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EPA Adds to Rural Woes
Friday, March 15, 2019 2:15PM CDT
By Todd Neeley
DTN Staff Reporter

OMAHA (DTN) -- The EPA granted five additional 2017 small-refinery exemptions (SREs) to the Renewable Fuel Standard on Thursday, raising the agency total for that year to 34, according to an update posted to EPA's online dashboard. The dashboard also indicates it has two more waiver requests pending for that year.

Ethanol industry interests, farmers and federal lawmakers were hopeful the agency would change the way it considered waivers under new Administrator Andrew Wheeler. The 2017 waiver requests were made during former Administrator Scott Pruitt's tenure.

Geoff Cooper, president and CEO of the Renewable Fuels Association, said during a news conference that the agency's latest actions would serve as a "bellwether" for how the EPA would handle waiver requests going forward and Thursday's decision would be an "important indication" of where Wheeler stands.

"It's extremely disappointing and outrageous to see EPA once again allow oil refiners to undermine the RFS and hurt family farms, ethanol producers and our environment by exploiting and abusing a statutory provision that exempts them from their obligations to blend renewable fuels," Cooper said in a statement following the press conference.

"The RFS was created to preserve the environment, protect America's energy security and give Americans more affordable options at the pump. These exemptions undercut those goals, and today's exemptions mean more than 2.6 billion gallons of RFS blending obligations have been erased with the stroke of EPA's pen."

Pruitt's EPA granted 48 such waivers total in 2016 and 2017, totaling an estimated 2.25 billion gallons of biofuels not blended. Five additional waivers granted for 2017 raises the total to 53. The agency had one 2017 request declared ineligible.

To put in perspective the potential corn demand lost from those waivers, assuming all ethanol gallons -- it takes about 928.6 million bushels of corn to produce 2.6 billion gallons of ethanol.

American Coalition for Ethanol CEO Brian Jennings said the agency's actions is another dagger to farmers.

"On National Agriculture Day, as farmers are long-suffering from lost market opportunities and low prices, and many farmer-owned ethanol plants across rural America are considering whether to suspend operations or sell out to a bigger company because of limited demand here at home, EPA has further depressed demand for ethanol by rubber stamping five more small-refinery exemptions for 2017, and done so without reallocating the blending obligations to other refiners," he said in a statement.

"Any benefit of selling E15 year-round will be wiped out until and unless EPA gets back to the rule of law when it comes to these refinery waivers under the Renewable Fuel Standard."

EPA said in a statement to DTN that it continues to follows the law.

"EPA continues to implement the Renewable Fuel Standard program in accordance with the Clean Air Act, taking into consideration additional direction from Congress, recommendations from Department of Energy, and relevant court decisions," the agency said. "Many aspects of the decisions for exempting individual refineries are based on confidential business information."

Scott Segal, an attorney who represents refining interests, said in a statement the EPA is following the law.

"The methodology for granting small-refiner exemptions is determined by statute," he said. "Attempts to set artificial barriers against granting SREs has been rejected both in court three times and by direction of Congress in EPA appropriations bills. To say that the current administration undertook any special treatment for refiners is completely inconsistent with law and precedent. It's just sour grapes from some in the biofuels sector."

CONSUMPTION FALLS

Domestic ethanol consumption declined for the first time in 20 years in 2018.

Cooper said the cause is not ethanol competitiveness, as ethanol is priced at 55 cents per gallon less than gasoline.

"Quite simply, the four dozen exemptions and billions of RINs (Renewable Identification Numbers) dumped on the market," he said. "The pressure to blend was wiped away. Because RINs had very little value in 2018, prices had to adjust. We lost more than $1 billion last year (in lost blending). It's really hard to overstate just how important the next few months will be."

The ethanol industry is expecting pivotal decisions from the EPA in the coming months. A final E15 and RIN reform rule is expected to be finalized by the end of May.

Wheeler's EPA is expected to decide on 37 pending waiver requests from 2018 in May or June. Also, the agency is expected to propose a RFS reset.

"Then throw in a possible trade deal with China," Cooper said, "and we cannot underscore enough that we need to see more restraint on the process on waivers. We need to see (lost) gallons accounted for. We need negotiations on China, we want the E15 rule to be legally defensible."

ETHANOL DEMAND LOST

Scott Richman, chief economist of the Renewable Fuels Association, said recent data shows the exemptions have led to lost demand for the ethanol industry.

"To put this in context, there was a considerable amount of debate about whether waivers are having an impact on the market," he said. "There was demand destruction."

In 2018, domestic consumption of ethanol fell for the first time since 1998.

The ethanol blend rate in gasoline dropped for the first time since 2009. In 2017, 14.5 billion gallons of ethanol was used by consumers, Richman said. That fell to 14.38 billion gallons in 2018. The 120-million-gallon drop in consumption, he said, is the equivalent of taking a large-scale ethanol plant out of production.

The ethanol blend rate fell from 10.13% in 2017 to 10.07% in 2018, Richman said. The U.S. Energy Information Administration expected the ethanol blend rate to be at 10.26% in 2018.

"The blend rate really moved past the 10% blend wall in 2016 and was 10.75% in January 2018," Richman said. "Then rumors on small-refinery waivers filtered into the market and it hurt RINs and ethanol blending."

From February to December 2018, the blend rate dropped to 10.01%. Considering that sales for both E15 and E85 increased in 2018, the rate of E10 blending probably was even lower, he said.

"The impact of exemptions continue to linger," Richman said. "Ethanol was priced very competitively in 2018 compared to gasoline. The impacts of SREs already granted are going to continue to linger."

INDUSTRY DOES ITS PART

Neil Koehler, CEO of Pacific Ethanol, said during a news conference the industry has been "significantly harmed" by the "irregular behavior" on granting small-refinery exemptions and artificial barriers on higher blends.

"In good faith, we did our part as our industry, and in 2018 we anticipated more demand," he said.

"That was lost to small-refinery exemptions. These are real impacts. We have had plants shut down and slow down, and margins are some of the worst the industry has seen. There's a lot of pain and suffering out there. We have a market that is not responding properly.

"We closed a plant and slowed another down. We have about 1 billion gallons of inventory in the market now. Farmers are hurt by this as well. We have the fuel, we have the benefit, all we are asking for is market access."

As for the EPA's granting of five additional waivers, Koehler said the market doesn't support it.

"We just do not see in today's market, a rationale," he said. "We're very clear the RFS requires gallons, and on average, it needs to be met. It is very clear the law says that it needs to be reallocated. They have an opportunity in the reset. We have a market problem and not a RIN problem."

Pruitt indicated that in handing out small-refinery exemptions, his hands were tied by a federal court decision that the agency used too strict of a test in denying a waiver request from Sinclair Oil Corp.

The agency rejected Sinclair because its two refining plants in Wyoming were profitable and would not be forced into closure because of the Renewable Fuel Standard.

Refining interests have maintained the agency has no choice but to grant requested waivers.

"EPA has more discretion," Cooper said. "Their hands are not tied. EPA changed the criteria on exemptions. EPA has acknowledged that refiner problems are not to do with the RFS."

Last week, DTN reported that court documents filed in the U.S. Court of Appeals for the District of Columbia Circuit showed EPA did not follow its own policy for granting waivers.

"We hope the administration doesn't make the same mistakes," Cooper said. "A lot of eyes are on Mr. Wheeler and a lot of sensitivity on how he's going to handle them with historically low RIN prices in 2018."

Many small refiners have claimed an economic hardship in meeting RFS requirements, because of the costs of RINs.

"They were purchasing RINs for 8 cents," Cooper said.

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @toddneeleyDTN

(ES/AG)


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