By Todd Neeley
DTN Staff Reporter
OMAHA (DTN) -- Quarterly financials from oil and gasoline companies paint a picture of how a 38-digit number can make a difference of millions of dollars flowing into the liquid fuel business.
The market for renewable identification numbers, or RIN, is a major revenue source that generates tens of millions of dollars for some gasoline and diesel refiners and importers. Other companies report losses.
The credits matter to agriculture because a functioning RIN market is critical to a renewable fuel standard that supports commodity and biofuels markets. The credit is a 38-digit code attached to every gallon of ethanol, biodiesel and other biofuels produced. Gasoline and diesel refiners and importers are required to either buy actual biofuels gallons or the credits attached.
As part of a clarion call from oil and gas interests to repeal the RFS, some companies claim the credit market is broken because compliance costs hurt their financial bottom lines.
In October 2016, Valero Energy Corp. reported $198 million in costs to meet the RFS by purchasing credits.
An August 2016 analysis by the Maguire Energy Institute in the Cox School of Business at Southern Methodist University provided examples of how oil and gas companies play the market. (http://bit.ly/…)
Since the renewable volume obligations apply to refiners and importers, the study said companies not bound by the RFS are able to "game" the system. Here's where the market distortions come into play, the study explained.
"For example, companies like Circle K, Sheetz and other large retailers have been increasing their market share by taking ownership of fuels at the blending point and acquiring RINs they can sell at a profit, thereby generating additional revenues that allow them to undercut their competitors' retail prices."
SMU said only large gasoline retailers have resources to participate in credit trading because it costs millions of dollars to blend fuels.
Murphy USA reported in its 2014 10-K report, filed with the U.S. Securities Exchange Commission, that credit sales had a "significant impact" on the company's operating income. Murphy reported year-end December 2014 credit sales hit $92.9 million compared to $91.4 million the previous year.
About 85% of Murphy's 2014 profits were generated through RIN sales.
Marathon Petroleum reported similar results in 2014. Marathon reported "other" income increased by $59 million compared to the previous fiscal year because of $74 million in credit sales.
A CVR Energy study this year, BP PLC, Royal Dutch Shell PLC and Chevron Corp. could generate more than $1 billion in credit revenue in 2016. Energy billionaire Carl Icahn, a vocal critic of the RFS, owns CVR Energy.
In August 2016 HollyFrontier Corp.'s President and Chief Executive Officer George Damiris said his company incurred $57 million in RFS compliance costs in the second quarter. HollyFrontier is a petroleum refiner and distributor.
MARKET CONCERNS
Scott Irwin, Laurence J. Norton chair of agricultural marketing for University of Illinois at Urbana-Champaign, said although the oil industry laments RIN prices as hurting the bottom line, the reality is those companies typically pass along the higher costs to consumers. Other studies support this notion, http://bit.ly/….
"There is a massive misunderstanding of RINs prices," Irwin told DTN in an interview.
"A huge issue is the pass-through issue. What is argued is the different parties in the fuel supply chain are big winners and losers on that 90 cents (price of credits this fall). Merchant refiners say they are short RINs, have to buy them and it is killing profits: It is complete bunk," Irwin said.
Gas stations are points of RFS obligation. Irwin said it is unlikely retailers absorb RFS compliance costs; instead, they pass it on to consumers. "We know that's how sales taxes work," he said. "It's not necessarily 100%, but it is close."
An Informa Economics study, however, found changing credit prices between 2013 and 2015 did not lead to higher gasoline prices. IE wrote in a May 2015 whitepaper for the Renewable Fuels Association that changes in credits prices from 2013 to 2015 "did not cause changes" in retail gasoline prices. The study found gasoline prices were driven mainly by movements in crude oil prices and gasoline demand. (See http://bit.ly/….)
In early 2013, there were indications ethanol usage could fall short of levels needed to meet the RFS. Prices of conventional ethanol credits hit levels Informa Economics said were "multiples of any that had been experienced previously." Prices hit $1.50 in July 2013 from the 2012 drought and ethanol plants idling in late 2012.
However, the credits prices dropped in late summer and early fall 2013.
EPA proposed volume cuts for most biofuels and the price of credits reached bottom in November 2013. Conventional ethanol credit prices rebounded to 50 cents by February 2014, and traded between 45 cents and 55 cents through November. Prices moved higher in late 2014. By mid-January through the end of the first quarter of 2015 ethanol credit prices hovered around 70 cents.
Irwin said one way to understand biofuels credits is to think of it as a gasoline tax. Gasoline taxes ultimately show up as higher pump prices.
"This is exactly what happens," he said.
"What they (oil and gas companies) will say is that on their income statements they have to book a large expense for RINs, but they have a bump in revenue because of increased blend stock prices that never shows up. It is wrong to say they are getting killed by RINs. On the other side, the so-called non-obligatory independents like Murphy's are not making a windfall. RIN revenue is offset by higher blend stock prices.
"The market is right. This is a market that works pretty well."
**
Editor's Note:
In the third and final story we'll examine a proposal to change the RFS point of obligation.
Todd Neeley can be reached at todd.neeley@dtn.com
Follow him on Twitter @toddneeleyDTN
(ES/AG)
© Copyright 2016 DTN/The Progressive Farmer. All rights reserved.