The White House has notified the biofuels trade association that it plans to issue an executive order this week that directs EPA to change the point of compliance under the Renewable Fuel Standard (RFS) from refiners to blenders and retailers.
The executive order could come as soon as today along with another expected executive order related to EPA water regulation or in conjunction with the President’s speech to Congress tonight.
In a note to Hedgeye clients in early December, we forecasted that the Trump Administration would make this change in its first few weeks in office and after EPA Administrator Scott Pruitt was confirmed. Pruitt was confirmed by the Senate on February 17.
Independent refiners are under great hardship due to high RINS prices and the RFS structure. The cost of compliance is hundreds of millions of dollars and for some companies exceed entire labor costs. Layoffs and refiner closings are real possibilities without this regulatory relief.
EPA will still likely be required to issue of notice of proposed rulemaking along with a public comment period before finalizing the rule changing the obligated party. This timeline could take anywhere from six months to a year but the executive order leaves no doubt regarding the outcome. Further, the issuance of the notice of proposed rulemaking will have an immediate impact for investors of public refiners.
The change is opposed by the American Petroleum Institute and ethanol producers. It is a tricky issue for Trump because he won farm states like Iowa and North Dakota and has pledged to support the RFS.
But he has also pledged to ease costly regulations and appointed investor Carl Icahn (& refinery owner) as a regulatory advisor.
The Administration believes it can thread the needle by issuing the rule to change the obligated party but taking some further action to bolster the RFS, such as administratively extending the program past the 2022 expiration.
In December the Obama Administration’s EPA denied a petition by Valero to shift the point of obligation under the RFS and opened up a public comment period on the denial which just completed on February 22.
During his confirmation hearing, Pruitt was pressed by farm-state senators on his position regarding the Valero petition to change the obligated party but he demurred citing the on-going comment period on the denial.
