Earlier this month, Philadelphia Energy Solutions (PES), the East Coast's largest refiner, which has been the center of recent tensions between oil and biofuels interests, filed for Chapter 11 bankruptcy. In a bout of wishful thinking, PES executives blamed the Renewable Fuel Standard (RFS) for their financial woes, claiming that their compliance costs associated with the RFS are to blame, despite the fact that all refineries – must comply with the law.
Indeed – it seems that PES executives smell the opportunity to take any shot at any policy that would likely reduce their market share by increasing the use of biofuels in the transportation fuel supply. As oil refiners look towards rising production of renewable fuels – they have two options – invest in renewable fuels infrastructure, or buy tradable compliance credits on the marketplace. PES chose the latter.
To quote Yogi Bera, it’s like déjà vu all over again. As longtime readers of SBFF will remember, PES’s troubled financial situation and Philadelphia area lawmakers looking for an easy scapegoat for the refiner’s woes is what sent the RFS, and consequently, the biofuels industry, into a tailspin in 2014.
But the refiner’s troubles go back to 2011, when the Carlyle Group bought two struggling Philadelphia refineries from Sunoco that produce 330,000 barrels of oil per day. Around the same time, Delta Air Lines purchased a struggling 185,000 barrel per day plant in suburban Philadelphia. Later, these refineries became PES.
Executives from both companies and Philadelphia area Representatives Robert Brady (D-PA) and Patrick Meehan (R-PA) worked with the White House to save the refineries and the hundreds of jobs they support. The White House helped accelerate environmental reviews for the refineries, secure $25 million in taxpayer-funded subsidies, and the EPA waived a prior Clean Air Act violation for the new owners. The deal secured 1,200 jobs in the Philadelphia area and headed off gas price spikes -- just before President Obama won Pennsylvania in his 2012 re-election campaign.
Fast-forward to late-January, when PES files for bankruptcy and blames the RFS for its financial situation. Over the past year, tensions between the two industries that President Trump has publicly supported have led to a number of public spats between biofuels supporters and oil backers.
Most recently, Senator Ted Cruz (R-TX) has blocked the nomination of Iowa Secretary of Agriculture, Bill Northey, to USDA Undersecretary for Farm Production and Conservation since September 2017. He has been using the block as leverage to force discussions about RFS reform, though that leverage point may be temporarily removed if Northey decides to step down from the nomination and instead run again for Iowa Secretary of Agriculture this November.
This has led staunch biofuels supporter Senator Chuck Grassley (R-IA) to release a memo that outlines why PES’s bankruptcy is likely due to a combination of poor financial decisions and cheap U.S. crude, and not the RFS. The Grassley memo points out a number of likely reasons PES filed for bankruptcy, including:
- Collapse in global oil prices in 2015 and 2016, which led to a drop in production from the Bakken region, which PES heavily relied upon for crude oil.
- Construction of a pipeline connecting the Bakken to the Gulf of Mexico, thus further directing Bakken crude away from PES.
- The lifting of the domestic crude oil export ban in 2015, which further directed Bakken crude to the Gulf.
- The construction of the Dakota Access pipeline, which further deprived PES of cheap crude.
Bottom line, as the refining industry responded to these seismic changes over the past few years: crude exports, new pipelines, cheap oil -- PES increasingly became a stranded asset, unable to pivot and respond to new economic realities in the oil sector.
As SBFF recently explained, RIN prices have little to do with refineries’ bottom lines, as refiners like PES are able to recoup RIN prices through the price they receive on the wholesale gasoline market. The Grassley memo points out a 2015 Harvard study that discussed the issue of RIN pass-through, which concluded, “this mechanism would not be apparent on the balance sheet of the obligated party because there is no explicit revenue line item offsetting the explicit cost of purchasing RINs.”
While there is some risk to the refiner due to market timing (a bad case of buying high and selling low), this is not likely what happened to PES, either. Instead, according to the Grassley memo, some suspect that PES may have been trying to short the RIN market and was betting that the Trump administration would impart some sort of regulatory relief for the sector, having shortly sold a majority of their RIN credits several months before they must be turned into EPA for the 2017 compliance period. The need to buy back millions of RINs certainly contributed to its bankruptcy, and they are now asking EPA to relieve them of their responsibility to do so.
If the Administration were to relieve PES of its RFS obligations, it would open the door to additional requests from refiners seeing a clever opportunity to book a few million in unexpected profit. Such a move would wreak havoc on the biofuels industry.
PES could have invested in biofuels blending infrastructure, which many merchant refiners are moving towards. While PES’ compliance costs have risen ten-fold in the past six years – to $832 million – the cost of installing the infrastructure needed to blend biofuels, and produce RINs, at PES is around $40 million.
The falling fortunes of one refinery cannot be reasonably pinned on the RFS, and the years-long issue of compliance costs with the RFS has been largely a distraction from the real issue -- the need to continue investing in biofuels infrastructure and increase blending levels. While the oil industry continues to dither about its contribution to climate change, biofuels remain and will continue to be an important wedge in reducing greenhouse gas emission from the transportation sector.
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