By Beth Hilbourn
In some ways, RIN prices are just like Aretha Franklin’s song, “Ever Changing Times,” since they are ever changing and oftentimes feel quite unpredictable. The RFS policy is a political play, and as such is reflected in RIN prices which have been quite volatile. In early June, the Trump Administration indefinitely delayed an expected announcement of planned changes to overhaul the U.S. biofuels policy under pressure from corn state legislators. The White House had been expected to announce reforms to the U.S. Renewable Fuel Program following months of negotiations, but the Administration has struggled to find a balance between oil refiners and Midwest farmers. The negotiations were moving toward temporatily lifting restrictions on summertime E15 and allowing ethanol exports to count toward the annual volume quotas. The resignation of EPA chief Scott Pruitt is a recent example of these ever changing times.
“Well it don’t bother me at all”
Even though the proposed 2019 RFS standards and 2020 biomass-based diesel volume standards were announced on June 26, 2018, a couple key unanswered questions remain. How much of the 2018 and 2019 volumes will be unfulfilled because of small refinery disproportionate economic hardships granted after the final RFS is set and will any missed prior year obligation be reallocated? If there is no reallocation of prior year obligations for the small refiner hardship volumes granted and if 2018 and 2019 are comparable to 2017, it will not be a strain to meet the Renewable Volume Obligation (RVO).Image may be NSFW.
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The increase in the 2019 RFS obligation is really in D4s at 590 million gallons. 2017 remaining D4s are 756 million gallons which is 19% of the total 2017 generated D4s of 3,992 million gallons. Also, YTD 2018 D4s (through May) at 1,480 million gallons is higher than any prior year (8% higher than 2017). 2017 D4 RIN generation was just slightly lower than 2016 and the Argentina biodiesel imports were (in large) made up with increased domestic production. The new and expanded biodiesel plants helped avoid this potential drop (Duonix LLC, Western Iowa Energy, AGP, REG, etc.). The 2018/2019 expansion to Sioux City AGP by 30 MMGPY and other large 50 MMGPY+ new plants (Wichita Cargill, Emporia REG, New Orleans REG, Brooklyn United Biodiesel, etc.) will provide additional domestic biodiesel production.
“It’s an ever changing time”
Though the ethanol blendwall was reached in early 2013, RIN generations have increased the last few years. RIN generations have historically been more heavily weighted during the last half of the year and in particular, the last month of the year. Overall, 2016 saw a large increase in RIN generations from 17.9 billion to 19.5 billion, due (in large) to Argentina biodiesel imports. In 2016, biomass-based diesel (D4) RIN generation was at 20.6% of all RIN generations; wheras, it was only up to 15.6% in prior years. In 2017, the Argentina biodiesel was discontinued; however, domestic biodiesel production increased to make up the difference so D4 RIN generation in 2017 equalled that of 2016. Note that both cellulosic (D3) RIN generation and advanced biofuel (D5) RIN generation are insignificant, each continuing to comprise 1% or less of total RIN generation in a given year for the past several years. Year-to-date 2018 RIN generation is slightly exceeding 2016 and 2017 levels; however, it is hard to tell where 2018 will end since RIN generation is more heavily weighted at the end of the year.Image may be NSFW.
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“Wonder if the dreams that I believed in still come true”
Figure 2 shows the actual reported total RVO for a year divided by the EIA projected. The EIA projected is calculated by the EIA projection volume of gasoline and diesel used in transportation fuel multiplied by the standard set by the EPA. Most years that are off from 100% are due to estimation inaccuracies. 2016 and (in particular) 2017 is believed due to the small refinery hardship petitions. The RVOs are set in November of the preceding year while small refinery hardship petitions are normally received in the first quarter of the compliance year since that is when the refinery has all of its financial data. So far, when a small refinery hardship petition has been approved after an RVO has been set and the percent obligations have already been calculated, the number of RINs retired decreases since the obligation had not been reallocated. This phenomenon is (in large) what has caused all categories of RINs to crater this year. Image may be NSFW.
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“And we’re holding on so tight, together”
The retired percent prior year RINs is shown in Figure 3 below. This RIN bank can affect both the current year and prior year RIN price. During 2016 compliance, the amount of carryover had been reduced below 10%; and, along with a 2017 RVO that appeared to be a stretch, helped to keep the RIN price high through 2017. Then when 2017 compliance was actually filed in early 2018, it became apparent that the projected RVO had not been met because of the granted small refinery hardship petitions granted and that domestic biodiesel production had made ground on the lost Argentina biodiesel imports. The 2017 RINs carried over to 2018 represent 17% of the proposed 2018 RVO. This amount is greater than 17% if there are small refinery hardships granted in 2018 once the percentage obligations are set. The price of both prior year RINs and current year RINS dropped with prior year RINs taking more of a drop. This scenario could change if the EPA reallocates part of the lost, small refinery obligation to other obligated parties. It is worthwhile to mention that since 2011, the amount of RINs that have not been used for an obligation and have expired has been less than 0.15% for each year. The 2019 obligation has not been set; however, it will affect the RIN price and more-so the current year RIN price.
“I see, that clock upon the wall, well it don’t bother me at all”
An obligated party can use up to 20% of prior year RINs to meet an obligation. If all current year RINs are retired for an obligation year then there would be no carryover and the next year’s obligation would need to be met with all current year RINs. This RIN carryover plays an important role in the cushion to the system. Take 2017 compliance, if the actual RVO was 100% of the projection and lost Argentina imports were not made up with domestic biodiesel production, the estimated 2017 carryover would reduce from 17.4% to 3.2%. Image may be NSFW.
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RIN price history is shown in Figure 4; and Figure 5 shows the delta between current and prior year RIN prices. RIN prices have not reached this low since September 2015 when the proposed 2014, 2015 and 2016 RFS triggered RIN prices to fall. The final 2014, 2015, and 2016 RFS mandate brought the RIN prices back up significantly. In 2018, current year minus prior year RIN differentials have increased from 2017. In fact, in 2017 the current year minus prior year ethanol RIN differential was never more than a couple cents, but now currently wavers between five and eight cents.Image may be NSFW.
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TM&C constantly monitors changes and proposed changes in regulations which can impact all segments of the petroleum industry. Many of these are associated with transportation fuels, affecting not only demand, but also production costs, compliance challenges, and other aspects of petroleum refining. We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook (the 2018 Mid-Year Edition is scheduled to be released in early August 2018) and our various other studies. In our Outlook, we have a Regulatory Initiatives section where we explore the impact of Regulations on petroleum product supply and demand. U.S. RFS policy also factors into our Alternative Fuels section of the Outlook. TM&C also assists clients involved in all aspects of transportation fuel production, blending activities, planning and compliance-monitoring. More information on these publications and our other work involving oil industry developments and dynamics can be obtained by contacting either one of us, visiting our website at turnermason.com or calling Cindy Parker at 214-754-0898.