Retailers dispute refiners’ proposed RIN changes
Vocal refiners facing rising costs have warned that the Renewable Fuel Standard (RFS) encourages market manipulation more than biofuel blending. But retailers including Murphy USA, a frequent target of refiners this year, said the complaints were misdirection.
"For an industry whose margins have collapsed by 50pc, it's disingenuous to point to this, when I think the bigger issues are staring them in the eyes," Murphy USA chief executive Andrew Clyde said.
Merchant refiners increased pressure this year to change the structure of federal mandates that require rising volumes of biofuels enter the domestic transportation fuel supply. The mandates measure volumes of biofuels such as ethanol or biodiesel blended with traditional fuel before shipping off to retail stores.
Refiners Valero, PBF Energy, CVR Energy and HollyFrontier all lack infrastructure to fully blend their own production, so they must purchase credits — called renewable identification numbers (RINs) — from blenders that do not need the credits under the program.
The refiners insist the system invites manipulation and blunts the program's ability to achieve higher volumes of blending. Sellers of RINs have more incentive to profit off scarce credits than to blend fuels, they say, and speculators have helped drive RIN prices to unreasonable levels.
Opponents also claim Murphy and other retailers use revenue from the program to slash fuel prices and pressure smaller competitors.
Refiners have pushed the Environmental Protection Agency (EPA) in rulemakings and courts filings to make blenders obligated to purchase RINs. These efforts to change compliance split the industry, with more integrated downstream competitors reluctant to sign on and the trade association made up of oil majors openly opposed to the idea.
Retailers have remained largely silent in the debate. Murphy rebutted the refiner-proposed changes in comments on blending volumes the EPA proposed this year. A handful of small fuel suppliers also commented, all using similar language to criticize grocers and large retailers making "extra profit from selling RINs," an echo of the refiner complaints about the system.
Retailers who sell RINs told Argus last week that refiners had exaggerated the program's influence on their profits.
"The bottom line to us and many, many others is that if the EPA or Congress change the point of obligation, the consumer will pay more for motor fuels and less renewable products will be introduced into the market," said Mike Thornbrugh, a spokesman for retailer QuikTrip.
QuikTrip declined to comment on its RIN sales revenues or to whom the midcontinent retailer sells the credits. Other privately held retailers contacted by Argus would not respond to questions.
Murphy singled out
No company has been more frequently cited by refiners critical of the program than publicly-traded Murphy USA, an almost 1,400-station chain anchored by Wal-Mart stores. The retailer reports revenue from RINs as a line item, allowing readers to easily track an increase from \\$5mn in the third quarter of 2013 to a peak of \\$44mn in the second quarter of this year — a period when the company saw \\$3bn in total revenue. The Murphy RIN revenue appeared in refiner filings to the Environmental Protection Agency and a Southern Methodist University paper suggesting RINs unfairly grant advantages to larger retailers.
Murphy does benefit from RINs, though not to the degree claimed by refiners, Clyde said. The retailer considers recent net gains of 2?/USG to 3?/USG following RIN sales a 9pc to 10pc return on its investment in the infrastructure needed to blend and deliver the fuel. Murphy owns line space on major products pipelines, operates blending infrastructure and purchases biofuels — all costs associated with the business that separates RINs, he said.
"It's easy for people to selectively pull one number, the other income number, and not net it," Clyde said. "It's just as misleading for someone to report the cost of RINs without netting it against the refinery margin that has that increased spot price built into it."
Refiners argue they cannot compel higher prices at blending racks, or spur those terminals to add biofuel blending capacity. But Murphy said it does see prices increased to offset compliance costs in barrels purchased directly from refiners. And the compliance credits offset a narrow, often negative margin between spot prices and the rack that intensifies when RIN prices climb, Clyde said.
Casey's Convenience Stores reports income from RINs, but the 14-state retailer owns no blending or terminal infrastructure, chief financial officer Bill Walljasper said. The retailer instead collects RINs through a quirk of Iowa state law, where the company operates roughly a quarter of its stores. Casey's receives RINs when ethanol splashes into the company's truck fleet just before heading off to its stores.
Casey's lacks infrastructure to increase or otherwise manage RIN access beyond the ebb and flow of outright fuel demand, he said.
"We don't manage our business to RINs at all," Walljasper said. Rather, the company sells to an obligated buyer twice a month, and had not seen any speculators seeking the credits.
Murphy's used brokers to place RINs, but the third parties did not take title, Clyde said.
"We see no signs of this quote 'rigged system', and we're selling to refiners either directly or through brokers," Clyde said.
What the current system does have is liquidity, he said. Shifting the compliance to blenders would slash the volume of buying and selling, leaving all parties, including refiners, with an illiquid market.
Some merchant refiners have begun to draw closer to the distribution business. But midcontinent refiners HollyFrontier and CVR Energy said they cannot acquire such facilities for their midcontinent systems. And Valero doubts it could secure infrastructure to blend all of its production without raising federal market power concerns. The EPA has said it was not the intent of the RFS to change refinery business models.
EPA also cannot change a natural business cycle, Clyde said. US refinery margins for gasoline and diesel have crumbled as the industry's advantages relative to global competitors faded with the price of oil this year.
"I think the refinery industry has a set of challenges on its hands that are completely independent of the RIN," Clyde said. "It's easy for them to look at our other income category and try to point to a windfall profit that doesn't exist."