ethanol plant

Choice of Pruitt sends RIN credit price downward

Last month, the Obama administration boosted the mandate for biofuel usage next year to a record 19.28 billion gallons, including as much as 15 billion of corn-based ethanol.

by Mario Parker

Six weeks before he becomes U.S. president, Donald Trump is already disrupting an obscure, $15 billion corner of the world’s biggest fuel market, drawing cheers from long-time supporter and fellow billionaire Carl Icahn.

Trump nominated Oklahoma Attorney General Scott Pruitt, an oil-industry champion and opponent of the Obama administration’s climate agenda, to head the Environmental Protection Agency. Refinery owners including Icahn attacked the EPA in the past year over rising costs to comply with renewable-fuel mandates, including credits linked to Renewable Identification Numbers (RINs). Icahn hailed Pruitt’s nomination, saying Trump consulted him on the pick.

The governors of Nebraska, Iowa and South Dakota sent a letter to Trump on Friday also reminding him of his past statements supporting the ethanol law. (Photo: i Stockr/Thinkstock)

While the president-elect hasn’t disclosed specific plans for the EPA, the Pruitt choice sent the price of RINs credits tumbling the most in at least a year. Icahn, who owns a controlling stake in CVR Energy Inc., which has refineries in Oklahoma and Kansas, said the agency’s leadership change won’t end the mandate. Instead, he’s confident Pruitt will shift the burden of compliance further down the distribution chain, to fuel blenders.

“We’re talking about getting rid of this goddamn RIN law and this obligation” for refiners, who are facing a financial crisis as the cost of credits surge, Icahn said Wednesday in a Bloomberg Television interview.

Telephone message left for Lincoln Ferguson, a spokesman for Pruitt, weren’t immediately returned. The president-elect’s transition team and his spokeswoman didn’t immediately respond to e-mails seeking comment on Thursday and Friday.

Renewable Mandate

Petroleum refiners are required to blend renewable fuels like ethanol into U.S. gasoline as part of a 2007 energy law passed under President George W. Bush that sought to slow the pace of oil consumption and its carbon footprint. Each gallon is tracked by a unique, 38-digit Renewable Identification Number.

If, like Icahn’s CVR Energy, a refiner doesn’t have facilities to add the biofuels, it has the option to purchase them on the open market, often from gasoline distributors that aren’t covered by the mandate, or they can buy excess RINs from refiners that have the infrastructure to blend. CVR Energy estimates it may spend $250 million on credits this year.

Last month, the Obama administration boosted the mandate for biofuel usage next year to a record 19.28 billion gallons, including as much as 15 billion of corn-based ethanol. While many big integrated oil companies have both refining and blending facilities and don’t need to turn to the open market, higher quotas can mean more RINs purchases for independent refiners. The value of credits has more than doubled in the past year.

EPA Power

As the head of EPA, Pruitt, 48, would have the power to make adjustments to the program. In March 2013, he filed a “friend of the court” brief in a lawsuit over the renewable fuels law, arguing that increased ethanol use threatens vehicle engines and that using corn for fuel diverts from the food supply and increases grocery bills. He’s sued the EPA over key parts of President Barack Obama’s climate agenda, and an official biography on Pruitt’s website says he’s “a leading advocate against the EPA’s activist agenda.”

Icahn didn’t immediately respond to messages seeking comment on how Pruitt might impact CVR Energy.

Democrats and conservation groups are laying the groundwork to oppose Pruitt’s nomination, which Senator Brian Schatz, a Democrat from Hawaii, called “a full-fledged environmental emergency.”

Valero Energy Corp., the largest independent U.S. refiner, said it was “pleased” by the appointment. The company has said it will spend as much as $850 million this year on RINs. “We know he has a deep understanding of our industry and the challenges we face,” the San Antonio-based refiner said in an e-mailed statement. “We look forward to working with him as he heads through the confirmation process.”

RINs Tumble

Since Pruitt’s nomination on Wednesday, the price of ethanol RINs has plunged 15% from a three-year high to 90 cents each, according to broker data compiled by Bloomberg.

Prices still are up 41% since January, and the market has been rocked by several alleged instances of multi-million-dollar frauds, where RINs sold to refiners were found to be invalid.

Icahn has been demanding the EPA shift the compliance burden because the cost of RINs is crippling the refining business, he says, and could spur a 2008-style financial crisis as smaller refineries die off, leaving big oil to “squeeze consumers at will” on gasoline prices.

Last month, EPA rejected the Icahn-backed request, but left the door open to possible changes by opening a 60-day public comment period that ends Jan. 23. Trump takes office Jan. 20.

“There is definitely a need to fundamentally change the way it works, otherwise a lot of refiners” will shutter, said James Potts, a Houston-based director of energy and commodities for OpenLink, a trading and risk management firm.

Divided Industry

RINs have divided America’s fuel industry. Last week, the American Petroleum Institute and two of the biggest ethanol trade groups sent a joint letter to EPA opposing any changes. On the other side are Icahn and the trade group American Fuel & Petrochemical Manufacturers, which want fuel distributors to bear the burden of compliance.

“A lot of these things in the next year are things a Trump administration is going to have to consider,” said Thomas Cape, senior analyst and head of energy policy research at Evercore ISI in New York.

Trump pledged support for the mandate as a candidate in Iowa, and he went on to win the vote there and in other corn-rich, ethanol-producing states, except Minnesota and Illinois. The U.S. is the biggest grower of the grain. But the Pruitt pick may signal an evolving view. The president-elect has had close ties to Icahn. In September, Trump’s campaign published a fact-sheet noting that the biofuel-credit trading penalized refiners, but it later removed that language.

Keep Mandate

Growth Energy, a Washington-based ethanol lobbying group that opposes changes to the biofuel law, congratulated Pruitt and reminded Trump about his Midwest supporters. Agriculture Secretary Tom Vilsack said the Renewable Fuels Standard will survive because ethanol is too-well established in rural areas to be dismantled. The Advanced Biofuels Business Council, in an e-mailed statement, urged Pruitt to consider acting in the national interests and not just those crucial to oil and Oklahoma.

The governors of Nebraska, Iowa and South Dakota sent a letter to Trump on Friday also reminding him of his past statements supporting the ethanol law, and said that they "look forward to a robust and healthy relationship" with the incoming administration.

“America’s ethanol industry worked hard to help bring President-elect Trump to the White House and continues to support his dedication to ensuring home-grown domestic energy security,” Emily Skor, Growth Energy’s chief executive officer, said in a statement.

To contact the reporter on this story: Mario Parker in Chicago at [email protected]

To contact the editors responsible for this story: Simon Casey at [email protected]

Steve Stroth

© 2016 Bloomberg L.P

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