Is EPA Bailing Out Bankrupt East Coast Refiner?

March 13, 2018 03:52 PM

The saga over the Renewable Fuels Standard (RFS) continues, with the latest page showing a possible government bailout by the Environment Protection Agency (EPA). The agency proposed this week to waive a portion of the $350 million owed by Philadelphia Energy Solutions Refining and Marketing LLC (PESRM) by law to the RFS.

According to court documents dated March 12, the settlement shows PESRM agreed to retire a total of 138 million currently held Renewable Identification Numbers (RINs) in order to resolve the outstand debt. The proposed move is now up for a 10-day comment period, but must ultimately be approved by the bankruptcy courts.

The refiner has been outspoken, blaming its financial woes on the ethanol industry, specifically the rising price of RINs. After the court documents were released, RIN prices were under pressure, falling to below 40 cents per unit, which is the lowest price in nearly a year.

Last month, pro-refinery Sen. Ted Cruz (R-Texas) spoke at a rally at PESRM, calling for an overhaul of the U.S. ethanol mandate. He sided with Philadelphia Energy in saying the biofuel standard is a major reason the company went bankrupt.

EPA’s proposed decision to temporarily relieve PES of its ethanol mandate obligations is adding fuel to the corn versus oil fire.

“It raises a couple of questions,” said pro-ethanol Sen. Chuck Grassley (R-Iowa). “How are the RIN obligations being treated compared to the other obligations of PES[RM]? Does this set an unfair precedent for other refiners that continue to act in good faith to comply with the law?”

Renewable Fuels Association’s CEO Bob Dinneen has been outspoken about the refinery’s claims, saying the company is using the ethanol industry as a scapegoat for its financial troubles. When in reality, Dinneen says, the company made some bad investments.

“We are evaluating the settlement and will comment on the proposal,” said Dinneen. “But at first blush, this strikes us as rewarding bad behavior and it sets an extraordinarily bad precedent."

Pete Meyer of S&P Global Platts Agricultural Analytics group agrees with Dinneen and is worried about a possible domino effect.

“It sets a dangerous precedent—a precedent that the target is moving what seems to be on a day to day basis now,” said Meyer. “Don't forget that Sen. Cruz showed up at PES[RM] and gave a rousing speech before he went to Washington less than a month ago, and now all of a sudden, there seems to be a rescinding of the debt. I understand why the ethanol business is upset with this, because it's become a moving target.”

Meyer says EPA’s proposed settlement indicates that the rules are changing. However, he says there are a myriad of opinions on the bigger issue of what a possible cap on RINs would mean for the American corn farmer. Iowa State University recently publishing a study showing a RIN cap would cost farmers 25 cents per bushel. That price drop comes at a time where corn prices struggle to break $4 per bushel.

"The big problem in markets is uncertainty, and now we're facing huge uncertainty on RINs,” said Meyer.

While the proposed bailout of PESRM isn’t something Meyer thinks will immediately impact farmers, he admits it’s a very fluid situation.

"Is it something to worry about at the moment?” said Meyer. “Probably not. This has to go through the bankruptcy court, people will have to make comments on it and I’m sure there will be tons of comments made."

Looking at the other side of recent RFS talk, Meyer says EPA Administrator Scott Pruitt stated he’s a proponent of E-15 gasoline blends for year-round distribution. However, Meyer warns that claim isn't new, as Pruitt voiced his support of higher ethanol blends 6 months ago.

While Meyer thinks E-15 would be good for corn prices, Meyer says the move would push the price of RINs lower.





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