Delaware City Refinery faces higher costs after EPA finalizes renewable fuel rule
Last week, the EPA finalized its Renewable Fuel Standard rule and this latest version of the rule could mean a significant increase in costs for smaller independent refineries, like PBF Energy’s Delaware City Refinery.
To comply with the rule, refiners must either blend biofuels into their products or purchase Renewable Identification Numbers to make up for their limited capacity to blend. But as the EPA’s blending requirements rise, so does the number of credits refineries need and that drives up the price of credits.
This week, contributor Jon Hurdle reports on the EPA’s final Renewable Fuel Standard rule and its impact on the Delaware City Refinery.
The owner of Delaware City refinery faces more cost pressures and even the possibility of downsizing after the U.S. Environmental Protection Agency finalized a rule that is expected to keep costs high for complying with its Renewable Fuel Standard.
PBF Energy said it paid more than $1.2 billion across all of its six refineries last year to buy credits called RINs that allowed it to meet the EPA requirements for an increasing volume of ethanol and other renewable fuels to be blended with gasoline.
The company and other independent refiners have to buy the credits because they have a limited capacity to blend renewable fuels with gasoline, and so have to pay millions to larger refiners that do have the capacity.
Now PBF and its peers face continued high costs for the credits because of the new EPA requirement, issued on June 21, that is expected to drive up the market price of RINs as refiners like PBF demand increasing numbers of the credits to match the rising volume of renewable fuels that are required by the federal agency.
“We are disappointed with the final rule,” said Michael Karlovich, a spokesman for PBF. “EPA locked in three years of an unachievable ethanol volume requirement, which if past is prologue, will keep RINs at their current, historically high values.”
The EPA is requiring that refiners use 20.94 billion gallons of renewable fuels this year, rising to 22.33 billion gallons in 2025, representing a steady increase in the amount of ethanol and other renewables in the nation’s gasoline supply. Of the total, 15.25 billion gallons is ethanol this year, edging down to 15 billion gallons a year for both 2024 and 2025. The remainder of the total is advanced biofuel, which is largely biodiesel or renewable diesel.
“We are disappointed with the final rule. EPA locked in three years of an unachievable ethanol volume requirement, which if past is prologue, will keep RINs at their current, historically high values.”Michael Karlovich, spokesman for PBF
The standard was first authorized by statute in 2005 and expanded in 2007. PBF has been complying with the RFS since 2010 when it bought Delaware City Refinery, which had been shut down and was scheduled for demolition, but was then restarted by its new owner.
PBF and its allies call the new requirements unachievable because they exceed the aggregate capacity of most U.S. gas stations and automobiles – both of which have technical limitations on the proportion of ethanol that they can combine with gasoline.
The EPA’s new requirement for some 15 billion gallons of ethanol exceeds 10 percent of total national gasoline consumption, and therefore exceeds a 10 percent limit on ethanol content in most cars, argued Brendan Williams, vice president of government relations for PBF.
“They keep on mandating more ethanol than the fuel supply can handle, and so the ethanol RINs become scarce,” he said.
At Delaware City and other PBF refineries, the cost of buying RINs exceeds all other costs combined except crude oil, Williams said. He declined to say whether the continued financial pressure could lead to layoffs for any of the Delaware refinery’s approximately 560 full-time workers, but warned that the company may be forced to cut its costs at some point.
“A lot of it will depend on what other market forces are impacting us but there is a possibility that RINs could certainly impact our operations and employment levels,” he said. PBF declined to release figures showing how its individual refineries are affected by the cost of the credits.
Despite the high cost of buying RINs, PBF Energy reported much stronger results in the first quarter of 2023 than it did a year earlier. The company reported net income of $385.9 million for the period, up from a loss of $3.3 million in the first quarter of 2022. It cut its debt by $525 million, and bought back 8.8 million of its own shares in a program that has cost $346 million to date.
The improved financial performance was driven by higher gasoline prices, said Karlovich. “The combination of rising prices and demand in 2022 following the pandemic resulted in positive earnings for oil companies last year,” he said. That was used to pay down debt and restart paying a dividend which PBF suspended in 2020 as a means of conserving cash during the sudden drop in demand related to government lockdowns, he said.
