By John Mayes, Tom Hogan and John Auers
Certainly Pink Floyd’s Roger Waters wasn’t thinking about renewable fuels mandates when he penned his multi-part rock classic “Another Brick in the Wall” in 1979, but it came into our minds last week when the EPA issued their latest proposed Renewable Volume Objectives (RVOs) for the 2017 Renewable Fuel Standard (RFS) program. One key aspect of the RVO was that it finally took the step of exceeding the 10% ethanol in the gasoline “blendwall,” posing potentially major problems for refiners and transportation fuel blenders. The timing of the announcement was somewhat of a surprise, considering the agency had previously indicated it planned to release the proposed 2017 RVOs in June, which in itself went against both precedent and requirements, as it was only obligated to make the announcement by the end of November. But the big news was really the magnitude of the RVO requirements. The total 2017 Renewable Fuel requirement was set at 18.8 billion gallons, with the Advanced Biofuel component at 4.0 billion gallons. This implied a required ethanol volume of 14.8 billion gallons or 10.4% of the expected total gasoline pool volume; a tough task indeed considering the difficulties in finding markets for E15 and/or E85.
Hey! Teachers (EPA)! Leave them kids (refiners) alone
Administration of the RFS program in recent years can at best be described as chaotic. In the early years (through 2012), the program generally developed according to the initial plan as set out by Congress in the Energy Independence and Security Act (EISA) of 2007 (Table 1). This is the same law which resurrected the Corporate Average Fuel Economy standards that have been increasing new vehicle mileage requirements. Each year, RVO targets were steadily increased (to achieve compliance with EISA requirements) and the EPA played by the rules and issued the next year’s targets in November of the preceding year. By 2013, however, the wheels began coming off the wagon. As the gasoline blend wall was approached, it became increasingly apparent that rising targets could not be met. Because cellulosic biofuels have largely failed to develop, the ethanol requirement is essentially the difference between the Total Renewable Fuels requirement and Advanced Biofuels target.
“Wrong, do it again!”
As the required ethanol blending volume approached 10% of the gasoline pool, the growth of renewable fuels stalled. Attempts to develop E15 have largely failed, and consumer response to E85 has been tepid at best. Amid growing discussions of the blend wall forcing a potential reduction in gasoline production, the EPA acquiesced to industry complaints in 2014. While the EPA had proposed new RVO requirements for 2014, they were never finalized. In the absence of RVO targets, the EPA recommended continuing at 2013 volumes. The EPA also indicated that the final 2014 targets would reflect the realities of actual market conditions and blending restrictions. This state of limbo continued into 2015, with the EPA finally setting the 2014, 2015, and 2016 targets on November 30 of 2015 and officially abandoning the original statutory requirements for all but biomass based diesel.
Figure 1 is a timeline of the RFS program. Above the time bar is the depiction of how the dates of the significant events were supposed to occur as per EISA. Below the time bar is the depiction of how they have actually occurred or are currently scheduled. The compression of actual critical dates is readily seen.
While the market was expecting a continuation of the measured and pragmatic approach in setting new RVO targets for 2017, the recent announcement by the EPA appears to indicate a return to a more aggressive strategy. While still well below the Congressional statutory level, renewable fuel targets have been raised by 0.7 billion gallons (nearly 46 MBPD) above the 2016 requirement. This increase is even more severe when the individual components are analyzed.
The implied ethanol blending volume of 14.8 billion gallons is only a modest increase above the 2016 requirement of 14.5 billion gallons. But even these small increases can be exceptionally difficult to achieve when the industry is constrained by the blendwall. In 2015, U.S. gasoline demand was 9,161 MBPD. Of this, 893 MBPD was ethanol, making the ethanol content 9.75% of the gasoline pool. This was accomplished primarily through the use of the dominant grade of E10, but also included a much smaller E0 component, the even smaller E85 (which actually averages around 72% ethanol) and even a miniscule volume of E15.
The ability to achieve the 2017 requirement of 14.8 billion gallons of blended ethanol would require an average ethanol content of approximately 10.4% of the gasoline pool. This modest step (from 9.75% to 10.4%) presents an incredibility difficult challenge to the petroleum industry.
The EPA however, does not accept this necessarily as a formidable task, stating, “. . . we continue to believe that the constraints associated with the E10 blendwall do not represent a firm barrier that cannot or should not be crossed.”
“How can you have any pudding, if you don’t eat yer meat?”
By definition, the ethanol content of E10 cannot be increased, thereby forcing greater sales of either E15 or E85. The EPA estimates that E85 consumption in 2014 was 150 million gallons, rising to 166 million gallons in 2015 and could reach 200 million gallons in 2016. Even if all of the remaining E0 was replaced with E10 (which is not realistic), E85 sales would have to jump to 752 million gallons in 2017 to achieve compliance. Correspondingly, sales of E15 would have to increase from nearly zero to 3.6 billion gallons in 2017 to achieve compliance. Neither of these possibilities is realistic.
Even the EPA acknowledges the problems associated with a potential acceleration of E85 growth, stating “. . . an examination of efforts to expand E85 offerings at retail in the past suggests that there are limits in how quickly this can occur even under the most favorable market conditions.” The EPA has also acknowledged the difficulty in gaining consumer acceptance of E85, even with pricing discounts. After reviewing historical data from five states with significant E85 sales, the agency stated, “We have also found that greater E85 price discounts relative to gasoline have not been associated with the substantial increases in E85 sales volumes that some stakeholders believe have occurred, or could occur in the near future.” But even with these admissions, the EPA is insistent on this path.
A similar situation can be seen with biodiesel and renewable diesel. The proposed 2017 RVO would call for approximately 130 MBPD of bio and renewable production. The EIA reports actual production in 2015 was 82 MBPD and net imports supplied an additional 16 MBPD. The increase to 130 MBPD would be difficult but not impossible. If meeting the ethanol blending requirement of 10.4% of the gasoline pool was deemed infeasible, the increased RFS mandate could still be achieved by producing incremental volumes of renewable diesel. This could push the 2017 requirement to as high as 170 MBPD, or more than twice as high as the actual 2015 output, mandating new renewable diesel production facilities or increased imports.
While acknowledging the difficulties, the EPA has proposed RVOs which will result in serious challenges for the refining industry. Judging from the early reaction, it would appear that no group is satisfied with the proposed volumes. The renewable fuels industry is critical that the mandates are not more severe, while the American Fuels & Petrochemicals Manufacturers and American Petroleum Institute have both called for the repeal of the RFS program.
TM&C stays abreast of the regulatory requirements associated with transportation fuels and assists clients involved in all aspects of product-blending activities and compliance-monitoring and planning. We also include the expected impact of these regulations in our semiannual Crude and Refined Products Outlook (next issue scheduled for release in late July/early August) and our various other studies. Please contact us for our views on the latest developments and their potential impacts, or if we can assist in any way or answer any question regarding fuels compliance and regulatory impacts.