The Environmental Protection Agency (EPA) granted waivers last month to three small refineries of Andeavor (ANDV) that exempted them from compliance under the Renewable Fuel Standard (RFS) for 2016. The waivers mean the refineries do not have to blend ethanol or other biofuels and do not have to buy RIN credits to comply with the RFS. Under the RFS law, EPA is allowed to grant waivers to small refineries for economic hardship due to compliance. Reuters reported the waivers on Tuesday here.
To date, EPA has issued 25 waivers for small refineries for 2017 (compliance is due in 2018 under the RFS) - more than double the exemptions granted in the previous year.
While the waivers alone are a big development for the individual companies receiving them, we think it signals a larger policy change being considered by the Trump Administration. We believe there is a greater than 50 percent chance the White House will soon implement changes to the RFS regulations that will provide relief to refiners from costly RINS compliance.
Last fall, the Administration and EPA were considering various policy options to the RFS program but succumbed to political pressure from corn state Senators who were holding up a key EPA nominee.
After the policy changes were abandoned, a Philadelphia refiner declared bankruptcy and placed blame on the RFS program and expensive RINS. Senators from oil and refining states retaliated by holding up a key Agriculture Department nominee important to corn states.
The two legislative power plays resulted in the White House convening both sides for talks to develop policy proposals to address the high costs of RINS compliance and also provide some requested changes sought by renewable fuels groups. The talks have not resulted in any progress mainly due to a refusal to compromise by renewable fuels groups that currently enjoy a favored position.
But EPA and other key policymakers in the administration have continued work behind the scenes and will soon present Trump with several policy options that will likely give something to both sides.
For renewable fuels groups, EPA is considering providing a waiver to allow sales of E15 ethanol during summer months – a policy change the groups have been seeking for several years.
In exchange, EPA has developed several policy options designed to limit high RINS costs and provide relief to refiners. The central theme of these options would similar to proposals floated by Senator Ted Cruz (R-Texas) to cap RIN credits at 10 cents or allow refiners to purchase discounted RINS directly from the federal government triggered when prices are above a certain level.
It is also possible that Trump may decide to do nothing but we believe this is not a likely outcome. The Philadelphia Energy Solutions refinery bankruptcy has provided some urgency to the policy process that did not exist last fall when the Administration sided with renewable fuels groups.
Much like the trade issue with China, the RINS issue with refiners is resonating in key states and among key constituencies in Trump’s political universe. The White House is being lobbied hard by United Steelworkers unions in Ohio and Pennsylvania whose members work at these refineries. Ohio and Pennsylvania are key states that Trump wants to keep in his column.
In our view, the EPA waivers granted to Andeavor last month highlight the policy problem presented by the RFS and now signal the direction the Administration will likely take in providing RINS relief. On timing, we believe we are near the end of the process and a decision may come as soon as this month.
