By John Auers and Elizabeth Hilbourn
AC/DC sings it in their 1981 song Breaking the Rules in the album For Those About to Rock We Salute You, AC/DC’s first album to reach number one in the U.S.
They got the regulation ties, regulation shoes
Those regulation fools with their regulation rules
Regulatory issues have become a critical issue for U.S. refiners over the past several decades and will continue to play a major role in shaping the playing field of the U.S. refining industry. States even have unique requirements, with California notoriously providing a difficult regulatory environment for refiners. Renewable fuel requirements can be very state specific with Minnesota leading the pack with its aggressive biodiesel requirement. Other country’s policies have an effect on the U.S. Prior to 2013, the European Union looked to the U.S. as a market for their biodiesel since the EU could not compete with product from Indonesia and Argentina. Then, in 2013 when the EU enforced its anti-dumping tariff, shifts were made which reduced EU biodiesel imports into the U.S., but were replaced with significant levels of Indonesian and Argentinian biodiesel imports. Also in 2013, Brazil increased its gasoline tax which resulted in more sugarcane ethanol staying in Brazil versus being exported to the U.S. Condensate splitters have been built on the Gulf Coast in order to get around the crude export policy and for a means to export condensate products from the U.S. Shifts and rebalancing occur whenever a key policy or regulation is enacted.
In 2015, there were numerous regulatory announcements; for example, August 3, 2015, U.S. President Obama and the EPA announced the Clean Power Plan, just ahead of the December 2015 United Nations Climate Change Conference. The renewable fuel standards for 2014, 2015 and 2016 were set in November in 2015. In that same month, the Office of Administrative Law approved the re-adoption of the California Low Carbon Fuel Regulation. The next month, U.S. President Obama signed legislation which ended the decades-long ban on U.S. crude oil exports. In February of 2016, EPA issued its mobile source civil penalty policy and Obama proposed a $10-a-barrel oil tax. All these issues and more are discussed in the Regulatory Initiative section of the 2016 Crude and Refined Products Outlook. The Outlook details world-wide GTL, CTL, BTL, cellulosic and renewable diesel projects and historic RIN and LCFS-CI values. It even includes a RIN forecast supported with key facts and assumptions.
C’mon get ready, get ready, get ready
Past blogs have discussed the impact of alternative fuels in the U.S., including renewable diesel, cellulosic biofuel, natural gas vehicles, and even electric vehicles. In “For Auld Lang Syne, My Dear, Let’s Take a Cup of Cooking Oil and Turn it into Diesel Fuel,” we discussed the growing renewable diesel supply to the U.S., including its impact on biomass-based diesel RINs, the difference between renewable diesel and biodiesel and where it is marketed in the U.S. In “The Song That Never Ends: Cellulosic Biofuel,” the push for cellulosic biofuel was related to the Infinite Loop. Though some cellulosic ethanol demonstration plants have been built in the U.S., the volume has been insignificant. In 2013, the EPA approved the use of landfill gas to generate cellulosic RINs. Ninety-eight percent of all cellulosic RINs are from LNG or CNG with only two percent from cellulosic ethanol. Production of these alternative fuels would not be economical without RFS2.
Ready to rule
The legislation, ending the crude export ban, was attached to a $1.15 trillion Omnibus Appropriations Act. With the elimination of crude oil export restrictions, the U.S., which is currently the world’s largest oil and gas producer, can export crude the same way it currently exports refined products, including gasoline. The new law authorizes the President to impose licensing requirements or other restrictions on crude oil exports. Domestic refiners could see a reduction in their margins as the price differential between Brent and WTI is expected to shrink. Prior to the December signing, the EIA issued a 58-page paper analyzing the effects of removing restrictions on U.S. crude oil exports. Included in the report is a fairly flat-line projection of Brent-WTI through 2025 ranging from $6-$8 per barrel. The 2010-2014 history of the Brent-WTI jumped from $0 per barrel in 2010 to $18 per barrel in 2012 and fell back to $6 per barrel in 2014. The Brent-WTI even went as high as $22 per barrel on a monthly average during the last quarter of 2012.
You’re nothing but a bunch of regulation fools
Obama’s proposed fiscal 2017 budget includes a $10.25 per barrel crude oil tax to overhaul the nation’s transportation system toward reducing carbon emissions. The administration would like to expand rail and mass transit networks, modernize freight transportation and expand research into self-driving cars. The 2017 budget requires congressional approval. The White House stated, “Our nation’s transportation system was built around President Eisenhower’s vision of interstate highways connecting 20th century America.” This new approach to investment and funding is one that places a priority on reducing greenhouse gases, while working to develop a more integrated, sophisticated, and sustainable transportation sector.” Other tax provisions are proposed to be repealed in the 2017 budget including the exclusion of refiners from the federal tax code’s Section 199 provision. The 2017 budget calls for outlays to extend renewable energy production and investment tax credits, including production of advanced technology vehicles.
A bad deal and a real rough ride
The petroleum industry will continue to need to adjust to a plethora of regulatory issues, most of which are driven by environmental forces. The most significant of these initiatives are:
- Renewable Fuel Standard. In November of 2015, the EPA issued its final RFS requirements for years 2014 through 2016. The mandated levels for Renewable Fuels are set to rise during the period but are substantively below the original requirements of the Clean Air Act.
- Climate Change. The 21st session of the UN Framework Convention on Climate Change was held in Paris in December of 2015. The conference produced an agreement which required country targets for greenhouse gas reductions, but set no penalties for noncompliance. The provincial government in Alberta also released a climate plan in November, which proposes a carbon tax and movement toward an oilsands emission limit.
- Other EPA Regulations.
- New regulations by the EPA will require ‘Fenceline Monitoring’ in 2018 of benzene to better inform local communities of potential hazards as well as stricter controls of flares and coking units.
- In August of 2015, the Clean Power Plan (CPP) was announced with an intent to significantly reduce CO2 emission from fossil fuel power plants through 2030. On February 9, 2016 the U.S. Supreme Court granted a stay to the implementation of the CPP in a ruling responding to an appeal from a group of 29 states and is now awaiting further court rulings which are unlikely to be finalized until at least the fall of 2016.
- Tier III gasoline regulations will take effect in January of 2017, which will reduce gasoline sulfur levels to 10 ppm. This will increase operating costs and also decrease refiners octane capabilities.
Turner, Mason & Company is in the business of analyzing downstream markets and assisting all segments of the oil industry in responding to changing market dynamics. Regulatory initiatives have a direct and substantive effect on the downstream markets. As a result we include an exhaustive section on regulatory initiatives in the 2016 Crude and Refined Products Outlook, a comprehensive analysis of the petroleum industry which was just issued this week. Also included in this report are detailed forecasts of supply, demand and prices for refined products, both in the U.S. and throughout the world. The impacts that the numerous regulatory initiatives have on the refined products markets have been incorporated into the forecasts. We also use this analysis, which we update on a regular basis in our other industry studies and work products. For more details about any of our publications, studies or other TM&C services, please visit our website, send us an email or give us a call.
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