For its part, the EPA said the new rule will reduce U.S. reliance on up to 140,000 barrels a day of imported oil while advancing the use of low-carbon fuels. The U.S. imported about 8.32 million barrels a day of petroleum and its products in 2022, according to the federal Energy Information Administration.
“From day one, EPA has been committed to the growth of renewable fuels that play a critical role in diversifying our country’s energy mix and combatting climate change, all while providing good-paying jobs and economic benefits to communities across the country."Michael Regan, EPA Administrator
“From day one, EPA has been committed to the growth of renewable fuels that play a critical role in diversifying our country’s energy mix and combatting climate change, all while providing good-paying jobs and economic benefits to communities across the country,” said EPA Administrator Michael Regan, in a statement.
Now that PBF and other independent refiners have lost the latest round of a long-running fight with the EPA, they are hoping that a planned bill by Senator Chris Coons and other Northeast lawmakers will provide the relief they seek from the high cost of RINs.
“I am disappointed by the final RFS rule issued today by the EPA,” Coons said in a statement. He said the rule does not adequately address the challenges and high costs it will bring to Delaware City and other small refineries.
Coons argued that the new blending requirements are significantly above domestic consumption capacity, and will endanger refineries across the mid-Atlantic. He said he wants to find a way of managing the RFS in a way that contains soaring compliance costs and provides certainty to independent refiners like PBF by stabilizing and reducing costs for the credits.
But his fellow Democrat, Sen. Tom Carper, praised the new rule, which he said would do more to address volatility in RFS compliance costs. “The Biden administration has made a real effort to provide much-needed flexibility and certainty without compromising the deployment of advanced renewable fuels,” he said.
Last September, Coons and four other mid-Atlantic lawmakers said they would be introducing a bill designed to curb what they called skyrocketing compliance costs for the RFS. The bill would direct the EPA to issue credits at a lower fixed cost for complying with the standard. They proposed that the revenue be used for the development of advanced biofuels; to incentivize farmers to produce biofuel feedstock, and to support the restoration of natural habitat in areas that have been used for biofuel production.
Williams of PBF said he expects the bill to be introduced soon.
The Fueling American Jobs Coalition, which represents trade unions and independent refiners opposing the RFS, accused the Biden administration of breaking a promise to reform the RFS in a way that created more certainty for all stakeholders.
“It sets ethanol blending nearly a billion gallons more than the federal government’s projected transportation fuel demand, ensuring RIN prices will stay astronomically high, benefiting multinational oil companies, Wall Street traders and other speculators at the expense of independent refiners,” the coalition said in a statement.
It called the RFS a hidden tax on domestic fuel supplies, adding an estimated $30 billion, or 20-30 cents a gallon to gasoline prices at the pump.
"...it is baffling that the federal government has refused to address the one cost factor it can control and could determine the fate of some U.S. refiners: runaway RIN costs."Michael Karlovich, spokesman for PBF
But the EPA said the new rule will have little effect on retail fuel prices. “We project that renewable fuels will become more cost competitive with petroleum-based fuels in future years. Thus, while the required volumes of renewable fuel increase in future years there is little to no impact on the price of gasoline and diesel, relative to 2022, because the cost per gallon of renewable fuel is projected to decrease,” an agency spokesperson said.
Meanwhile, the EPA said it would meet with financial market regulators in an effort to curb market manipulation, which critics say has contributed to the soaring cost of RINs. The agency said the final rule followed a “robust engagement strategy”, and reflects the comments of a diverse set of stakeholders.
Karlovich of PBF said it was quite possible that some parts of the independent refining industry will be unable to sustain the high costs of buying the credits indefinitely.
“Which specific facilities will be impacted depends on a host of factors, but given how the invasion of Ukraine has shone a glaring spotlight on the need to ensure domestic energy security, it is baffling that the federal government has refused to address the one cost factor it can control and could determine the fate of some U.S. refiners: runaway RIN costs,” he said.