after the U.S. government set targets for alternative fuel use above industry expectations.
Higher costs could be passed on to consumers, pushing fuel prices higher and prompting further calls from the oil industry for reductions in the quotas.
Companies such as Marathon Petroleum Co and Valero Energy Corp are scrambling to digest the requirements for biofuel use set by the Environmental Protection Agency and work out how much they may have to pay for paper credits to help them meet quotas.
The EPA’s targets can be met either by blending biofuels such as ethanol into gasoline or by buying credits – known as Renewable Identification Numbers (RINs) – from biofuel producers or blenders that are generated for every gallon of renewable produced.
RIN prices have soared since the EPA said on Monday fuel companies will have to use 18.1 billion gallons of renewables next year, up from a May proposal, though not as high as Congress mandated in a 2007 law.
Average RINs costs had already been higher this year than last amid regulatory delays and worries over supplies. That coincided with higher costs for refiners to comply with targets, according to industry sources and a Reuters analysis.
U.S. refiners spent $740 million on these paper credits in the first nine months of 2015, up $90 million from the prior-year period, according to a tally by Reuters of seven refiners that disclosed the costs in securities filings.
That puts them on track to shoulder their highest such costs since 2013 – a year marked by volatility in the opaque market for RINs, when worries of a supply crunch sent prices to $1.45 from just five cents at the end of 2012. A number of refiners and fuel companies including Tesoro Corp did not detail RIN costs in filings, suggesting the total cost is higher.
The EPA’s 2016 requirement would likely push the amount of ethanol in fuel over 10 percent – a “blend wall” that oil companies argue is a maximum before costly changes are needed to pumps and other infrastructure, as well as vehicles.
“There are serious problems with RFS (Renewable Fuel Standard) that drive higher fuel costs for consumers, which must be fixed by Congress,” said John Reese, downstream policy and advocacy manager for Shell, which is both a refiner and a renewables producer.
He added the requirements should be aligned with vehicle capabilities and infrastructure.
A Phillips 66 spokesman described RFS mandates as “unworkable,” saying they could be impossible to meet for some refiners and ultimately impact consumers.
A RISING TAB
Prices of renewable fuel RINs through Sept. 30 were about 20 percent higher during the first nine months of 2015 than in the prior-year period, according to Oil Price Information Service data.
This week they hit their highest since January, and some experts think they could remain elevated because of the EPA’s targets.
“Compliance costs will be higher because RINs will be higher-priced compared to this year,” said Citigroup research analyst Aakash Doshi, though he said carryover inventories of the credits for 1.5 billion to 2 billion gallons may temper rallies.
Further, higher costs come against a backdrop of soaring profits for refiners, and the EPA itself has said refiners recover their outlays.
Others expect higher costs will ultimately force companies to add infrastructure for blending of renewables and say RINs subsidize retail ethanol prices for consumers.
“High RIN prices are the solution to this blend wall,” said Iowa State University economist Bruce Babcock, who recently wrote a paper on the subject.
(Reporting by Chris Prentice; Editing by Jessica Resnick-Ault and Steve Orlofsky)